Federal Register Vol. 83, No.90,

Federal Register Volume 83, Issue 90 (May 9, 2018)

Page Range21165-21706
FR Document

Current View
Page and SubjectPDF
83 FR 21333 - Imposition of Nonproliferation Measures Against Rosoboronexport, Including a Ban on U.S. Government ProcurementPDF
83 FR 21169 - Airworthiness Directives; Rolls-Royce plc Turbojet EnginesPDF
83 FR 21171 - Special Local Regulation; Wolf River Chute, Memphis, TNPDF
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, AlaskaPDF
83 FR 21301 - National Institute on Drug Abuse; Notice of Closed MeetingPDF
83 FR 21300 - National Institute on Drug Abuse; Notice of Closed MeetingsPDF
83 FR 21302 - National Institute of Biomedical Imaging and Bioengineering; Notice of Closed MeetingPDF
83 FR 21304 - Center for Scientific Review; Notice of Closed MeetingsPDF
83 FR 21272 - National Cybersecurity Center of Excellence (NCCoE) Securing Picture Archiving and Communication System (PACS) Cybersecurity for the Healthcare SectorPDF
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 SeasonPDF
83 FR 21278 - Renewal of the Market Risk Advisory CommitteePDF
83 FR 21182 - Endangered and Threatened Wildlife and Plants: Final Rule To List the Taiwanese Humpback Dolphin as Endangered Under the Endangered Species ActPDF
83 FR 21235 - Air Plan Approval; California; Yolo-Solano Air Quality Management District; Negative DeclarationsPDF
83 FR 21233 - Approval and Promulgation of Air Quality Implementation Plans; Virginia; Interstate Transport Requirements for the 2012 Fine Particulate Matter StandardPDF
83 FR 21295 - Change in Bank Control Notices; Acquisitions of Shares of a Bank or Bank Holding CompanyPDF
83 FR 21318 - Proposed Collection; Comment RequestPDF
83 FR 21309 - Notice of Funds and Request for Applications for 2017 Hurricanes and Wildfires Disaster-Response Legal Services GrantsPDF
83 FR 21226 - Interstate Transport Prongs 1 and 2 for the 2012 Fine Particulate Matter (PM2.5PDF
83 FR 21340 - Agency Information Collection Activity Under OMB Review: Funeral ArrangementsPDF
83 FR 21214 - Ballast Water Management-Annual Reporting RequirementPDF
83 FR 21283 - 229 Boundary Notice for the Pantex Plant Administrative Support ComplexPDF
83 FR 21339 - Agency Information Collection Activities: Information Collection Renewal; Submission for OMB Review; Customer Complaint FormPDF
83 FR 21181 - Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure InvestmentPDF
83 FR 21282 - Change in Control: Cameron LNG, LLCPDF
83 FR 21338 - Agency Information Collection Activities: Request for Comments for a New Information CollectionPDF
83 FR 21263 - Notice of Funding Availability: Inviting Applications for the Market Access ProgramPDF
83 FR 21295 - Common Formats for Patient Safety Data CollectionPDF
83 FR 21257 - Notice of Funding Availability: Inviting Applications for the Quality Samples ProgramPDF
83 FR 21260 - Notice of Funding Availability: Inviting Applications for the Technical Assistance for Specialty Crops ProgramPDF
83 FR 21269 - Notice of Funding Availability: Inviting Applications for the Foreign Market Development Cooperator ProgramPDF
83 FR 21265 - Notice of Funding Availability: Inviting Applications for the Emerging Markets ProgramPDF
83 FR 21284 - Combined Notice of Filings #1PDF
83 FR 21284 - Notice of Petition for Declaratory Order: Buckeye Pipe Line Company, L.P., Laurel Pipe Line Company, L.P.PDF
83 FR 21288 - Commission Information Collection Activities (FERC-917 and FERC-918); Comment Request; ExtensionPDF
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 LLCPDF
83 FR 21293 - Notice of Electric Quarterly Report Users Group MeetingPDF
83 FR 21290 - Notice of Document Labelling Guidance for Documents Submitted to or Filed With the Commission or Commission StaffPDF
83 FR 21294 - Notice of Commission Staff AttendancePDF
83 FR 21285 - Before Commissioners: Cheryl A. LaFleur, Neil Chatterjee, Robert F. Powelson, and Richard GlickPDF
83 FR 21294 - Notice of Institution of Section 206 Proceeding and Refund Effective Date; NRG Energy Center Dover LLCPDF
83 FR 21293 - Notice of Institution of Section 206 Proceeding and Refund Effective Date; NRG Wholesale Generation LPPDF
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 ConferencePDF
83 FR 21287 - Combined Notice of FilingsPDF
83 FR 21290 - Combined Notice of Filings #2PDF
83 FR 21300 - Meeting of the Chronic Fatigue Syndrome Advisory CommitteePDF
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; AvailabilityPDF
83 FR 21307 - Notice of Lodging of Proposed Consent Decree Under the Clean Water ActPDF
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 TradingPDF
83 FR 21277 - Submission for OMB Review; Comment RequestPDF
83 FR 21276 - Submission for OMB Review; Comment RequestPDF
83 FR 21274 - Proposed Information Collection; Comment Request; Observer Programs' Information That Can Be Gathered Only Through QuestionsPDF
83 FR 21275 - Proposed Extension of a Currently Approved Information Collection; Comment Request; Aleutian Islands Pollock FisheryPDF
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 CertificatePDF
83 FR 21308 - Inorganic Arsenic Standard; Extension of the Office of Management and Budget's (OMB) Approval of Information Collection (Paperwork) RequirementsPDF
83 FR 21280 - National Assessment Governing BoardPDF
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 ProgramPDF
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 ProgramPDF
83 FR 21335 - RTCA PMC Program Management Committee PlenaryPDF
83 FR 21327 - Meeting of the Interagency Task Force on Veterans Small Business DevelopmentPDF
83 FR 21299 - National Advisory Council on the National Health Service Corps; Notice of MeetingPDF
83 FR 21327 - Meeting of the Advisory Committee on Veterans Business AffairsPDF
83 FR 21279 - Proposed Collection; Comment RequestPDF
83 FR 21340 - Health Services Research and Development Service Scientific Merit Review Board; Notice of MeetingPDF
83 FR 21221 - Changes to the Claim Construction Standard for Interpreting Claims in Trial Proceedings Before the Patent Trial and Appeal BoardPDF
83 FR 21188 - Irish Potatoes Grown in Certain Designated Counties in Idaho, and Malheur County, Oregon; Modification of Handling RegulationsPDF
83 FR 21306 - Low Melt Polyester Staple Fiber (PSF) From Korea and Taiwan; Revised Schedule for Final InvestigationsPDF
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 ErrorPDF
83 FR 21165 - Grapes Grown in a Designated Area of Southeastern California; Decreased Assessment RatePDF
83 FR 21304 - Office of The Director, National Institutes of Health; Notice of MeetingPDF
83 FR 21302 - National Institute of Diabetes and Digestive and Kidney Diseases Notice of Closed MeetingsPDF
83 FR 21303 - National Institute of Diabetes and Digestive and Kidney Diseases; Notice of Closed MeetingsPDF
83 FR 21304 - National Institute on Aging; Notice of Closed MeetingPDF
83 FR 21301 - Center for Scientific Review; Notice of Closed MeetingsPDF
83 FR 21279 - Submission for OMB Review; Comment RequestPDF
83 FR 21295 - Notice of Termination of ReceivershipsPDF
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 OrdersPDF
83 FR 21167 - Regulation A: Extensions of Credit by Federal Reserve BanksPDF
83 FR 21328 - Agency Information Collection Activities: Proposed Request and Comment RequestPDF
83 FR 21310 - Northern States Power Company: Monticello Nuclear Generating PlantPDF
83 FR 21238 - Approval and Promulgation of Air Quality State Implementation Plans; California; Chico Redesignation Request and Maintenance Plan for the 2006 24-hour PM2.5PDF
83 FR 21309 - Notice of Intent To Grant Partially Exclusive Patent License; CorrectionPDF
83 FR 21174 - Approval and Promulgation of Implementation Plans; New Jersey; Motor Vehicle Enhanced Inspection and Maintenance ProgramPDF
83 FR 21178 - Approval and Promulgation of Implementation Plans; Texas; Revisions to Permitting and Public Participation for Air Quality Permit ApplicationsPDF
83 FR 21191 - Airworthiness Directives; ATR-GIE Avions de Transport Régional AirplanesPDF
83 FR 21196 - Airworthiness Directives; Airbus AirplanesPDF
83 FR 21194 - Airworthiness Directives; Airbus HelicoptersPDF
83 FR 21278 - Community Bank Advisory Council MeetingPDF
83 FR 21296 - Agency Information Collection Activities: Proposed Collection; Comment RequestPDF
83 FR 21254 - Outer Continental Shelf Air Regulations; Consistency Update for Massachusetts; Reopening of Comment PeriodPDF
83 FR 21199 - Airworthiness Directives; SOCATA AirplanesPDF
83 FR 21334 - Thirty Sixth RTCA SC-214 Standards for Air Traffic Data Communications Services PlenaryPDF
83 FR 21334 - Eighty Eighth RTCA SC-147 Plenary Session Joint With EUROCAE WG-75PDF
83 FR 21684 - Aviation Economic Regulation AmendmentsPDF
83 FR 21203 - Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser RegulationPDF
83 FR 21342 - Reform of Generator Interconnection Procedures and AgreementsPDF
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 TitlesPDF
83 FR 21574 - Regulation Best InterestPDF

Issue

83 90 Wednesday, May 9, 2018 Contents Agency Health Agency for Healthcare Research and Quality NOTICES Common Formats for Patient Safety Data Collection, 21295-21296 2018-09870 Agricultural Marketing Agricultural Marketing Service RULES Decreased Assessment Rates: Grapes Grown in a Designated Area of Southeastern California, 21165-21167 2018-09817 PROPOSED RULES Modification of Handling Regulations: Irish Potatoes Grown in Certain Designated Counties in Idaho, and Malheur County, Oregon, 21188-21191 2018-09820 Agriculture Agriculture Department See

Agricultural Marketing Service

See

Commodity Credit Corporation

See

Foreign Agricultural Service

Army Army Department NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 21279 2018-09811 Consumer Financial Protection Bureau of Consumer Financial Protection NOTICES Meetings: Community Bank Advisory Council, 21278-21279 2018-09735 Centers Medicare Centers for Medicare & Medicaid Services NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 21296-21297 2018-09686 Coast Guard Coast Guard RULES Special Local Regulations: Wolf River Chute, Memphis, TN, 21171-21174 2018-09908 PROPOSED RULES Ballast Water Management—Annual Reporting Requirement, 21214-21221 2018-09877 Commerce Commerce Department See

National Institute of Standards and Technology

See

National Oceanic and Atmospheric Administration

See

Patent and Trademark Office

Commodity Credit Commodity Credit Corporation NOTICES Funding Availability: Applications for the Market Access Program, 21263-21265 2018-09871 Applications for the Technical Assistance for Specialty Crops Program, 21260-21263 2018-09868 Inviting Applications for the Emerging Markets Program, 21265-21269 2018-09866 Inviting Applications for the Foreign Market Development Cooperator Program, 21269-21272 2018-09867 Inviting Applications for the Quality Samples Program, 21257-21260 2018-09869 Commodity Futures Commodity Futures Trading Commission NOTICES Charter Renewals: Market Risk Advisory Committee, 21278 2018-09891 Comptroller Comptroller of the Currency NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Customer Complaint Form, 21339 2018-09875 Defense Department Defense Department See

Army Department

NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 21279-21280 2018-09823
Education Department Education Department NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Assurance of Compliance—Civil Rights Certificate, 21280 2018-09833 Meetings: National Assessment Governing Board, 21280-21282 2018-09831 Energy Department Energy Department See

Federal Energy Regulatory Commission

See

National Nuclear Security Administration

NOTICES Changes in Control: Cameron LNG, LLC, 21282-21283 2018-09873
Environmental Protection Environmental Protection Agency RULES Air Quality State Implementation Plans; Approvals and Promulgations: New Jersey; Motor Vehicle Enhanced Inspection and Maintenance Program, 21174-21178 2018-09788 Texas; Revisions to Permitting and Public Participation for Air Quality Permit Applications, 21178-21181 2018-09755 PROPOSED RULES Air Quality State Implementation Plans; Approvals and Promulgations: California; Chico Redesignation Request and Maintenance Plan for the 2006 24-hour PM2.5 Standard, 21238-21254 2018-09792 California; Yolo-Solano Air Quality Management District; Negative Declarations, 21235-21237 2018-09888 Interstate Transport Prongs 1 and 2 for the 2012 Fine Particulate Matter (PM2.5) Standard for Colorado, Montana, North Dakota, South Dakota and Wyoming, 21226-21232 2018-09880 Virginia; Interstate Transport Requirements for the 2012 Fine Particulate Matter Standard, 21233-21235 2018-09887 Outer Continental Shelf Air Regulations: Massachusetts; Consistency Update, 21254-21256 2018-09646 Federal Aviation Federal Aviation Administration RULES Airworthiness Directives: Rolls-Royce plc Turbojet engines, 21169-21171 2018-09913 PROPOSED RULES Airworthiness Directives: Airbus Airplanes, 21196-21199 2018-09743 Airbus Helicopters, 21194-21196 2018-09742 ATR-GIE Avions de Transport Regional Airplanes, 21191-21194 2018-09746 SOCATA Airplanes, 21199-21203 2018-09602 NOTICES Meetings: Eighty Eighth RTCA SC-147 Plenary Session Joint with EUROCAE WG-75, 21334 2018-09444 RTCA PMC Program Management Committee Plenary, 21335 2018-09828 Thirty Sixth RTCA SC-214 Standards for Air Traffic Data Communications Services Plenary, 21334-21335 2018-09445 Submission Deadlines for Schedule Information: 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, 21335-21338 2018-09894 Federal Communications Federal Communications Commission RULES Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment, 21181-21182 2018-09874 Federal Deposit Federal Deposit Insurance Corporation NOTICES Terminations of Receiverships, 21295 2018-09808 Federal Energy Federal Energy Regulatory Commission RULES Reform of Generator Interconnection Procedures and Agreements, 21342-21414 2018-08659 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 21288-21290 2018-09859 Combined Filings, 21284-21285, 21287-21288, 21290 2018-09849 2018-09850 2018-09861 Environmental Assessments; Availability, etc.: Cheyenne Connector, LLC, Rockies Express Pipeline LLC; Cheyenne Connector Pipeline and Cheyenne Hub Enhancement Projects, 21291-21293 2018-09858 Guidance: Document Labelling Guidance for Documents Submitted to or Filed with the Commission or Commission Staff, 21290-21291 2018-09856 Institution of Section 206 Proceedings: NRG Energy Center Dover LLC, 21294-21295 2018-09853 NRG Wholesale Generation LP, 21293 2018-09852 Meetings: Electric Quarterly Report User Group, 21293-21294 2018-09857 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.; Technical Conference, 21294 2018-09851 Petitions for Declaratory Orders: Buckeye Pipe Line Company, LP, Laurel Pipe Line Company, LP, 21284 2018-09860 Simultaneous Transmission Import Limit Values for the Southeast Region: CinCap V, LLC Duke Energy Beckjord, LLC Duke Energy Carolinas, LLC, et. al, 21285-21287 2018-09854 Staff Attendances, 21294 2018-09855 Federal Highway Federal Highway Administration NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 21338 2018-09872 Federal Reserve Federal Reserve System RULES Extensions of Credit by Federal Reserve Banks, 21167-21168 2018-09805 NOTICES Changes in Bank Control: Acquisitions of Shares of a Bank or Bank Holding Company, 21295 2018-09886 Food and Drug Food and Drug Administration NOTICES Guidance: Waivers, Exceptions, and Exemptions from the Requirements of Section 582 of the Federal Food, Drug, and Cosmetic Act, 21297-21299 2018-09843 Foreign Agricultural Foreign Agricultural Service NOTICES Funding Availability: Applications for the Market Access Program, 21263-21265 2018-09871 Applications for the Technical Assistance for Specialty Crops Program, 21260-21263 2018-09868 Inviting Applications for the Emerging Markets Program, 21265-21269 2018-09866 Inviting Applications for the Foreign Market Development Cooperator Program, 21269-21272 2018-09867 Inviting Applications for the Quality Samples Program, 21257-21260 2018-09869 Health and Human Health and Human Services Department See

Agency for Healthcare Research and Quality

See

Centers for Medicare & Medicaid Services

See

Food and Drug Administration

See

Health Resources and Services Administration

See

National Institutes of Health

NOTICES Meetings: Chronic Fatigue Syndrome Advisory Committee, 21300 2018-09844
Health Resources Health Resources and Services Administration NOTICES Meetings: National Advisory Council on the National Health Service Corps, 21299 2018-09825 Homeland Homeland Security Department See

Coast Guard

International Trade Com International Trade Commission NOTICES Investigations; Determinations, Modifications, and Rulings, etc.: Certain Mobile Electronic Devices and Radio Frequency and Processing Components Thereof, 21307 2018-09818 Low Melt Polyester Staple Fiber (PSF) from Korea and Taiwan, 21306 2018-09819 Justice Department Justice Department NOTICES Proposed Consent Decrees under the Clean Water Act, 21307-21308 2018-09842 Labor Department Labor Department See

Occupational Safety and Health Administration

Legal Legal Services Corporation NOTICES Requests for Applications: 2017 Hurricanes and Wildfires Disaster-Response Legal Services Grants, 21309 2018-09881 NASA National Aeronautics and Space Administration NOTICES Partially Exclusive Patent Licenses; Correction, 21309-21310 2018-09790 National Institute National Institute of Standards and Technology NOTICES Requests for Applications: National Cybersecurity Center of Excellence Securing Picture Archiving and Communication System Cybersecurity for the Healthcare Sector, 21272-21274 2018-09897 National Institute National Institutes of Health NOTICES Meetings: Advisory Committee to the Director, 21304 2018-09816 Center for Scientific Review, 21301-21302, 21304-21306 2018-09812 2018-09898 National Institute of Biomedical Imaging and Bioengineering, 21302 2018-09899 National Institute of Diabetes and Digestive and Kidney Diseases, 21302-21303 2018-09814 2018-09815 National Institute on Aging, 21304 2018-09813 National Institute on Drug Abuse, 21300-21301 2018-09900 2018-09901 Energy National Nuclear National Nuclear Security Administration NOTICES 229 Boundary for the Pantex Plant Administrative Support Complex, 21283-21284 2018-09876 National Oceanic National Oceanic and Atmospheric Administration RULES Endangered and Threatened Species: Listing the Taiwanese Humpback Dolphin as Endangered Under the Endangered Species Act, 21182-21187 2018-09890 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 21276-21278 2018-09836 2018-09837 Agency Information Collection Activities; Proposals, Submissions, and Approvals: Aleutian Islands Pollock Fishery, 21275-21276 2018-09834 Observer Programs' Information that Can Be Gathered Only Through Questions, 21274-21275 2018-09835 Taking and Importing Marine Mammals: Construction and Operation of the Liberty Drilling and Production Island, Beaufort Sea, AK, 21276-21277 2018-09904 Nuclear Regulatory Nuclear Regulatory Commission NOTICES Exemptions: Northern States Power Co; Monticello Nuclear Generating Plant, 21310-21316 2018-09801 Occupational Safety Health Adm Occupational Safety and Health Administration NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Inorganic Arsenic Standard, 21308-21309 2018-09832 Patent Patent and Trademark Office PROPOSED RULES Changes to the Claim Construction Standard for Interpreting Claims in Trial Proceedings Before the Patent Trial and Appeal Board, 21221-21226 2018-09821 Securities Securities and Exchange Commission PROPOSED RULES Form CRS Relationship Summary and Form ADV: Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles, 21416-21571 2018-08583 Regulation Best Interest, 21574-21682 2018-08582 Standard of Conduct for Investment Advisers: Enhancing Investment Adviser Regulation, 21203-21214 2018-08679 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 21318-21319 2018-09884 Self-Regulatory Organizations; Proposed Rule Changes: BOX Options Exchange LLC, 21320-21324 2018-09806 Cboe Exchange, Inc., 21316-21318, 21324-21327 2018-09829 2018-09830 Nasdaq PHLX LLC, 21319-21320 2018-09838 Small Business Small Business Administration NOTICES Meetings: Advisory Committee on Veterans Business Affairs, 21327 2018-09824 Interagency Task Force on Veterans Small Business Development, 21327-21328 2018-09827 Social Social Security Administration NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 21328-21333 2018-09802 State Department State Department NOTICES Imposition of Nonproliferation Measures Against Rosoboronexport, Including a Ban on U.S. Government Procurement, 21333-21334 2018-09928 Transportation Department Transportation Department See

Federal Aviation Administration

See

Federal Highway Administration

PROPOSED RULES Aviation Economic Regulation Amendments, 21684-21706 2018-08683
Treasury Treasury Department See

Comptroller of the Currency

Veteran Affairs Veterans Affairs Department NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Funeral Arrangements, 21340 2018-09878 Meetings: Health Services Research and Development Service Scientific Merit Review Board, 21340 2018-09822 Separate Parts In This Issue Part II Energy Department, Federal Energy Regulatory Commission, 21342-21414 2018-08659 Part III Securities and Exchange Commission, 21416-21571 2018-08583 Part IV Securities and Exchange Commission, 21574-21682 2018-08582 Part V Transportation Department, 21684-21706 2018-08683 Reader Aids

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.

83 90 Wednesday, May 9, 2018 Rules and Regulations DEPARTMENT OF AGRICULTURE Agricultural Marketing Service 7 CFR Part 925 [Doc. No. AMS-SC-17-0082; SC18-925-1 FR] Grapes Grown in a Designated Area of Southeastern California; Decreased Assessment Rate AGENCY:

Agricultural Marketing Service, USDA.

ACTION:

Final rule.

SUMMARY:

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.

DATES:

Effective June 8, 2018.

FOR FURTHER INFORMATION CONTACT:

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: [email protected] or [email protected].

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: [email protected].

SUPPLEMENTARY INFORMATION:

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 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 fiscal year 2017 were $50,000 for management and compliance services, $28,330 in office expenditures, and $28,500 for research.

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.

Final Regulatory Flexibility Analysis

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 Federal Register on March 1, 2018 (83 FR 8802). Copies of the proposed rule were also mailed or sent via facsimile to all grape handlers. Finally, the proposal was made available through the internet by USDA and the Office of the Federal Register. A 30-day comment period ending April 2, 2018, was provided for interested persons to respond to the proposal. One comment was received in support of the decreased assessment rate. The commenter stated that a decreased assessment rate should result in lower costs to the industry and ultimately to the consumer. No changes will be made to the rule as proposed based on the comments received. The proposal contained administrative revisions to the Order's subpart headings to bring the language into conformance with the Office of Federal Register requirements. These revisions are not included in this rule as they were included in a technical amendment final rule published in the Federal Register on April 6, 2018 (83 FR 14736).

A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at: http://www.ams.usda.gov/rules-regulations/moa/small-businesses. Any questions about the compliance guide should be sent to Richard Lower at the previously-mentioned address in the FOR FURTHER INFORMATION CONTACT section.

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.

List of Subjects in 7 CFR Part 925

Grapes, Marketing agreements, Reporting and recordkeeping requirements.

For the reasons set forth in the preamble, 7 CFR part 925 is amended as follows:

PART 925—GRAPES GROWN IN A DESIGNATED AREA OF SOUTHEASTERN CALIFORNIA 1. The authority citation for part 925 continues to read as follows: Authority:

7 U.S.C. 601-674.

2. Section 925.215 is revised to read as follows:
§ 925.215 Assessment rate.

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.

Dated: May 3, 2018 Bruce Summers, Acting Administrator, Agricultural Marketing Service.
[FR Doc. 2018-09817 Filed 5-8-18; 8:45 am] BILLING CODE 3410-02-P
FEDERAL RESERVE SYSTEM 12 CFR Part 201 [Docket No. R-1585; RIN 7100-AE 90] Regulation A: Extensions of Credit by Federal Reserve Banks AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Final rule.

SUMMARY:

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.

DATES:

The final rule is effective June 8, 2018.

FOR FURTHER INFORMATION CONTACT:

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.

SUPPLEMENTARY INFORMATION:

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 2014.1

1https://www.federalreserve.gov/monetarypolicy/talf.htm.

I. Notice of Proposed Rulemaking

On December 8, 2017, the Board published a notice of proposed rulemaking in the Federal Register proposing amendments to Regulation A that would (1) revise the regulatory procedures for establishing the primary credit rate in a financial emergency; and (2) delete the provisions relating to the use of credit ratings for collateral for extensions of credit under the former TALF.2 Specifically, the Board proposed to amend § 201.51(d)(1) of Regulation A to provide that, in a financial emergency, the primary credit rate is the target federal funds rate or, if the FOMC has established a target range for the federal funds rate, a rate corresponding to the top of the target range. In addition, the Board proposed to delete § 201.3(e) of Regulation A as unnecessary given the expiration of the TALF program. The comment period on the proposed rule closed on January 8, 2018.

2 82 FR 57886 (Dec. 8, 2017).

II. Comments Received on the Proposed Rule and Adoption of Final Rule

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.

III. Administrative Law Matters A. Regulatory Flexibility Act

An initial regulatory flexibility analysis (IRFA) was included in the proposal in accordance with section 3(a) of the Regulatory Flexibility Act (RFA).3 In the IRFA, the Board requested comment on the effect of the proposed rule on small entities and on any significant alternatives that would reduce the regulatory burden on small entities. The Board did not receive any comments on the IRFA.

3 5 U.S.C. 601 et seq.

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.

Section 201.51(d) of Regulation A. Currently, there are 1,523 depository institutions that are able to request primary credit that meet the definition of “small” business entity, out of a total of 2,777 institutions that are able to request primary credit. The final rule makes a ministerial amendment to conform the provision to the current operating framework of the FOMC in establishing a target range for the federal funds rate. The final rule affects the actions of the Federal Reserve Banks and the Board, and requires no action or changes in procedures for any depository institution, large or small, and so there are no costs associated with the final rule. In addition, the final rule clarifies the operation of the provision for reducing the primary credit rate in a financial emergency from its current level to a lower level based on the target federal funds rate or the target range for the federal funds rate. Any economic impact of the final rule on small entities would be beneficial, because the final rule enables large and small entities to obtain primary credit at an interest rate that would be lower than the existing primary credit rate. Accordingly, the Board believes that a reasonable basis exists for assuming that the economic effect of the final rule would be de minimis or insignificant for small entities affected by it.

Section 201.3(e) of Regulation A. The final rule deletes obsolete provisions applicable to credit extended under the TALF program. Since the TALF program no longer exists, the deletion of regulatory provisions governing the use of credit ratings in it will have no impact, economic or otherwise, on any credit rating agency. Accordingly, the Board believes that a reasonable basis exists for assuming costs would be de minimis or insignificant for small entities affected by it.

B. Paperwork Reduction Act Analysis

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 Federal Register in accordance with OMB regulations. OMB regulations define a “collection of information” as obtaining, causing to be obtained, soliciting, or requiring the disclosure to an agency, third parties or the public of information by or for an agency “by means of identical questions posed to, or identical reporting, recordkeeping, or disclosure requirements imposed on, ten or more persons, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit.”

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.

C. Plain Language

Each Federal banking agency, including the Board, is required to use plain language in all proposed and final rulemakings published after January 1, 2000.4 The Board has sought to present the final rule, to the extent possible, in a simple and straightforward manner. The Board received one comment that addressed the extent to which the proposed rule used plain language. This comment expressed appreciation for the Board's plain language interpretation of the regulation as set forth in the proposed rule.

4 12 U.S.C. 4809.

List of Subjects in 12 CFR Part 201

Banks, Banking, Federal Reserve System, Reporting and recordkeeping requirements.

Authority and Issuance

For the reasons set forth in the preamble, the Board is amending 12 CFR chapter II as follows:

PART 201—EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION A) 1. The authority citation for part 201 continues to read as follows: Authority:

12 U.S.C. 248(i)-(j) and (s), 343 et seq., 347a, 347b, 347c, 348 et seq., 357, 374, 374a, and 461.

§ 201.3 [Amended]
2. Section 201.3 is amended by removing paragraph (e). 3. Section 201.51 is amended by revising paragraph (d)(1) introductory text to read as follows:
§ 201.51 Interest rates applicable to credit extended by a Federal Reserve Bank.3

(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:

3 The primary, secondary, and seasonal credit rates described in this section apply to both advances and discounts made under the primary, secondary, and seasonal credit programs, respectively.

By the Board of Governors of the Federal Reserve System, May 3, 2018.

Michele Taylor Fennell, Assistant Secretary of the Board.
[FR Doc. 2018-09805 Filed 5-8-18; 8:45 am] BILLING CODE 6210-01-P
DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2018-0287; Product Identifier 2018-NE-10-AD; Amendment 39-19263; AD 2018-09-07] RIN 2120-AA64 Airworthiness Directives; Rolls-Royce plc Turbojet Engines AGENCY:

Federal Aviation Administration (FAA), DOT.

ACTION:

Final rule; request for comments.

SUMMARY:

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.

DATES:

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.

ADDRESSES:

You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:

Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments.

Fax: 202-493-2251.

Mail: U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590.

Hand Delivery: U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

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: [email protected]. You may view this service information at the 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. It is also available on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0287.

Examining the AD Docket

You may examine the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0287; or in person at Docket Operations between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this final rule, the mandatory continuing airworthiness information (MCAI), the regulatory evaluation, any comments received, and other information. The street address for Docket Operations (phone: 800-647-5527) is listed above. Comments will be available in the AD docket shortly after receipt.

FOR FURTHER INFORMATION CONTACT:

Robert Green, Aerospace Engineer, ECO Branch, FAA, 1200 District Avenue, Burlington, MA 01803; phone: 781-238-7754; fax: 781-238-7199; email: [email protected].

SUPPLEMENTARY INFORMATION:

Discussion

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 http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0287.

Related Service Information Under 1 CFR Part 51

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 ADDRESSES section.

FAA's Determination

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.

AD Requirements

This AD requires inspecting the oil pump assembly and oil pressure filter and replacing pre-modification parts with parts eligible for installation.

FAA's Justification and Determination of the Effective Date

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 good cause exists for making this amendment effective in less than 30 days.

Comments Invited

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 ADDRESSES section. Include the docket number FAA-2018-0287 and Product Identifier 2018-NE-10-AD at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this final rule. We will consider all comments received by the closing date and may amend this final rule because of those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this final rule.

Costs of Compliance

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:

Estimated Costs Action Labor cost Parts cost Cost per
  • product
  • Cost on U.S. operators
    Inspect and replace the oil filter 3 work-hours × $85 per hour = $255 $200 $455 $14,560

    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.

    On-Condition Costs Action Labor cost Parts cost Cost per
  • product
  • Replace the oil pump assembly 4 work-hours × $85 per hour = $340 $200 $540
    Authority for This Rulemaking

    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.

    Regulatory Findings

    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.

    List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

    Adoption of the Amendment

    Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

    PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

    49 U.S.C. 106(g), 40113, 44701.

    § 39.13 [Amended]
    2. The FAA amends § 39.13 by adding the following new airworthiness directive (AD): 2018-09-07 Rolls-Royce plc: Amendment 39-19263; Docket No. FAA-2018-0287; Product Identifier 2018-NE-10-AD. (a) Effective Date

    This AD is effective May 24, 2018.

    (b) Affected ADs

    None.

    (c) Applicability

    This AD applies to all Rolls-Royce plc (RR) Viper Mk. 601-22 engines.

    (d) Subject

    Joint Aircraft System Component (JASC) Code 7900, Engine Oil System (Airframe Furnished).

    (e) Unsafe Condition

    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 result in loss of engine thrust control, and reduced control of the airplane.

    (f) Compliance

    Comply with this AD within the compliance times specified, unless already done.

    (g) Required Actions

    (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.

    (h) Installation Prohibition

    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.

    (i) Alternative Methods of Compliance (AMOCs)

    (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: [email protected].

    (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.

    (j) Related Information

    (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: [email protected].

    (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 http://www.regulations.gov by searching for and locating it in Docket No. FAA-2018-0287.

    (k) Material Incorporated by Reference

    (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: [email protected].

    (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: http://www.archives.gov/federal-register/cfr/ibr-locations.html.

    Issued in Burlington, Massachusetts, on April 25, 2018. Robert J. Ganley, Manager, Engine and Propeller Standards Branch, Aircraft Certification Service.
    [FR Doc. 2018-09913 Filed 5-8-18; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 100 [Docket Number USCG-2018-0313] RIN 1625-AA08 Special Local Regulation; Wolf River Chute, Memphis, TN AGENCY:

    Coast Guard, DHS.

    ACTION:

    Temporary final rule.

    SUMMARY:

    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.

    DATES:

    This rule is effective from 7 a.m. through 4 p.m. on May 12, 2018.

    ADDRESSES:

    To view documents mentioned in this preamble as being available in the docket, go to http://www.regulations.gov, type USCG-2018-0313 in the “SEARCH” box and click “SEARCH.” Click on Open Docket Folder on the line associated with this rule.

    FOR FURTHER INFORMATION CONTACT:

    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 [email protected].

    SUPPLEMENTARY INFORMATION:

    I. Table of Abbreviations CFR Code of Federal Regulations COTP Captain of the Port Sector Lower Mississippi River DHS Department of Homeland Security FR Federal Register NPRM Notice of proposed rulemaking §  Section U.S.C. United States Code II. Background Information and Regulatory History

    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 Federal Register. Delaying the effective date of this rule would be impracticable and contrary to public interest because immediate action is necessary to protect persons and property from the dangers associated with commercial traffic interacting with this rowing event.

    III. Legal Authority and Need for a Rule

    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.

    IV. Discussion of the Rule

    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.

    V. Regulatory Analyses

    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.

    A. Regulatory Planning and Review

    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.

    B. Impact on Small Entities

    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 FOR FURTHER INFORMATION CONTACT section.

    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.

    C. Collection of Information

    This rule will not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).

    D. Federalism and Indian Tribal Governments

    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 FOR FURTHER INFORMATION CONTACT section above.

    E. Unfunded Mandates Reform Act

    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.

    F. Environment

    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 ADDRESSES.

    G. Protest Activities

    The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the FOR FURTHER INFORMATION CONTACT section to coordinate protest activities so that your message can be received without jeopardizing the safety or security of people, places, or vessels.

    List of Subjects in 33 CFR Part 100

    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:

    PART 100—SAFETY OF LIFE ON NAVIGABLE WATERS 1. The authority citation for part 100 continues to read as follows: Authority:

    33 U.S.C. 1233.

    2. Add § 100.35T08-0313 to read as follows:
    § 100.35T08-0313 Special Local Regulation; Wolf River Chute, Memphis, TN.

    (a) Location. (1) The following area is a special local regulation: All navigable waters of the Wolf River Chute forming the mouth of the 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.

    (b) Regulations. (1) In accordance with the general regulations in § 100.801 of this part, no vessel or person shall enter the regulated area unless authorized by the Captain of the Port Sector Lower Mississippi River (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”.

    (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) Effective period. This section is effective from 7 a.m. until 4 p.m. on May 12, 2018.

    (d) Informational broadcasts. The COTP or a designated representative will inform the public through Broadcast Notices to Mariners (BNMs) of the enforcement period for the regulated area as well as any changes in the dates and times of enforcement.

    Dated: April 23, 2018. R. Tamez, Captain, U.S. Coast Guard, Captain of the Port Sector Lower Mississippi River.
    [FR Doc. 2018-09908 Filed 5-8-18; 8:45 am] BILLING CODE 9110-04-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [EPA-R02-OAR-2017-0101; FRL-9977-61—Region 2] Approval and Promulgation of Implementation Plans; New Jersey; Motor Vehicle Enhanced Inspection and Maintenance Program AGENCY:

    Environmental Protection Agency (EPA).

    ACTION:

    Final rule.

    SUMMARY:

    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.

    DATES:

    This rule is effective on June 8, 2018.

    ADDRESSES:

    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 www.regulations.gov website. Although listed in the index, some information is not publicly available, e.g., confidential business information or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the internet and will be publicly available only in hard copy form. Publicly available docket materials are available through www.regulations.gov, or please contact the person identified in the For Further Information Contact section for additional availability information.

    FOR FURTHER INFORMATION CONTACT:

    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 [email protected].

    SUPPLEMENTARY INFORMATION: I. What action is the EPA taking today? II. What was submitted by the NJDEP and how did the EPA respond? III. What comments were received in response to the EPA's proposed action? IV. What is the EPA's conclusion? V. Incorporation by Reference VI. Statutory and Executive Order Reviews I. What action is the EPA taking today?

    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.

    II. What was submitted by the NJDEP and how did the EPA respond?

    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.

    III. What comments were received in response to the EPA's proposed action?

    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.

    Comment #2: An anonymous commenter asked “Why would we not test and control idling emissions? What is to be gained by not ensuring that this doesn't allow harmful toxins and particulate matter into the air? Do you want your child on line for the school bus that is idling and spewing?”

    Response: Under this SIP revision, New Jersey's revised SIP will expand inspection test requirements to all vehicles with OBD systems that are covered by New Jersey I/M testing program. Light duty gasoline vehicles from model year 1996 and later, and heavy-duty engines and vehicles between 8,500 and 14,000 pounds gross vehicle weight rating from 2008 and later are all required by EPA regulations to have OBD systems.

    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 Jersey, and is reducing in volume each year. In 2006, pre-1996 model year vehicles subject to inspection under the existing rules represented 30% of initial inspections, whereas those vehicles represented only 3% of initial inspections in 2016.

    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.

    IV. What is the EPA's conclusion?

    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.

    V. Incorporation by Reference

    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 www.regulations.gov and at the EPA Region 2 Office (please contact the person identified in the For Further Information Contact section of this preamble for more information). These materials have been approved by the EPA for inclusion in the State implementation plan, have been incorporated by reference by the EPA into that plan, are fully federally enforceable under sections 110 and 113 of the CAA as of the effective date of the final rulemaking of the EPA's approval, and will be incorporated by reference by the Director of the Federal Register in the next update to the SIP compilation.1

    1 62 FR 27968 (May 22, 1997).

    VI. Statutory and Executive Order Reviews

    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 et seq.);

    • 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 et seq.);

    • 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 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. The EPA will submit a report containing this action and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. A major rule cannot take effect until 60 days after it is published in the Federal Register. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

    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 petition for judicial review may be filed, and shall not postpone the effectiveness of such rule or action. This action may not be challenged later in proceedings to enforce its requirements. (See section 307(b)(2)).

    List of Subjects in 40 CFR Part 52

    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.

    Authority:

    42 U.S.C. 7401 et seq.

    Dated: April 19, 2018. Peter D. Lopez, Regional Administrator, Region 2.

    Part 52 chapter I, title 40 of the Code of Federal Regulations is amended as follows:

    PART 52—APPROVAL AND PROMULGATION OF IMPLEMENTATION PLANS 1. The authority citation for part 52 continues to read as follows: Authority:

    42 U.S.C. 7401 et seq.

    Subpart FF—New Jersey 2. In § 52.1570, the table in paragraph (c) is amended by: a. Removing the entry “Title 7, Chapter 27, Subchapter 14, Sections 14.2(old)”. b. Revising the entries “Title 7, Chapter 27, Subchapter 14, Section 14.1”, “Title 7, Chapter 27, Subchapter 14, Section 14.2”, and “Title 7, Chapter 27, Subchapter 14, Section 14.3”. c. Adding the entries “Title 7, Chapter 27, Subchapter 14, Section 14.4”, “Title 7, Chapter 27, Subchapter 14, Section 14.5”, “Title 7, Chapter 27, Subchapter 14, Section 14.6”, “Title 7, Chapter 27, Subchapter 14, Section 14.7”, “Title 7, Chapter 27, Subchapter 14, Section 14.10”, and “Title 7, Chapter 27, Subchapter 14, Appendix” in numerical order. d. Revising the entry “Title 7, Chapter 27, Subchapter 15”. e. Adding the entry “Title 7, Chapter 27A, Subchapter 3, Section 3.10” after the entry “Title 7, Chapter 27, Subchapter 34”. f. Adding entries “Title 7, Chapter 27B, Subchapter 4, Section 4.1”, “Title 7, Chapter 27B, Subchapter 4, Section 4.2”, “Title 7, Chapter 27B, Subchapter 4, Section 4.3”, “Title 7, Chapter 27B, Subchapter 4, Section 4.6”, “Title 7, Chapter 27B, Subchapter 4, Section 4.7”, and “Title 7, Chapter 27B, Subchapter 4, Section 4.8” in numerical order after the entry “Title 7, Chapter 27B, Subchapter 3”. g. Revising the entry “Title 7, Chapter 27B, Subchapter 5”. h. Removing the entry “Title 13, Chapter 20, Subchapter 7, Sections: 7.1, 7.2, 7.3, 7.4, 7.5, and 7.6”. i. Adding the entries “Title 13, Chapter 20, Subchapter 7.1”, “Title 13, Chapter 20, Subchapter 7.2”, “Title 13, Chapter 20, Subchapter 7.3”, “Title 13, Chapter 20, Subchapter 7.4”, “Title 13, Chapter 20, Subchapter 7.5”, and “Title 13, Chapter 20, Subchapter 7.6” in numerical order after the entry “Title 7, Chapter 27B, Subchapter 5”. j. Removing the entry “Title 13, Chapter 20, Subchapter 26, Sections 26.2 and 26.16”. k. Adding the entries “Title 13, Chapter 20, Subchapter 26, Section 26.2”, “Title 13, Chapter 20, Subchapter 26, Section 26.11”, “Title 13, Chapter 20, Subchapter 26, Section 26.12”, “Title 13, Chapter 20, Subchapter 26, Section 26.16”, and “Title 13, Chapter 20, Subchapter 26, Section 26.17” in numerical order after the entry “Title 13, Chapter 20, Subchapter 24, Section 20”. l. Revising the entries “Title 13, Chapter 20, Subchapter 32”, “Title 13, Chapter 20, Subchapter 33”, “Title 13, Chapter 20, Subchapter 43”, and “Title 13, Chapter 20, Subchapter 44”.

    The revisions and additions read as follows:

    § 52.1570 Identification of plan.

    (c) * * *

    EPA-Approved New Jersey State Regulations State citation Title/subject State effective
  • date
  • EPA approval
  • date
  • Comments
    *         *         *         *         *         *         * Title 7, Chapter 27, Subchapter 14, Section 14.1 Control and Prohibition of Air Pollution from Diesel-Powered Motor Vehicles/Definitions October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27, Subchapter 14, Section 14.2 Control and Prohibition of Air Pollution from Diesel-Powered Motor Vehicles/Applicability October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27, Subchapter 14, Section 14.3 Control and Prohibition of Air Pollution from Diesel-Powered Motor Vehicles/General prohibitions October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27, Subchapter 14, Section 14.4 Control and Prohibition of Air Pollution from Diesel-Powered Motor Vehicles/General public highway standards October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27, Subchapter 14, Section 14.5 Control and Prohibition of Air Pollution from Diesel-Powered Motor Vehicles/Motor vehicle inspections October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27, Subchapter 14, Section 14.6 Control and Prohibition of Air Pollution from Diesel-Powered Motor Vehicles/Motor vehicle standards October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27, Subchapter 14, Section 14.7 Control and Prohibition of Air Pollution from Diesel-Powered Motor Vehicles/Licensed emissions inspectors October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27, Subchapter 14, Section 14.10 Control and Prohibition of Air Pollution from Diesel-Powered Motor Vehicles/Penalties October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27, Subchapter 14, Appendix Control and Prohibition of Air Pollution from Diesel-Powered Motor Vehicles/Appendix October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27, Subchapter 15 Control and Prohibition of Air Pollution from Gasoline-Fueled Motor Vehicles/Definition October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] *         *         *         *         *         *         * Title 7, Chapter 27A, Subchapter 3, Section 3.10 Civil Administrative Penalties and Requests for Adjudicatory Hearings October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] *         *         *         *         *         *         * Title 7, Chapter 27B, Subchapter 4, Section 4.1 Air Test Method 4: Testing Procedures for Diesel-Powered Motor Vehicles October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27B, Subchapter 4, Section 4.2 Air Test Method 4: Testing Procedures for Diesel-Powered Motor Vehicles October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27B, Subchapter 4, Section 4.3 Air Test Method 4: Testing Procedures for Diesel-Powered Motor Vehicles October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27B, Subchapter 4, Section 4.6 Air Test Method 4: Testing Procedures for Diesel-Powered Motor Vehicles October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27B, Subchapter 4, Section 4.7 Air Test Method 4: Testing Procedures for Diesel-Powered Motor Vehicles October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27B, Subchapter 4, Section 4.8 Air Test Method 4: Testing Procedures for Diesel-Powered Motor Vehicles October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 7, Chapter 27B, Subchapter 5 Air Test Method 5: Testing Procedures for Gasoline-Fueled Motor Vehicles October 3, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 7.1 Vehicle Inspections April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 7.2 Vehicle Inspections April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 7.3 Vehicle Inspections April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 7.4 Vehicle Inspections April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 7.5 Vehicle Inspections April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 7.6 Vehicle Inspections April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] *         *         *         *         *         *         * Title 13, Chapter 20, Subchapter 26, Section 26.2 Compliance with Diesel Emission Standards and Equipment, Periodic Inspection Program for Diesel Emissions, and Self-Inspection of Certain Classes of Motor Vehicles April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 26, Section 26.11 Compliance with Diesel Emission Standards and Equipment, Periodic Inspection Program for Diesel Emissions, and Self-Inspection of Certain Classes of Motor Vehicles April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 26, Section 26.12 Compliance with Diesel Emission Standards and Equipment, Periodic Inspection Program for Diesel Emissions, and Self-Inspection of Certain Classes of Motor Vehicles April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 26, Section 26.16 Compliance with Diesel Emission Standards and Equipment, Periodic Inspection Program for Diesel Emissions, and Self-Inspection of Certain Classes of Motor Vehicles April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 26, Section 26.17 Compliance with Diesel Emission Standards and Equipment, Periodic Inspection Program for Diesel Emissions, and Self-Inspection of Certain Classes of Motor Vehicles April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] *         *         *         *         *         *         * Title 13, Chapter 20, Subchapter 32 Inspection Standards and Test Procedures to be Used by Official Inspection Facilities April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 33 Inspection Standards and Test Procedures to be Used by Licensed Private Inspection Facilities April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 43 Enhanced Motor Vehicle Inspection and Maintenance Program April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] Title 13, Chapter 20, Subchapter 44 Private Inspection Facility Licensing April 26, 2016 May 9, 2018, EPA approval finalized at [insert Federal Register citation] *         *         *         *         *         *         *
    [FR Doc. 2018-09788 Filed 5-8-18; 8:45 am] BILLING CODE 6560-50-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [EPA-R06-OAR-2017-0124; FRL-9976-95-Region 6] Approval and Promulgation of Implementation Plans; Texas; Revisions to Permitting and Public Participation for Air Quality Permit Applications AGENCY:

    Environmental Protection Agency (EPA).

    ACTION:

    Final rule.

    SUMMARY:

    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.

    DATES:

    This rule is effective on June 8, 2018.

    ADDRESSES:

    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 http://www.regulations.gov website. Although listed in the index, some information is not publicly available, e.g., Confidential Business Information or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the internet and will be publicly available only in hard copy form. Publicly available docket materials are available either electronically through http://www.regulations.gov or in hard copy at the EPA Region 6, 1445 Ross Avenue, Suite 700, Dallas, Texas 75202-2733.

    FOR FURTHER INFORMATION CONTACT:

    Adina Wiley, 214-665-2115, [email protected].

    SUPPLEMENTARY INFORMATION:

    Throughout this document “we,” “us,” and “our” means the EPA.

    I. Background

    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.1 These comments were not significant as they did not raise relevant points which, if adopted, would require a change in the agency's proposed rule. The EPA is finalizing as proposed; no changes have been made as a result of the comments received.

    1 The comments are available in the docket for this rulemaking.

    II. Final Action

    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 with the CAA and EPA's regulations, policy and guidance for NSR permitting. Therefore, under section 110 of the Act, the EPA approves the following revisions to the Texas SIP:

    • 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.

    III. Incorporation by Reference

    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 www.regulations.gov and at the EPA Region 6 Office (please contact Adina Wiley for more information). Therefore, these materials have been approved by EPA for inclusion in the SIP, have been incorporated by reference by EPA into that plan, are fully federally enforceable under sections 110 and 113 of the CAA as of the effective date of the final rulemaking of EPA's approval, and will be incorporated by reference in the next update to the SIP compilation.

    IV. Statutory and Executive Order Reviews

    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 et seq.);

    • 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 et seq.);

    • 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).

    In addition, the SIP is not approved to apply on any Indian reservation land or in any other area where 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 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this action and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. A major rule cannot take effect until 60 days after it is published in the Federal Register. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

    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 petition for judicial review may be filed, and shall not postpone the effectiveness of such rule or action. This action may not be challenged later in proceedings to enforce its requirements. (See section 307(b)(2).)

    List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by reference, Nitrogen dioxide, Ozone, Particulate matter, Reporting and recordkeeping requirements, Sulfur oxides, Volatile organic compounds.

    Dated: April 27, 2018. Wren Stenger, Acting Regional Administrator, Region 6.

    40 CFR part 52 is amended as follows:

    PART 52—APPROVAL AND PROMULGATION OF IMPLEMENTATION PLANS 1. The authority citation for part 52 continues to read as follows: Authority:

    42 U.S.C. 7401 et seq.

    Subpart SS—Texas 2. In § 52.2270(c), the table titled “EPA Approved Regulations in the Texas SIP” is amended by: a. Revising the entries for Sections 39.405, 39.411, 39.419, 39.602, 39.603, 55.152, and 55.156; b. Adding an entry for Section 116.127 in numerical order under the heading “Division 1—Permit Application”; c. Removing the heading “Division 2—Compliance History” and the entries that follow for Sections 116.120, 116.121, 116.122, 116.123, 116.125, 116.126, and 116.127; and d. Removing the heading “Division 3—Public Notice” and the entries that follow for Sections 116.130, 116.131, 116.132, 116.133, 116.134, 116.136, and 116.137.

    The revision and addition read as follows:

    § 52.2270 Identification of plan.

    (c) * * *

    EPA Approved Regulations in the Texas SIP State citation Title/subject State approval/
  • submittal date
  • EPA approval date Explanation
    *         *         *         *         *         *         * Chapter 39—Public Notice Subchapter H—Applicability and General Provisions *         *         *         *         *         *         * Section 39.405 General Notice Provisions 12/9/2015 5/9/2018, [Insert Federal Register citation] SIP includes 39.405(f)(3) and (g), (h)(2)-(h)(4), (h)(6), (h)(8)-(h)(11), (i) and (j) as adopted on 12/9/2015.
  • SIP includes 39.405(h)(1)9A) as adopted on 6/2/2010.
  • *         *         *         *         *         *         * Section 39.411 Text of Public Notice 12/7/2016 5/9/2018, [Insert Federal Register citation] SIP includes 39.411(a), 39.411(e)(1)-(4)(A)(i) and (iii), (4)(B), (e)(5) introductory paragraph, (e)(5)(A), (e)(5)(B), (e)(6)-(9), (e)(11)(A)(i), (e)(11)(A)(iii), (e)(11)(A)(iv), (e)(11)(B)-(F), (e)(13), (e)(15), (e)(16), (f)(1)-(8), (g), and (h) as adopted 12/7/2016.
  • SIP includes 39.411(e)(10) as adopted on 3/26/2014.
  • *         *         *         *         *         *         * Section 39.419 Notice of Application and Preliminary Determination 12/9/2015 5/9/2018, [Insert Federal Register citation] SIP includes 39.419(e) (e)(1) and (e)(2). *         *         *         *         *         *         * Subchapter K—Public Notice of Air Quality Applications *         *         *         *         *         *         * Section 39.602 Mailed Notice 6/2/2010 1/6/2014, 79 FR 551 SIP does not include 39.602(c) adopted on 12/9/2015. Section 39.603 Newspaper Notice 12/7/2016 5/9/2018, [Insert Federal Register citation] *         *         *         *         *         *         * Chapter 55—Requests for Reconsideration and Contested Case Hearings; Public Comment Subchapter E—Public Comment and Public Meetings *         *         *         *         *         *         * Section 55.152 Public Comment Period 12/7/2016 5/9/2018, [Insert Federal Register citation] SIP includes 55.152(a)(1), (a)(2), (a)(3), (a)(6), (a)(7), and (b). *         *         *         *         *         *         * Section 55.156 Public Comment Processing 12/9/2015 5/9/2018, [Insert Federal Register citation] SIP includes 55.156(a), (b), (c)(1), and (g). *         *         *         *         *         *         * Chapter 116 (Reg 6)—Control of Air Pollution by Permits for New Construction or Modification *         *         *         *         *         *         * Subchapter B—New Source Review Permits Division 1—Permit Application *         *         *         *         *         *         * Section 116.127 Actual to Projected Actual and Emission Exclusion Test for Emissions 2/9/2011 10/25/2012, 77 FR 65119 *         *         *         *         *         *         *
    [FR Doc. 2018-09755 Filed 5-8-18; 8:45 am] BILLING CODE 6560-50-P
    FEDERAL COMMUNICATIONS COMMISSION 47 CFR Part 63 [WC Docket No. 17-84; FCC 17-154] Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment AGENCY:

    Federal Communications Commission.

    ACTION:

    Final rule; announcement of effective date.

    SUMMARY:

    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 Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment Report and Order, Declaratory Ruling, and Further Notice of Proposed Rulemaking, FCC 17-154, which stated that the Commission would publish a document in the Federal Register announcing the effective date of those rules.

    DATES:

    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.

    FOR FURTHER INFORMATION CONTACT:

    Michele Levy Berlove, Attorney Advisor, Wireline Competition Bureau, at (202) 418-1477, or by email at [email protected]. For additional information concerning the Paperwork Reduction Act information collection requirements, contact Nicole Ongele at (202) 418-2991 or [email protected].

    SUPPLEMENTARY INFORMATION:

    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 Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment Report and Order, Declaratory Ruling, and Further Notice of Proposed Rulemaking, FCC 17-154, published at 82 FR 61453, December 28, 2017, as specified above.

    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 [email protected].

    To request materials in accessible formats for people with disabilities (Braille, large print, electronic files, audio format), send an email to [email protected] or call the Consumer and Governmental Affairs Bureau at (202) 418-0530 (voice), (202) 418-0432 (TTY).

    Synopsis

    As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507), the FCC is notifying the public that it received final OMB approval on May 1, 2018, for the information collection requirements contained in the modifications to the Commission's rules in 47 CFR part 63. Under 5 CFR part 1320, an agency may not conduct or sponsor a collection of information unless it displays a current, valid OMB Control Number.

    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:

    OMB Control Number: 3060-0149.

    OMB Approval Date: May 1, 2018.

    OMB Expiration Date: May 31, 2021.

    Title: Part 63, Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment, WC Docket No. 17-84, FCC 17-154.

    Form Number: N/A.

    Respondents: Business or other for-profit entities.

    Number of Respondents and Responses: 58 respondents; 58 responses.

    Estimated Time per Response: 6 hours.

    Frequency of Response: One-time reporting requirement and third-party disclosure requirements.

    Obligation to Respond: Required to obtain or retain benefits. Statutory authority for this collection of information is contained in 47 U.S.C. Sections 214 and 402 of the Communications Act of 1934, as amended.

    Total Annual Burden: 348 hours.

    Total Annual Cost: No cost(s).

    Privacy Act Impact Assessment: No impact(s).

    Nature and Extent of Confidentiality: The Commission is not requesting that the respondents submit confidential information to the FCC. Respondents may, however, request confidential treatment for information they believe to be confidential under 47 CFR 0.459 of the Commission's rules.

    Needs and Uses: The Commission is seeking Office of Management and Budget (OMB) approval for a revision to a currently approved collection. Section 214 of the Communications Act of 1934, as amended, requires that a carrier first obtain FCC authorization either to (1) construct, operate, or engage in transmission over a line of communications, or (2) discontinue, reduce or impair service over a line of communications. Part 63 of Title 47 of the Code of Federal Regulations (CFR) implements Section 214. Part 63 also implements provisions of the Cable Communications Policy Act of 1984 pertaining to video which was approved under this OMB Control Number 3060-0149. In 2009, the Commission modified part 63 to extend to providers of interconnected Voice of internet Protocol (VoIP) service the discontinuance obligations that apply to domestic non-dominant telecommunications carriers under Section 214 of the Communications Act of 1934, as amended. In 2014, the Commission adopted improved administrative filing procedures for domestic transfers of control, domestic discontinuances and notices of network changes, and among other adjustments, modified part 63 to require electronic filing for applications for authorization to discontinue, reduce, or impair service under section 214(a) of the Act. In July 2016, the Commission revised certain section 214(a) discontinuance procedures. OMB has approved the revised rules that: (1) Allow carriers to provide notice via email or other alternative methods to offer additional options to customers; (2) provide for streamlined treatment of applications to discontinue services for which the carrier has had no existing customers or reasonable requests for service during the previous 180 days; (3) make a competitive LEC's application for discontinuance deemed granted on the effective date of any copper retirement that made the discontinuance unavoidable; and (4) require that applicants must provide notice of discontinuance applications to federally-recognized Tribal Nations. OMB approval has not yet been sought for the additional section 214(a) discontinuance rules adopted in 2016 pertaining to streamlined treatment of discontinuance applications for legacy voice service as part of a technology transition or outreach requirements for such transitions, and approval of those rules and requirements will be addressed separately at a later date. In Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment, WC Docket No. 17-84, Report and Order, Declaratory Ruling, and Further Notice of Proposed Rulemaking, FCC 17-154 (rel. Nov. 29, 2017) (Wireline Infrastructure Order), the Commission, among other things, reduced the public comment and auto-grant periods for applications that grandfather low speed legacy services and applications to discontinue previously grandfathered legacy data services. The Commission also held that if a carrier files an application to discontinue, reduce, or impair a legacy voice or data service below 1.544 Mbps for which it has had no customers and no request for service for at least a 30-day period immediately preceding submission of the application, that application will be automatically granted on the 15th day after its filing with the Commission, absent Commission notice to the contrary. The Commission will use the information collected under these revisions to 47 CFR part 63 to determine if affected respondents are in compliance with its rules and the requirements of section 214 of the Communications Act of 1934, as amended.

    Federal Communications Commission. Marlene Dortch, Secretary, Office of the Secretary.
    [FR Doc. 2018-09874 Filed 5-8-18; 8:45 am] BILLING CODE 6712-01-P
    DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Part 224 [Docket No. 160413329-8412-03] RIN 0648-XE571 Endangered and Threatened Wildlife and Plants: Final Rule To List the Taiwanese Humpback Dolphin as Endangered Under the Endangered Species Act AGENCY:

    National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.

    ACTION:

    Final rule.

    SUMMARY:

    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 (Sousa chinensis taiwanensis) as endangered under the Endangered Species Act (ESA). We have reviewed the status of the Taiwanese humpback dolphin, including efforts being made to protect the subspecies, and considered public comments submitted on the proposed listing rule as well as new information received since publication of the proposed rule. Based on all of this information, we have determined that the Taiwanese humpback dolphin warrants listing as an endangered subspecies. We will not designate critical habitat for this subspecies, because the geographical areas occupied by these dolphins are entirely outside U.S. jurisdiction, and we have not identified any unoccupied areas within U.S. jurisdiction that are currently essential to the conservation of the subspecies.

    DATES:

    This final rule is effective June 8, 2018.

    ADDRESSES:

    Endangered Species Conservation Division, NMFS Office of Protected Resources (F/PR3), 1315 East-West Highway, Silver Spring, MD 20910.

    FOR FURTHER INFORMATION CONTACT:

    Chelsey Young, NMFS, Office of Protected Resources, [email protected], (301) 427-8491.

    SUPPLEMENTARY INFORMATION: Background

    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 (S. chinensis taiwanensis) as threatened or endangered under the ESA throughout its range. We found that the petitioned action may be warranted for the species and, on May 12, 2016, we published a positive 90-day finding for the Taiwanese humpback dolphin (81 FR 29515), announcing that the petition presented substantial scientific or commercial information indicating the petitioned action may be warranted range wide, and explaining the basis for the finding. We also announced the initiation of a status review of the species, as required by section 4(b)(3)(a) of the ESA, and requested information to inform the agency's decision on whether the subspecies warranted listing as endangered or threatened under the ESA. On June 26, 2017, we published a proposed rule to list the Taiwanese humpback dolphin as endangered (82 FR 28802). We requested public comments on the information in the proposed rule and associated status review during a 60-day public comment period, which closed on August 25, 2017. This final rule provides a discussion of the public comments received in response to the proposed rule and our final determination on the petition to list the Taiwanese humpback dolphin under the ESA.

    Listing Determination Under the ESA

    We are responsible for determining whether species meet the definition of threatened or endangered under the ESA (16 U.S.C. 1531 et seq.). To make this determination, we first consider whether a group of organisms constitutes a “species” under the ESA, then whether the status of the species qualifies it for listing as either threatened or endangered. Section 3 of the ESA defines a “species” to include any subspecies of fish or wildlife or plants, and any distinct population segment of any species of vertebrate fish or wildlife, which interbreeds when mature. The Taiwanese humpback dolphin, S. chinensis taiwanensis, is a formally recognized subspecies (Wang et al., 2015; Committee on Taxonomy, 2016) and thus meets the ESA definition of a “species.”

    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 et al. (2000), to organize and evaluate the forms of risks. The approach of considering demographic risk factors to help frame the consideration of extinction risk has been used in many of our previous status reviews (see http://www.nmfs.noaa.gov/pr/species for links to these reviews). In this approach, the collective condition of individual populations is considered at the species level according to four demographic viability factors: Abundance and trends, population growth rate or productivity, spatial structure and connectivity, and genetic diversity. These viability factors reflect concepts that are well-founded in conservation biology and that individually and collectively provide strong indicators of extinction risk.

    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.

    Summary of Comments

    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.

    Comments on Proposed Listing Determination

    Comment 1: As mentioned previously, all public comments received were supportive of the proposed listing determination for the Taiwanese humpback dolphin as endangered. One commenter emphasized the detrimental ecosystem impacts that can result from species extinctions. The commenter also noted the importance of the United States to continue leading in the area of environmental preservation and expressed support for the proposed listing.

    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 Comment 2). The Marine Mammal Commission also submitted a letter of support regarding our determination that the Taiwanese humpback dolphin has a high risk of extinction throughout its range and warrants listing as an endangered subspecies.

    Response: We acknowledge the several public comments in support of our listing determination and the public interest in conserving the Taiwanese humpback dolphin.

    Comments on Threats to the Taiwanese Humpback Dolphin

    Comment 2: We received a comment letter from the petitioners (AWI, CBD, and Guardians) that provided some new scientific information related to the threat of underwater noise and acoustic disturbance to the Taiwanese humpback dolphin. Specifically, the commenters emphasized the emerging threat of pile-driving activities associated with the development and installation of offshore wind farms in close proximity to the dolphin's habitat. The commenters provided recent studies that evaluated the in-situ noise pressure levels from these types of activities (Chen et al., 2017a, 2017b) and referred to NMFS's technical guidance for assessing the effects of anthropogenic sound on marine mammal hearing to suggest that the development of offshore wind farms is a significant threat to the Taiwanese humpback dolphin. We received a letter from another group of commenters expressing similar concerns regarding the wind farm development on the western coast of Taiwan. The commenters stated that “offshore wind farms and their construction will exacerbate noise pollution that can be traumatically harmful to the dolphins.”

    Response: We agree with commenters that the development of offshore wind farms on the western coast of Taiwan is concerning for the Taiwanese humpback dolphin, particularly given the limited amount of suitable habitat available to the subspecies. We incorporated this new information into our status review report, and we agree that this new information further supports our endangered listing determination for the dolphin. As described in the status review report and proposed rule, acoustic disturbance is likely a threat that compounds other threats to the population by decreasing foraging success, increasing stress, and decreasing immune health. As such, we ranked this threat as “moderate,” meaning that it is likely that this particular threat contributes significantly to the subspecies' risk of extinction. We maintain our conclusion regarding this threat ranking for acoustic disturbance to the Taiwanese humpback dolphin. However, given the increasing development activities related to the installation of numerous wind turbines slated to occur within the dolphin's habitat in the next several years, we acknowledge that the threat of acoustic disturbance to the Taiwanese humpback dolphin population is likely to increase in the future.

    Summary of Changes From the Proposed Listing Rule

    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.

    Status Review

    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 ADDRESSES section).

    ESA Section 4(a)(1) Factors Affecting the Taiwanese Humpback Dolphin

    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 consistent with or reinforced information in the status review report and proposed rule, and thus, did not change our conclusions regarding any of the section 4(a)(1) factors or their interactions. Therefore, we incorporate and affirm herein all information, discussion, and conclusions regarding the factors affecting the Taiwanese humpback dolphin from the final status review report (Whittaker and Young 2018) and the proposed rule (82 FR 28802; June 26, 2017).

    Extinction Risk

    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).

    Protective Efforts

    In addition to regulatory measures (e.g., Taiwan's Wildlife Conservation Act and designation of Major Wildlife Habitat, etc.), we considered other efforts being made to protect the Taiwanese humpback dolphin. We considered whether such protective efforts altered the conclusions of the extinction risk analysis for the species; however, none of the information we received on the proposed rule affected our conclusions regarding conservation efforts to protect the dolphin. 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).

    Final Listing Determination

    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.

    Effects of Listing

    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.

    Activities That Would Constitute a Violation of Section 9 of the ESA

    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.

    Identification of Those Activities That Would Not Likely Constitute a Violation of Section 9 of the ESA

    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 were in possession at the time of listing. Such parts may be non-commercially exported or imported; however, the importer or exporter must be able to provide evidence to show that the parts meet the criteria of ESA section 9(b)(1) (i.e., held in a controlled environment at the time of listing, in a non-commercial activity).

    Identifying Section 7 Consultation Requirements

    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

    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.

    Peer Review

    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 http://www.cio.noaa.gov/services_programs/prplans/ID370.html.

    References

    A complete list of the references used is available upon request (see ADDRESSES).

    Classification National Environmental Policy Act

    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 Pacific Legal Foundation v. Andrus, 657 F.2d 829 (6th Cir. 1981), we have concluded that ESA listing actions are not subject to the environmental assessment requirements of the National Environmental Policy Act (NEPA).

    Executive Order 12866, Regulatory Flexibility Act

    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.

    Paperwork Reduction Act

    This final rule does not contain a collection-of-information requirement for the purposes of the Paperwork Reduction Act.

    Executive Order 13132, Federalism

    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.

    List of Subjects in 50 CFR Part 224

    Endangered and threatened species, Exports, Transportation.

    Dated: May 4, 2018. Samuel D. Rauch, III, Deputy Assistant Administrator for Regulatory Programs, National Marine Fisheries Service.

    For the reasons set out in the preamble, 50 CFR part 224 is amended as follows:

    PART 224—ENDANGERED MARINE AND ANADROMOUS SPECIES 1. The authority citation for part 224 continues to read as follows: Authority:

    16 U.S.C. 1531-1543 and 16 U.S.C 1361 et seq.

    2. In § 224.101, amend the table in paragraph (h) by adding an entry for “Dolphin, Taiwanese humpback” under “Marine Mammals” in alphabetical order, by common name, to read as follows:
    § 224.101 Enumeration of endangered marine and anadromous species.

    (h) * * *

    Species 1 Common
  • name
  • Scientific
  • name
  • Description of
  • listed entity
  • Citation(s) for listing
  • determination(s)
  • Critical
  • habitat
  • ESA rules
    *         *         *         *         *         *         * Marine Mammals *         *         *         *         *         *         * Dolphin, Taiwanese humpback Sousa chinensis taiwanensis Entire subspecies [Insert Federal Register page where the document begins], May 9, 2018 NA NA *         *         *         *         *         *         * 1 Species includes taxonomic species, subspecies, distinct population segments (DPSs) (for a policy statement, see 61 FR 4722, February 7, 1996), and evolutionarily significant units (ESUs) (for a policy statement, see 56 FR 58612, November 20, 1991).
    [FR Doc. 2018-09890 Filed 5-8-18; 8:45 am] BILLING CODE 3510-22-P
    83 90 Wednesday, May 9, 2018 Proposed Rules DEPARTMENT OF AGRICULTURE Agricultural Marketing Service 7 CFR Part 945 [Doc. No. AMS-SC-17-0077; SC18-945-1 PR] Irish Potatoes Grown in Certain Designated Counties in Idaho, and Malheur County, Oregon; Modification of Handling Regulations AGENCY:

    Agricultural Marketing Service, USDA.

    ACTION:

    Proposed rule.

    SUMMARY:

    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 Federal Register requirements.

    DATES:

    Comments must be received by July 9, 2018.

    ADDRESSES:

    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: http://www.regulations.gov. Comments should reference the document number and the date and page number of this issue of the Federal Register and will be available for public inspection in the Office of the Docket Clerk during regular business hours, or can be viewed at http://www.regulations.gov. All comments submitted in response to this proposed rule will be included in the record and will be made available to the public. Please be advised that the identity of the individuals or entities submitting the comments will be made public on the internet at the address provided above.

    FOR FURTHER INFORMATION CONTACT:

    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: [email protected] or [email protected].

    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: [email protected].

    SUPPLEMENTARY INFORMATION:

    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 classifications that determine the size requirements for U.S. No. 2 grade potatoes. Sections 945.51 and 945.52 provide authority for the establishment and modification of grade, size, quality, and maturity regulations applicable to the handling of potatoes.

    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.

    Initial Regulatory Flexibility Analysis

    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 types, who are subject to regulation under the Act. Small agricultural service firms, which include potato handlers and importers, are defined by the Small Business Administration (SBA) as those having annual receipts of less than $7,500,000, and small agricultural producers are defined as those whose annual receipts are less than $750,000 (13 CFR 121.201).

    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: http://www.ams.usda.gov/rules-regulations/moa/small-businesses. Any questions about the compliance guide should be sent to Richard Lower at the previously mentioned address in the FOR FURTHER INFORMATION CONTACT section.

    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.

    List of Subjects in 7 CFR Part 945

    Marketing agreements, Potatoes, Reporting and recordkeeping requirements.

    For the reasons set forth above, 7 CFR part 945 is proposed to be amended as follows:

    PART 945—IRISH POTATOES GROWN IN CERTAIN DESIGNATED COUNTIES IN IDAHO, AND MALHEUR COUNTY, OREGON 1. The authority citation for 7 CFR part 945 continues to read as follows: Authority:

    7 U.S.C. 601-674.

    [Subpart Redesignated as Subpart A] 2. Redesignate “Subpart—Order Regulating Handling” as “Subpart A—Order Regulating Handling”. [Subpart Redesignated as Subpart B and Amended] 3. Redesignate “Subpart—Rules and Regulations” as subpart B and revise the heading to read as follows: Subpart B—Administrative Requirements [Subpart Redesignated as Subpart C] 4. Redesignate “Subpart—Assessment Rates” as “Subpart C—Assessment Rates”. [Subpart Redesignated as Subpart D and Amended] 5. Redesignate “Subpart—Handling Regulations” as subpart D and revise the heading to read as follows: Subpart D—Handling Requirements 6. In § 945.341, revise paragraphs (a)(2)(i) and (ii) to read as follows:
    § 945.341 Handling regulation.

    (a) * * *

    (1) * * *

    (2) Size—(i) All varieties, except Russet types. 17/8 inches minimum diameter, unless otherwise specified on the container in connection with the grade.

    (ii) Russet types. 2 inches minimum diameter, or 4 ounces minimum weight: Provided, That at least 40 percent of the potatoes in each lot shall be 5 ounces or heavier.

    Dated: May 3, 2018. Bruce Summers, Acting Administrator, Agricultural Marketing Service.
    [FR Doc. 2018-09820 Filed 5-8-18; 8:45 am] BILLING CODE 3410-02-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2018-0391; Product Identifier 2017-NM-165-AD] RIN 2120-AA64 Airworthiness Directives; ATR-GIE Avions de Transport Régional Airplanes AGENCY:

    Federal Aviation Administration (FAA), DOT.

    ACTION:

    Notice of proposed rulemaking (NPRM).

    SUMMARY:

    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.

    DATES:

    We must receive comments on this proposed AD by June 25, 2018.

    ADDRESSES:

    You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:

    Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments.

    Fax: 202-493-2251.

    Mail: U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590.

    Hand Delivery: Deliver to Mail address above between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

    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 [email protected]; http://www.atr-aircraft.com. You may view this service information at the FAA, Transport Standards Branch, 2200 South 216th Street, Des Moines, WA. For information on the availability of this material at the FAA, call 206-231-3195.

    Examining the AD Docket

    You may examine the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0391; or in person at the Docket Management Facility between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this NPRM, the regulatory evaluation, any comments received, and other information. The street address for the Docket Operations office (telephone 800-647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt.

    FOR FURTHER INFORMATION CONTACT:

    Shahram Daneshmandi, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th Street, Des Moines, WA 98198; telephone and fax 206-231-3220.

    SUPPLEMENTARY INFORMATION:

    Comments Invited

    We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2018-0391; Product Identifier 2017-NM-165-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this NPRM. We will consider all comments received by the closing date and may amend this NPRM based on those comments.

    We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this NPRM.

    Discussion

    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 http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0391.

    Relationship Between Proposed AD and Certain Other ADs

    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.

    Related Service Information Under 1 CFR Part 51

    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 ADDRESSES section.

    FAA's Determination and Requirements of This Proposed AD

    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 (e.g., inspections). Compliance with these actions is required by 14 CFR 91.403(c). For airplanes that have been previously modified, altered, or repaired in the areas addressed by this proposed AD, the operator may not be able to accomplish the actions described in the revisions. In this situation, to comply with 14 CFR 91.403(c), the operator must request approval for an alternative method of compliance according to paragraph (k)(1) of this proposed AD. The request should include a description of changes to the required actions that will ensure the continued operational safety of the airplane.

    Airworthiness Limitations Based on Type Design

    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.

    Costs of Compliance

    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).

    Authority for This Rulemaking

    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.

    Regulatory Findings

    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.

    List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

    The Proposed Amendment

    Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

    PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

    49 U.S.C. 106(g), 40113, 44701.

    § 39.13 [Amended]
    2. The FAA amends § 39.13 by adding the following new airworthiness directive (AD): ATR-GIE Avions de Transport Régional: Docket No. FAA-2018-0391; Product Identifier 2017-NM-165-AD. (a) Comments Due Date

    We must receive comments by June 25, 2018.

    (b) Affected ADs

    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”).

    (c) Applicability

    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.

    (d) Subject

    Air Transport Association (ATA) of America Code 05, Time limits/maintenance checks.

    (e) Reason

    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.

    (f) Compliance

    Comply with this AD within the compliance times specified, unless already done.

    (g) Maintenance or Inspection Program Revision

    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.

    (h) Initial Compliance Times for Certain CMR Tasks

    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.

    EP09MY18.018 (i) No Alternative Actions and Intervals

    After the maintenance or inspection program, as applicable, has been revised as required by paragraphs (g) and (h) of this AD, no alternative actions (e.g., inspections) or intervals may be used unless the actions or intervals are approved as an alternative method of compliance (AMOC) in accordance with the procedures specified in paragraph (k)(1) of this AD.

    (j) Terminating Action for Certain ADs

    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.

    (k) Other FAA AD Provisions

    The following provisions also apply to this AD:

    (1) Alternative Methods of Compliance (AMOCs): The Manager, International Section, Transport Standards 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 International Section, send it to the attention of the person identified in paragraph (l)(2) of this AD. Information may be emailed to: [email protected]. 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.

    (2) Contacting the Manufacturer: For any requirement in this AD to obtain corrective actions from a manufacturer, the action must be accomplished using a method approved by the Manager, International Section, Transport Standards Branch, FAA; or the European Aviation Safety Agency (EASA); or ATR-GIE Avions de Transport Régional's EASA Design Organization Approval (DOA). If approved by the DOA, the approval must include the DOA-authorized signature.

    (l) Related Information

    (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 http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0391.

    (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 [email protected]; http://www.atr-aircraft.com. You may view this service information at the FAA, Transport Standards Branch, 2200 South 216th Street, Des Moines, WA. For information on the availability of this material at the FAA, call 206-231-3195.

    Issued in Des Moines, Washington, on April 27, 2018. Michael Kaszycki, Acting Director, System Oversight Division, Aircraft Certification Service.
    [FR Doc. 2018-09746 Filed 5-8-18; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2018-0384; Product Identifier 2017-SW-061-AD] RIN 2120-AA64 Airworthiness Directives; Airbus Helicopters AGENCY:

    Federal Aviation Administration (FAA), DOT.

    ACTION:

    Notice of proposed rulemaking (NPRM).

    SUMMARY:

    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.

    DATES:

    We must receive comments on this proposed AD by July 9, 2018.

    ADDRESSES:

    You may send comments by any of the following methods:

    Federal eRulemaking Docket: Go to http://www.regulations.gov. Follow the online instructions for sending your comments electronically.

    Fax: 202-493-2251.

    Mail: Send comments to the U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590-0001.

    Hand Delivery: Deliver to the “Mail” address between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

    Examining the AD Docket

    You may examine the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0384; or in person at Docket Operations between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this proposed AD, the European Aviation Safety Agency (EASA) AD, the economic evaluation, any comments received, and other information. The street address for Docket Operations (telephone 800-647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt.

    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 http://www.helicopters.airbus.com/website/en/ref/Technical-Support_73.html. You may review the referenced service information at the FAA, Office of the Regional Counsel, Southwest Region, 10101 Hillwood Pkwy, Room 6N-321, Fort Worth, TX 76177.

    FOR FURTHER INFORMATION CONTACT:

    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 [email protected].

    SUPPLEMENTARY INFORMATION:

    Comments Invited

    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.

    Discussion

    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.

    FAA's Determination

    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.

    Related Service Information Under 1 CFR Part 51

    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 ADDRESSES section.

    Proposed AD Requirements

    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.

    Differences Between This Proposed AD and the EASA AD

    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.

    Interim Action

    We consider this proposed AD to be an interim action. If final action is later identified, we might consider further rulemaking then.

    Costs of Compliance

    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.

    Authority for This Rulemaking

    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.

    Regulatory Findings

    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.

    List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

    The Proposed Amendment

    Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

    PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

    49 U.S.C. 106(g), 40113, 44701.

    § 39.13 [Amended]
    2. The FAA amends § 39.13 by adding the following new airworthiness directive (AD): Airbus Helicopters: Docket No. FAA-2018-0384; Product Identifier 2017-SW-061-AD. (a) Applicability

    This AD applies to Model AS-365N2, AS 365 N3, EC 155B, EC155B1, SA-365N1, and SA-366G1 helicopters, certificated in any category.

    (b) Unsafe Condition

    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.

    (c) Comments Due Date

    We must receive comments by July 9, 2018.

    (d) Compliance

    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.

    (e) Required Actions

    (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.

    (f) Alternative Methods of Compliance (AMOCs)

    (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 [email protected].

    (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.

    (g) Additional Information

    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 http://www.regulations.gov in the AD Docket.

    (h) Subject

    Joint Aircraft Service Component (JASC) Code: 5302, Rotorcraft tail boom.

    Issued in Fort Worth, Texas, on April 26, 2018. Lance T. Gant, Director, Compliance & Airworthiness Division,Aircraft Certification Service.
    [FR Doc. 2018-09742 Filed 5-8-18; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2018-0395; Product Identifier 2017-NM-136-AD] RIN 2120-AA64 Airworthiness Directives; Airbus Airplanes AGENCY:

    Federal Aviation Administration (FAA), DOT.

    ACTION:

    Notice of proposed rulemaking (NPRM).

    SUMMARY:

    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 certain components installed on the MLG, NLG, and CLG. We are proposing this AD to address the unsafe condition on these products.

    DATES:

    We must receive comments on this proposed AD by June 25, 2018.

    ADDRESSES:

    You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:

    Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments.

    Fax: 202-493-2251.

    Mail: U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590.

    Hand Delivery: Deliver to Mail address above between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

    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 [email protected]; internet http://www.airbus.com. You may view this service information at the FAA, Transport Standards Branch, 2200 South 216th St., Des Moines, WA. For information on the availability of this material at the FAA, call 206-231-3195.

    Examining the AD Docket

    You may examine the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0395; or in person at the Docket Management Facility between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this NPRM, the regulatory evaluation, any comments received, and other information. The street address for the Docket Operations office (telephone 800-647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt.

    FOR FURTHER INFORMATION 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.

    SUPPLEMENTARY INFORMATION:

    Comments Invited

    We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2018-0395; Product Identifier 2017-NM-136-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this NPRM. We will consider all comments received by the closing date and may amend this NPRM based on those comments.

    We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this NPRM.

    Discussion

    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 http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0395.

    Related Service Information Under 1 CFR Part 51

    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 ADDRESSES section.

    FAA's Determination and Requirements of This Proposed AD

    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.

    Costs of Compliance

    We estimate that this proposed AD affects 103 airplanes of U.S. registry.

    We estimate the following costs to comply with this proposed AD:

    Estimated Costs Action Labor cost Parts cost Cost per
  • product
  • Cost on U.S. operators
    Inspection 4 work-hours × $85 per hour = $340 $0 $340 $35,020

    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.

    Authority for This Rulemaking

    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.

    Regulatory Findings

    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.

    List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

    The Proposed Amendment

    Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

    PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

    49 U.S.C. 106(g), 40113, 44701.

    § 39.13 [Amended]
    2. The FAA amends § 39.13 by adding the following new airworthiness directive (AD): Airbus: Docket No. FAA-2018-0395; Product Identifier 2017-NM-136-AD. (a) Comments Due Date

    We must receive comments by June 25, 2018.

    (b) Affected ADs

    None.

    (c) Applicability

    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.

    (d) Subject

    Air Transport Association (ATA) of America Code 32, Landing Gear.

    (e) Reason

    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.

    (f) Compliance

    Comply with this AD within the compliance times specified, unless already done.

    (g) Definitions

    (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 CLG that has not exceeded the applicable life limit specified in paragraph (g)(2)(i), (g)(2)(ii), or (g)(2)(iii) of this AD, since first installation on an airplane.

    (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.

    (h) Identification of Part Number, Serial Number, Weight Variant, and Reduced Life Limit

    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.

    (i) Replacement of Affected Parts

    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).

    (j) Parts Installation Specification

    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.

    (k) Other FAA AD Provisions

    The following provisions also apply to this AD:

    (1) Alternative Methods of Compliance (AMOCs): The Manager, International Section, Transport Standards 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 International Section, send it to the attention of the person identified in paragraph (l)(2) of this AD. Information may be emailed to: [email protected]. 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.

    (2) Contacting the Manufacturer: For any requirement in this AD to obtain corrective actions from a manufacturer, the action must be accomplished using a method approved by the Manager, International Section, Transport Standards Branch, FAA; or the European Aviation Safety Agency (EASA); or Airbus's EASA Design Organization Approval (DOA). If approved by the DOA, the approval must include the DOA-authorized signature.

    (3) Required for Compliance (RC): If any service information contains procedures or tests that are identified as RC, those procedures and tests must be done to comply with this AD; any procedures or tests that are not identified as RC are recommended. Those procedures and tests that are not identified as RC may be deviated from using accepted methods in accordance with the operator's maintenance or inspection program without obtaining approval of an AMOC, provided the procedures and tests identified as RC can be done and the airplane can be put back in an airworthy condition. Any substitutions or changes to procedures or tests identified as RC require approval of an AMOC.

    (l) Related Information

    (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 http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0395.

    (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 [email protected]; internet http://www.airbus.com. You may view this service information at the FAA, Transport Standards Branch, 2200 South 216th St., Des Moines, WA. For information on the availability of this material at the FAA, call 206-231-3195.

    Issued in Des Moines, Washington, on April 30, 2018. Dionne Palermo, Acting Director, System Oversight Division, Aircraft Certification Service.
    [FR Doc. 2018-09743 Filed 5-8-18; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2018-0326; Product Identifier 2018-CE-006-AD] RIN 2120-AA64 Airworthiness Directives; SOCATA Airplanes AGENCY:

    Federal Aviation Administration (FAA), Department of Transportation (DOT).

    ACTION:

    Notice of proposed rulemaking (NPRM).

    SUMMARY:

    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.

    DATES:

    We must receive comments on this proposed AD by June 25, 2018.

    ADDRESSES:

    You may send comments by any of the following methods:

    Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments.

    Fax: (202) 493-2251.

    Mail: U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590.

    Hand Delivery: U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays.

    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: [email protected]; internet: https://www.mysocata.com/login/accueil.php. You may review copies of the referenced service information at the FAA, Policy and Innovation Division, 901 Locust, Kansas City, Missouri 64106. For information on the availability of this material at the FAA, call (816) 329-4148.

    Examining the AD Docket

    You may examine the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0326; or in person at Docket Operations between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this proposed AD, the regulatory evaluation, any comments received, and other information. The street address for Docket Operations (telephone (800) 647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt.

    FOR FURTHER INFORMATION CONTACT:

    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: [email protected].

    SUPPLEMENTARY INFORMATION:

    Comments Invited

    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 ADDRESSES section. Include “Docket No. FAA-2018-0326; Product Identifier 2018-CE-006-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD because of those comments.

    We will post all comments we receive, without change, to http://regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

    Discussion

    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, i.e. which were not subject to repetitive inspections as required by that [DGAC France] AD. Consequently, SOCATA revised SB 10-081-57 (now at revision (rev) 3), extending the Applicability to all TB 10 aeroplanes, as well as to TB 200 aeroplanes, and improving the repair solution of the wing front attachment on wing side.

    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 http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0326.

    Related Service Information Under 1 CFR Part 51

    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 ADDRESSES section of this NPRM.

    FAA's Determination and Requirements of the Proposed AD

    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.

    Costs of Compliance

    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.

    Authority for This Rulemaking

    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.

    Regulatory Findings

    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.

    List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.

    The Proposed Amendment

    Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

    PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority:

    49 U.S.C. 106(g), 40113, 44701.

    § 39.13 [Amended]
    2. The FAA amends § 39.13 by removing Airworthiness Directive (AD) 98-16-03, Amendment 39-10677 (63 FR 40359; July 29, 1998), and adding the following new AD: SOCATA: Docket No. FAA-2018-0326; Product Identifier 2018-CE-006-AD. (a) Comments Due Date

    We must receive comments by June 25, 2018.

    (b) Affected ADs

    This AD replaces AD 98-16-03, Amendment 39-10677 (63 FR 40359; July 29, 1998) (“AD 98-16-03”).

    (c) Applicability

    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.

    (d) Subject

    Air Transport Association of America (ATA) Code 57: Wings.

    (e) Reason

    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.

    (f) Compliance

    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.

    (g) Actions for Airplanes NOT EQUIPPED With Modification Kit OPT109110XX

    (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.

    EP09MY18.019

    (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.

    EP09MY18.020 (h) Actions for Airplanes EQUIPPED With Modification Kit OPT109110XX

    (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.

    EP09MY18.021

    (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.

    (i) Actions for Group 1 Airplanes

    (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.

    EP09MY18.022

    (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.

    EP09MY18.023

    (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.

    (j) Replacement of the Reinforced Front Attachment

    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.

    (k) Credit for Previous Actions

    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.

    (l) Other FAA AD Provisions

    The following provisions also apply to this AD:

    (1) Alternative Methods of Compliance (AMOCs): The Manager, Small Airplane Standards Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. Send information to ATTN: 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: [email protected]. Before using any approved AMOC on any airplane to which the AMOC applies, notify your appropriate principal inspector (PI) in the FAA Flight Standards District Office (FSDO), or lacking a PI, your local FSDO.

    (2) Contacting the Manufacturer: For any requirement in this AD to obtain corrective actions from a manufacturer, the action must be accomplished using a method approved by the Manager, Small Airplane Standards Branch, FAA; or the European Aviation Safety Agency (EASA).

    (m) Related Information

    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 http://www.regulations.gov by searching for and locating Docket No. FAA-2018-0326. For service information related to this 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: [email protected]; internet: https://www.mysocata.com/login/accueil.php. You may review copies of the referenced service information at the FAA, Policy and Innovation Division, 901 Locust, Kansas City, Missouri 64106. For information on the availability of this material at the FAA, call (816) 329-4148.

    Issued in Kansas City, Missouri, on April 30, 2018. Melvin J. Johnson, Deputy Director, Policy & Innovation Division, Aircraft Certification Service.
    [FR Doc. 2018-09602 Filed 5-8-18; 8:45 am] BILLING CODE 4910-13-P
    SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 275 [Release No. IA-4889; File No. S7-09-18] RIN 3235-AM36 Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation AGENCY:

    Securities and Exchange Commission.

    ACTION:

    Proposed interpretation; request for comment.

    SUMMARY:

    The Securities and Exchange Commission (the “SEC” or the “Commission”) is publishing for comment a proposed interpretation of the standard of conduct for investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act” or the “Act”). The Commission also is requesting comment on: Licensing and continuing education requirements for personnel of SEC-registered investment advisers; delivery of account statements to clients with investment advisory accounts; and financial responsibility requirements for SEC-registered investment advisers, including fidelity bonds.

    DATES:

    Comments should be received on or before August 7, 2018.

    ADDRESSES:

    Comments may be submitted by any of the following methods:

    Electronic Comments

    • Use the Commission's internet comment form (http://www.sec.gov/rules/interp.shtml); or

    • Send an email to [email protected]. Please include File Number S7-09-18 on the subject line.

    Paper Comments

    • Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

    All submissions should refer to File Number S7-09-18. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/interp.shtml). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available.

    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 www.sec.gov to receive notifications by email.

    FOR FURTHER INFORMATION CONTACT:

    Jennifer Songer, Senior Counsel, or Sara Cortes, Assistant Director, at (202) 551-6787 or [email protected], Investment Adviser Regulation Office, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.

    SUPPLEMENTARY INFORMATION:

    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].1

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

    Table of Contents II. Investment Advisers' Fiduciary Duty A. Duty of Care i. Duty To Provide Advice That Is in the Client's Best Interest ii. Duty To Seek Best Execution iii. Duty To Act and To Provide Advice and Monitoring Over the Course of the Relationship B. Duty of Loyalty C. Request for Comment III. Economic Considerations A. Background B. Economic Impacts IV. Request for Comment Regarding Areas of Enhanced Investment Adviser Regulation A. Federal Licensing and Continuing Education B. Provision of Account Statements C. Financial Responsibility I. Introduction

    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.2 Its fiduciary obligation, which includes an affirmative duty of utmost good faith and full and fair disclosure of all material facts, is established under federal law and is important to the Commission's investor protection efforts.3 The Commission also regulates broker-dealers, including the obligations that broker-dealers owe to their customers. Investment advisers and broker-dealers provide advice and services to retail investors and are important to our capital markets and our economy more broadly. Broker-dealers and investment advisers have different types of relationships with their customers and clients and have different models for providing advice, which provide investors with choice about the levels and types of advice they receive and how they pay for the services that they receive.

    2SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (“SEC v. Capital Gains”). See also infra notes 26-32 and accompanying text; Investment Adviser Codes of Ethics, Investment Advisers Act Release No. 2256 (July 2, 2004); Compliance Programs of Investment Companies and Investment Advisers, Investment Advisers Act Release No. 2204 (Dec. 17, 2003) (“Compliance Programs Release”); Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Investment Advisers Act Release No. 1862 (Apr. 5, 2000). We acknowledge that investment advisers also have antifraud liability with respect to prospective clients under section 206 of the Advisers Act.

    3See SEC v. Capital Gains, supra note 2.

    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 4 when making a recommendation of any securities transaction or investment strategy involving securities to retail customers (“Regulation Best Interest”).5 We are also proposing to require registered investment advisers and registered broker-dealers to deliver to retail investors a relationship summary, which would provide these investors with information 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.6 In light of the comprehensive nature of our proposed set of rulemakings, we believe it would be appropriate and beneficial to address in one release 7 and reaffirm—and in some cases clarify—certain aspects of the fiduciary duty that an investment adviser owes to its clients under section 206 of the Advisers Act.8

    4 An investment adviser has a fiduciary duty to all of its clients, whether or not the client is a retail investor.

    5 Regulation Best Interest, Exchange Act Release No. 34-83062 (April 18, 2018) (“Regulation Best Interest Proposal”).

    6 Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles, Investment Advisers Act Release No. IA-4888 (April 18, 2018) (“Form CRS Proposal”).

    7 This Release is intended to highlight the principles relevant to an adviser's fiduciary duty. It is not, however, intended to be the exclusive resource for understanding these principles.

    8 The Commission recognizes that many advisers provide impersonal investment advice. See, e.g., Advisers Act rule 203A-3 (defining “impersonal investment advice” in the context of defining “investment adviser representative” as “investment advisory services provided by means of written material or oral statements that do not purport to meet the objectives or needs of specific individuals or accounts”). This Release does not address the extent to which the Advisers Act applies to different types of impersonal investment advice.

    An investment adviser's fiduciary duty is similar to, but not the same as, the proposed obligations of broker-dealers under Regulation Best Interest.9 While we are not proposing a uniform standard of conduct for broker-dealers and investment advisers in light of their different relationship types and models for providing advice, we continue to consider whether we can improve protection of investors through potential enhancements to the legal obligations of investment advisers. Below, in addition to our interpretation of advisers' existing fiduciary obligations, we request comment on three potential enhancements to their legal obligations by considering areas where the current broker-dealer framework provides investor protections that may not have counterparts in the investment adviser context.

    9 Regulation Best Interest Proposal, supra note 5. In addition to the obligations proposed in Regulation Best Interest, broker-dealers have a variety of existing specific obligations, including, among others, suitability, best execution, and fair and reasonable compensation. See, e.g., Hanly v. SEC, 415 F.2d 589, 596-97 (2d Cir. 1969) (“A securities dealer occupies a special relationship to a buyer of securities in that by his position he implicitly represents that he has an adequate and reasonable basis for the opinions he renders.”); and FINRA rules 2111 (Suitability), 5310 (Best Execution and Interpositioning), and 2121 (Fair Prices and Commissions)).

    II. Investment Advisers' Fiduciary Duty

    The Advisers Act establishes a federal fiduciary standard for investment advisers.10 This fiduciary standard is based on equitable common law principles and is fundamental to advisers' relationships with their clients under the Advisers Act.11 The fiduciary duty to which advisers are subject is not specifically defined in the Advisers Act or in Commission rules, but reflects a Congressional recognition “of the delicate fiduciary nature of an investment advisory relationship” as well as a Congressional intent to “eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not disinterested.” 12 An adviser's fiduciary duty is imposed under the Advisers Act in recognition of the nature of the relationship between an investment adviser and a client and the desire “so far as is presently practicable to eliminate the abuses” that led to the enactment of the Advisers Act.13 It is made enforceable by the antifraud provisions of the Advisers Act.14

    10Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979) (“Transamerica Mortgage v. Lewis”) (“§ 206 establishes federal fiduciary standards to govern the conduct of investment advisers.”) (quotation marks omitted); Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 471, n.11 (1977) (in discussing SEC v. Capital Gains, stating that the Supreme Court's reference to fraud in the “equitable” sense of the term was “premised on its recognition that Congress intended the Investment Advisers Act to establish federal fiduciary standards for investment advisers”); SEC v. Capital Gains, supra note 2; Amendments to Form ADV, Investment Advisers Act Release No. 3060 (July 28, 2010) (“Investment Advisers Act Release 3060”) (“Under the Advisers Act, an adviser is a fiduciary whose duty is to serve the best interests of its clients, which includes an obligation not to subrogate clients' interests to its own,” citing Proxy Voting by Investment Advisers, Investment Advisers Act Release No. 2106 (Jan. 31, 2003) (“Investment Advisers Act Release 2106”)).

    11See SEC v. Capital Gains, supra note 2 (discussing the history of the Advisers Act, and how equitable principles influenced the common law of fraud and changed the suits brought against a fiduciary, “which Congress recognized the investment adviser to be”).

    12See SEC v. Capital Gains, supra note 2.

    13See SEC v. Capital Gains, supra note 2 (“The Advisers Act thus reflects a congressional recognition `of the delicate fiduciary nature of an investment advisory relationship,' as well as a congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not disinterested.” and also noting that the “declaration of policy” in the original bill, which became the Advisers Act, declared that “the national public interest and the interest of investors are adversely affected when the business of investment advisers is so conducted as to defraud or mislead investors, or to enable such advisers to relieve themselves of their fiduciary obligations to their clients. It [sic] is hereby declared that the policy and purposes of this title, in accordance with which the provisions of this title shall be interpreted, are to mitigate and, so far as is presently practicable to eliminate the abuses enumerated in this section” (citing S. 3580, 76th Cong., 3d Sess., § 202 and Investment Trusts and Investment Companies, Report of the Securities and Exchange Commission, Pursuant to Section 30 of the Public Utility Holding Company Act of 1935, on Investment Counsel, Investment Management, Investment Supervisory, and Investment Advisory Services, H.R. Doc. No. 477, 76th Cong. 2d Sess., 1, at 28). See also In the Matter of Arleen W. Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948) (“Arleen Hughes”) (discussing the relationship of trust and confidence between the client and a dual registrant and stating that the registrant was a fiduciary and subject to liability under the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act).

    14SEC v. Capital Gains, supra note 2; Transamerica Mortgage v. Lewis, supra note 10 (“[T]he Act's legislative history leaves no doubt that Congress intended to impose enforceable fiduciary obligations.”).

    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 15 on the standards of conduct for investment advisers and broker-dealers acknowledged these duties.16 This fiduciary duty requires an adviser “to adopt the principal's goals, objectives, or ends.” 17 This means the adviser must, at all times, serve the best interest of its clients and not subordinate its clients' interest to its own.18 The federal fiduciary duty is imposed through the antifraud provisions of the Advisers Act.19 The duty follows the contours of the relationship between the adviser and its client, and the adviser and its client may shape that relationship through contract when the client receives full and fair disclosure and provides informed consent.20 Although the ability to tailor the terms means that the application of the fiduciary duty will vary with the terms of the relationship, the relationship in all cases remains that of a fiduciary to a client. In other words, the investment adviser cannot disclose or negotiate away, and the investor cannot waive, the federal fiduciary duty.21 We discuss our views 22 on an investment adviser's fiduciary duty in more detail below.23

    15 Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers, Chairman Jay Clayton (June 1, 2017), available at https://www.sec.gov/news/public-statement/statement-chairman-clayton-2017-05-31 (“Chairman Clayton's Request for Public Input”).

    16See, e.g., Comment letter of the Investment Adviser Association (Aug. 31, 2017) (“IAA Letter”) (“The well-established fiduciary duty under the Advisers Act, which incorporates both a duty of loyalty and a duty of care, has been applied consistently over the years by courts and the SEC.”); Comment letter of the Consumer Federation of America (Sept. 14, 2017) (“an adviser's fiduciary obligation `divides neatly into the duty of loyalty and the duty of care.' The duty of loyalty is designed to protect against `malfeasance,' or wrongdoing, on the part of the adviser, while the duty of care is designed to protect against `nonfeasance,' such as neglect.”).

    17 Arthur B. Laby, The Fiduciary Obligations as the Adoption of Ends, 56 Buffalo Law Review 99 (2008). See also Restatement (Third) of Agency, § 2.02 Scope of Actual Authority (2006) (describing a fiduciary's authority in terms of the fiduciary's reasonable understanding of the principal's manifestations and objectives).

    18 Investment Advisers Act Release 3060, supra footnote 10 (adopting amendments to Form ADV and stating that “under the Advisers Act, an adviser is a fiduciary whose duty is to serve the best interests of its clients, which includes an obligation not to subrogate clients' interests to its own,” citing Investment Advisers Act Release 2106 supra note 10); SEC v. Tambone, 550 F.3d 106, 146 (1st Cir. 2008) (“Section 206 imposes a fiduciary duty on investment advisers to act at all times in the best interest of the fund and its investors.”); SEC v. Moran, 944 F. Supp. 286 (S.D.N.Y 1996) (“Investment advisers are entrusted with the responsibility and duty to act in the best interest of their clients.”).

    19See supra note 14.

    20See infra note 40 and accompanying text for a discussion of informed consent.

    21 As an adviser's federal fiduciary obligations are enforceable through section 206 of the Act, we would view a waiver of enforcement of section 206 as implicating section 215(a) of the Act, which provides that “any condition, stipulation or provision binding any person to waive compliance with any provision of this title . . . shall be void.” Some commenters on Chairman Clayton's Request for Public Input and other Commission requests for comment also stated that an adviser's fiduciary duty could not be disclosed away. See, e.g., IAA Letter supra note 16 (“While disclosure of conflicts is crucial, it cannot take the place of the overarching duty of loyalty. In other words, an adviser is still first and foremost bound by its duty to act in its client's best interest and disclosure does not relieve an adviser of this duty.”); Comment letter of AARP (Sept. 6, 2017) (“Disclosure and consent alone do not meet the fiduciary test.”); Financial Planning Coalition Letter (July 5, 2013) responding to SEC Request for Data and Other Information, Duties of Brokers, Dealers, and Investment Advisers, Exchange Act Release No. 69013 (Mar. 1, 2013) (“Financial Planning Coalition 2013 Letter”) (“[D]isclosure alone is not sufficient to discharge an investment adviser's fiduciary duty; rather, the key issue is whether the transaction is in the best interest of the client.”) (internal citations omitted). See also Restatement (Third) of Agency, § 8.06 Principal's Consent (2006) (“The law applicable to relationships of agency as defined in § 1.01 imposes mandatory limits on the circumstances under which an agent may be empowered to take disloyal action. These limits serve protective and cautionary purposes. Thus, an agreement that contains general or broad language purporting to release an agent in advance from the agent's general fiduciary obligation to the principal is not likely to be enforceable. This is because a broadly sweeping release of an agent's fiduciary duty may not reflect an adequately informed judgment on the part of the principal; if effective, the release would expose the principal to the risk that the agent will exploit the agent's position in ways not foreseeable by the principal at the time the principal agreed to the release. In contrast, when a principal consents to specific transactions or to specified types of conduct by the agent, the principal has a focused opportunity to assess risks that are more readily identifiable.”); Tamar Frankel, Arthur Laby & Ann Schwing, The Regulation of Money Managers, (updated 2017) (“The Regulation of Money Managers”) (“Disclosure may, but will not always, cure the fraud, since a fiduciary owes a duty to deal fairly with clients.”).

    22 In various circumstances, other regulators, including the U.S. Department of Labor, and other legal regimes, including state securities law, impose obligations on investment advisers. In some cases, these standards may differ from the standard imposed and enforced by the Commission.

    23 The interpretations discussed in this Release also apply to automated advisers, which are often colloquially referred to as “robo-advisers.” Robo-advisers, like all SEC-registered investment advisers, are subject to all of the requirements of the Advisers Act, including the requirement that they provide advice consistent with the fiduciary duty they owe to their clients. The staff of the Commission has issued guidance regarding how robo-advisers can meet their obligations under the Advisers Act, given the unique challenges and opportunities presented by their business models. See Division of Investment Management, SEC, Staff Guidance on Robo Advisers, (February 2017), available at https://www.sec.gov/investment/im-guidance-2017-02.pdf.

    A. Duty of Care

    As fiduciaries, investment advisers owe their clients a duty of care.24 The Commission has discussed the duty of care and its components in a number of contexts.25 The duty of care includes, among other things: (i) The duty to act and to provide advice that is in the best interest of the client, (ii) the duty to seek best execution of a client's transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and (iii) the duty to provide advice and monitoring over the course of the relationship.

    24See Investment Advisers Act Release No. 2106, supra note 10 (stating that under the Advisers Act, “an adviser is a fiduciary that owes each of its clients duties of care and loyalty with respect to all services undertaken on the client's behalf, including proxy voting,” which is the subject of the release, and citing SEC v. Capital Gains supra note 2, to support this point). See also Restatement (Third) of Agency, § 8.08 (discussing the duty of care that an agent owes its principal as a matter of common law); The Regulation of Money Managers, supra note 21 (“Advice can be divided into three stages. The first determines the needs of the particular client. The second determines the portfolio strategy that would lead to meeting the client's needs. The third relates to the choice of securities that the portfolio would contain. The duty of care relates to each of the stages and depends on the depth or extent of the advisers' obligation towards their clients.”).

    25See, e.g., Suitability of Investment Advice Provided by Investment Advisers; Custodial Account Statements for Certain Advisory Clients, Investment Advisers Act Release No. 1406 (Mar. 16, 1994) (“Investment Advisers Act Release 1406”) (stating that advisers have a duty of care and discussing advisers' suitability obligations); Securities; Brokerage and Research Services, Exchange Act Release No. 23170 (Apr. 23, 1986) (“Exchange Act Release 23170”) (“an adviser, as a fiduciary, owes its clients a duty of obtaining the best execution on securities transactions.”). We highlight certain contexts in which the Commission has addressed the duty of care but we note that there are others; for example, voting proxies when an adviser undertakes to do so. Investment Advisers Act Release 2106, supra note 10.

    i. Duty To Provide Advice That Is in the Client's Best Interest

    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.26

    26 In 1994, the Commission proposed a rule that would make express the fiduciary obligation of investment advisers to make only suitable recommendations to a client. Investment Advisers Act Release 1406, supra note 25. Although never adopted, the rule was designed, among other things, to reflect the Commission's interpretation of an adviser's existing suitability obligation under the Advisers Act. We believe that this obligation, when combined with an adviser's fiduciary duty to act in the best interest of its client, requires an adviser to provide investment advice that is suitable for and in the best interest of its client.

    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.27

    27 Investment Advisers Act Release 1406, supra note 25. After making a reasonable inquiry into the client's investment profile, it generally would be reasonable for an adviser to rely on information provided by the client (or the client's agent) regarding the client's financial circumstances, and an adviser should not be held to have given advice not in its client's best interest if it is later shown that the client had misled the adviser.

    An adviser must update a client's investment profile in order to adjust its advice to reflect any changed circumstances.28 The frequency with which the adviser must update the information in order to consider changes to any advice the adviser provides would turn on many factors, including whether the adviser is aware of events that have occurred that could render inaccurate or incomplete the investment profile on which it currently bases its advice. For example, a change in the relevant tax law or knowledge that the client has retired or experienced a change in marital status might trigger an obligation to make a new inquiry.

    28 We note that this would not be done for a one-time financial plan or other investment advice that is not provided on an ongoing basis. See also infra note 37.

    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. 29 Whether the advice is in a client's best interest must be evaluated in the context of the portfolio that the adviser manages for the client and the client's investment profile. For example, when an adviser is advising a client with a conservative investment objective, investing in certain derivatives may be in the client's best interest when they are used to hedge interest rate risk in the client's portfolio, whereas investing in certain directionally speculative derivatives on their own may not. For that same client, investing in a particular security on margin may not be in the client's best interest, even if investing in that same security may be in the client's best interest. When advising a financially sophisticated investor with a high risk tolerance, however, it may be consistent with the adviser's duties to recommend investing in such directionally speculative derivatives or investing in securities on margin.

    29 We note that Item 8 of Part 2A of Form ADV requires an investment adviser to describe its methods of analysis and investment strategies and disclose that investing in securities involves risk of loss which clients should be prepared to bear. This item also requires that an adviser explain the material risks involved for each significant investment strategy or method of analysis it uses and particular type of security it recommends, with more detail if those risks are significant or unusual.

    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.30 Furthermore, an adviser would not satisfy its fiduciary duty to provide advice that is in the client's best interest by simply advising its client to invest in the least expensive or least remunerative investment product or strategy without any further analysis of other factors in the context of the portfolio that the adviser manages for the client and the client's investment profile. For example, it might be consistent with an adviser's fiduciary duty to advise a client with a high risk tolerance and significant investment experience to invest in a private equity fund with relatively high fees if other factors about the fund, such as its diversification and potential performance benefits, cause it to be in the client's best interest. We believe that a reasonable belief that investment advice is in the best interest of a client also requires that an adviser conduct a reasonable investigation into the investment sufficient to not base its advice on materially inaccurate or incomplete information.31 We have brought enforcement actions where an investment adviser did not independently or reasonably investigate securities before recommending them to clients.32 This obligation to provide advice that is suitable and in the best interest applies not just to potential investments, but to all advice the investment adviser provides to clients, including advice about an investment strategy or engaging a sub-adviser and advice about whether to rollover a retirement account so that the investment adviser manages that account.

    30See infra notes 48-52 and accompanying text (discussing an adviser's duties related to disclosure and consent).

    31See, e.g., Concept Release on the U.S. Proxy System, Investment Advisers Act Release No. 3052 (July 14, 2010) (stating “as a fiduciary, the proxy advisory firm has a duty of care requiring it to make a reasonable investigation to determine that it is not basing its recommendations on materially inaccurate or incomplete information”).

    32See In the Matter of Larry C. Grossman, Investment Advisers Act Release No. 4543 (Sept. 30, 2016) (Commission opinion) (imposing liability on a principal of a registered investment adviser for recommending offshore private investment funds to clients without a reasonable independent basis for his advice).

    ii. Duty To Seek Best Execution

    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.33 In meeting this obligation, an adviser must seek to obtain the execution of transactions for each of its clients such that the client's total cost or proceeds in each transaction are the most favorable under the circumstances. An adviser fulfills this duty by executing securities transactions on behalf of a client with the goal of maximizing value for the client under the particular circumstances occurring at the time of the transaction. As noted below, maximizing value can encompass more than just minimizing cost. When seeking best execution, an adviser should consider “the full range and quality of a broker's services in placing brokerage including, among other things, the value of research provided as well as execution capability, commission rate, financial responsibility, and responsiveness” to the adviser.34 In other words, the determinative factor is not the lowest possible commission cost but whether the transaction represents the best qualitative execution. Further, an investment adviser should “periodically and systematically” evaluate the execution it is receiving for clients.35

    33See Commission Guidance Regarding Client Commission Practices Under Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Release No. 54165 (July 18, 2006) (stating that investment advisers have “best execution obligations”); Investment Advisers Act Release 3060, supra note 10 (discussing an adviser's best execution obligations in the context of directed brokerage arrangements and disclosure of soft dollar practices). See also Advisers Act rule 206(3)-2(c) (referring to adviser's duty of best execution of client transactions).

    34 Exchange Act Release 23170, supra note 25.

    35Id. The Advisers Act does not prohibit advisers from using an affiliated broker to execute client trades. However, the adviser's use of such an affiliate involves a conflict of interest that must be fully and fairly disclosed and the client must provide informed consent to the conflict.

    iii. Duty To Act and To Provide Advice and Monitoring Over the Course of the Relationship

    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.36 An adviser is required to provide advice and services to a client over the course of the relationship at a frequency that is both in the best interest of the client and consistent with the scope of advisory services agreed upon between the investment adviser and the client. The duty to provide advice and monitoring is particularly important for an adviser that has an ongoing relationship with a client (for example, a relationship where the adviser is compensated with a periodic asset-based fee or an adviser with discretionary authority over client assets). Conversely, the steps needed to fulfill this duty may be relatively circumscribed for the adviser and client that have agreed to a relationship of limited duration via contract (for example, a financial planning relationship where the adviser is compensated with a fixed, one-time fee commensurate with the discrete, limited-duration nature of the advice provided).37 An adviser's duty to monitor extends to all personalized advice it provides the client, including an evaluation of whether a client's account or program type (for example, a wrap account) continues to be in the client's best interest.

    36See SEC v. Capital Gains, supra note 2 (describing advisers' “basic function” as “furnishing to clients on a personal basis competent, unbiased, and continuous advice regarding the sound management of their investments” (quoting Investment Trusts and Investment Companies, Report of the Securities and Exchange Commission, Pursuant to Section 30 of the Public Utility Holding Company Act of 1935, on Investment Counsel, Investment Management, Investment Supervisory, and Investment Advisory Services, H.R. Doc. No. 477, 76th Cong. 2d Sess., 1, at 28)). Cf. Barbara Black, Brokers and Advisers-What's in a Name?, 32 Fordham Journal of Corporate and Financial Law XI (2005) (“[W]here the investment adviser's duties include management of the account, [the adviser] is under an obligation to monitor the performance of the account and to make appropriate changes in the portfolio.”); Arthur B. Laby, Fiduciary Obligations of Broker-Dealers and Investment Advisers, 55 Villanova Law Review 701, at 728 (2010) (“Laby Villanova Article”) (“If an adviser has agreed to provide continuous supervisory services, the scope of the adviser's fiduciary duty entails a continuous, ongoing duty to supervise the client's account, regardless of whether any trading occurs. This feature of the adviser's duty, even in a non-discretionary account, contrasts sharply with the duty of a broker administering a non-discretionary account, where no duty to monitor is required.”) (internal citations omitted).

    37See Laby Villanova Article, supra note 36, at 728 (2010) (stating that the scope of an adviser's activity can be altered by contract and that an adviser's fiduciary duty would be commensurate with the scope of the relationship).

    B. Duty of Loyalty

    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.38 In seeking to meet its duty of loyalty, an adviser must make full and fair disclosure to its clients of all material facts relating to the advisory relationship.39 In addition, an adviser must seek to avoid conflicts of interest with its clients, and, at a minimum, make full and fair disclosure of all material conflicts of interest that could affect the advisory relationship. The disclosure should be sufficiently specific so that a client is able to decide whether to provide informed consent to the conflict of interest.40 We discuss each of these aspects of the duty of loyalty below.

    38See Investment Advisers Act Release 3060 (“Under the Advisers Act, an adviser is a fiduciary whose duty is to serve the best interests of its clients, which includes an obligation not to subrogate clients' interests to its own,” citing Investment Advisers Act Release 2106 supra note 9). See also Staff of the U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Jan. 2011), available at https://www.sec.gov/news/studies/2011/913studyfinal.pdf (“913 Study”).

    39 Investment Advisers Act Release 3060, supra note 6 (“as a fiduciary, an adviser has an ongoing obligation to inform its clients of any material information that could affect the advisory relationship”). See also General Instruction 3 to Part 2 of Form ADV (“Under federal and state law, you are a fiduciary and must make full disclosure to your clients of all material facts relating to the advisory relationship.”).

    40 Arleen Hughes, supra note 13, at 4 and 8 (stating, “[s]ince loyalty to his trust is the first duty which a fiduciary owes to his principal, it is the general rule that a fiduciary must not put himself into a position where his own interests may come in conflict with those of his principal. To prevent any conflict and the possible subordination of this duty to act solely for the benefit of his principal, a fiduciary at common law is forbidden to deal as an adverse party with his principal. An exception is made, however, where the principal gives his informed consent to such dealings,” and adding that, “[r]egistrant has an affirmative obligation to disclose all material facts to her clients in a manner which is clear enough so that a client is fully apprised of the facts and is in a position to give his informed consent.”). See also Hughes v. Securities and Exchange Commission, 174 F.2d 969 (1949) (affirming the SEC decision in Arleen Hughes).

    See also General Instruction 3 to Part 2 of Form ADV (stating that an adviser's disclosure obligation “requires that [the adviser] provide the client with sufficiently specific facts so that the client is able to understand the conflicts of interest [the adviser has] and the business practices in which [the adviser] engage[s], and can give informed consent to such conflicts or practices or reject them”); Investment Advisers Act Release 3060, supra note 10 (same); Restatement (Third) of Agency § 8.06 (“Conduct by an agent that would otherwise constitute a breach of duty as stated in §§ 8.01, 8.02, 8.03, 8.04, and 8.05 [referencing the fiduciary duty] does not constitute a breach of duty if the principal consents to the conduct, provided that (a) in obtaining the principal's consent, the agent (i) acts in good faith, (ii) discloses all material facts that the agent knows, has reason to know, or should know would reasonably affect the principal's judgment unless the principal has manifested that such facts are already known by the principal or that the principal does not wish to know them, and (iii) otherwise deals fairly with the principal; and (b) the principal's consent concerns either a specific act or transaction, or acts or transactions of a specified type that could reasonably be expected to occur in the ordinary course of the agency relationship”).

    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.41 Accordingly, the duty of loyalty includes a duty not to treat some clients favorably at the expense of other clients. Thus, we believe that in allocating investment opportunities among eligible clients, an adviser must treat all clients fairly.42 This does not mean that an adviser must have a pro rata allocation policy, that the adviser's allocation policies cannot reflect the differences in clients' objectives or investment profiles, or that the adviser cannot exercise judgment in allocating investment opportunities among eligible clients. Rather, it means that an adviser's allocation policies must be fair and, if they present a conflict, the adviser must fully and fairly disclose the conflict such that a client can provide informed consent.

    41 The Commission has brought numerous enforcement actions against advisers that unfairly allocated trades to their own accounts and allocated less favorable or unprofitable trades to their clients' accounts. See, e.g., SEC v. Strategic Capital Management, LLC and Michael J. Breton, Litigation Release No. 23867 (June 23, 2017) (partial settlement) (adviser placed trades through a master brokerage account and then allocated profitable trades to adviser's account while placing unprofitable trades into the client accounts.).

    42See also Barry Barbash and Jai Massari, The Investment Advisers Act of 1940; Regulation by Accretion, 39 Rutgers Law Journal 627 (2008) (stating that under section 206 of the Advisers Act and traditional notions of fiduciary and agency law an adviser must not give preferential treatment to some clients or systematically exclude eligible clients from participating in specific opportunities without providing the clients with appropriate disclosure regarding the treatment).

    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.43 Disclosure of a conflict alone is not always sufficient to satisfy the adviser's duty of loyalty and section 206 of the Advisers Act.44 Any disclosure must be clear and detailed enough for a client to make a reasonably informed decision to consent to such conflicts and practices or reject them.45 An adviser must provide the client with sufficiently specific facts so that the client is able to understand the adviser's conflicts of interest and business practices well enough to make an informed decision.46 For example, an adviser disclosing that it “may” have a conflict is not adequate disclosure when the conflict actually exists.47 A client's informed consent can be either explicit or, depending on the facts and circumstances, implicit. We believe, however, that it would not be consistent with an adviser's fiduciary duty to infer or accept client consent to a conflict where either (i) the facts and circumstances indicate that the client did not understand the nature and import of the conflict, or (ii) the material facts concerning the conflict could not be fully and fairly disclosed.48 For example, in some cases, conflicts may be of a nature and extent that it would be difficult to provide disclosure that adequately conveys the material facts or the nature, magnitude and potential effect of the conflict necessary to obtain informed consent and satisfy an adviser's fiduciary duty. In other cases, disclosure may not be specific enough for clients to understand whether and how the conflict will affect the advice they receive. With some complex or extensive conflicts, it may be difficult to provide disclosure that is sufficiently specific, but also understandable, to the adviser's clients. In all of these cases where full and fair disclosure and informed consent is insufficient, we expect an adviser to eliminate the conflict or adequately mitigate the conflict so that it can be more readily disclosed.

    43See SEC v. Capital Gains, supra note 2 (advisers must fully disclose all material conflicts, citing Congressional intent “to eliminate, or at least expose, all conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not disinterested”). See also Investment Advisers Act Release 3060, supra note 9.

    44See SEC v. Capital Gains, supra note 2 (in discussing the legislative history of the Advisers Act, citing ethical standards of one of the leading investment counsel associations, which provided that an investment counsel should remain “as free as humanly possible from the subtle influence of prejudice, conscious or unconscious” and “avoid any affiliation, or any act which subjects his position to challenge in this respect” and stating that one of the policy purposes of the Advisers Act is “to mitigate and, so far as is presently practicable to eliminate the abuses” that formed the basis of the Advisers Act). Separate and apart from potential liability under the antifraud provisions of the Advisers Act enforceable by the Commission for breaches of fiduciary duty in the absence of full and fair disclosure, investment advisers may also wish to consider their potential liability to clients under state common law, which may vary from state to state.

    45See Arlene Hughes, supra at 13 (in finding that registrant had not obtained informed consent, citing to testimony indicating that “some clients had no understanding at all of the nature and significance” of the disclosure).

    46See General Instruction 3 to Part 2 of Form ADV. Cf. Arleen Hughes, supra note 13 (Hughes acted simultaneously in the dual capacity of investment adviser and of broker and dealer and conceded having a fiduciary duty. In describing the fiduciary duty and her potential liability under the antifraud provisions of the Securities Act and the Exchange Act, the Commission stated she had “an affirmative obligation to disclose all material facts to her clients in a manner which is clear enough so that a client is fully apprised of the facts and is in a position to give his informed consent.”).

    47 We have brought enforcement actions in such cases. See, e.g., In the Matter of The Robare Group, Ltd., et al., Investment Advisers Act Release No. 4566 (Nov. 7, 2016) (Commission Opinion) (appeal docketed) (finding, among other things, that adviser's disclosure was inadequate because it stated that the adviser may receive compensation from a broker as a result of the facilitation of transactions on client's behalf through such broker-dealer and that these arrangements may create a conflict of interest when adviser was, in fact, receiving payments from the broker and had such a conflict of interest).

    48See Arleen Hughes, supra note 13 (“Registrant cannot satisfy this duty by executing an agreement with her clients which the record shows some clients do not understand and which, in any event, does not contain the essential facts which she must communicate.”) Some commenters on Commission requests for comment agreed that full and fair disclosure and informed consent are important components of an adviser's fiduciary duty. See, e.g., Financial Planning Coalition 2013 Letter, supra note 21 (“[C]onsent is only informed if the customer has the ability fully to understand and to evaluate the information. Many complex products . . . are appropriate only for sophisticated and experienced investors. It is not sufficient for a fiduciary to make disclosure of potential conflicts of interest with respect to such products. The fiduciary must make a reasonable judgment that the customer is fully able to understand and to evaluate the product and the potential conflicts of interest that it presents—and then the fiduciary must make a judgment that the product is in the best interests of the customer.”).

    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.49 Investment advisers are required to deliver the brochure to a prospective client at or before entering into a contract so that the prospective client can use the information contained in the brochure to decide whether or not to enter into the advisory relationship.50 In a concurrent release, we are proposing to require all investment advisers to deliver to retail investors before or at the time the adviser enters into an investment advisory agreement a relationship summary which would include a summary of certain conflicts of interest.51

    49 Investment Advisers Act Release 3060, supra note 10; General Instruction 3 to Part 2 of Form ADV (“Under federal and state law, you are a fiduciary and must make full disclosure to your clients of all material facts relating to the advisory relationship. As a fiduciary, you also must seek to avoid conflicts of interest with your clients, and, at a minimum, make full disclosure of all material conflicts of interest between you and your clients that could affect the advisory relationship. This obligation requires that you provide the client with sufficiently specific facts so that the client is able to understand the conflicts of interest you have and the business practices in which you engage, and can give informed consent to such conflicts or practices or reject them.”).

    50 Investment Advisers Act rule 204-3. Investment Advisers Act Release 3060, supra note 10 (adopting amendments to Form ADV and stating that “A client may use this disclosure to select his or her own adviser and evaluate the adviser's business practices and conflicts on an ongoing basis. As a result, the disclosure clients and prospective clients receive is critical to their ability to make an informed decision about whether to engage an adviser and, having engaged the adviser, to manage that relationship.”).

    51 Form CRS Proposal, supra note 6.

    C. Request for Comment

    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?

    III. Economic Considerations

    The Commission is sensitive to the potential economic effects of the proposed interpretation provided above.52 In this section we discuss how the proposed Commission interpretation may benefit investors and reduce agency problems by reaffirming and clarifying the fiduciary duty an investment adviser owes to its clients. We also discuss some potential broader economic effects on the market for investment advice.

    52 The Commission, where possible, has sought to quantify the economic impacts expected to result from the proposed interpretations. However, as discussed more specifically below, the Commission is unable to quantify certain of the economic effects because it lacks information necessary to provide reasonable estimates.

    A. Background

    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.53 There are 12,659 investment advisers registered with the Commission with over $72 trillion in assets under management as well as 17,635 investment advisers registered with states and 3,587 investment advisers who submit Form ADV as exempt reporting advisers.54 As of December 2017, there are approximately 36 million client accounts advised by SEC-registered investment advisers.

    53See Form CRS Proposal, supra note 6, at Section IV.A (discussing the market for financial advice generally).

    54See Form CRS Proposal, supra note 6, at Section IV.A.1.b (discussing SEC-registered investment advisers). Note, however, that because we are interpreting advisers' fiduciary duties under section 206 of the Advisers Act, this interpretation would be applicable to both SEC- and state-registered investment advisers, as well as other investment advisers that are exempt from registration or subject to a prohibition on registration under the Advisers Act.

    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.

    B. Economic Impacts

    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.

    Clients of Investment Advisers

    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.55 Because investors and investment advisers are likely to have different preferences and goals, the investment adviser relationship is subject to agency problems: That is, investment advisers may take actions that increase their well-being at the expense of investors, thereby imposing agency costs on investors.56 A fiduciary duty, such as the duty investment advisers owe their clients, can mitigate these agency problems and reduce agency costs by deterring agents from taking actions that expose them to legal liability.57

    55See, e.g., James A. Brickley, Clifford W. Smith, Jr., Jerold L. Zimmerman, Managerial Economics and Organizational Architecture (2004), at 265 (“An agency relationship consists of an agreement under which one party, the principal, engages another party, the agent, to perform some service on the principal's behalf.”). See also Michael C. Jensen and William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, Vol. 3, 305-360 (1976).

    56See, e.g., Jensen and Meckling, supra note 55. See also the discussion on agency problems in the market for investment advice in Section IV.B. of the Regulation Best Interest Proposal, supra note 5.

    57See, e.g., Frank H. Easterbrook and Daniel R. Fischel, Contract and Fiduciary Duty, Journal of Law & Economics, Vol. 36, 425-46 (1993).

    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.

    Investment Advisers and the Market for Investment Advice

    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 circumstances in which the Commission speaks to the legal obligations of regulated entities, affected firms, including those whose practices are consistent with the Commission's interpretation, incur costs to evaluate the Commission's interpretation and assess its applicability to them. Moreover, as discussed above, there may be certain investment advisers who currently understand the practices necessary to comply with their fiduciary duty to be different from the standard of conduct in the Commission's interpretation. Those investment advisers if any, would experience an increase in their compliance costs as they change their systems, processes and behavior, and train their supervised persons, to align with the Commission's interpretation.

    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,58 may suggest that the costs of expanding the supply of investment advisory services are currently relatively low.

    58See Form CRS Proposal, supra note 6, at Section IV.A.1.d.

    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.59

    59 Beyond having an effect on competition in the market for investment adviser services, it is possible that the Commission's interpretation could affect competition between investment advisers and other providers of financial advice, such as broker-dealers, banks, and insurance companies. This may be the case if certain investors base their choice between an investment adviser and another provider of financial advice, at least in part, on their perception of the standards of conduct each owes to their customers. To the extent that the Commission's interpretation increases investors' trust in investment advisers' overall compliance with their standard of conduct, certain of these investors may become more willing, to hire an investment adviser rather than one of their non-investment adviser competitors. As a result, investment advisers as a group may increase their competitive situation compared to that of other types of providers of financial advice. On the other hand, if the Commission's interpretation raises costs for investment advisers, they could become less competitive with other financial services providers.

    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.60 As a result, the number of investment advisers willing to advise a client to make these investments may be reduced. A decline in the supply of investment adviser advice on these investments could potentially reduce the efficiency of portfolio allocation of those investors who might otherwise benefit from investment adviser advice on these investments.

    60 For example, such products could include highly complex, high cost products with risk and return characteristics that are hard to fully understand for retail investors or mutual funds or fund share classes that may pay higher compensation to investment advisers that are dual registrants, or that the investment adviser and its representatives may receive through payments to an affiliated broker-dealer or third party broker-dealer with which representatives of the investment adviser are associated.

    IV. Request for Comment Regarding Areas of Enhanced Investment Adviser Regulation

    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.61 We have identified a few discrete areas where the current broker-dealer framework provides investor protections that may not have counterparts in the investment adviser context, and request comment on those areas. The Commission intends to consider these comments in connection with any future proposed rules or other proposed regulatory actions with respect to these matters.

    61 The staff made two primary recommendations in the 913 Study. The first recommendation was that we engage in rulemaking to implement a uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. The second recommendation was that we consider harmonizing certain regulatory requirements of broker-dealers and investment advisers where such harmonization appears likely to enhance meaningful investor protection, taking into account the best elements of each regime. In the 913 Study, the areas the staff suggested the Commission consider for harmonization included, among others, licensing and continuing education requirements for persons associated with firms. The staff stated that the areas identified were not intended to be a comprehensive or exclusive listing of potential areas of harmonization. See 913 Study supra note 38.

    A. Federal Licensing and Continuing Education

    Associated persons of broker-dealers that effect securities transactions are required to be registered with the Financial Industry Regulatory Authority (“FINRA”),62 and must meet qualification requirements, which include passing a securities qualification exam and fulfilling continuing education requirements.63 The federal securities laws do not require investment adviser representatives to become licensed or to meet qualification requirements, but most states impose registration, licensing, or qualification requirements on investment adviser representatives who have a place of business in the state, regardless of whether the investment adviser is registered with the Commission or the state.64 These qualification requirements typically mandate that investment adviser representatives register and pass certain securities exams or hold certain designations (such as Chartered Financial Analyst credential).65 The staff recommended in the 913 Study that the Commission consider requiring investment adviser representatives to be subject to federal continuing education and licensing requirements.66

    62 Generally, all registered broker-dealers that deal with the public must become members of FINRA, a registered national securities association, and may choose to become exchange members. See Exchange Act section 15(b)(8) and Exchange Act rule 15b9-1. FINRA is the sole national securities association registered with the SEC under section 15A of the Exchange Act.

    63See NASD Rule 1021 (“Registration Requirements”); NASD Rule 1031 (“Registration Requirements”); NASD Rule 1041 (“Registration Requirements for Assistant Representatives”); FINRA Rule 1250 (“Continuing Education Requirements”).

    64See 913 Study, supra note 38, at 86. See also Advisers Act rule 203A-3(a) (definition of “investment adviser representative”).

    65See 913 Study, supra note 38, at 86-87, 138. The North American Securities Administrators Association (“NASAA”) is considering a potential model rule that would require that investment adviser representatives meet a continuing education requirement in order to maintain their state registrations. An internal survey of NASAA's membership identified strong support for such a requirement along with significant regulatory need. NASAA is now conducting a nationwide survey of relevant stakeholders to get their input and views on such a requirement. For more information, see http://www.nasaa.org/industry-resources/investment-advisers/nasaa-survey-regarding-continuing-education-for-investment-adviser-representatives/.

    66 Several commenters, cited in the 913 Study, suggested that this was a gap that should be addressed. See 913 Study, supra note 38, at 138 (citing letters from AALU, Bank of America, FSI, Hartford, LPL, UBS, and Woodbury).

    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.67

    67See 913 Study, supra note 38, at 138.

    • 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 (i.e., as compared to broker-dealers)?

    • 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?

    B. Provision of Account Statements

    Fees and costs are important to retail investors,68 but many retail investors are uncertain about the fees they will pay.69 The relationship summary that we are proposing in a concurrent release would discuss certain differences between advisory and brokerage fees to provide investors more clarity concerning the key categories of fees and expenses they should expect to pay, but would not require more complete, specific or personalized disclosures or disclosures about the amount of fees and expenses.70 We believe that delivery of periodic account statements, if they specified the dollar amounts of fees and expenses, would allow clients to readily see and understand the fees and expenses they pay for an adviser's services. Clients would receive account statements close in time to the assessment of periodic account fees, which could be an effective way for clients to understand and evaluate the cost of the services they are receiving from their advisers.

    68See Staff of the Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors as required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Aug. 2012), at iv, available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf (“With respect to financial intermediaries, investors consider information about fees, disciplinary history, investment strategy, conflicts of interest to be absolutely essential.”).

    69See Angela A. Hung, et al., RAND Institute for Civil Justice, Investor and Industry Perspectives on Investment Advisers and Broker-Dealers (2008), at xix, available at https://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf (“In fact, focus-group participants with investments acknowledged uncertainty about the fees they pay for their investments, and survey responses also indicate confusion about the fees.”).

    70See Form CRS Proposal, supra note 6, at Section II.B.4.

    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.71 Broker-dealers generally must provide account statements no less than once every calendar quarter. Brokerage customers must receive periodic account statements even when not receiving immediate trade confirmations.72 Although we understand that many advisers do provide clients with account statements, advisers are not directly required to provide account statements under the federal securities laws. Notably, however, the custody rule requires advisers with custody of a client's assets to have a reasonable basis for believing that the qualified custodian sends an account statement at least quarterly.73 In addition, in any separately managed account program relying on rule 3a-4 under the Investment Company Act of 1940, the program sponsor or another person designated by the sponsor must provide clients statements at least quarterly containing specified information.74

    71See, e.g., NASD Rule 2340; FINRA Rule 2232; MSRB Rule G-15. See also Exchange Act rule 15c3-2 (account statements); Exchange Act rule 10b-10 (confirmation of transactions).

    72See Confirmation of Transactions, Securities Exchange Act Release No. 34962 (November 10, 1994).

    73 Advisers Act rule 206(4)-2(a)(3) (custody rule). The Commission also has stated that an adviser's policies and procedures, at a minimum, should address the accuracy of disclosures made to investors, clients, and regulators, including account statements.

    74 Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] (“Investment Company Act”) rule 3a-4(a)(4).

    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 (e.g., brokerage fees) and expenses? Would retail clients benefit from a requirement that they receive account statements from registered investment advisers? If clients are uncertain about what fees and expenses they will pay, would they benefit from a requirement that, before receiving advice from a registered investment adviser, they enter into a written (including electronic) agreement specifying the fees and expenses to be paid?

    • 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 (e.g., via U.S. mail, electronic delivery, notice and access)? Are there any other factors that would impact cost?

    C. Financial Responsibility

    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.75 Exchange Act rule 15c3-3 (the customer protection rule) requires broker-dealers to segregate customer assets and maintain them in a manner designed to ensure that should the broker-dealer fail, those assets are readily available to be returned to customers.76 Broker-dealers are also subject to extensive recordkeeping and reporting requirements, including an annual audit requirement as well as a requirement to make their audited balance sheets available to customers.77 Broker-dealers are required to be members of the Securities Investor Protection Corporation (“SIPC”), which is responsible for overseeing the liquidation of member broker-dealers that close due to bankruptcy or financial trouble and customer assets are missing. When a brokerage firm is closed and customer assets are missing, SIPC, within certain limits, works to return customers' cash, stock, and other securities held by the firm. If a firm closes, SIPC protects the securities and cash in a customer's brokerage account up to $500,000, including up to $250,000 protection for cash in the account.78 Finally, FINRA rules require that broker-dealers obtain fidelity bond coverage from an insurance company.79

    75See Exchange Act rule 15c3-1.

    76See Exchange Act rule 15c3-3.

    77See Exchange Act rules 17a-3, 17a-4, and 17a-5.

    78See Securities Investor Protection Act of 1970, Public Law 91-598, 84 Stat. 1636 (Dec. 30, 1970), 15 U.S.C. 78aaa through 15 U.S.C. 78lll.

    79See FINRA Rule 4360, (“Fidelity Bonds”).

    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.80 In 2009 the Commission adopted amendments to the custody requirements for investment advisers that, among other enhancements, required all registered investment advisers with custody of client assets to undergo an annual surprise examination by an independent public accountant. SEC-registered investment advisers, however, are not subject to any net capital requirements comparable to those applicable to broker-dealers, although they must disclose any material financial condition that impairs their ability to provide services to their clients.81 Many investment advisers have relatively small amounts of capital, particularly compared to the amount of assets that they have under management.82 When we discover a serious fraud by an adviser, often the assets of the adviser are insufficient to compensate clients for their loss. In addition, investment advisers are not required to obtain fidelity bonds, unlike many other financial service providers that have access to client assets.83

    80See Advisers Act rule 206(4)-2.

    81See Form ADV. Many states have imposed fidelity bonding and/or net capital requirements on state-registered investment advisers. Rule 17g-1 under the Investment Company Act of 1940 requires registered investment companies to obtain fidelity bonds covering their officers and employees who may have access to the investment companies' assets.

    82See Custody of Funds or Securities of Clients by Investment Advisers, Investment Advisers Act Release No. 2968 (Dec. 30, 2009).

    83 Fidelity bonds are required to be obtained by broker-dealers (FINRA Rule 4360; New York Stock Exchange Rule 319; American Stock Exchange Rule 330); transfer agents (New York Stock Exchange Rule Listed Company Manual § 906); investment companies (17 CFR 270.17g-1); national banks (12 CFR 7.2013); federal savings associations (12 CFR 563.190).

    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? 84 Do the custody rule and other rules 85 under the Advisers Act adequately address the potential for misappropriation of client assets and other financial responsibility concerns for advisers? Should investment advisers be subject to an annual audit requirement?

    84 We note that Congress and the Commission have considered such requirements in the past. In 1973, a Commission advisory committee recommended that Congress authorize the Commission to adopt minimum financial responsibility requirements for investment advisers, including minimum capital requirements. See Report of the Advisory Committee on Investment Management Services for Individual Investors, Small Account Investment Management Services, Fed. Sec. L. Rep. (CCH) No. 465, Pt. III, 64-66 (Jan. 1973) (“Investment Management Services Report”). Three years later, in 1976, the Senate Committee on Banking, Housing and Urban Affairs considered a bill that, among other things, would have authorized the Commission to adopt rules requiring investment advisers (i) with discretionary authority over client assets, or (ii) that advise registered investment companies, to meet financial responsibility standards. S. Rep. No. 94-910, 94th Cong. 2d Sess. (May 20, 1976) (reporting favorably S. 2849). S. 2849 was never enacted. In 1992, both the Senate and House of Representatives passed bills that would have given the Commission the explicit authority to require investment advisers with custody of client assets to obtain fidelity bonds. S. 226, 102d Cong., 2d Sess. (Aug. 12, 1992) and H.R. 5726, 102d Cong. Ed (Sept. 23, 1992). Differences in these two bills were never reconciled and thus neither became law. In 2003, the Commission requested comment on whether to require a fidelity bonding requirement for advisers as a way to increase private sector oversight of the compliance by funds and advisers with the federal securities laws. The Commission decided not to adopt a fidelity bonding requirement at that time, but noted that it regarded such a requirement as a viable option should the Commission wish to further strengthen compliance programs of funds and advisers. Compliance Programs of Investment Companies and Investment Advisers, Investment Company Act Release No. 25925 (Feb. 5, 2003).

    85See, e.g., Advisers Act rule 206(4)-7 (requires each investment adviser registered or required to be registered with the Commission to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and Advisers Act rules, review those policies and procedures annually, and designate an individual to serve as a chief compliance officer).

    • Should advisers be required to obtain a fidelity bond from an insurance company? If so, should some advisers be excluded from this requirement? 86 Is there information or data that demonstrates fidelity bonding requirements provide defrauded clients with recovery, and if so what amount or level of recovery is evidenced?

    86 As noted above, the 1992 legislation would have given us the explicit authority to require bonding of advisers that have custody of client assets or that have discretionary authority over client assets. Section 412 of ERISA [29 U.S.C. 1112] and related regulations (29 CFR 2550.412-1 and 29 CFR 2580) generally require that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be bonded. Registered investment advisers exercising investment discretion over assets of plans covered by title I of ERISA are subject to this requirement; it does not apply to advisers who exercise discretion with respect to assets in an individual retirement account or other non-ERISA retirement account. In 1992, only approximately three percent of Commission registered advisers had discretionary authority over client assets; as of March 31, 2018, according to data collected on Form ADV, 91 percent of Commission registered advisers have that authority.

    • Alternatively, should advisers be required to maintain a certain amount of capital that could be the source of compensation for clients? 87 What amount of capital would be adequate? 88

    87See supra note 84.

    88 Section 412 of ERISA provides that the bond required under that section must +be at least ten percent of the amount of funds handled, with a maximum required amount of $500,000 (increased to $1,000,000,000 for plans that hold securities issued by an employer of employees covered by the plan).

    • 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 89 (which requires, among other things, an investment adviser who has custody of client funds or securities to maintain at all times a minimum net worth of $35,000 (with some exceptions), an adviser who has discretionary authority but not custody over client funds or securities to maintain at all times a minimum net worth of $10,000, and an adviser who accepts prepayment of more than $500 per client and six or more months in advance to maintain at all times a positive net worth), provide an appropriate model for a minimum capital requirement? Why or why not?

    89 NASAA Minimum Financial Requirements For Investment Advisers Model Rule 202(d)-1 (Sept. 11, 2011), available at http://www.nasaa.org/wp-content/uploads/2011/07/IA-Model-Rule-Minimum-Financial-Requirements.pdf.

    • 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.90 Should advisers be required to obtain annual audits of their own financials and to provide such information on Form ADV? Would such a requirement raise privacy concerns for privately held advisers?

    90 Form ADV only requires that advisers with significant assets (at least $1 billion) report the approximate amount of their assets within one of the three ranges ($1 billion to less than $10 billion, $10 billion to less than $50 billion, and $50 billion or more). Item 1.O of Part 1A of Form ADV.

    By the Commission.

    Dated: April 18, 2018. Brent J. Fields, Secretary.
    [FR Doc. 2018-08679 Filed 5-8-18; 8:45 am] BILLING CODE 8011-01-P
    DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 151 [Docket No. USCG-2018-0245] RIN 1625-AC45 Ballast Water Management—Annual Reporting Requirement AGENCY:

    Coast Guard, DHS.

    ACTION:

    Notice of proposed rulemaking.

    SUMMARY:

    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 regulated population of vessels which are equipped with ballast tanks.

    DATES:

    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.

    ADDRESSES:

    You may submit comments identified by docket number USCG-2018-0245 using the Federal eRulemaking Portal at http://www.regulations.gov. See the “Public Participation and Request for Comments” portion of the SUPPLEMENTARY INFORMATION section for further instructions on submitting comments.

    Collection of information. Submit comments on the collection of information discussed in section V.D. of this preamble both to the Coast Guard's online docket and to the Office of Information and Regulatory Affairs (OIRA) in the White House Office of Management and Budget using one of the following two methods:

    Email: [email protected]. Mail: OIRA, 725 17th Street NW, Washington, DC 20503, attention Desk Officer for the Coast Guard.
    FOR FURTHER INFORMATION CONTACT:

    For information about this document call or email Mr. John Morris, Program Manager, Environmental Standards Division, Coast Guard; telephone 202-372-1402, email [email protected].

    SUPPLEMENTARY INFORMATION: Table of Contents for Preamble I. Public Participation and Request for Comments II. Abbreviations III. Basis and Purpose IV. Discussion of Proposed Rule V. Regulatory Analyses A. Regulatory Planning and Review B. Small Entities C. Assistance for Small Entities D. Collection of Information E. Federalism F. Unfunded Mandates Reform Act G. Taking of Private Property H. Civil Justice Reform I. Protection of Children J. Indian Tribal Governments K. Energy Effects L. Technical Standards M. Environment I. Public Participation and Requests for Comments

    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 http://www.regulations.gov. If your material cannot be submitted using http://www.regulations.gov, contact the person in the FOR FURTHER INFORMATION CONTACT section of this proposed rule for alternate instructions. Documents mentioned in this proposed rule as being available in the docket, and all public comments, will be available in our online docket at http://www.regulations.gov, and can be viewed by following that website's instructions. Additionally, if you go to the online docket and sign up for email alerts, you will be notified when comments are posted or if a final rule is published.

    We accept anonymous comments. All comments received will be posted without change to http://www.regulations.gov and will include any personal information you have provided. For more about privacy and the docket, visit http://www.regulations.gov/privacyNotice.

    II. Abbreviations BLS Bureau of Labor Statistics BWM Ballast Water Management CFR Code of Federal Regulations COI Collection of Information COT Captain of the Port DHS Department of Homeland Security FR Federal Register NANPCA Non-Indigenous Aquatic Nuisance Prevention and Control Act of 1990 NBIC National Ballast Information Clearinghouse NISA National Invasive Species Act of 1996 OMB Office of Management and Budget Pub. L. Public Law § Section U.S.C. United States Code III. Basis and Purpose A. Legal Authority

    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 et seq.). These statutes also direct the Secretary to issue regulations and collect records regarding vessel ballasting practices as a means for determining vessel compliance with the ballast water management (BWM) program (16 U.S.C. 4711(c) and (f)) and they authorize 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 (16 U.S.C. 4711(e)). The Secretary has delegated the regulatory functions and authorities in 16 U.S.C. 4711 to the Commandant of the Coast Guard (Department of Homeland Security Delegation No. 0170.1 (II.)(57)).

    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).

    B. Reason for This Proposed Rule

    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 National Ballast Information Clearinghouse (NBIC).

    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.1 Our objective was to gather a sufficient amount of data without imposing an undue burden on vessels that were otherwise not required to report. However, we have concluded that the current annual reporting data fields are too simplistic to capture vessel movements and ballasting operations in the necessary level of detail. Therefore, we propose to relieve the affected population of the requirement to submit an annual report for calendar year 2018.

    1 See 80 FR 73105, 73106.

    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.

    IV. Discussion of Proposed Rule

    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.

    Section 151.2015. Currently § 151.2015(c) exempts vessels that operate exclusively on voyages between ports or places within a single COTP Zone from the ballast water management requirements in § 151.2025 and from the recordkeeping requirements in § 151.2070. We propose to add the reporting requirements in § 151.2060 to this current list of exemptions in § 151.2015(c). Restoring this reporting exemption provision to § 151.2015(c) makes it clear to vessels that operate exclusively on voyages between ports or places within a single COTP Zone that they are not subject to the reporting requirements in § 151.2060.

    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.

    Section 151.2060. Paragraph (b) of § 151.2060 currently begins with language exempting vessels operating exclusively on voyages between ports or places within a single COTP Zone. We propose to delete this language because it would no longer be needed based on our proposed amendment to § 151.2015(c) that would exempt such vessels from the requirements in § 151.2060. Also, as previously discussed we propose to remove § 151.2060(e) and (f). Paragraph (e) contains the requirement to submit the Annual Ballast Water Summary Report to the NBIC and paragraph (f) describes the information to be included in that report.

    V. Regulatory Analyses

    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.

    A. Regulatory Planning and Review

    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.

    Table 1—Summary of the Economic Impact of the Proposed Rule Proposed change Description Affected
  • population 2
  • Cost savings Benefits
    Eliminate the requirement for vessels operating exclusively within a single COTP Zone to report ballast management practices to the NBIC Owners or Operators of vessels with ballast tanks and operating exclusively on voyages between ports and places within one COTP Zone would not have to report their ballast management practices for the final year of a 3-year commitment to report ballasting operations 67 owners or operators of 166 vessels operating in one COTP Zone One-time savings of $3,461 The proposed rule would remove the reporting requirement for the remainder of 2018 and provide a one-time partial year savings for owners or operators.

    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 3 have reported ballasting operations in accordance with § 151.2060(e). Table 2 presents the vessel types and number of these vessels.

    1 3 We estimated the population of affected vessels in the 2015 final rule to be 1,280. This was an estimate based on potential vessels that might operate exclusively within a single COTP Zone. Since the publication of the 2015 final rule, vessel owners or operators have been providing information to the NBIC regarding their ballasting operations and area of operation. From this information, we are able to determine the actual vessel population that exclusively operate within a single COTP Zone. This proposed rule, in addition to eliminating § 151.2060(e), would also reduce the affected population estimated in the 2015 final rule from 1,280 to 166 vessels.

    Table 2—U.S.-Flagged Vessels Operating Exclusively Within a Single COTP Zone Affected by This Proposed Rule Vessel type Affected
  • population
  • Tanker—Other 1 Tug only 57 Offshore supply vessel 38 Other (research, fishing, etc.) 21 Passenger 2 Bulk carrier 2 Barge only 45 Total 166 Source: NBIC Data https://invasions.si.edu/nbic/.

    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.4 We calculated the load factor from data collected in the Employer Cost for Employee Compensation survey done by the BLS and applied it to the mean hourly wage rate to obtain a fully loaded wage rate, which more accurately represents the employers' cost per hour for an employee's work.5 The load factor we used for this economic analysis is 1.52.6 7 The loaded mean hourly wage rate used to assess the savings estimates for this proposed rule is calculated at $59.57 ($39.19 × 1.52).

    4 Information about the wage rates for Captains, Mates and Vessel Pilots (53-5021) can be found at https://www.bls.gov/oes/2016/may/oes535021.htm.

    5 A loaded wage rate is what a company pays per hour to employ a person, not the hourly wage the employee receives. The loaded wage rate includes the cost of benefits (health insurance, vacation, etc.).

    6 From the BLS, Employer Cost for Employee Compensation survey. Total compensation divided by wage and salary compensation.

    7 The load factor for wages is calculated by dividing total compensation by wages and salaries. For this report, we used the Transportation and Materials Moving Occupations, Private Industry report (Series IDs, CMU2010000520000D and CMU2020000520000D) for all workers using the multi-screen data search. Using 2016 Q2 data, we divide $27.55/$18.08 to get the load factor of 1.52. See https://data.bls.gov/cgi-bin/srgate.

    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.

    Table 3—Total Savings for Affected Vessels Hourly Wage Paid to Employee $39.19 Load Factor to Account for Cost of Benefits 1.52 Loaded Wage $59.57 Hours 0.35 Savings per Vessel (Hours × Loaded Wage Rate) $20.85 Affected Population 166 Total Savings * (Cost per Vessel × Affected Population) $3,461 * Represents undiscounted totals. Totals may not sum due to rounding.

    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.

    B. Small Entities

    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 ADDRESSES. In your comment, explain why you think it qualifies and how and to what degree this proposed rule would economically affect it.

    C. Assistance for Small Entities

    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 FOR FURTHER INFORMATION CONTACT section of this proposed rule. The Coast Guard will not retaliate against small entities that question or complain about this proposed rule or any policy or action of the Coast Guard.

    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).

    D. Collection of Information

    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.

    Title: Ballast Water Management Reporting and Recordkeeping.

    OMB Control Number: 1625-0069.

    Summary of the Collection of Information: This proposed rule modifies the existing BWM reporting and recordkeeping requirement in § 151.2060(e) which would amend current reporting. In the current regulation, the Coast Guard requires vessels with ballast tanks that operate exclusively on voyages between ports or places within a single COTP Zone to submit an annual summary report on their ballast water practices. The current final rule published in 2015 requires vessels to report to the NBIC for a 3-year period, after which a sunset clause in the rule has this provision expiring at the end of the 2018 calendar year. This proposed rule would remove the last year of reporting requirements for the population affected by the 2015 final rule and prior to the provision's sunset; thereby, returning the overall Collection of Information (COI) burden estimates to the 2015 final rule's level.

    Need for Information: The Coast Guard is removing the reporting requirement under § 151.2060(e), because the information being provided by the affected population did not meet the expectations of the Coast Guard.

    Proposed Use of Information: The collection of this BWM data was intended to fill a limited gap in information about vessels operating exclusively within a single COTP Zone. The data was to measure ballast water practices within a COTP Zone, by vessels that operated exclusively within a single COTP Zone. Sections 151.2060(e) and (f) are being removed because the data collected did not help the Coast Guard to better understand these ballasting practices.

    Description of the Respondents: The respondents are the owners or operators of vessels with ballast water tanks operating exclusively on voyages between ports or place within a single COTP Zone.

    Number of Respondents: The current number of respondents is 9,663. However, when we published the final rule in 2015, we incorrectly estimated the additional number of respondents in the collection of information to be 1,280. The population of 1,280 was an overestimation by the Coast Guard because information about vessels operating exclusively within a single COTP Zone had not been documented prior to the 2015 final rule. For the purpose of maintaining continuity between the 2015 final rule and the overall COI OMB CONTROL NUMBER: 1625-0069, the Coast Guard estimates changes to the overall COI using the 2015 final rule COI values to obtain a net result of zero.8 Therefore, in order to revert back to the 2015 baseline, we need to subtract the 1,280 respondents we incorrectly estimated in the final rule.9 With this change, we are maintaining the 2015 baseline of 8,383 respondents because we would be subtracting the incorrect estimated population of 1,280 respondents. The incurred cost savings and burden-hour reduction we estimate in this proposed rule would only affect 166 respondents for the last three months of this calendar year. After this time, the approved OMB-approved number of respondents would remain at the 2015 baseline level of 8,383 respondents because of the sunset clause in the 2015 final rule. We show these calculations, for illustrative purposes, in the below table.

    8 The goal is to revert the COI Control #1625-0069 back to its original collection prior to the 2015 ballast water recordkeeping and reporting final rule.

    9 Appendix A of COI OMB Control No. 1625-0069.

    Table 4—Summary of Collection of Information, Respondents Reporting items Current COI respondents NPRM change New COI
  • values
  • (A) (B) (C) (B−C) Voyage Reports 8,383 0 8,383 Annual Reports 1,280 1,280 0 Compliance Extension Request 0 0 0 Total 9,663 1,280 8,383

    Frequency of Response: Reporting requirement under this COI is scheduled to occur annually. This proposed rule would result in current respondents under § 151.2060(e) to be no longer required to maintain and submit BWM information on an annual basis.

    Burden of Response: The Coast Guard anticipates that the elimination of the rule would decrease burden by approximately 40 minutes per report for vessels with ballast water tanks operating exclusively on voyages between ports or places within a single COTP Zone.

    Estimate of Total Annual Burden: The annual reduction in burden is estimated as follows:

    (a) Annual reduction in burden resulting from removing reporting requirement for vessels operating within a single COTP Zone: This proposed rule would reduce the private sector burden hours for this COI by 58.1 hours (166 vessels × 0.35 hours [3 months of savings]). There are three items associated with this collection of information: Voyage reports, annual reports (which is applicable to this proposed rule), and compliance extension requests. The voyage reports and compliance extension requests are not included in this proposed rule. The burden estimates in this collection of information, stemming from these, would be unaffected. Voyage reports account for 60,727 hours, annual reports account for 858 hours, and compliance extension requests account for 234 hours for a total of 61,819 hours. Essentially, with this proposed rule, we are accounting for the 58.1 burden hours of reduction in the last three months of this calendar year only, when the sunset clause becomes effective. To capture this change and to correct for the incorrect hour burden estimate of 858 hours, the total hour burden in the last three months of this year would be about 61,019 hours (61,819 hours − 858 hours + 58 hours). After December 31, 2018, the burden hours will remain at the 2015 baseline level of 60,691 hours, or the current OMB inventory amount, with the subtraction of the 858 hours for the annual reports.

    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.

    Table 5—Summary of Collection of Information, Burden Hours Reporting items Current COI burden hours NPRM change New COI
  • values
  • (A) (B) (C) (B−C) Voyage Reports 60,727 0 60,727 Annual Reports 858 858 0 Compliance Extension Request 234 0 234 Total 61,819 858 *60,961 * Although this proposed rule would add 58.1 hours for the last three months of this year, after this time, the total hour burden estimate would revert back to the 2015 baseline level or current OMB inventory amount of 60,961 due to the fact that there would no longer be a need to complete annual reports for vessels traveling exclusively between ports or places within a single Captain of the Port Zone.

    (b) Reduction of annual burden due to the elimination of the current rule: This proposed rule would result in a reduction of annual burden of 58.1 hours for the last three months of the year ending December 31, 2018. However, after correcting for the overestimated burden in the 2015 COI, the reduction in annual burden hours as reflected in the Supporting Statement for this COI is 858 hours (as explained above).

    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 ADDRESSES, by the date under DATES.

    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.

    E. Federalism

    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 power and responsibilities among the various levels of government. We have analyzed this proposed rule under Executive Order 13132 and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132. Our analysis follows.

    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 FOR FURTHER INFORMATION section of this preamble.

    F. Unfunded Mandates Reform Act

    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.

    G. Taking of Private Property

    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).

    H. Civil Justice Reform

    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.

    I. Protection of Children

    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.

    J. Indian Tribal Governments

    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.

    K. Energy Effects

    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.

    L. Technical Standards

    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 (e.g., specifications of materials, performance, design, or operation; test methods; sampling procedures; and related management systems practices) that are developed or adopted by voluntary consensus standards bodies.

    This proposed rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards.

    M. Environment

    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.

    List of Subjects in 33 CFR Part 151

    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 amend 33 CFR part 151, subpart D, as follows:

    PART 151—VESSELS CARRYING OIL, NOXIOUS LIQUID SUBSTANCES, GARBAGE, MUNICIPAL OR COMMERCIAL WASTE, AND BALLAST WATER 1. The authority citation for part 151, subpart D, is revised to read as follows: Authority:

    16 U.S.C. 4711; Department of Homeland Security Delegation No. 0170.1, para. II, (57).

    2. Amend § 151.2015 as follows: a. In paragraph (c), after the text “(ballast water management (BWM) requirements),” add the text “151.2060 (reporting)”; and b. Revise the fourth and sixth rows in table 1 to § 151.2015 to read as follows:
    § 151.2015 Exemptions. Table 1 to § 151.2015—Table of 33 CFR 151.2015 Specific Exemptions for Types of Vessels 151.2025
  • (Management)
  • 151.2060
  • (Reporting)
  • 151.2070
  • (Recordkeeping)
  • *         *         *         *         *         *         * Vessel operates exclusively on voyages between ports or places within a single COTP Zone Exempt Exempt Exempt. *         *         *         *         *         *         * Non-seagoing vessel Exempt Applicable 1 Applicable 1. *         *         *         *         *         *         * 1 Unless operating exclusively on voyages between ports or places within a single COTP Zone.
    § 151.2060 [Amended]
    3. Amend § 151.2060 as follows: a. In paragraph (b), remove the words “Unless operating exclusively on voyages between ports or places within a single COTP Zone, the” and add, in their place, the word “The”; and b. Remove paragraphs (e) and (f). Dated: May 4, 2018. J. G. Lantz, Director of Commercial Regulations and Standards.
    [FR Doc. 2018-09877 Filed 5-8-18; 8:45 am] BILLING CODE 9110-04-P
    DEPARTMENT OF COMMERCE Patent and Trademark Office 37 CFR Part 42 [Docket No. PTO-P-2018-0036] RIN 0651-AD16 Changes to the Claim Construction Standard for Interpreting Claims in Trial Proceedings Before the Patent Trial and Appeal Board AGENCY:

    United States Patent and Trademark Office, Department of Commerce.

    ACTION:

    Notice of proposed rulemaking.

    SUMMARY:

    The United States Patent and Trademark Office (“USPTO” or “Office”) proposes changes to the claim construction standard for interpreting claims in inter partes review (“IPR”), post-grant review (“PGR”), and the transitional program for covered business method patents (“CBM”) proceedings before the Patent Trial and Appeal Board (“PTAB” or “Board”). In particular, the Office proposes to replace the broadest reasonable interpretation (“BRI”) standard for construing unexpired patent claims and proposed claims in these trial proceedings with a standard that is the same as the standard applied in federal district courts and International Trade Commission (“ITC”) proceedings. The Office also proposes to amend the rules to add that the Office will consider any prior claim construction determination concerning a term of the involved claim in a civil action, or an ITC proceeding, that is timely made of record in an IPR, PGR, or CBM proceeding.

    DATES:

    Comment Deadline Date: The Office solicits comments from the public on this proposed rulemaking. Written comments must be received on or before July 9, 2018 to ensure consideration.

    ADDRESSES:

    Comments should be sent by electronic mail message over the internet addressed to: [email protected]. Comments may also be sent by electronic mail message over the internet via the Federal eRulemaking Portal at http://www.regulations.gov. See the Federal eRulemaking Portal website for additional instructions on providing comments via the Federal eRulemaking Portal. All comments submitted directly to the USPTO or provided on the Federal eRulemaking Portal should include the docket number (PTO-P-2018-0036).

    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, https://go.usa.gov/xXXFW, and on the Federal eRulemaking Portal. Because comments will be made available for public inspection, information that the submitter does not desire to be made public, such as address or phone number, should not be included in the comments.

    FOR FURTHER INFORMATION CONTACT:

    Michael Tierney and Jacqueline Wright Bonilla, Vice Chief Administrative Patent Judges, by telephone at (571) 272-9797.

    SUPPLEMENTARY INFORMATION:

    Executive Summary

    Purpose: This proposed rule would amend the rules for IPR, PGR, and CBM proceedings that implemented provisions of the Leahy-Smith America Invents Act (“AIA”) providing for trials before the Office, by replacing the current claim construction standard for interpreting unexpired patent claims and claims proposed in a motion to amend, with an approach that is the same as the standard used by Article III federal courts following Phillips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005) (en banc). This proposed rule also would amend the rules to add that the Office will consider any prior claim construction determination concerning a term of the involved claim in a civil action, or an ITC proceeding, that is timely made of record in an IPR, PGR, or CBM proceeding.

    Summary of Major Provisions: The Office is using over five years of historical data and user experiences to further shape and improve PTAB trial proceedings, particularly IPR, PGR, and CBM proceedings. In this notice of proposed rulemaking, the Office seeks feedback and information in relation to the Office's proposed changes to the claim construction standard used for interpreting unexpired patent claims and claims proposed in a motion to amend. The Supreme Court of the United States has endorsed the Office's ability to choose an approach to claim construction for AIA trial proceedings. Cuozzo Speed Techs., LLC v. Lee, 136 S. Ct. 2131, 2144-46 (2016). Some parties have expressed a desire that the Office apply the same claim construction standard used in federal district courts, rather than the current standard of BRI. As part of the Office's continuing efforts to improve the trial proceedings, it is appropriate to revisit the claim construction standard applied in AIA trial proceedings involving unexpired patent claims and claims proposed in a motion to amend. The proposed changes would replace the BRI standard with an approach that would be consistent with the claim construction standard used in federal district courts. The proposed changes also would be consistent with the Office's current approach for interpreting claims in an expired patent. See Wasica Fin. GmbH v. Cont'l Auto. Sys., Inc., 853 F.3d 1272, 1279 (Fed. Cir. 2017) (noting that “[t]he Board construes claims of an expired patent in accordance with Phillips . . . and [u]nder that standard, words of a claim are generally given their ordinary and customary meaning”).

    Costs and Benefits: This rulemaking is not economically significant, and is not significant, under Executive Order 12866 (Sept. 30, 1993), as amended by Executive Order 13258 (Feb. 26, 2002) and Executive Order 13422 (Jan. 18, 2007).

    Background

    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). See Rules of Practice for Trials Before the Patent Trial and Appeal Board and Judicial Review of Patent Trial and Appeal Board Decisions, 77 FR 48612 (Aug. 14, 2012); Changes to Implement Inter Partes Review Proceedings, Post-Grant Review Proceedings, and Transitional Program for Covered Business Method Patents, 77 FR 48680 (Aug. 14, 2012); Transitional Program for Covered Business Method Patents—Definitions of Covered Business Method Patent and Technological Invention, 77 FR 48734 (Aug. 14, 2012). Additionally, the Office published a Patent Trial Practice Guide to advise the public on the general framework of the regulations, including the structure and times for taking action in each of the new proceedings. See Office Patent Trial Practice Guide, 77 FR 48756 (Aug. 14, 2012).

    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 Federal Register and, at public request, extended the period for receiving comments to October 16, 2014. See Request for Comments on Trial Proceedings Under the America Invents Act Before the Patent Trial and Appeal Board, 79 FR 36474 (June 27, 2014) (“Request for Comments”). The Request for Comments asked seventeen questions on ten broad topics, including a general catchall question, to gather public feedback on any changes to the AIA trial proceedings that might be beneficial. See Request for Comments, 79 FR at 36476-77.

    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).

    Claim Construction Standard

    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 Phillips.

    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 same standard in the various fora could help increase judicial efficiency overall. One study found that 86.8% of patents at issue in AIA trial proceedings also have been the subject of litigation in the federal courts. Saurabh Vishnubhakat, Arti K. Rai & Jay P. Kesan, Strategic Decision Making in Dual PTAB and District Court Proceedings, 31 Berkeley Tech. L.J. 45 (2016), https://ssrn.com/abstract=2731002. Thus, the high percentage of overlap between AIA trial proceedings and district court litigation favors using a claim construction standard in AIA trials that is consistent with the standard used by federal district courts and the ITC.

    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 Phillips standard, a patent claim could be found unpatentable in an AIA trial on account of claim scope that the patent owner would not be able to assert in an infringement proceeding. For example, even if a competitor's product would not be found to infringe a patent claim if it was sold after the patent's effective filing date, the same product nevertheless could constitute invalidating prior art if publicly sold before the patent's effective filing date.

    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; see also id. at 40 (AIA “is designed to establish a more efficient and streamline patent system that will improve patent quality and limit unnecessary and counterproductive litigation costs.”). The claim construction standard could be outcome determinative. PPC Broadband, Inc. v. Corning Optical Comm'ns RF, LLC, 815 F.3d 734, 740-42 (Fed. Cir. 2016) (noting that “[t]his case hinges on the claim construction standard applied—a scenario likely to arise with frequency”); see also Rembrandt Wireless Techs., LP v. Samsung Elecs. Co., 853 F.3d 1370, 1377 (Fed. Cir. 2017) (noting that “the Board in IPR proceedings operates under a broader claim construction standard than the federal courts”); Google LLC v. Network-1 Techs., Inc.. No. 2016-2509, 2018 WL 1468370, at *5 (Fed. Cir. Mar. 26, 2018) (nonprecedential) (holding that “[i]n order to be found reasonable, it is not unnecessary that a claim be given its correct construction under the framework laid out in Phillips.”). Using the same claim construction standard as the standard applied in federal district courts would “seek out the correct construction—the construction that most accurately delineates the scope of the claim invention—under the framework laid out in Phillips.” PPC Broadband, 815 F.3d at 740-42.

    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 Phillips.

    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 Phillips and its progeny. For example, claim construction begins with the language of the claims. Phillips, 415 F.3d at 1312-14. The “words of a claim are generally given their ordinary and customary meaning,” which is “the meaning that the term would have to a person of ordinary skill in the art in question at the time of the invention, i.e., as of the effective filing date of the patent application.” Id. at 1212-1313. The specification is “the single best guide to the meaning of a disputed term and . . . acts as a dictionary when it expressly defines terms used in the claims or when it defines terms by implication.” Id. at 1321. Although the prosecution history “often lacks the clarity of the specification and thus is less useful for claim construction purposes,” it is another source of intrinsic evidence that can “inform the meaning of the claim language by demonstrating how the inventor understood the invention and whether the inventor limited the invention in the course of prosecution, making the claim scope narrower than it would otherwise be.” Id. at 1317. Extrinsic evidence, such as expert testimony and dictionaries, may be useful in educating the court regarding the field of the invention or helping determine what a person of ordinary skill in the art would understand claim terms to mean. Id. at 1318-19. However, extrinsic evidence in general is viewed as less reliable than intrinsic evidence. Id.

    Additionally, consistent with Phillips and its progeny, the doctrine of construing claims to preserve their validity would apply to AIA trials. Phillips, 415 F.3d at 1327-28. As the Federal Circuit recognized in Phillips, however, this doctrine is “of limited utility.” Id.

    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.” Id. at 1327. The doctrine of construing claims to preserve their validity has been limited to cases in which “the court concludes, after applying all the available tools of claim construction, that the claim is still ambiguous.” Id. (quoting Liebel-Flarsheim Co. v. Medrad, Inc., 358 F.3d 898, 911 (Fed. Cir. 2004)). Moreover, the Federal Circuit “repeatedly and consistently has recognized that courts may not redraft claims, whether to make them operable or to sustain their validity.” Rembrandt Data Techs., LP v. AOL, LLC, 641 F.3d 1331, 1339 (Fed. Cir. 2011); see also MBO Labs., Inc. v. Becton, Dickinson & Co., 474 F.3d 1323, 1332 (Fed. Cir. 2007) (noting that “validity construction should be used as a last resort, not first principle”).

    The prosecution history taken into account would be the prosecution history that occurred previously at the USPTO, including before an examiner during examination, reissue, reexamination, IPR, PGR, and CBM proceedings. This would also include prosecution before an examiner in a related application where relevant (Trading Technologies Intern., Inc. v. Open E Cry, LLC, 728 F.3d 1309 (Fed. Cir. 2013)) and any argument made on appeal of a rejection before the grant of the patent for which review is sought, as those arguments are before the examiner when the decision to allow an application is made (See TMC Fuel Injection System, LLC v. Ford Motor Company, 682 Fed. Appx. 895 (Fed. Cir. 2017)).

    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); see also Aqua Prods., Inc. v. Matal, 872 F.3d 1290, 1306 (noting that “[t]he patent owner proposes an amendment that it believes is sufficiently narrower than the challenged claim to overcome the grounds of unpatentability upon which the IPR was instituted”). Among other things, having the same claim construction standard for both the original patent claims and proposed claims would reduce the potential for inconsistency in the interpretation of the same or similar claim terms.

    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.

    Discussion of Specific Rules

    Title 37 of the Code of Federal Regulations, part 42, is proposed to be amended as follows:

    Sections 42.100, 42.200, and 42.300: Each of §§ 42.100(b), 42.200(b), and 42.300(b) is proposed to be amended to replace the first sentence with the following: a claim of a patent, 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 revision would replace the BRI standard for construing unexpired patent claims and proposed claims during an IPR, PGR, or CBM proceeding with a standard that is the same as the standard applied in federal district courts and ITC proceedings. As discussed above, the Office would apply the principles that the Federal Circuit articulated in Phillips and its progeny. 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, as well as relevant extrinsic evidence, all as in prevailing jurisprudence of Article III courts. The prosecution history taken into account would be the prosecution history that occurred previously in proceedings at the USPTO prior to the IPR, PGR, or CBM proceeding at issue, including in another IPR, PGR, or CBM proceeding, or before an examiner during examination, reissue, and reexamination.

    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.

    Rulemaking Considerations

    A. Administrative Procedure Act (APA): This proposed rule would revise the rules relating to Office trial practice for IPR, PGR, and CBM proceedings. The changes being proposed in this notice of proposed rulemaking would not change the substantive criteria of patentability. These proposed changes involve rules of agency procedure and interpretation. See Perez v. Mortg. Bankers Ass'n, 135 S. Ct. 1199, 1204 (2015) (Interpretive rules “advise the public of the agency's construction of the statutes and rules which it administers.” (citation and internal quotation marks omitted)); Bachow Commc'ns, Inc. v. F.C.C., 237 F.3d 683, 690 (D.C. Cir. 2001) (rules governing an application process are procedural under the Administrative Procedure Act); Inova Alexandria Hosp. v. Shalala, 244 F.3d 342, 350 (4th Cir. 2001) (rules for handling appeals were procedural where they did not change the substantive requirements for reviewing claims); Nat'l Org. of Veterans' Advocates, Inc. v. Sec'y of Veterans Affairs, 260 F.3d 1365, 1375 (Fed. Cir. 2001) (rule that clarifies interpretation of a statute is interpretive); JEM Broad. Co. v. F.C.C., 22 F.3d 320, 328 (D.C. Cir. 1994) (rules are not legislative because they do not “foreclose effective opportunity to make one's case on the merits”).

    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). See Perez, 135 S. Ct. at 1206 (Notice-and-comment procedures are required neither when an agency “issue[s] an initial interpretive rule” nor “when it amends or repeals that interpretive rule.”); Cooper Techs. Co. v. Dudas, 536 F.3d 1330, 1336-37 (Fed. Cir. 2008) (stating that 5 U.S.C. 553, and thus 35 U.S.C. 2(b)(2)(B), do not require notice and comment rulemaking for “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice”) (quoting 5 U.S.C. 553(b)(3)(A)).

    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 in this notice of proposed rulemaking would not have a significant economic impact on a substantial number of small entities. See 5 U.S.C. 605(b).

    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 et seq.), prior to issuing any final rule, the United States Patent and Trademark Office will submit a report containing the rule and other required information to the United States Senate, the United States House of Representatives, and the Comptroller General of the Government Accountability Office. The changes in this proposed rule are not expected to result in an annual effect on the economy of 100 million dollars or more, a major increase in costs or prices, or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets. Therefore, this proposed rule is not a “major rule” as defined in 5 U.S.C. 804(2).

    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. See 2 U.S.C. 1501 et seq.

    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. See 42 U.S.C. 4321 et seq.

    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.

    List of Subjects in 37 CFR Part 42

    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:

    PART 42—TRIAL PRACTICE BEFORE THE PATENT TRIAL AND APPEAL BOARD 1. The authority citation for 37 CFR part 42 continues to read as follows: Authority:

    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.

    2. Amend § 42.100 by revising paragraph (b) to read as follows:
    § 42.100 Procedure; pendency.

    (b) In an inter partes review proceeding, a claim of a patent, or a claim proposed in a motion to amend under § 42.121, 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 inter partes review proceeding will be considered.

    3. Amend § 42.200 by revising paragraph (b) to read as follows:
    § 42.200 Procedure; pendency.

    (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.

    4. Amend § 42.300 by revising paragraph (b) to read as follows:
    § 42.300 Procedure; pendency.

    (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.

    Dated: May 3, 2018. Andrei Iancu, Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office.
    [FR Doc. 2018-09821 Filed 5-8-18; 8:45 am] BILLING CODE 3510-16-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [EPA-R08-OAR-2018-0055; FRL-9977—44—Region 8] Interstate Transport Prongs 1 and 2 for the 2012 Fine Particulate Matter (PM2.5) Standard for Colorado, Montana, North Dakota, South Dakota and Wyoming AGENCY:

    Environmental Protection Agency (EPA).

    ACTION:

    Proposed rule.

    SUMMARY:

    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 (PM2.5) National Ambient Air Quality Standards (NAAQS). These submissions address the requirement that each SIP contain adequate provisions prohibiting air emissions that will have certain adverse air quality effects in other states. The EPA is proposing to approve portions of these infrastructure SIPs for the aforementioned states as containing adequate provisions to ensure that air emissions in the states will not significantly contribute to nonattainment or interfere with maintenance of the 2012 annual PM2.5 NAAQS in any other state.

    DATES:

    Comments must be received on or before June 8, 2018.

    ADDRESSES:

    Submit your comments, identified by Docket ID No EPA-R08-OAR-2018-0055 at http://www.regulations.gov. Follow the online instructions for submitting comments. Once submitted, comments cannot be edited or removed from www.regulations.gov. The EPA may publish any comment received to its public docket. Do not submit electronically any information you consider to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. Multimedia submissions (audio, video, etc.) must be accompanied by a written comment. The written comment is considered the official comment and should include discussion of all points you wish to make. The EPA will generally not consider comments or comment contents located outside of the primary submission (i.e., on the web, cloud, or other file sharing system). For additional submission methods, the full EPA public comment policy, information about CBI or multimedia submissions, and general guidance on making effective comments, please visit http://www2.epa.gov/dockets/commenting-epa-dockets.

    FOR FURTHER INFORMATION CONTACT:

    Adam Clark, Air Program, U.S. EPA Region 8, (303) 312-7104, [email protected].

    SUPPLEMENTARY INFORMATION:

    I. Background

    On December 14, 2012, the EPA revised the primary annual PM2.5 NAAQS to 12.0 micrograms per cubic meter (μg/m3). See 78 FR 3086 (January 15, 2013). An area meets the standard if the three-year average of its annual average PM2.5 concentration (at each monitoring site in the area) is less than or equal to 12.0 μg/m3. The CAA requires states to submit, within three years after promulgation of a new or revised standard, SIPs meeting the applicable “infrastructure” elements of sections 110(a)(1) and (2). One of these applicable infrastructure elements, CAA section 110(a)(2)(D)(i), requires SIPs to contain “good neighbor” provisions to prohibit certain adverse air quality effects on neighboring states due to interstate transport of pollution.

    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 PM2.5 NAAQS in any other state. All other applicable infrastructure SIP requirements for these SIP submissions have been addressed in separate rulemakings.1

    1See 82 FR 39030, August 17, 2017 (Colorado); 81 FR 23180, April 20, 2016 (Montana); 82 FR 46681, October 6, 2017 (North Dakota); 82 FR 38832, August 16, 2017 (South Dakota); 82 FR 18992, April 25, 2017, and 82 FR 9142, February 3, 2017 (Wyoming).

    II. Relevant Factors To Evaluate 2012 PM2.5 Interstate Transport SIPs

    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 PM2.5 NAAQS. This framework includes the following four steps: (1) Identify downwind areas that are expected to have problems attaining or maintaining the NAAQS; (2) Identify which upwind states contribute to these air quality problems in amounts sufficient to warrant further review and analysis; (3) Identify any emissions reductions necessary to prevent an identified upwind state from significantly contributing to downwind nonattainment or interfering with downwind maintenance of the NAAQS; and (4) Adopt permanent and enforceable measures needed to achieve those emissions reductions.

    To help states identify the receptors expected to have problems attaining or maintaining the 2012 annual PM2.5 NAAQS, the EPA released a memorandum titled, “Information on the Interstate Transport `Good Neighbor' Provision for the 2012 Fine Particulate Matter National Ambient Air Quality Standards under Clean Air Act Section 110(a)(2)(D)(i)(I)” on March 17, 2016 (hereon “2016 Memo”).2 The 2016 Memo provides projected future year annual PM2.5 design values for monitors throughout the country based on quality assured and certified ambient monitoring data and recent air quality modeling and explains the methodology used to develop these projected design values. The 2016 Memo also describes how the projected values can be used to help determine which monitors should be further evaluated as potential receptors under step 1 of the interstate transport framework described above, and how to determine whether emissions from other states significantly contribute to nonattainment or interfere with maintenance of the 2012 annual PM2.5 NAAQS at these monitoring sites.

    2 This memorandum is available in the docket and at https://www.epa.gov/sites/production/files/2016-08/documents/good-neighbor-memo_implementation.pdf.

    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. See 81 FR 74504 (October 26, 2016). Future year modeling was performed for 2025 to support the Regulatory Impact Assessment of the final 2015 Ozone NAAQS.3 In addition, and relevant to this proposed action on interstate transport SIPs for the 2012 annual PM2.5 NAAQS, the outputs from these model runs included hourly concentrations of PM2.5 that were used in conjunction with measured data to project annual average PM2.5 design values for 2017 and 2025.

    3See 2015 ozone NAAQS RIA at: http://www3.epa.gov/ozonepollution/pdfs/20151001ria.pdf.

    Areas that were designated as moderate PM2.5 nonattainment areas for the 2012 annual PM2.5 NAAQS in 2014 must attain the NAAQS by December 31, 2021, or as expeditiously as practicable. Since modeling results are only available for 2017 and 2025, the 2016 Memo explains that one way to assess potential receptors for 20214 is to assume that receptors projected to have average and/or maximum design values above the NAAQS in both 2017 and 2025 are also likely to be either nonattainment or maintenance receptors in 2021. Similarly, the EPA stated that it may be reasonable to assume that receptors that are projected to attain the NAAQS in both 2017 and 2025 are also likely to be attainment receptors in 2021. Where a potential receptor is projected to be nonattainment or maintenance in 2017, but projected to be attainment in 2025, further analysis of the emissions and modeling may be needed to make a further judgement regarding the receptor status in 2021.

    4 Assessing downwind PM2.5 air quality problems based on estimates of air quality concentrations in a future year aligned with the relevant attainment deadline is consistent with the instructions from the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) in North Carolina v. EPA, 531 F.3d 896, 911-12 (D.C. Cir. 2008), that upwind emission reductions should be harmonized, to the extent possible, with the attainment deadlines for downwind areas.

    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 PM2.5 NAAQS and expected to maintain the NAAQS due to downward emission trends for NOX and SO2 (www.epa.gov/air-trends/air-quality-design-values and www.epa.gov/air-emissions-inventories/air-pollutant-emissions-trends-data). Recent ambient data from 2015 and 2016 for Idaho and Illinois indicated that violations of the 2012 annual PM2.5 NAAQS in the areas with previous data quality issues are unlikely. Considering this information, the very low background concentrations recorded at IMPROVE monitoring site locations in Idaho, and the continuing downward trend of annual PM2.5 levels at monitors across Illinois, we propose that the Idaho and Illinois areas should not be considered receptors for purposes of the 2012 annual PM2.5 NAAQS.5

    5 These data quality issues are addressed in more detail in the technical support documents (TSDs) for this rulemaking, which can be found in the docket.

    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 PM2.5 concentrations that would result from emissions from individual states. Accordingly, the EPA will evaluate prong 1 and 2 submissions for states using a weight of evidence analysis. This analysis is based on a review of the state's submission and other available information, including air quality trends; topographical, geographical, and meteorological information; local emissions in downwind states and emissions from the upwind state; contribution modeling from prior interstate transport analyses; and existing and planned emission control measures in the state of interest. While none of these factors is by itself dispositive, together they may be used in weight of evidence analyses to determine whether the emissions from each of the five states that are the subject of this notice will significantly contribute to nonattainment or interfere with maintenance of the 2012 annual PM2.5 NAAQS at the identified receptors in the 2016 Memo.

    III. States' Submissions and the EPA's Analysis

    In this section, we provide an overview of each state's 2012 annual PM2.5 transport analysis, as well as a summary of the EPA's evaluation of prongs 1 and 2 for each state. A detailed discussion of our evaluations can be found in the Technical Support Documents (TSDs) for this action, with separate TSDs for each of the five states. The TSDs can be accessed through www.regulations.gov (e-docket EPA-R08-OAR-2018-0055).

    Colorado: Colorado concluded that it does not contribute significantly to nonattainment or interfere with maintenance of the 2012 annual PM2.5 NAAQS in any other state for the following reasons: (1) Colorado has never violated the 2012 PM2.5 NAAQS; (2) The nearest downwind nonattainment area is about 900 miles from Colorado's eastern border,6 and the nearest upwind nonattainment area is about 600 miles from Colorado's western border; and (3) Colorado has an EPA-approved Regional Haze State Implementation Plan that will result in substantial future reductions of PM2.5 and its precursors.

    6 Colorado was referring to the Floyd County, Indiana area. The EPA did not consider transport to this area as part of this action because no receptors in the area were projected as nonattainment or maintenance monitors in the 2016 Memo.

    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 PM2.5 NAAQS in any other state. In remanding the Clean Air Interstate Rule (CAIR) to the EPA in North Carolina v. EPA, the D.C. Circuit explained that the regulating authority must give the “interfere with maintenance” clause of section 110(a)(2)(D)(i)(I) “independent significance” by evaluating the impact of upwind state emissions on downwind areas that, while currently in attainment, are at risk of future nonattainment, considering historic variability.7 While Colorado's submittal pre-dates the 2016 Memo, which provided the states with information about potential maintenance-only receptors, Colorado was still required to evaluate the potential impact of its emissions on areas that are currently measuring clean data, but that may have issues maintaining that air quality, and Colorado did not do so.

    7 531 F.3d 896, 910-11 (D.C. Cir. 2008) (holding that the EPA must give “independent significance” to each prong of CAA section 110(a)(2)(D)(i)(I)).

    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 PM2.5 levels in California are driven primarily by local emissions.8 Additionally, Colorado's western border is more than 570 miles to the east and generally downwind of the California receptors, with several intervening mountain ranges which tend to impede interstate pollution transport. Finally, monitoring data demonstrate that the air in remote areas between Colorado and California is well below the level of the 2012 PM2.5 NAAQS. All of these factors indicate that emissions from Colorado will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at any California projected receptors.

    8 See “California: Imperial County, Los Angeles-South Coast Air Basin, Plumas County, San Joaquin Valley Area Designations for the 2012 Primary Annual PM2.5 National Ambient Air Quality Standard Technical Support Document” in the docket for this action.

    With regard to the Shoshone County, Idaho receptor, our analysis showed that elevated PM2.5 levels in the area are driven primarily by local emissions from wood burning in the wintertime.9 Additionally, Colorado is more than 550 miles to the southeast and downwind of this receptor. Finally, monitoring data indicate that the air in remote areas between Colorado and the Idaho receptor is well below the level of the 2012 PM2.5 NAAQS. All of these factors indicate that emissions from Colorado will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at the projected Shoshone County receptor.

    9 See “Idaho: West Silver Valley Nonattainment Area—2012 Primary Annual PM2.5 National Ambient Air Quality Standard Technical Support Document” in the docket for this action.

    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 PM2.5 NAAQS.10 For the 2011 CSAPR, the EPA modeled contribution from states in the Eastern U.S. to air quality monitors (referred to as “receptors”) also located in the Eastern U.S.11 Therefore, the 2011 CSAPR modeling did not project downwind contribution of emissions from Colorado, but projected contributions from states immediately east of Colorado, including Kansas. This modeling indicated that Kansas, a state located much closer to the Allegheny County receptor and with higher PM2.5 precursor emissions than Colorado,12 was modeled to be below 1% (the contribution level at which eastern states were considered “linked” to downwind receptors in the CSAPR and CSAPR Update rulemakings) of the 2012 annual PM2.5 NAAQS at all receptors in the eastern U.S., including the Allegheny County receptor. Additionally, the modeling information contained in EPA's 2016 Memo shows that the Allegheny County receptor is projected to both attain and maintain the NAAQS by 2025. These factors, in addition to the very large distance (1,165 miles) from the Allegheny County receptor to the Colorado border, indicate that emissions from Colorado will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at the projected Allegheny County receptor.

    10 See Table V.D-1 in the EPA's Cross-State Air Pollution Rule (CSAPR) (August 8, 2011), at 76 FR 48240.

    11 In these rules, “Eastern” states refer to all contiguous states east of the Rocky Mountains, specifically not including: Montana, Wyoming, Colorado and New Mexico.

    12 See Tables 7-1 and 7-2 in “Emissions Inventory Final Rule Technical Support Document (TSD)” for CSAPR, June 28, 2011, Document number EPA-HQ-OAR-2009-0491-4522 in www.regulations.gov.

    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 PM2.5 NAAQS in any other state.

    Montana: Montana concluded that it does not contribute significantly to nonattainment or interfere with maintenance of the 2012 annual PM2.5 NAAQS in any other state for the following reasons: (1) The one PM2.5 nonattainment area within the state, the Libby 1997 PM2.5 nonattainment area, monitors PM2.5 values which attain the 2012 PM2.5 NAAQS; (2) Elevated levels of PM2.5 in the state which can occur during the wintertime are highly dependent on low wind speed and meteorological “inversions” that lead to limited vertical mixing, resulting in neighborhood-scale impacts that are unlikely to contribute to elevated PM2.5 levels in other states; and (3) The evidence indicates that Montana does not contribute to elevated emissions at the only area designated nonattainment for the 2012 PM2.5 NAAQS with close proximity to the state, the West Silver Valley in Shoshone County, Idaho. Montana cited the EPA's technical support document on the West Silver Valley, Idaho nonattainment area designation,13 which indicated that residential wood combustion within the West Silver Valley during wintertime periods of low wind speeds and low mixing height was the primary cause of the PM2.5 issues in that area. Montana also noted winds into the West Silver Valley tend to be westerly, and that the Bitterroot and Coeur D'Alene mountain ranges run along the western border of Montana between the state and the West Silver Valley nonattainment area. Montana asserted that all of these considerations combined made it unlikely that emissions from Montana sources will contribute significantly to nonattainment or interfere with maintenance in the West Silver Valley, Idaho area.

    13 See “Idaho: West Silver Valley Nonattainment Area- 2012 Primary Annual PM2.5 National Ambient Air Quality Standard Technical Support Document” in the docket for this action.

    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 PM2.5 NAAQS in any other state. While Montana's submittal pre-dates the 2016 Memo, which provided the states with information about potential maintenance-only receptors, Montana was still required to evaluate the potential impact of its emissions on areas that are currently measuring clean data, but that may have issues maintaining that air quality, and Montana did not do so.

    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 PM2.5 levels in the area are driven primarily by local emissions from wood burning in the wintertime during inversion conditions, and therefore are not driven by transported emissions.14 Monitoring data also indicate that the air in remote areas in western Montana and throughout the region is well below the level of the 2012 PM2.5 NAAQS, especially during the winter months when PM2.5 levels at the Shoshone County receptor are highest.15 Additionally, the predominant wind direction in Shoshone County is from the west, while Montana is located to the east, making transport of emissions from Montana to this receptor unlikely. Finally, the intervening topography of the Bitterroot and Coeur D'Alene mountain ranges would impede interstate pollution transport. These factors, which are also discussed in Montana's analysis and further examined by the EPA in a TSD for this action,16 indicate that emissions from Montana will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at the projected Shoshone County receptor.

    14 Id.

    15 See Id. at 13, as well as “IMPROVE data 2013-2015,” in the docket for this action.

    16 The TSD for the Montana portion of this rulemaking can be found in the docket for this action.

    With regard to the 17 California receptors, our analysis showed that elevated PM2.5 levels in California are driven primarily by local emissions.17 Additionally, Montana is more than 630 miles to the northeast and generally downwind of the California receptors, with several intervening mountain ranges which tend to impede interstate pollution transport. Finally, monitoring data demonstrate that the air in remote areas between Montana and California is well below the level of the 2012 PM2.5 NAAQS. All of these factors indicate that emissions from Montana will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at any California projected receptors.

    17 See “California: Imperial County, Los Angeles-South Coast Air Basin, Plumas County, San Joaquin Valley Area Designations for the 2012 Primary Annual PM2.5 National Ambient Air Quality Standard Technical Support Document” in the docket for this action.

    With regard to the Allegheny County, Pennsylvania receptor, our analysis included review of previous modeling data conducted for the EPA's 2011 CSAPR.18 The 2011 CSAPR modeling did not project downwind contribution of emissions from Montana, but projected contributions from states immediately east of Montana, including North Dakota. This modeling indicated that North Dakota, a state located much closer to the Allegheny County receptor and with higher PM2.5 precursor emissions than Montana,19 was modeled to be below 1% of the 2012 annual PM2.5 NAAQS at all receptors in the eastern U.S., including the Allegheny County receptor. Additionally, the modeling information contained in the EPA's 2016 Memo shows that the Allegheny County receptor is projected to both attain and maintain the NAAQS by 2025. These factors, in addition to the very large distance (1,267 miles) from the Allegheny County receptor to Montana's eastern border, indicate that emissions from Montana will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at the projected Allegheny County receptor.

    18 See Table V.D-1 in the EPA's Cross-State Air Pollution Rule (CSAPR) (August 8, 2011), at 76 FR 48240.

    19 See Tables 7-1 and 7-2 in “Emissions Inventory Final Rule Technical Support Document (TSD)” for CSAPR, June 28, 2011, Document number EPA-HQ-OAR-2009-0491-4522 in www.regulations.gov.

    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 PM2.5 NAAQS in any other state.

    North Dakota: North Dakota concluded that it does not contribute significantly to nonattainment or interfere with maintenance of the 2012 annual PM2.5 NAAQS in any other state for the following reasons: (1) There are no PM2.5 nonattainment areas within North Dakota; (2) The nearest 2012 PM2.5 nonattainment area, in Shoshone County, Idaho, is roughly 660 miles west of the western border of North Dakota. Given that the three PM2.5 monitors in western North Dakota indicate very low annual PM2.5 levels, and the wind in the western U.S. is generally westerly, any PM2.5 contribution from North Dakota to the nearest nonattainment area would be insignificant; (3) The modeling conducted for the EPA's CSAPR (August 8, 2011, 76 FR 48208) indicated that North Dakota sources have a maximum annual average contribution to any nonattainment area of .06 μg/m3, and a maximum contribution of .04 μg/m3 to any maintenance receptor in the Eastern U.S.; (4) Annual PM2.5 monitor values throughout North Dakota are all well below the 2012 PM2.5 NAAQS; and (5) Direct and precursor emissions of PM2.5 have been steadily declining in North Dakota for years. Between 2004-2014, NOx emissions in the state decreased by 36%, SO2 emissions decreased by 64%, and primary particulate emissions from major point sources decreased by 19%, with further anticipated reductions due to North Dakota's Regional Haze requirements.

    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 PM2.5 levels in California are driven primarily by local emissions.20 Additionally, North Dakota is more than 1,030 miles to the east and generally downwind of the California receptors, with several intervening mountain ranges which tend to impede interstate pollution transport. Finally, monitoring data demonstrate that the air in remote areas between North Dakota and California is well below the level of the 2012 PM2.5 NAAQS. All of these factors indicate that emissions from North Dakota will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at any California projected receptors.

    20 See “California: Imperial County, Los Angeles-South Coast Air Basin, Plumas County, San Joaquin Valley Area Designations for the 2012 Primary Annual PM2.5 National Ambient Air Quality Standard Technical Support Document: in the docket for this action.

    With regard to the Shoshone County, Idaho receptor, our analysis showed that elevated PM2.5 levels in the area are driven primarily by local emissions from wood burning in the wintertime.21 Additionally, North Dakota is more than 500 miles to the east and downwind of this receptor. Finally, monitoring data indicate that the air in remote areas between North Dakota and the Shoshone County receptor is well below the level of the 2012 PM2.5 NAAQS. All of these factors indicate that emissions from North Dakota will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at the projected Shoshone County receptor.

    21 See “Idaho: West Silver Valley Nonattainment Area- 2012 Primary Annual PM2.5 National Ambient Air Quality Standard Technical Support Document” in the docket for this action.

    With regard to the Allegheny County, Pennsylvania receptor, our analysis included review of previous modeling data conducted for the EPA's 2011 CSAPR.22 As noted, this modeling projected North Dakota's impact at all receptors in the eastern U.S., including the Allegheny County receptor, and that impact was modeled to be well below 1% of the 2012 annual PM2.5 NAAQS at all receptor locations.23 Additionally, the modeling information contained in EPA's 2016 Memo shows that the Allegheny County receptor is projected to both attain and maintain the NAAQS by 2025. These factors, in addition to the very large distance (925 miles) from the Allegheny County receptor to North Dakota's eastern border, indicate that emissions from North Dakota will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at the projected Allegheny County receptor.

    22 See Table V.D-1 in the EPA's Cross-State Air Pollution Rule (CSAPR) (August 8, 2011), at 76 FR 48240.

    23 Id.

    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 PM2.5 NAAQS in any other state.

    South Dakota: South Dakota concluded that it does not contribute significantly to nonattainment or interfere with maintenance of the 2012 annual PM2.5 NAAQS in any other state for the following reasons: (1) There are no 2012 PM2.5 nonattainment or maintenance areas within South Dakota or neighboring states; (2) Source-oriented PM2.5 emissions are low throughout South Dakota; (3) Existing programs in the South Dakota SIP will prevent new or modified sources from causing nonattainment in South Dakota or contributing significantly to nonattainment or maintenance with this NAAQS in neighboring states; and (4) South Dakota has a small population.

    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 PM2.5 NAAQS in any other state. While South Dakota's submittal pre-dates the 2016 Memo, which provided the states with information about potential maintenance-only receptors, South Dakota was still required to evaluate the potential impact of its emissions on areas that are currently measuring clean data, but that may have issues maintaining that air quality, and South Dakota did not do so.

    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 receptors. In our evaluation, we identified potential downwind nonattainment and maintenance receptors using the 2016 Memo. We then evaluated these receptors to determine whether South 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 South Dakota TSD.

    With regard to the 17 California receptors, our analysis showed that elevated PM2.5 levels in California are driven primarily by local emissions.24 Additionally, South Dakota is more than 937 miles to the northeast and generally downwind of the California receptors. Finally, monitoring data demonstrate that the air in remote areas between South Dakota and California is well below the level of the 2012 PM2.5 NAAQS. All of these factors indicate that emissions from South Dakota will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at any California projected receptors.

    24 See “California: Imperial County, Los Angeles-South Coast Air Basin, Plumas County, San Joaquin Valley Area Designations for the 2012 Primary Annual PM2.5 National Ambient Air Quality Standard Technical Support Document” in the docket for this action.

    With regard to the Shoshone County, Idaho receptor, our analysis showed that elevated PM2.5 levels in the area are driven primarily by local emissions from wood burning in the wintertime.25 Additionally, South Dakota is more than 600 miles to the east and downwind of this receptor. Finally, monitoring data indicate that the air in remote areas between South Dakota and the Idaho receptor is well below the level of the 2012 PM2.5 NAAQS. All of these factors indicate that emissions from South Dakota will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at the projected Shoshone County receptor.

    25 See “Idaho: West Silver Valley Nonattainment Area—2012 Primary Annual PM2.5 National Ambient Air Quality Standard Technical Support Document” in the docket for this action.

    With regard to the Allegheny County, Pennsylvania receptor, our analysis included review of previous modeling data conducted for the EPA's 2011 CSAPR.26 This modeling projected South Dakota's impact at all receptors in the eastern U.S., including the Allegheny County receptor, and that impact was modeled to be well below 1% of the 2012 annual PM2.5 NAAQS at all receptor locations.27 Additionally, the modeling information contained in the EPA's 2016 Memo shows that the Allegheny County receptor is projected to both attain and maintain the NAAQS by 2025. These factors, in addition to the very large distance (880 miles) from the Allegheny County receptor to South Dakota's eastern border, indicate that emissions from South Dakota will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at the projected Allegheny County receptor.

    26 See Table V.D-1 in the EPA's Cross-State Air Pollution Rule (CSAPR) (August 8, 2011), at 76 FR 48240.

    27 Id.

    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 PM2.5 NAAQS in any other state.

    Wyoming: Wyoming concluded that it does not contribute significantly to nonattainment or interfere with maintenance of the 2012 annual PM2.5 NAAQS in any other state for the following reasons: (1) There are no PM2.5 nonattainment areas within Wyoming, and all PM2.5 monitors in the state indicate levels well below the NAAQS in spite of certain maximum values being influenced by wildfires; (2) There are no 2012 PM2.5 nonattainment areas in states bordering Wyoming apart from Idaho; and (3) The evidence indicates that Wyoming does not contribute to elevated emissions at the only area designated nonattainment for the 2012 PM2.5 NAAQS with close proximity to the state, the West Silver Valley in Shoshone County, Idaho. This nonattainment area is over 300 miles from the nearest border of Wyoming, and wind roses within Wyoming show that winds primarily blow west-to-east, and do not favor southeast-to-northwest transport needed for Wyoming emissions to impact this nonattainment area. The monitored PM2.5 values in the Wyoming counties nearest the West Silver Valley, Idaho nonattainment area are well below the NAAQS. Wyoming also cited the EPA's technical support document on the West Silver Valley, Idaho, nonattainment area designation,28 which indicated that residential wood combustion and prescribed burning within the West Silver Valley were the primary causes of PM2.5 issues in that area. Wyoming also stated that the Beaverhead, Lemhi, Teton and Gallatin mountain ranges also inhibited westward transport between Wyoming and the West Silver Valley, Idaho nonattainment area. Wyoming asserted that all of these considerations combined made it reasonable to conclude that emissions from Wyoming sources are not significantly contributing to nonattainment in the West Silver Valley, Idaho area.

    28 See “Idaho: West Silver Valley Nonattainment Area—2012 Primary Annual PM2.5 National Ambient Air Quality Standard Technical Support Document” in the docket for this action.

    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 PM2.5 NAAQS in any other state. Each state is required to evaluate the potential impact of its emissions on areas that are currently measuring clean data, but that may have issues maintaining that air quality, and Wyoming did not do so.

    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 PM2.5 levels in the area are driven primarily by local emissions from wood burning in the wintertime during inversion conditions, and therefore are not driven by transported emissions.29 Additionally, monitoring data indicate that the air in remote areas between Wyoming and the Idaho receptor is well below the level of the 2012 PM2.5 NAAQS. These factors indicate that emissions from Wyoming will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at the projected Shoshone County receptor.

    29 Id.

    With regard to the 17 California receptors, our analysis showed that elevated PM2.5 levels in California are driven primarily by local emissions.30 Additionally, Wyoming is more than 548 miles to the east and generally downwind of the California receptors, with several intervening mountain ranges which tend to impede interstate pollution transport. Finally, monitoring data demonstrate that the air in remote areas between Wyoming and California is well below the level of the 2012 PM2.5 NAAQS. All of these factors indicate that emissions from Wyoming will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at any California projected receptors.

    30 See “California: Imperial County, Los Angeles-South Coast Air Basin, Plumas County, San Joaquin Valley Area Designations for the 2012 Primary Annual PM2.5 National Ambient Air Quality Standard Technical Support Document” in the docket for this action.

    With regard to the Allegheny County, Pennsylvania receptor, our analysis included review of previous modeling data conducted for the EPA's 2011 CSAPR.31 The 2011 CSAPR modeling did not project contribution of emissions from Wyoming, but projected contributions from states immediately east of Wyoming, including Nebraska. This modeling indicated that Nebraska, a state located much closer to the Allegheny County receptor and with higher PM2.5 precursor emissions than Wyoming,32 was modeled to be below 1% of the 2012 annual PM2.5 NAAQS at all receptors in the eastern U.S., including the Allegheny County receptor. Additionally, the modeling information contained in the EPA's 2016 Memo shows that the Allegheny County receptor is projected to both attain and maintain the NAAQS by 2025. These factors, in addition to the very large distance (1,260 miles) from the Allegheny County receptor to Wyoming's eastern border, indicate that emissions from Wyoming will not significantly contribute to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS at the projected Allegheny County receptor.

    31 See Table V.D-1 in the EPA's Cross-State Air Pollution Rule (CSAPR) (August 8, 2011), at 76 FR 48240.

    32 See Tables 7-1 and 7-2 in “Emissions Inventory Final Rule Technical Support Document (TSD)” for CSAPR, June 28, 2011, Document number EPA-HQ-OAR-2009-0491-4522 in www.regulations.gov.

    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 PM2.5 NAAQS in any other state.

    IV. Proposed Action

    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 PM2.5 NAAQS: Colorado's December 1, 2015 submittal; Montana's December 17, 2015 submittal; North Dakota's August 23, 2015 submittal; South Dakota's January 25, 2016 submittal; and Wyoming's June 24, 2016 submittal. The EPA is proposing this approval based on our review of the information and analysis provided by each state, as well as additional relevant information, which indicates that in-state air emissions will not contribute significantly to nonattainment or interfere with maintenance of the 2012 PM2.5 NAAQS in any other state. This action is being taken under section 110 of the CAA.

    V. Statutory and Executive Order Reviews

    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 et seq.);

    • 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 et seq.);

    • 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).

    List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Nitrogen dioxide, Particulate matter, Reporting and recordkeeping requirements, Sulfur dioxide, Volatile organic compounds.

    Authority:

    42 U.S.C. 7401 et seq.

    Dated: May 4, 2018. Douglas Benevento, Regional Administrator, Region 8.
    [FR Doc. 2018-09880 Filed 5-8-18; 8:45 am] BILLING CODE 6560-50-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [EPA-R03-OAR-2017-0337; FRL-9977-88—Region 3] Approval and Promulgation of Air Quality Implementation Plans;Virginia; Interstate Transport Requirements for the 2012 Fine Particulate Matter Standard AGENCY:

    Environmental Protection Agency (EPA).

    ACTION:

    Proposed rule.

    SUMMARY:

    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 (PM2.5) national ambient air quality standards (NAAQS). EPA is approving this revision in accordance with the requirements of the Clean Air Act (CAA).

    DATES:

    Written comments must be received on or before June 8, 2018.

    ADDRESSES:

    Submit your comments, identified by Docket ID No. EPA-R03-OAR-2017-0337 at https://www.regulations.gov, or via email to [email protected]. For comments submitted at Regulations.gov, follow the online instructions for submitting comments. Once submitted, comments cannot be edited or removed from Regulations.gov. For either manner of submission, EPA may publish any comment received to its public docket. Do not submit electronically any information you consider to be confidential business information (CBI) or other information whose disclosure is restricted by statute. Multimedia submissions (audio, video, etc.) must be accompanied by a written comment. The written comment is considered the official comment and should include discussion of all points you wish to make. EPA will generally not consider comments or comment contents located outside of the primary submission (i.e. on the web, cloud, or other file sharing system). For additional submission methods, please contact the person identified in the For Further Information Contact section. For the full EPA public comment policy, information about CBI or multimedia submissions, and general guidance on making effective comments, please visit https://www2.epa.gov/dockets/commenting-epa-dockets.

    FOR FURTHER INFORMATION CONTACT:

    Joseph Schulingkamp, (215) 814-2021, or by email at [email protected].

    SUPPLEMENTARY INFORMATION:

    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. See 81 FR 39210. EPA's previous approval on that June 16, 2015 submittal is not at issue in this rulemaking action and EPA will not be taking comment on the previous approval. On May 16, 2017, Virginia, through VADEQ, submitted a SIP revision addressing the infrastructure requirements under section 110(a)(2)(D)(i) of the CAA for the 2012 PM2.5 NAAQS.

    I. Background A. General

    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. PM2.5 can be emitted directly into the atmosphere, or it can form from chemical reactions of precursor gases including sulfur dioxide (SO2), nitrogen dioxide (NO2), certain volatile organic compounds (VOC), and ammonia. On January 15, 2013, EPA revised the level of the health based (primary) annual PM2.5 standard to 12 micrograms per meter cubed (µg/m3). See 78 FR 3086.

    B. EPA's Infrastructure Requirements

    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.

    C. Interstate Pollution Transport Requirements

    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 PM2.5 NAAQS (2016 PM2.5 Memorandum).1 Further information can be found in the Technical Support Document (TSD) for this rulemaking action, which is available online at www.regulations.gov, Docket number EPA-R03-OAR-2017-0337.

    1 “Information on the Interstate Transport “Good Neighbor” Provision for the 2012 Fine Particulate Matter National Ambient Air Quality Standards under Clean Air Act Section 110(a)(2)(D)(i)(I),” Memorandum from Stephen D. Page, Director, EPA Office of Air Quality Planning and Standards (March 17, 2016). A copy is included in the docket for this rulemaking action.

    II. Summary of SIP Revisions and EPA Analysis

    Virginia's May 16, 2017 SIP submittal includes a summary of annual emissions of oxides of nitrogen (NOX) and SO2, both of which are precursors of PM2.5. The emissions summary shows that emissions from Virginia sources have been steadily decreasing for sources that could potentially contribute with respect to the 2012 PM2.5 NAAQS to nonattainment in, or interfere with maintenance of, any other state. The submittal also included currently available air quality monitoring data for PM2.5, and its precursors SO2 and NO2, which Virginia alleged show that PM2.5 levels continue to be below the 2012 PM2.5 NAAQS in Virginia.

    Virginia also discussed EPA's 2016 PM2.5 Memorandum and the fact that EPA's analysis showed that only one monitor in the eastern United States had projected PM2.5 data above the 12.0 µg/m3 NAAQS value (Allegheny County, PA). Virginia also discussed the direction of prevailing winds throughout Virginia and how, apart from short-term weather variations, Virginia's emissions would have a negligible influence on Allegheny County's attainment status. Virginia also points to EPA's response to comments on the 2012 PM2.5 Designations, in which EPA discusses the factors contributing to the Allegheny County area's nonattainment designation.2

    2 “Response to Significant Comments on the State and Tribal Designation Recommendations for the 2012 Annual PM2.5 National Ambient Air Quality Standard (NAAQS)” December 17, 2014. See Docket Number: EPA-HQ-OAR-2012-0918-0337, page 10.

    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 PM2.5 and its precursors within Virginia. Virginia alleges with these measures, emissions reductions, ambient monitored PM2.5 data, and meteorological data, the Commonwealth does not significantly contribute to, nor interfere with the maintenance of, another state for the 2012 PM2.5 NAAQS. A detailed summary of Virginia's submittal and EPA's review and rationale for approval of this SIP revision as meeting CAA section 110(a)(2)(D)(i)(I) for the 2012 PM2.5 NAAQS may be found in the TSD for this rulemaking action, which is available online at www.regulations.gov, Docket number EPA-R03-OAR-2017-0337.

    EPA used the information in the 2016 PM2.5 Memorandum and additional information for the evaluation and came to the same conclusion as Virginia. As discussed in greater detail in the TSD, EPA identified the potential downwind nonattainment and maintenance receptors identified in the 2016 PM2.5 Memorandum, and then evaluated them to determine if Virginia's emissions could potentially contribute to nonattainment and maintenance problems in 2021, the attainment year for moderate PM2.5 nonattainment areas. Specifically, the analysis identified the following areas as potential nonattainment and maintenance receptors: (i) 17 potential receptors in California; (ii) one potential receptor in Shoshone County, Idaho; (iii) one potential receptor in Allegheny County, Pennsylvania; (iv) data gaps exist for the monitors in four counties in Florida; and (v) data gaps exist for all monitors in Illinois. For the 17 receptors in California and one potential receptor in Idaho, based on EPA's evaluation of distance and wind direction, EPA proposes to conclude that Virginia's emissions do not significantly impact those receptors. For the potential receptor in Allegheny County, EPA expects the air quality affecting that monitor to improve to the point where the monitor will not be a nonattainment or maintenance receptor by 2021 and is therefore unlikely to be a receptor for purposes of interstate transport. For the four counties in Florida and the monitors in Illinois with data gaps, EPA initially treats those receptors as potential nonattainment or maintenance receptors. For the Florida receptors, it is unlikely that they will be nonattainment or maintenance receptors in 2021 and in any event, modeling from the Cross-State Air Pollution Rule (CSAPR) indicates that Virginia's emissions do not contribute to them. For the monitors in Illinois, the most recent air quality data (from 2015 and 2016) indicates that all monitors are likely attaining the PM2.5 NAAQs and are therefore unlikely to be nonattainment or maintenance concerns in 2021. Therefore, EPA proposes to conclude that Virginia emissions will not contribute to those monitors. For these reasons, EPA is proposing to find that Virginia's existing SIP provisions as identified in the May 16, 2017 SIP submittal are adequate to prevent its emission sources from significantly contributing to nonattainment or interfering with maintenance in another state with respect to the 2012 PM2.5 NAAQS.

    III. Proposed Action

    EPA is proposing to approve the May 16, 2017 Virginia SIP revision addressing the interstate transport requirements for the 2012 PM2.5 NAAQS because the submittal adequately addresses section 110(a)(2)(D)(i)(I) of the CAA. EPA is soliciting public comments on the issues discussed in this document. These comments will be considered before taking final action.

    IV. General Information Pertaining to SIP Submittals From the Commonwealth of Virginia

    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 opinion states that the quoted language renders this statute inapplicable to enforcement of any federally authorized programs, since “no immunity could be afforded from administrative, civil, or criminal penalties because granting such immunity would not be consistent with federal law, which is one of the criteria for immunity.”

    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.

    V. Statutory and Executive Order Reviews

    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 et seq.);

    • 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 et seq.);

    • 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 PM2.5 standard, is not approved to apply on any Indian reservation land as defined in 18 U.S.C. 1151 or in any other area where 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).

    List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by reference, Particulate matter.

    Authority:

    42 U.S.C. 7401 et seq.

    Dated: May 1, 2018. Cosmo Servidio, Regional Administrator, Region III.
    [FR Doc. 2018-09887 Filed 5-8-18; 8:45 am] BILLING CODE 6560-50-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [EPA-R09-OAR-2018-0160; FRL-9977-85—Region 9] Air Plan Approval; California; Yolo-Solano Air Quality Management District; Negative Declarations AGENCY:

    Environmental Protection Agency (EPA).

    ACTION:

    Proposed rule.

    SUMMARY:

    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.

    DATES:

    Any comments must arrive by June 8, 2018.

    ADDRESSES:

    Submit your comments, identified by Docket ID No. EPA-R09-OAR-2018-0160 at https://www.regulations.gov/, or via email to Stanley Tong, at [email protected]. For comments submitted at Regulations.gov, follow the online instructions for submitting comments. Once submitted, comments cannot be removed or edited from Regulations.gov. For either manner of submission, the EPA may publish any comment received to its public docket. Do not submit electronically any information you consider to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. Multimedia submissions (audio, video, etc.) must be accompanied by a written comment. The written comment is considered the official comment and should include discussion of all points you wish to make. The EPA will generally not consider comments or comment contents located outside of the primary submission (i.e., on the web, cloud, or other file sharing system). For additional submission methods, please contact the person identified in the FOR FURTHER INFORMATION CONTACT section. For the full EPA public comment policy, information about CBI or multimedia submissions, and general guidance on making effective comments, please visit https://www.epa.gov/dockets/commenting-epa-dockets.

    FOR FURTHER INFORMATION CONTACT:

    Stanley Tong, EPA Region IX, (415) 947-4122, [email protected].

    SUPPLEMENTARY INFORMATION:

    Throughout this document, “we,” “us” and “our” refer to the EPA.

    Table of Contents I. The State's Submittal A. What document did the State submit? B. Are there other versions of the RACT SIP—negative declarations? C. What is the purpose of the submitted negative declarations? II. The EPA's Evaluation and Action A. How did the EPA evaluate the negative declarations and what conclusions did the EPA reach? B. Public Comment and Proposed Action III. Statutory and Executive Order Reviews I. The State's Submittal A. What document did the State submit?

    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.

    1 Negative declarations are for the 1997 and 2008 8-hour ozone standards.

    Table 1—Submitted Negative Declarations 1 CTG document CTG document title EPA-450/2-77-008 Control of Volatile Organic Emissions from Existing Stationary Sources—Volume II: Surface Coating of Cans, Coils, Paper, Fabrics, Automobiles, and Light-Duty Trucks. EPA-450/2-77-025 Control of Refinery Vacuum Producing Systems, Wastewater Separators, and Process Unit Turnarounds. EPA-450/2-77-032 Control of Volatile Organic Emissions from Existing Stationary Sources—Volume III: Surface Coating of Metal Furniture. EPA-450/2-77-033 Control of Volatile Organic Emissions from Existing Stationary Sources—Volume IV: Surface Coating of Insulation of Magnet Wire. EPA-450/2-77-034 Control of Volatile Organic Emissions from Existing Stationary Sources—Volume V: Surface Coating of Large Appliances. EPA-450/2-77-036 Control of Volatile Organic Emissions from Storage of Petroleum Liquids in Fixed-Roof Tanks. EPA-450/2-78-029 Control of Volatile Organic Emissions from Manufacture of Synthesized Pharmaceutical Products. EPA-450/2-78-032 Control of Volatile Organic Emissions from Existing Stationary Sources—Volume VII: Factory Surface Coating of Flat Wood Paneling. EPA-450/2-78-033 Control of Volatile Organic Emissions from Existing Stationary Sources—Volume VIII: Graphic Arts-Rotogravure and Flexography. EPA-450/2-78-036 Control of Volatile Organic Compound Leaks from Petroleum Refinery Equipment. EPA-450/2-78-030 Control of Volatile Organic Emissions from Manufacture of Pneumatic Rubber Tires. EPA-450/3-82-009 Control of Volatile Organic Compound Emissions from Large Petroleum Dry Cleaners. EPA-450/3-83-008 Control of Volatile Organic Compound Emissions from Manufacture of High-Density Polyethylene, Polypropylene, and Polystyrene Resins. EPA-450/3-83-007 Control of Volatile Organic Compound Equipment Leaks from Natural Gas/Gasoline Processing Plants. EPA-450/3-83-006 Control of Volatile Organic Compound Leaks from Synthetic Organic Chemical Polymer and Resin Manufacturing Equipment. EPA-450/3-84-015 Control of Volatile Organic Compound Emissions from Air Oxidation Processes in Synthetic Organic Chemical Manufacturing Industry. EPA-450/4-91-031 Control of Volatile Organic Compound Emissions from Reactor Processes and Distillation Operations in Synthetic Organic Chemical Manufacturing Industry. EPA-453/R-96-007 Control of Volatile Organic Compound Emissions from Wood Furniture Manufacturing Operations. 61 FR-44050 8/27/96 Control Techniques Guidelines for Shipbuilding and Ship Repair Operations (Surface Coating). EPA-453/R-97-004 Aerospace (CTG & MACT). EPA-453/R-06-003 Control Techniques Guidelines for Flexible Package Printing. EPA-453/R-06-004 Control Techniques Guidelines for Flat Wood Paneling Coatings. EPA 453/R-07-003 Control Techniques Guidelines for Paper, Film, and Foil Coatings. EPA 453/R-07-004 Control Techniques Guidelines for Large Appliance Coatings. EPA 453/R-07-005 Control Techniques Guidelines for Metal Furniture Coatings. EPA 453/R-08-005 Control Techniques Guidelines for Miscellaneous Industrial Adhesives. EPA 453/R-08-006 Control Techniques Guidelines for Automobile and Light-Duty Truck Assembly Coatings. EPA 453/R-08-003 Control Techniques Guidelines for Miscellaneous Metal and Plastic Parts Coatings (plastic parts portion only). EPA 453/B-16-001 Control Techniques Guidelines for the Oil and Natural Gas Industry.

    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.

    B. Are there other versions of the RACT SIP—negative declarations?

    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.

    C. What is the purpose of the submitted negative declarations?

    Volatile Organic Compounds (VOCs) and nitrogen oxides (NOX) together produce ground-level ozone, smog and particulate matter, which harm human health and the environment. Section 110(a) of the CAA requires states to submit regulations that control VOC and NOX emissions. Sections 182(b)(2) and (f) require that SIPs for ozone nonattainment areas classified as Moderate or above implement RACT for any source covered by a CTG document and for any major source of VOCs or NOX. The YSAQMD is subject to this requirement because it regulates part of the Sacramento Metropolitan ozone nonattainment area that is classified as a Severe-15 ozone nonattainment area for the 2008 8-hour ozone NAAQS.2 Therefore, the YSAQMD must, at a minimum, adopt RACT-level controls for all sources covered by a CTG document and for all major non-CTG sources of VOCs or NOX within the nonattainment area that it regulates.

    2 40 CFR 81.305; 80 FR 12264 (March 6, 2015). The YSAQMD regulates the Solano County and Yolo County portions of the Sacramento Metro ozone nonattainment area.

    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.

    II. The EPA's Evaluation and Action A. How did the EPA evaluate the negative declarations and what conclusions did the EPA reach?

    SIP rules must require RACT for each category of sources covered by a CTG document as well as each major source of VOC or NOX in ozone nonattainment areas classified as Moderate or above (see CAA section 182(b)(2)). States should submit for SIP approval negative declarations for those source categories for which they are not adopting VOC CTG-based regulations (because they have no sources covered by the CTG) regardless of whether such negative declarations were made for an earlier RACT SIP.

    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 NOX sources, we took CARB's emissions inventory list of VOC stationary sources in the YSAQMD and identified those with a sufficient quantity of VOC emissions that they could potentially be covered by a CTG. We then performed an internet search on these sources to determine if they performed operations subject to any of the CTGs for which YSAQMD was claiming a negative declaration. Our evaluation also included a review of whether identified stationary sources' Standard Industrial Code classification numbers corresponded to negative declarations claimed by the District. Finally, we queried YSAQMD staff regarding what VOC producing operations occurred at specific stationary source facilities to determine if any of those operations might be subject to a negative declaration. Based on this, the EPA agrees with YSAQMD's conclusion that it has no stationary sources of VOCs that are subject to the CTGs for which they have adopted negative declarations for the 1997 and 2008 8-hour ozone NAAQS. We believe these negative declarations are consistent with the relevant policy and guidance regarding RACT and SIP relaxations.

    B. Public Comment and Proposed Action

    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.

    III. Statutory and Executive Order Reviews

    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 et seq.);

    • 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 et seq.);

    • 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).

    List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Nitrogen dioxide, Ozone, Reporting and recordkeeping requirements, Volatile organic compounds.

    Authority:

    42 U.S.C. 7401 et seq.

    Dated: April 27, 2018. Alexis Strauss, Acting Regional Administrator, Region IX.
    [FR Doc. 2018-09888 Filed 5-8-18; 8:45 am] BILLING CODE 6560-50-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Parts 52 and 81 [EPA-R09-OAR-2018-0181; FRL-9977-77-Region 9] Approval and Promulgation of Air Quality State Implementation Plans; California; Chico Redesignation Request and Maintenance Plan for the 2006 24-hour PM2.5 Standard AGENCY:

    Environmental Protection Agency (EPA).

    ACTION:

    Proposed rule.

    SUMMARY:

    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 (PM2.5) national ambient air quality standard. The EPA is also proposing to approve the PM2.5 maintenance plan and the determination that contributions from motor vehicle emissions to the PM2.5 pollution in the Chico nonattainment area are insignificant. The EPA is proposing this action because the SIP revision meets the requirements of the Clean Air Act and EPA guidance for such plans. We are taking comments on this proposal and plan to follow with a final action.

    DATES:

    Any comments on this proposal must arrive by June 8, 2018.

    ADDRESSES:

    Submit comments, identified by docket number EPA-R09-OAR-2018-0181, at https://www.regulations.gov, or via email to [email protected]. For comments submitted at Regulations.gov, follow the online instructions for submitting comments. Once submitted, comments cannot be edited or removed from Regulations.gov. For either manner of submission, the EPA may publish any comment received to its public docket. Do not submit electronically any information you consider to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. Multimedia submissions (audio, video, etc.) must be accompanied by a written comment. The written comment is considered the official comment and should include discussion of all points you wish to make. The EPA will generally not consider comments or comment contents located outside of the primary submission (i.e., on the web, cloud, or other file sharing system). For additional submission methods, please contact the person identified in the FOR FURTHER INFORMATION CONTACT section. For the EPA's full public comment policy, information about CBI or multimedia submissions, and general guidance on making effective comments, please visit http://www2.epa.gov/dockets/commenting-epa-dockets.

    FOR FURTHER INFORMATION CONTACT:

    Ginger Vagenas, EPA Region IX, 415-972-3964, [email protected].

    SUPPLEMENTARY INFORMATION:

    Throughout this document, the terms “we,” “us,” and “our” mean the EPA.

    Table of Contents I. Summary of Today's Proposed Action II. Background A. The PM2.5 NAAQS B. Designation of PM2.5 Nonattainment Areas C. PM2.5 Planning Requirements III. Procedural Requirements for Adoption and Submittal of SIP Revisions IV. Substantive Requirements for Redesignation V. Evaluation of the State's Redesignation Request for the Chico PM2.5 Nonattainment Area A. Determination That the Area Has Attained the PM2.5 NAAQS B. The Area Must Have a Fully Approved SIP Meeting the Requirements Applicable for Purposes of Redesignation Under Section 110 and Part D C. The Area Must Show the Improvement in Air Quality Is Due to Permanent and Enforceable Emission Reductions D. The Area Must Have a Fully Approved Maintenance Plan Under Section 175A VI. Proposed Action and Request for Public Comment VII. Statutory and Executive Order Reviews I. Summary of Today's Proposed Action

    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 (PM2.5) national ambient air quality standards (NAAQS or “standards”). We are doing so based on our conclusion that the area has met the five criteria for redesignation under CAA section 107(d)(3)(E). Specifically, we have concluded that: (1) The area has attained the 24-hour PM2.5 NAAQS in the 2014-2016 time period and continues to attain the PM2.5 standard since that time; (2) the relevant portions of the California SIP are fully approved; (3) the improvement in air quality is due to permanent and enforceable reductions in emissions; (4) California has met all requirements applicable to the Chico PM2.5 nonattainment area with respect to section 110 and part D of the CAA; and (5) the Chico, CA/Butte County PM 2.5 Nonattainment Area Redesignation Request and Maintenance Plan (“Chico PM2.5 Plan” or “Plan”) meets the requirements of section 175A of the CAA.

    In addition, the EPA is proposing to approve the Chico PM2.5 Plan as a revision to the SIP under section 110(k)(3) of the CAA because we find that the maintenance demonstration shows how the area will continue to attain the 24-hour PM2.5 NAAQS for at least 10 years beyond redesignation (through 2030) and that the contingency provisions describing the action the Butte County Air Quality Management District (BCAQMD or “District”) will take in the event of a future monitored violation meet all applicable requirements for maintenance plans and section 175A of the CAA.

    The EPA is proposing these actions because the SIP revision meets the requirements of the CAA and EPA guidance for such plans.

    II. Background A. The PM2.5 NAAQS

    Particulate matter includes particles with diameters that are generally 2.5 microns or smaller (PM2.5) and particles with diameters that are generally 10 microns or smaller (PM10). It contributes to effects that are harmful to human health and the environment, including premature mortality, aggravation of respiratory and cardiovascular disease, decreased lung function, visibility impairment, and damage to vegetation and ecosystems. Individuals particularly sensitive to PM2.5 exposure include older adults, people with heart and lung disease, and children (78 FR 3086 at 3088, January 15, 2013). PM2.5 can be emitted directly into the atmosphere as a solid or liquid particle (“primary PM2.5” or “direct PM2.5”) or can be formed in the atmosphere (“secondary PM2.5”) as a result of various chemical reactions among precursor pollutants such as nitrogen oxides (NOX), sulfur oxides (SOx), volatile organic compounds (VOC), and ammonia (NH3).1

    1 EPA, Air Quality Criteria for Particulate Matter, No. EPA/600/P-99/002aF and EPA/600/P-99/002bF, October 2004.

    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 welfare.2 PM2.5 is one of the ambient pollutants for which the EPA has established health-based standards. Section 110(a) of the CAA requires states to submit regulations that control PM2.5 emissions.

    2 For a given air pollutant, “primary” national ambient air quality standards are those determined by the EPA as requisite to protect the public health. “Secondary” standards are those determined by the EPA as requisite to protect the public welfare from any known or anticipated adverse effects associated with the presence of such air pollutant in the ambient air. CAA section 109(b).

    On July 18, 1997, the EPA revised the NAAQS for particulate matter to add new standards for PM2.5. The EPA established primary and secondary annual and 24-hour standards for PM2.5 (62 FR 38652). The annual standard was set at 15.0 micrograms per meter cubed (µg/m3) based on a 3-year average of annual mean PM2.5 concentrations, and the 24-hour (daily) standard was set at 65 µg/m3 based on the 3-year average of the annual 98th percentile values of 24-hour PM2.5 concentrations at each population-oriented monitor within an area.3

    3 The primary and secondary standards were set at the same level for both the 24-hour and the annual PM2.5 standards.

    On October 17, 2006, the EPA retained the annual average NAAQS at 15 µg/m3 but revised the level of the 24-hour PM2.5 NAAQS to 35 µg/m3 based on a 3-year average of the annual 98th percentile values of 24-hour concentrations (71 FR 61144).4

    4 Under EPA regulations at 40 CFR part 50, the primary and secondary 2006 24-hour PM2.5 NAAQS are attained when the annual arithmetic mean concentration, as determined in accordance with 40 CFR part 50, Appendix N, is less than or equal to 35 µg/m3 at all relevant monitoring sites in the subject area, averaged over a 3-year period.

    On December 14, 2012, the EPA promulgated the 2012 PM2.5 NAAQS, including a revision of the annual standard to 12.0 µg/m3 based on a 3-year average of annual mean PM2.5 concentrations, and maintaining the current 24-hour standard of 35 µg/m3 based on a 3-year average of the 98th percentile of 24-hour concentrations (78 FR 3086, January 15, 2013).

    B. Designation of PM2.5 Nonattainment Areas

    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 PM2.5 NAAQS (72 FR 20586). Effective December 14, 2009, the EPA established initial air quality designations under subpart 1 of the Act for most areas in the United States for the 2006 24-hour PM2.5 NAAQS, including the Chico area (74 FR 58688, November 13, 2009).5

    5 All 1997 and 2006 PM2.5 NAAQS areas were designated under subpart 1 of the Act. Subpart 1 contains the general requirements for nonattainment areas for any pollutant governed by a NAAQS and is less prescriptive than the other subparts of title I, part D.

    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 (PM2.5)” (73 FR 28321, May 16, 2008) (collectively, “1997 PM2.5 Implementation Rules”) to the EPA on January 4, 2013, in Natural Resources Defense Council v. EPA, 706 F.3d 428 (D.C. Cir. 2013). The Court found that the EPA erred in implementing the 1997 PM2.5 NAAQS pursuant to the general implementation provisions of subpart 1 rather than the particulate matter-specific provisions of Part D of title I (subpart 4). The EPA responded to the D.C. Circuit's decision by identifying all PM2.5 nonattainment areas for the 1997 and 2006 nonattainment areas for the 1997 and 2006 NAAQS as “moderate” nonattainment areas under subpart 4 and by establishing a new SIP submission date of December 31, 2014, for moderate area attainment plans and for any additional attainment-related or nonattainment new source review plans necessary for areas to comply with the requirements applicable under subpart 4 (79 FR 31566, June 2, 2014).

    On July 29, 2016, EPA issued a rule entitled, “Fine Particulate Matter National Ambient Air Quality Standards: State Implementation Plan Requirements” (“PM2.5 SIP Requirements Rule”) that clarifies how states should meet the statutory SIP requirements that apply to areas designated nonattainment for any PM2.5 NAAQS under subparts 1 and 4 (81 FR 58010, August 24, 2016). It does so by establishing regulatory requirements and by providing guidance that is applicable to areas that are currently designated nonattainment for existing PM2.5 NAAQS and areas that are designated nonattainment for any PM2.5 NAAQS in the future. In addition, the rule responds to the D.C. Circuit's remand of the 1997 PM2.5 Implementation Rules. As a result, the requirements of the rule also govern future actions associated with states' ongoing implementation efforts for the 1997 and 2006 PM2.5 NAAQS.

    The Chico PM2.5 nonattainment area is located within Butte County, California, in the northern Sacramento Valley, which is defined by the southern Cascade Mountains and northern Sierra Nevada mountains to the east and the Coastal Mountains to the north and west. As noted in the Chico PM2.5 Plan, the surrounding mountains provide “a substantial physical barrier to both locally created pollution and the pollution that has been transported northward on prevailing winds from the metropolitan areas to the south.” (Plan, p. 4.) Most of the population lives and works at elevations below 1,000 feet, where wintertime inversions can result in poor air quality.

    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 PM2.5 redesignation request and maintenance plan.

    C. PM2.5 Planning Requirements

    Within three years of the effective date of designations, states with areas designated as nonattainment for the 2006 24-hour PM2.5 NAAQS are required to submit SIP revisions that, among other elements, provide for implementation of reasonably available control measures (RACM), reasonable further progress (RFP), attainment of the standard as expeditiously as practicable but no later than five years from the nonattainment designation (in this instance, no later than December 14, 2014), as well as contingency measures.6 Prior to the due date for these submissions, the State requested that the EPA make a determination that, based on quality assured and certified data from the 2008-2010 period, the Chico PM2.5 nonattainment area had attained the 2006 24-hour PM2.5 NAAQS.7 In addition to requesting a finding of attainment, the State requested that the EPA suspend the attainment-related planning requirements.

    6See CAA sections 172(a)(2), 172(c)(1), 172(c)(2), and 172(c)(9).

    7 Letter from James N. Goldstene, Executive Officer, CARB, to Jared Blumenfeld, Regional Administrator, EPA Region 9, dated June 2, 2011.

    Effective October 10, 2013, the EPA determined that the Chico nonattainment area had attained the 2006 24-hour PM2.5 standard based on the 2010-2012 monitoring period (78 FR 55225, September 10, 2013). Based on that determination and pursuant to 40 CFR 51.1004(c), the requirements for this area to submit an attainment demonstration, together with RACM, an RFP plan, and contingency measures for failure to meet RFP and attainment deadlines were suspended for so long as the area continued to attain the 2006 24-hour PM2.5 NAAQS or until the area is redesignated to attainment.8 The EPA subsequently issued a determination that the Chico area had attained the 2006 24-hour PM2.5 NAAQS by the applicable attainment date of December 31, 2015, based on 2013-2015 data (82 FR 21711, May 10, 2017). On December 18, 2017, CARB submitted the Chico PM2.5 Plan and requested that the EPA redesignate the Chico PM2.5 nonattainment area to attainment for the 2006 24-hour PM2.5 NAAQS.

    8 For more information on the regulatory basis for determining attainment of the NAAQS, see the proposed determination of attainment (77 FR 65651, October 30, 2012).

    III. Procedural Requirements for Adoption and Submittal of SIP Revisions

    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 PM2.5 Plan documents the public review process followed by BCAQMD and CARB in adopting the Chico PM2.5 Plan prior to submittal to the EPA as a revision to the California SIP. The submittal provides evidence that reasonable notice of a public hearing was provided to the public and that a public hearing was conducted prior to adoption. Specifically, a notice of public hearing was published on September 26, 2017, in the Chico Enterprise-Record, a newspaper of general circulation in the City of Chico and Butte County. The notice announced the availability of the Chico PM2.5 Plan at the District office and on its website, and it opened the comment period 30 days prior to the public hearing. The public hearing was held on October 26, 2017. No comments on the Plan were made during the public hearing and no written comments were received during the public comment period. Following adoption by BCAQMD's Air Quality Governing Board, the District provided the maintenance plan to CARB and requested that it submit the redesignation request and maintenance plan to the EPA.9

    9 Letter from W. James Wagoner, Air Pollution Control Officer, BCAQMD, to Richard Corey, Executive Officer, CARB, dated October 31, 2017.

    On November 16, 2017, CARB adopted the Chico PM2.5 Plan, as certified in Resolution 17-41. No public comments were received during the CARB hearing. CARB submitted the Plan to the EPA on December 18, 2017. On February 15, 2018, CARB provided additional information regarding its development of the 2012 winter emission inventory and other emissions inventories for the Chico PM2.5 Plan.10 Based on the documentation provided, we find that submittal of the Chico PM2.5 Plan as a revision to the California SIP satisfies the procedural requirements of section 110(l) of the Act.

    10 Letter with enclosures from Sylvia Vanderspeck, Chief, Air Quality Planning Branch, CARB, to GwenYoshimura, Manager, Air Quality Analysis Section, EPA Region 9.

    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 PM2.5 Plan to be complete.11

    11 Letter from Elizabeth J. Adams, Acting Air Division Director, EPA Region 9 to Richard W. Corey, Executive Officer, CARB.

    IV. Substantive Requirements for Redesignation

    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 Federal Register on April 16, 1992 (57 FR 13498), and supplemented on April 28, 1992 (57 FR 18070) (referred to herein as the “General Preamble”). Additional guidance was issued on September 4, 1992, in a memorandum from John Calcagni, Director, Air Quality Management Division, EPA Office of Air Quality Planning and Standards, entitled “Procedures for Processing Requests to Redesignate Areas to Attainment” (referred to herein as the “Calcagni memo”). Maintenance plan submittals are SIP revisions, and as such, the EPA is obligated under CAA section 110(k) to approve them or disapprove them depending upon whether they meet the applicable CAA requirements for such plans.

    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 PM2.5 NAAQS based on our conclusion that all the criteria under CAA section 107(d)(3)(E) have been satisfied.

    V. Evaluation of the State's Redesignation Request for the Chico PM2.5 Nonattainment Area A. Determination That the Area Has Attained the PM2.5 NAAQS

    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 PM2.5 NAAQS. In 2013, the EPA determined that the Chico nonattainment area had attained the 2006 24-hour PM2.5 NAAQS based on the 2010-2012 monitoring period. In 2017, the EPA determined that the Chico nonattainment area attained the 2006 24-hour PM2.5 NAAQS by the area's applicable attainment date of December 31, 2015, based on data for the years 2013-2015.12 Today's action updates these determinations based on the most recent available PM2.5 monitoring data.

    12See Section II.C. of this document.

    Generally, the EPA determines whether an area's air quality is meeting the 2006 24-hour PM2.5 NAAQS based upon complete, quality-assured, and certified data measured at established state and local air monitoring stations (SLAMS) in the nonattainment area and entered into the EPA Air Quality System (AQS) database. The EPA will consider air quality data from air monitoring sites other than SLAMS in the nonattainment area provided those stations meet the federal monitoring requirements for SLAMS, including the quality assurance and quality control criteria in 40 CFR part 58, appendix A.13

    13See 40 CFR 58.20; 71 FR 61236 at 61242 (October 17, 2006).

    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.14 All valid data are reviewed to determine the area's air quality status in accordance with 40 CFR part 50, appendix N.

    14See 40 CFR 50.13; 40 CFR part 50, appendix L; 40 CFR part 53; 40 CFR part 58; and, 40 CFR part 58, appendices A, C, D, and E.

    As described previously, the 2006 24-hour PM2.5 NAAQS is met when the design value is less than or equal to 35 µg/m3. The PM2.5 24-hour average is considered valid when 75 percent of the hourly averages for the 24-hour period are available. Data completeness requirements for a given year are met when at least 75 percent of the scheduled sampling days for each quarter have valid data.

    The California Air Resources Board is responsible for monitoring ambient air quality within Butte County and operates the PM2.5 monitoring network in Butte County. CARB submits annual monitoring network plans to the EPA. These network plans describe the monitoring network operated by CARB within Butte County and discuss the status of the air monitoring network, as required under 40 CFR 58.10. The EPA regularly reviews these annual plans for compliance with the applicable reporting requirements in 40 CFR part 58. With respect to PM2.5, the EPA has found that the area's network plans meet the applicable reporting requirements under 40 CFR part 58.15 The EPA also concluded from its 2015 Technical Systems Audit that CARB's monitoring network currently meets or exceeds the requirements for the minimum number of SLAMS for PM2.5 in the Chico, CA Metropolitan Statistical Area (MSA), which comprises the Chico PM2.5 nonattainment area.16 CARB annually certifies that the data it submits to AQS are complete and quality-assured.17

    15 For example, see letter from Gwen Yoshimura, Manager, Air Quality Analysis Office, EPA Region IX, to Ravi Ramalingam, Chief, Consumer Products and Air Quality Assessment Branch, CARB, dated December 14, 2017, approving CARB's 2017 Annual Network Plan.

    16 EPA Region IX, Technical System Audit Final Report, CARB Ambient Air Monitoring Program, April-August 2015. Enclosed with letter from Elizabeth Adams, Acting Director, Air Division, EPA Region IX, to Richard Corey, Executive Officer, CARB, dated August 31, 2016.

    17 For example, see letter from Ravi Ramalingam, Chief, Consumer Products and Air Quality Assessment Branch, CARB, to Elizabeth Adams, Acting Director, Air Division, EPA Region IX, certifying calendar year 2016 ambient air quality data and quality assurance data, dated June 2, 2017.

    During the 2014-2016 period, CARB operated one PM2.5 SLAMS monitoring site, Chico-East Avenue (AQS ID: 06-007-0008), within the Chico PM2.5 nonattainment area. SLAMS produce data comparable to the NAAQS, and therefore, the monitor must be an approved Federal Reference Method (FRM), Federal Equivalent Method, or Approved Regional Method. The Chico-East Avenue monitor measures PM2.5 concentrations on a daily, year-round basis using a method that has been designated an FRM by the EPA. Butte County also had two additional monitoring sites operated by CARB during this period, Gridley (AQS ID: 06-007-4001) and Paradise-Theater (06-007-2002), whose data are not comparable to the NAAQS and cannot be used for attainment demonstration purposes. CARB continues to meet EPA requirements for the minimum number of PM2.5 monitoring sites in Butte County within the Chico MSA.

    Consistent with the requirements contained in 40 CFR part 50, the EPA has reviewed the quality-assured and certified PM2.5 ambient air monitoring data collected at the Chico-East Avenue monitoring site, as recorded in AQS, for the applicable monitoring period. We have determined that the data are of sufficient completeness for the purposes of making comparisons with the 2006 24-hour PM2.5 NAAQS. The EPA's evaluation of whether the Chico PM2.5 nonattainment area has attained the 2006 24-hour PM2.5 NAAQS is based on our review of the monitoring data and takes into account the adequacy of the PM2.5 monitoring network in the nonattainment area and the reliability of the data collected by the network as discussed earlier in this section of this document.

    Table 1 below shows the 24-hour PM2.5 design value monitored at the Chico-East Avenue monitoring site over the most recent three-year period (2014-2016). The data show that the 24-hour design value for the 2014-2016 period was equal to or less than 35 µg/m3 at the Chico-East Avenue monitor. Therefore, we find that, based on complete, quality-assured, and certified data for 2014-2016, the Chico PM2.5 nonattainment area has attained the 2006 24-hour PM2.5 NAAQS. Preliminary data available in AQS for 2017 indicate that the area continues to attain the 2006 24-hour PM2.5 NAAQS.

    Table 1—Chico-East Avenue 2014-2016 Design Value Monitoring Site AQS ID 2006 24-hour
  • PM2.5 NAAQS
  • (μg/m3)
  • 98th Percentile
  • (μg/m3)
  • 2014 2015 2016 2014-2016
  • 24-hour design
  • value
  • (μg/m3)
  • Chico-East Avenue 06-007-0008 35 26.0 29.5 21.2 26 Source: EPA, AQS Design Value Report, March 29, 2018.
    B. The Area Must Have a Fully Approved SIP Meeting the Requirements Applicable for Purposes of Redesignation Under Section 110 and Part D

    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.

    1. Basic SIP Requirements Under Section 110

    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 PM2.5 nonattainment area is redesignated to attainment.

    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.18

    18See, e.g., 75 FR 36023 at 36026 (June 24, 2010).

    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 19 contains enforceable emission limitations; requires monitoring, compiling and analyzing of ambient air quality data; requires preconstruction review of new or modified stationary sources; provides for adequate funding, staff, and associated resources necessary to implement its requirements; and provides the necessary assurances that the State maintains responsibility for ensuring that the CAA requirements are satisfied in the event that Butte County is unable to meet its CAA obligations. There are no outstanding or disapproved applicable SIP submittals with respect to the Butte County portion of the SIP that prevent redesignation of the Chico PM2.5 nonattainment area for the 24-hour PM2.5 standard. Therefore, we propose to conclude that CARB and BCAQMD have met all general SIP requirements for Chico that are applicable for purposes of redesignation under section 110 of the CAA.

    19 The Butte County portion of the federally approved SIP can be viewed at https://www.epa.gov/sips-ca/epa-approved-butte-county-air-district-regulations-california-sip.

    2. SIP Requirements Under Part D

    Subparts 1 and 4 of part D, title 1 of the CAA contain air quality planning requirements for PM2.5 nonattainment areas. Subpart 1 contains general requirements for all nonattainment areas of any pollutant, including PM2.5, governed by a NAAQS. The subpart 1 requirements include, among other things, provisions for RACM, RFP, emissions inventories, contingency measures, and conformity. Subpart 4 contains specific planning and scheduling requirements for PM2.5 nonattainment areas. Section 189(a), (c), and (e) requirements apply specifically to moderate PM2.5 nonattainment areas and include: An approved permit program for construction of new and modified major stationary sources; provisions for RACM; an attainment demonstration; quantitative milestones demonstrating RFP toward attainment by the applicable attainment date; and provisions to ensure that the control requirements applicable to major stationary sources of PM2.5 also apply to major stationary sources of PM2.5 precursors, except where the Administrator has determined that such sources do not contribute significantly to PM2.5 levels that exceed the NAAQS in the area.

    As noted in Section II.C.of this document, the EPA determined in 2013 that the Chico PM2.5 nonattainment area attained the 24-hour PM2.5 NAAQS based on 2010-2012 data. In accordance with the EPA's Clean Data Policy, we determined that the following requirements do not apply to the Chico PM2.5 nonattainment area for so long as the area continues to attain the PM2.5 standard or until the area is redesignated to attainment: An attainment demonstration under section 189(a)(1)(B); RACM provisions under sections 172(c) and 189(a)(1)(C); reasonable further progress provisions under section 189(c)(1); and contingency measures under section 172(c)(9).20

    20 The EPA's Clean Data Policy for PM2.5 nonattainment areas is set forth in a memorandum entitled “Clean Data Policy for the Fine Particle National Ambient Air Quality Standards,” issued on December 14, 2004, by Stephen D. Page, Director, EPA Office of Air Quality Planning and Standards. For examples of other rulemaking actions applying the Clean Data Policy in PM2.5 nonattainment areas, see 78 FR 41901, July 12, 2013 (West Central Pinal, Arizona); 80 FR 22666, April 23, 2015 (Liberty-Clairton, Pennsylvania); and 82 FR 13392, March 13, 2017 (Imperial County, California). The PM2.5 SIP Requirements Rule includes a discussion of EPA's Clean Data Policy (81 FR 58010 at 58127) and codifies the Clean Data Policy governing the implementation of current and future PM2.5 NAAQS at 40 CFR 51.1015.

    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,21 and specifically in the context of redesignations, the EPA interpreted attainment-linked requirements as not applicable for purposes of redesignation. In the General Preamble, the EPA explained that the section 172(c)(9) requirements are directed at ensuring RFP and attainment by the applicable date. We noted that these requirements no longer apply when an area has attained the standard and is eligible for redesignation. Furthermore, CAA section 175A for maintenance plans provides specific requirements for contingency measures that effectively supersede the requirements of section 172(c)(9) for these areas.

    21 The Calcagni memo states that the requirements for reasonable further progress and other measures needed for attainment will not apply for redesignations because they only have meaning for areas not attaining the standard (p. 6).

    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.22

    22See Sierra Club v. EPA, 375 F.3d 537 (7th Cir. 2004).

    The remaining applicable Part D requirements for moderate PM2.5 areas are: (1) An emission inventory under section 172(c)(3); (2) a permit program for the construction and operation of new and modified major stationary sources of PM2.5 under sections 172(c)(5) and 189(a)(1)(A); (3) control requirements for major stationary sources of PM2.5 precursors under section 189(e), except where the Administrator determines that such sources do not contribute significantly to PM2.5 levels that exceed the standard in the area; (4) requirements under section 172(c)(7) that meet the applicable provisions of section 110(a)(2); and (5) provisions to ensure that federally supported or funded projects conform to the air quality planning goals in the applicable SIP under section 176(c).

    The Chico redesignation request substantively meets the Part D requirements for redesignation purposes. We discuss each of these requirements below.

    a. Emissions Inventory

    Section 172(c)(3) of the CAA requires states to submit a comprehensive, accurate, current inventory of relevant PM2.5 pollutants for the baseline year from all sources within the nonattainment area. The inventory must address direct and secondary PM2.5 emissions, and all stationary (generally referring to larger stationary source or “point” sources), area (generally referring to smaller stationary and fugitive sources), and mobile (on-road, non-road, locomotive and aircraft) sources are to be included in the inventory.

    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 PM2.5 and PM2.5 precursors.23 After reviewing the CARB submittal of the Chico emissions inventory and supporting documentation, the EPA determined that the emissions inventory met the requirements of the CAA and EPA guidance and approved it consistent with CAA sections 110 and 172(c)(3) (79 FR 14404, March 14, 2014).

    23 Monitoring data for the Chico nonattainment area indicate that high concentrations of PM2.5 occur primarily during the winter months; consequently, the District submitted a winter-season inventory.

    b. Permits for New and Modified Major Stationary Sources

    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.24

    24 PSD requirements control the growth of new source emissions in areas designated as attainment for a NAAQS.

    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,25 it does not affect EPA approval of the redesignation request because the maintenance demonstration does not rely on implementation of NNSR 26 and upon redesignation the nonattainment permitting program requirements shift to the PSD permitting program requirements under 40 CFR 51.166.

    25 The EPA partially approved and partially disapproved BCAQMD's nonattainment NSR rule (Rule 432) because ammonia was not listed as a PM2.5 precursor (81 FR 93820, December 22, 2016). On June 12, 2017, the District submitted a revised rule to correct this deficiency. The EPA proposed to approve the revised rule on March 23, 2018 (83 FR 12694).

    26 Because PSD requirements will apply after redesignation, an area being redesignated to attainment need not comply with the requirement that a nonattainment NSR program be approved prior to redesignation, providing the state demonstrates maintenance of the NAAQS in the area without implementation of nonattainment NSR. A more detailed rationale for this view is described in a memorandum from Mary Nichols, Assistant Administrator for Air and Radiation, dated October 14, 1994, titled “Part D New Source Review Requirements for Areas Requesting Redesignation to Attainment.” See also redesignation rulemakings for Detroit, Michigan (60 FR 12459, March 7, 1995); Cleveland-Akron-Lorain, Ohio (61 FR 20458, May 7, 1996); Louisville, Kentucky (66 FR 53665, October 23, 2001); Grand Rapids, Michigan (61 FR 31831, June 21, 1996); and Yuba City-Marysville, California (79 FR 61822, October 15, 2014).

    The District has a SIP-approved PSD program (Rule 1107) that will apply to PM2.5 and PM2.5 precursor emissions from new major sources or major modifications upon redesignation of the area to attainment.27 Thus, new major sources with significant PM2.5 emissions and major modifications of PM2.5 at major sources as defined under 40 CFR 51.166 will be required to obtain a PSD permit or address PM2.5 emissions in their existing PSD permit. Further, the maintenance demonstration does not rely on implementation of NNSR because the Plan applies standard growth factors to stationary source emissions and does not rely on NSR offsets to reduce the rate of increase in emissions over time from point sources. In addition, the Chico PM2.5 Plan adds emission reduction credits (ERCs) for PM10,28 NOX, SOX, and reactive organic gasses (ROG) 29 to future projected emissions to ensure that the use of ERCs will not be inconsistent with the future PM2.5 maintenance goals. Therefore, the EPA concludes that a fully-approved nonattainment NSR program is not necessary for approval of the State's redesignation request for the Chico PM2.5 nonattainment area.

    27 Rule 1107 was approved on November 12, 2015 (80 FR 69880).

    28 BCAQMD issues ERCs for PM10. When creating the future year inventories for the maintenance demonstration, the District added the amount of PM10 ERCs to the future year inventories of PM2.5. Because PM2.5 is a fraction of PM10, this approach conservatively estimates the maximum pollutant increase if all ERCs were redeemed within the BCAQMD during the maintenance period. Plan, p. 18 and Attachment D.

    29 California plans sometimes use the term Reactive Organic Gases (ROG) for VOC. These terms are essentially synonymous.

    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.

    c. Control Requirements for PM2.5 Precursors

    CAA section 189(e) provides that control requirements for major stationary sources of direct PM10 (including PM2.5) shall also apply to PM precursors from those sources, except where the EPA determines that major stationary sources of such precursors do not contribute significantly to PM10 levels that exceed the standard in the area. The CAA does not explicitly address whether it would be appropriate to include a potential exemption from precursor controls for all source categories under certain circumstances. In implementing subpart 4 with regard to controlling PM10, the EPA permitted states to determine that a precursor was “insignificant” where the state could show in its attainment plan that it would expeditiously attain without adoption of emission reduction measures aimed at that precursor. This approach was upheld in Association of Irritated Residents v. EPA, 423 F.3d 989 (9th Cir. 2005) and extended to PM2.5 implementation in the PM2.5 SIP Requirements Rule. A state may develop its attainment plan and adopt RACM that target only those precursors that are necessary to control for purposes of timely attainment. See 81 FR 58010 at 58020.

    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 PM2.5 nonattainment area had attained the 2006 24-hour PM2.5 NAAQS, and in 2017 affirmed that the area had attained the NAAQS by the statutory attainment date. The Chico area has expeditiously attained the 2006 24-hour PM2.5 NAAQS, and therefore, no additional controls of any pollutant, including any PM2.5 precursor, are necessary to bring the area into attainment. In Section V.A. of this document, we find that the area continues to attain the NAAQS. In section V.C. of this document, the EPA is proposing to determine that the Chico PM2.5 nonattainment area has attained the standard due to permanent and enforceable emissions reductions. Further, as set forth in section V.D. of this document, we believe that the Plan demonstrates continued maintenance of the 2006 24-hour PM2.5 standard through 2030. Taken together, these factors support our conclusion that PM2.5 precursors are adequately controlled.

    d. Compliance With Section 110(a)(2)

    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.

    e. General and Transportation Conformity Requirements

    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. See Wall v. EPA, 265 F.3d 426 (6th Cir. 2001), upholding this interpretation.30

    30See, e.g., 60 FR 62748 (December 7, 1995).

    C. The Area Must Show the Improvement in Air Quality Is Due to Permanent and Enforceable Emission Reductions

    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 (e.g., reduced production or shutdown due to temporary adverse economic conditions) or unusually favorable meteorology would not qualify as an air quality improvement due to permanent and enforceable emission reductions (Calcagni memo, p. 4).

    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 PM2.5 in the nonattainment area; control measures that have been implemented since the area was redesignated to nonattainment; changes to the emissions inventory over time; and meteorological and economic trends. Based on these factors, the District concluded that permanent and enforceable reductions in emissions from residential wood burning and mobile sources provided the greatest emissions reductions (Plan, Section 3.c.).

    Using chemical composition data from speciation samplers located at the Chico monitoring site, the District calculated the average contribution of different components to the PM2.5 design value on the 10 percent of days with highest monitored concentrations of PM2.5 for 2014-2016.31 Total carbonaceous mass, which is linked to smoke from residential wood burning stoves and fireplaces, contributed 76 percent (19.84 μg/m3) of the 26 μg/m3 design value. The second largest fraction is ammonium nitrate, formed from precursor emissions of NOX and ammonia, which accounted for 16 percent of the total (4.07 μg/m3). Other contributors (i.e., ammonium sulfate, formed from precursor emissions of SOX and ammonia—4 percent, geological materials—2 percent, and elements—2 percent) account for a much smaller portion of the ambient PM2.5 (Plan, Section 4.a. and Attachment F). As described in our analysis of the District's maintenance demonstration,32 the Plan makes the case that residential wood burning is the primary contributor to the air quality problem in the Chico nonattainment area and that secondary PM2.5 (ammonium nitrate and ammonium sulfate), geological materials, and elements are relatively small contributors.

    31 This matches the three years used to derive the 2016 design value.

    32 Section V.D.2., of this document.

    The Chico PM2.5 Plan credits control measures adopted and implemented by BCAQMD and CARB and approved into the SIP by the EPA as reducing emissions to attain the 2006 24-hour PM2.5 NAAQS. The District has jurisdiction over air quality planning requirements for the Chico nonattainment area and is largely responsible for the regulation of stationary sources and most area sources. Table 2 lists BCAQMD rules adopted and SIP-approved since the area's PM2.5 nonattainment designation that contribute towards attainment and maintenance of the 2006 24-hour PM2.5 NAAQS.

    Table 2—BCAQMD SIP-Approved Control Measures and Programs Contributing Towards Attainment and Maintenance of the 2006 24-Hour PM2.5 NAAQS Rule Title Adoption or amendment date Status 207 Wood Burning Devices Amended December 11, 2008 EPA approved—78 FR 21540. 300 Open Burning Requirements, Prohibitions, and Exemptions a Amended December 9, 2010, February 24, 2011, and August 27, 2015 EPA approved—81 FR 70018. 400 Permit Requirements Amended May 26, 2011 and April 24, 2014 EPA approved—81 FR 93820. 401 Permit Exemptions Amended May 26, 2011 and April 24, 2014 EPA approved—81 FR 93820. 432 Federal New Source Review Adopted May 26, 2011, Amended April 24, 2014 and March 23, 2017 81 FR 93820 (limited approval/limited disapproval), 83 FR 12694 (proposed approval). 433 Rice Straw Emission Reduction Credits Amended April 24, 2014 EPA approved—83 FR 17380. 1107 Prevention of Significant Deterioration Adopted June 28, 2012 EPA approved—80 FR 69880. Source: Plan, Table 3-2. a BCAQMD participates in the State's Sacramento Valley Air Basin Smoke Management Program (Plan, p. 11). The program describes the policies and procedures used with hourly and daily measurements of air quality and meteorology to determine how much open biomass burning can be allowed in the Sacramento Valley Air Basin. The program ensures that agricultural burning is prohibited on days meteorologically conducive to potentially elevated PM10 concentrations. See Title 17 California Code of Regulations, Subchapter 2, Section 80100 et seq. The regulations can be viewed at http://www.arb.ca.gov/smp/regs/RevFinRegwTOC.pdf.

    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 PM2.5 emissions by 40.5 tons per year (Plan, Attachment C).33 These reductions were made federally enforceable by SIP approval of Rule 207, which prohibits the installation of non-certified wood burning devices in new and existing dwellings. The Plan illustrates the correlation in improvement in air quality with the decline of carbonaceous aerosols, further emphasizing the role that reductions to this category played in attaining the 24-hour PM2.5 NAAQS. In addition, the District has adopted or strengthened open burning requirements and stationary source rules. Together, these rules have provided and will continue to provide permanent and enforceable emissions reductions that have contributed to the improvement in air quality.

    33 In addition to the woodstove replacement program, BCAQMD has a voluntary wood burning curtailment program. Because reductions from this program are not federally enforceable, the District does not categorize them as permanent and enforceable (Plan, p. 11).

    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.34 In addition, the State has standards for lawn and garden equipment, recreational vehicles and boats, and other off-road sources that require newly manufactured equipment to be 80-98 percent cleaner than their uncontrolled counterparts.35 Finally, the State has adopted many measures that focus on achieving reductions from in-use mobile sources that include more stringent inspection and maintenance or “Smog Check” requirements and truck and bus idling restrictions. The State's measures have generally been approved by the EPA into the SIP and as such are fully creditable for meeting CAA requirements.36 While reductions in PM2.5 emissions from residential wood burning have been the primary driver for improved air quality in the Chico nonattainment area, we note that many of the State measures cited above have provided emissions reductions of PM2.5 and its precursors since 2006, and thus, some improvement in air quality may reasonably be attributed to them.

    34 See page 37 of the 2007 State Strategy, which was adopted by CARB on September 27, 2007 and submitted to the EPA on November 16, 2007. The 2007 State Strategy and associated documents can be viewed at https://www.arb.ca.gov/planning/sip/2007sip/2007sip.htm#state.

    35Id.

    36 A list of SIP-approved state measures is available at https://www.epa.gov/sips-ca/epa-approved-regulations-california-sip.

    Finally, in addition to the local district and State rules discussed above, the Chico PM2.5 nonattainment area has also benefitted from emission reductions from federal measures. These federal measures include the EPA's national emissions standards for heavy-duty diesel trucks, certain emissions standards for new construction and farm equipment (i.e., Tier 2 and 3 non-road engines standards, and Tier 4 diesel non-road engine standards), locomotive engine standards and motor vehicle (Tier 3) standards.37 These on-road and off-road vehicle and engine standards, along with State measures cited above, have contributed to improved air quality through the gradual, continued turnover and replacement of older vehicle models with newer models manufactured to meet increasingly stringent emissions standards.

    37See 66 FR 5001 (January 18, 2001), 63 FR 56968 (October 23, 1998), 69 FR 38958 (June 29, 2004), 63 FR 18978 (April 16, 1998), 73 FR 37096 (June 30, 2008), and 79 FR 23414 (April 28, 2014).

    Wintertime emissions of the two largest contributors to ambient PM2.5 concentrations (i.e., direct PM2.5 and NOX in the form of ammonium nitrate) declined significantly between 2006 and 2015. In 2006, wintertime PM2.5 emissions in the Chico PM2.5 nonattainment area were estimated to be approximately 6 tpd. By 2015, total emissions of PM2.5 had declined 12 percent to 5.3 tpd. These reductions were largely attributable to reductions in emissions from residential fuel combustion and mobile sources. Over the same period, NOX emissions declined from 22.5 tpd to 13 tpd. This 41 percent reduction in NOX emissions came primarily from the mobile source category and, to a lesser extent, from stationary sources.38

    38 Plan, Table 3-3 and Attachment D.

    The Plan demonstrates that the air quality improvement in the Chico PM2.5 nonattainment area between 2006 and 2015 was not the result of a local economic downturn or unusual or extreme weather patterns. As illustrated by Figure 3-9 of the Plan, the gross domestic product of the Chico Metropolitan Statistical Area has increased continuously since 2008, while at the same time, ambient levels of PM2.5 were improving. The area has continued to attain the PM2.5 NAAQS under conditions that were both colder and warmer, and both drier and wetter than average, supporting the conclusion that attainment of the standard is not the result of unusual meteorological conditions (Plan, Figures 3-7 and 3-8).

    We find that the improvement in air quality in the Chico PM2.5 nonattainment area is the result of permanent and enforceable emissions reductions from a combination of EPA-approved local and State control measures and federal control measures. As such, we propose to find that the criterion for redesignation set forth at CAA section 107(d)(3)(E)(iii) is satisfied.

    D. The Area Must Have a Fully Approved Maintenance Plan Under Section 175A

    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 PM2.5 Plan because we believe that it meets the requirements of CAA section 175A.

    1. Attainment Inventory

    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.39 Where a state has made an adequate demonstration that air quality has improved as a result of the SIP, the attainment inventory will generally be an inventory of actual emissions at the time the area attained the standard. The inventory must also be comprehensive, including emissions from stationary point sources, area sources, and mobile sources.

    39 A maintenance plan for the 2006 24-hour PM2.5 NAAQS must include an inventory of emissions of directly emitted PM2.5 and its precursors: NOX, SO2, VOCs, and NH3. 40 CFR 51.1008. Consistent with CARB's usual practice, the Plan provides an inventory of ROG rather than VOC. ROG has a slightly broader group of compounds than those identified in the EPA's VOC list and is acceptable for use by the District.

    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 PM2.5 emissions inventory requirements are set forth in the Air Emissions Reporting Rule (40 CFR 51, subpart A) and in 40 CFR 51.1008. The EPA has provided additional guidance for developing PM2.5 emissions inventories in Emissions Inventory Guidance for Implementation of Ozone and Particulate Matter National Ambient Air Quality Standards (NAAQS) and Regional Haze Regulations (July 2017) (“EPA 2017 EI Guidance”).40

    40 This document is available at https://www.epa.gov/sites/production/files/2017-07/documents/ei_guidance_may_2017_final_rev.pdf.

    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, 2018.41

    41 Letter with enclosures from Sylvia Vanderspeck, Chief, Air Quality Planning Branch, CARB, to GwenYoshimura, Manager, Air Quality Analysis Section, EPA Region 9.

    The Chico PM2.5 Plan's demonstration that the area has attained the standard is based on monitoring data from 2014-2016. The District selected 2015 for the base year inventory, which is consistent with this time period. Monitoring data for the Chico nonattainment area have shown that high PM2.5 concentrations occur primarily during the winter months; therefore, the Plan's three emissions inventories (the 2015 base year, and the 2025 and 2030 future year inventories) are all winter-season inventories. All three inventories have been projected from actual 2012 inventories.

    a. 2015 Base Year Emissions Inventory

    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 PM2.5 nonattainment area is listed in Table 3 and is shown in tons per day (tpd).

    Table 3—Chico PM2.5 Nonattainment Area 2015 Base Year Emissions Inventory (tpd) Winter Episode Average-Season-Day Source type/category PM2.5a NOX SO2 ROG NH3 Stationary 0.560 1.653 0.096 1.973 0.126 Areawide 4.560 1.449 0.145 6.848 3.937 Mobile 0.375 10.121 0.053 4.103 0.165 Benefit of woodstove changeout −0.238 Totals 5.257 13.223 0.294 12.924 4.228 Source: Plan, Attachment D. a The EPA's 2017 EI Guidance notes that emissions inventories are required to include direct PM2.5 emissions, separately reported as PM2.5 filterable and condensable emissions, as applicable. In order to clarify “as applicable,” the 2017 EI Guidance provides a list of source types that are expected to include condensable particulate matter (2017 EI Guidance, Table 15). Because the Chico area's air quality problem is largely driven by wood smoke and because there are currently no data available for condensable PM from wood smoke, reporting total direct PM2.5 is acceptable.

    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.42 These emission factors were then applied to specific transportation activity data from the 2015 Federal Statewide Transportation Improvement Program (FSTIP).

    42 The EPA approved EMFAC2014 for use in SIP revisions and transportation conformity at 80 FR 77337 (December 14, 2015).

    Emissions from off-road mobile sources, which include cargo handling equipment, pleasure craft, recreational vehicles, and locomotives, were grown from the 2012 emissions inventory.

    b. Projected Emissions Inventories

    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 (e.g., economic activity, fuel usage, population, housing units, etc.) that best reflect the expected growth trends for each specific source category. Growth projections were obtained primarily from government entities with expertise in developing forecasts for specific sectors or econometric models. Control profiles, which account for emission reductions resulting from adopted rules and regulations, are derived from data provided by the regulatory agencies responsible for the affected emission categories. A summary of the Chico PM2.5 nonattainment area projected winter episode average-season-day emissions inventories for the years 2025 and 2030 is provided in Table 4.

    Table 4—2025 and 2030 Projected CA/Butte County PM2.5 Nonattainment Area Winter Episode Average-Season-Day Emissions Inventories (tpd) Source type/category PM2.5 2025 2030 NOX 2025 2030 SOX 2025 2030 ROG 2025 2030 NH3 2025 2030 Stationary 0.652 0.699 1.621 1.662 0.113 0.122 2.086 2.238 0.141 0.147 Areawide 4.597 4.529 1.446 1.450 0.151 0.153 7.374 7.557 4.067 4.113 Mobile 0.255 0.236 4.829 3.809 0.053 0.055 2.379 2.090 0.131 0.130 ERC Bank 0.107 0.107 0.164 0.164 0.008 0.008 0.164 0.164 Woodstove Changeout −0.238 −0.238 Total 5.373 5.333 8.060 7.085 0.325 0.338 12.003 12.049 4.338 4.390 Source: Plan, Attachment F.

    The EPA has reviewed the results, procedures, and methodologies for the Chico PM2.5 nonattainment area emissions inventories. We have determined that the 2015 base year inventory and the 2025 and 2030 projected inventories are based on the most current and accurate information available to CARB and BCAQMD at the time the Plan and its inventories were being developed. The selection of 2015 for the base year inventory is also appropriate because it is within the 2014-2016 period during which the area attained the standard. The inventories comprehensively address all source categories in the Chico PM2.5 nonattainment area and appropriate procedures were used to develop the inventories. In addition, CARB and BCAQMD developed the 2025 and the 2030 projected inventories based on the 2015 base year inventory and accounted for projected growth and reductions in emissions. We are therefore proposing to approve the 2015 base year emissions inventory and the 2025 and 2030 projected year inventories for the Chico PM2.5 Nonattainment Area as meeting the requirements of CAA section 175A of the CAA.

    2. PM2.5 Maintenance Demonstration a. PM2.5 Modeling Requirements

    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 Guideline on Air Quality Models (“Guideline”).43 Section 4.2.3.5 of the Guideline notes that PM2.5 is a mixture of components: Primary (directly emitted) and secondary (chemically formed in the atmosphere from precursor emissions). In its discussion of modeling for PM2.5 New Source Review,44 the Guideline refers to the general dispersion modeling requirements located in sections 4.2.1 and 4.2.2 for primary PM2.5, and in Section 5.4 for secondary PM2.5. The Guideline's discussion of PM2.5 SIP attainment demonstrations 45 references Section 5.4 and associated SIP modeling guidance that mainly pertain to photochemical models to handle secondarily formed PM2.5.46 These modeling recommendations address situations that involve a few major point sources emitting primary PM2.5 (Section 4.2) and situations with a few large sources or many sources of secondary PM2.5 (Section 5.4).

    43 40 CFR 51 Appendix W, Guideline on Air Quality Models, 82 FR 5182, January 17, 2017; available at https://www.epa.gov/scram/clean-air-act-permit-modeling-guidance.

    44See subsection (b) of the Guideline.

    45See subsection (c) of the Guideline.

    46Modeling Guidance for Demonstrating Attainment of Air Quality Goals for Ozone, PM 2.5, and Regional Haze, December 2014 Draft, EPA OAQPS; available at https://www.epa.gov/scram/state-implementation-plan-sip-attainment-demonstration-guidance.

    For areas such as the Chico area that are dominated by primary PM10 or PM2.5 emitted by many small dispersed sources such as fugitive dust or residential wood burning, the rollback model has historically been used. In simple rollback, the monitored ambient concentration (net of any unchanging background concentration) is assumed to be proportional to emissions. When emissions are reduced by a given percentage, the concentration is assumed to scale or “roll back” by the same percentage. A variant of this technique is “proportional rollback,” in which rollback is applied to each emission source category individually, then summed in proportion to each source category's ambient contribution. The proportions, or source apportionment, can be estimated using chemically speciated PM2.5 measurements. This can be done with a receptor model such as the Chemical Mass Balance model or the Positive Matrix Factorization model, which finds the source category contributions that are the best statistical fit to the measured chemical species concentrations, given measured or estimated source species profiles. More simply, in “speciated rollback,” rollback is applied to each species or species group separately, then the individual components are summed. Within each species, a source category's contribution is proportional to its share of the corresponding species emission inventory.

    For any of the rollback approaches, assumptions must be made about secondary PM2.5 such as ammonium nitrate and ammonium sulfate, since they do not correspond directly to emission inventory pollutants and because chemical interactions between precursors are not represented in rollback's linear scaling. The secondary components could conservatively be assumed to be part of the unchanging background concentration, or they might be assumed to scale in proportion to their corresponding precursor emissions, e.g., ammonium nitrate in proportion to NOX emissions. While these approaches are relatively imprecise in comparison to photochemical grid models, if secondary particulates are a small portion of ambient PM2.5 in a particular area, the uncertainty in the model results will also be small.

    b. Modeling in the Plan

    Because some precursors increase slightly over the 10-year maintenance period, the Chico PM2.5 Plan uses modeling to demonstrate ongoing maintenance of the standard. The Plan's maintenance demonstration is based on speciated rollback modeling, with concentrations for PM2.5 species scaled according to changes in corresponding species emission inventory categories.47 The Plan shows the chemical composition of PM2.5 in tables and pie charts, showing concentrations and percentages for five species groups (ammonium nitrate, ammonium sulfate, carbonaceous aerosols, geological, and elements) for the 10 percent of days with the highest monitored 24-hour PM2.5 concentrations.48 49 The species percentages were derived from averages of speciated Chico PM2.5 monitoring data during 2014-2016, which matches the three years used to derive the 2016 design value.

    47 Plan, Section 4.a. The Plan uses the terms “rollback” and “proportional rollback.” Here and elsewhere, the terms “proportional rollback” and “speciated rollback” are used loosely. These and other rollback variants all assume concentrations are proportional to emissions but vary in how they map emissions to concentrations.

    48 Plan, Figure 4.1, p. 20; Attachment E, table in Figure 4.1, p.1; and Attachment F, Figure 1, p.1.

    49 The “geological” group comprises those species typically found in soil (such as silicon). The “elements” group consists of all species not in other groups.

    The speciation data show that days with high PM2.5 concentrations in the Chico nonattainment area are dominated by carbonaceous aerosol, which accounted for 76 percent of the total. The District's attribution of this principally to organic matter from wood burning is corroborated by the close agreement between the concentration trends of carbonaceous aerosol and of potassium, a marker element for wood burning.50 Wood burning emissions are 85 percent of the total direct PM2.5 emissions. The Plan states that the highest concentrations occur under stagnant conditions in winter, typically in the evening and early morning hours. The diurnal pattern of concentrations is consistent with this and with increased residential wood burning in the evening hours.51 The geological and elements species groups each contributed 2 percent to high PM2.5 levels.

    50 Plan, p.13.

    51 Plan, p.13, including Figure 3-4, and p.15.

    Secondarily formed PM2.5 in the form of ammonium nitrate and ammonium sulfate respectively comprised 16 percent and 4 percent of PM2.5 concentrations. These species are formed from precursor emissions of NOX, SOX, and ammonia.

    The instruments and techniques used to measure speciated PM2.5 do not measure all species, so some adjustments are needed for the total speciated to match the full PM2.5 mass, as measured with the FRM for PM2.5.52 For the rollback, the Plan mainly used the adjustments followed in the IMPROVE (Interagency Monitoring of Protected Visual Environments) network for each species group.53 The exception was carbonaceous aerosol or organic matter, which was estimated by mass balance, that is, the total PM2.5 mass less the mass of all the other species.54 The concentrations were then scaled so the total matched the 2016 design value of 26 μg/m3. This procedure yielded species group concentrations representative of the design value as the starting point for speciated rollback.

    52 For example, carbon and various ions are measured but the oxygen originally chemically bound to them is not. Also, the sampling schedules and averaging procedures differ between the FRM and speciated measurements.

    53 Plan, Table 4.1, p. 21; IMPROVE (Interagency Monitoring of Protected Visual Environments) is a monitoring program managed by EPA and other federal and state agencies, to assess visibility and aerosol conditions including PM2.5 species, in Class I areas such as National Parks. http://vista.cira.colostate.edu/Improve/reconstructed-fine-mass/.

    54 Due to large uncertainties in carbonaceous mass measurements, mass balance is also used in the EPA-recommended SANDWICH approach (Sulfate, Adjusted Nitrate, Derived Water, Inferred Carbonaceous material balance approach), described in EPA draft Modeling Guidance for Demonstrating Attainment, section 4.4.4.

    Ambient concentrations of PM2.5 have both a local component and a background component. The local component is generated by emissions from sources located with the nonattainment area. The background component is not attributed to local sources; it consists of PM2.5 (and its precursors) that is transported into the area by air flowing in from upwind. Since only the local component can be affected by changes in the area's emissions, rollback scales concentrations with background concentrations subtracted out (i.e., net of background). Speciated concentrations from Bliss State Park next to Lake Tahoe were chosen in the Plan as background concentrations that would occur in the airshed in the absence of local anthropogenic emissions. These concentrations were subtracted from Chico concentrations for the corresponding species groups, resulting in local concentrations to be scaled according to emissions changes (“available for rolling”).

    To perform the rollback analysis, the species groups must be matched to emission inventory categories that affect those species' concentrations. Since the highest PM2.5 concentrations occur during winter months when residential wood burning is greatest, a winter season inventory was used. Five groups of ambient species were mapped to emission inventory categories. The geological (or fugitive dust) component was assumed to be proportional to fugitive dust emissions, including farming operations, construction, road dust, and fugitive wind-blown dust. The sum of the carbonaceous aerosols component and the elements component was assumed to be proportional to the total emissions from all other directly-emitted primary PM2.5 emissions categories. The ammonium nitrate component was assumed to scale with total NOX emissions, and ammonium sulfate with total SOX emissions.

    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 PM2.5 emissions, so PM10 ERCs were used. Both of these choices make the 2030 emission estimate conservatively high. The District had a successful wood burning device change out program. As previously noted, between 2005-2015, 739 wood stoves were replaced with cleaner-burning devices. The resulting emission reductions were included in both the base and future year emissions, reflecting baseline emission inventory estimates through the maintenance period. No credit was taken for later stove change outs or for the District's Check Before You Light voluntary curtailment program, both of which are expected to yield additional emission reductions through 2030.

    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,55 but this component accounts for only 2.3 percent of PM2.5 concentrations. The sum of all other directly-emitted primary PM2.5 emissions categories is the largest single component of concentrations; it is expected to decline by only 0.8 percent by 2030. NOX emissions, used to scale ammonium nitrate, are expected to fall by some 46 percent; this is mainly due to declining mobile source emissions, which are 80 percent of the NOX inventory. SOX emissions, used to scale ammonium sulfate, are projected to increase by about 15 percent, mainly due to an increase in stationary source fuel combustion from electricity generation. As noted above, ammonium sulfate is only 4 percent of PM2.5 concentrations.

    55 California Air Resources Board, CEPAM—California Emissions Projection Analysis Model, https://www.arb.ca.gov/app/emsinv/fcemssumcat/fcemssumcat2016.php, retrieved March 4th, 2018.

    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 NOX emissions will yield a 1.83 μg/m3 reduction to the design value. The decrease in non-dust PM2.5 accounts for an additional reduction of 0.16 μg/m3. Projected increases in ammonium sulfate and fugitive dust emissions are predicted to contribute a 0.18 μg/m3 increase. The final result of the maintenance demonstration modeling was a decrease of 1.8 μg/m3 from the 2016 level, resulting in a 2030 design value of 24.2 μg/m3, well below the 35 μg/m3 NAAQS.

    c. EPA Evaluation of the Maintenance Demonstration

    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 PM2.5 in ambient concentrations, the dispersed nature of the many sources responsible for it, and the relatively small fraction composed of secondary particulate matter. As discussed in the Plan, organic carbon from wood burning emissions is 76 percent of PM2.5 on the highest concentration days, and the highest concentrations occur under stagnant winter conditions. The Plan examined meteorology, PM2.5 emissions, ambient PM2.5 data, including speciated PM2.5 monitoring data over the past decade, and how the diurnal PM2.5 pattern changed over time, to make the case that residential wood burning is the dominant contributor to the air quality problem in the Chico nonattainment area. The key assumption in rollback, i.e., that concentrations are proportional to emissions, is true for these primary PM2.5 emissions. Current EPA guidance does not mention rollback; however, it also does not fully cover the Chico situation of dominant primary PM2.5 from many dispersed sources. Instead, it mainly discusses photochemical grid models and dispersion models that are more appropriate for other situations. It would be unreasonable to require the use of a photochemical grid model just to handle the minor secondary particulate component in Chico, given the time and resources involved, the established nature of the main PM2.5 problem in the area (wood smoke), and the monitored concentrations that are well below the NAAQS. Nor would a dispersion model be appropriate, given the large number and dispersed distribution of sources, especially since the highest concentrations occur under stagnant conditions, which dispersion models do not handle well. Given that the key air quality problem is already understood, neither photochemical grid models nor dispersion models would provide much information that is not already available from the rollback model. The EPA finds that the use of rollback meets available guidance and is appropriate for the Chico maintenance demonstration.

    The EPA also finds that the Plan correctly implemented the calculations needed for rollback, used an appropriate mapping of ambient PM2.5 components to emission inventory categories, and incorporated a degree of conservatism.

    The main drawback to rollback for Chico PM2.5 is its inherently simple handling of secondary particulates, which, though a minor ambient component in this instance, are not negligible. The assumption that ammonium nitrate and ammonium sulfate scale linearly with NOX and SOX emissions, respectively, is simple and is consistent with rollback, but may not be fully correct. Even if they do scale in a reasonably linear manner, they might not respond on a one-to-one basis, e.g. a 10 percent NOX emission reduction might yield only a 7 percent ambient ammonium nitrate response. As noted above, the decline in NOX emissions accounts for much of the predicted 1.8 μg/m3 decrease in PM2.5 concentrations between 2015 and 2030. However, ambient concentrations in Chico are far enough below the level of the NAAQS that, even using highly conservative assumptions for secondary particulates, maintenance of the NAAQS is not jeopardized. If ammonium nitrate does not respond at all to the 46 percent NOX reduction, but instead remains at its 2016 design value level, and ammonium sulfate does conservatively respond on a one-to-one basis to the 15 percent SOX emission increase of 0.036 tpd, the rollback model predicts a 2030 design value of 26.03 μg/m3 (starting from 26.00 μg/m3 in 2015), still well below the NAAQS. Despite the greater ammonium nitrate in the highly conservative assumption described above as compared to the maintenance demonstration in the Plan, the increase in predicted 2030 design value from 24.2 to 26.0 is relatively small because ammonium nitrate is only 16 percent of PM2.5 concentrations. Therefore, even if the reasonable and straightforward assumptions in the rollback modeling were not fully correct, the maintenance demonstration would still be adequate given how clean the air is in Chico. Consequently, we are proposing to determine that the Chico PM2.5 Plan adequately demonstrates maintenance of the 2006 24-hour PM2.5 NAAQS through 2030.

    3. Verification of Continued Attainment

    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 PM2.5 Plan because we believe that it meets the CAA section 175A requirements for verification of continued attainment.

    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, PM2.5 is currently monitored by CARB within the Chico PM2.5 nonattainment area. In Section 4.c. of the Chico PM2.5 Plan, the District indicates that CARB intends to maintain an appropriate PM2.5 monitoring network and review data through the maintenance period and will collaborate with the EPA and stakeholders on any potential changes to the network. The District commits to using ambient data to track the progress of the maintenance plan. We find that the Chico PM2.5 Plan contains adequate provisions for continued operation of air quality monitors that will provide verification of continued attainment.

    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 maintenance of the PM2.5 NAAQS. We are proposing to determine that these methods are sufficient for verifying continued attainment.

    4. Contingency Provisions

    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 PM2.5 air quality problems. The contingency provisions in the Chico PM2.5 Plan are contained in Section 4.e. of the Plan. BCAQMD identifies the contingency plan trigger as a violation of the 2006 24-hour PM2.5 NAAQS. If that should occur, BCAQMD commits to the following steps:

    (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 PM2.5 or precursors.

    (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 PM2.5 Plan clearly identify specific contingency measures, contain tracking and triggering mechanisms to determine when contingency measures are needed, contain a description of the process of recommending and implementing contingency measures, and contain specific timelines for action. Thus, we conclude that the contingency provisions of the Chico PM2.5 Plan are adequate to ensure prompt correction of a violation and that they comply with section 175A(d) of the CAA. For the reasons set forth above, EPA is proposing to find that the Chico PM2.5 Plan is consistent with the maintenance plan contingency provision requirements of the CAA and EPA guidance.

    5. Transportation and Motor Vehicle Emissions Budgets

    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 PM2.5 and PM2.5 precursors subject to transportation conformity analyses.56 For motor vehicle emissions budgets to be approvable, they must meet, at a minimum, the EPA's adequacy criteria (40 CFR 93.118(e)(4)).

    56 Section 93.102(b)(2)(v) of the conformity rule identifies VOC, SOX, and ammonia as PM2.5 precursor pollutants that that are presumed insignificant unless the SIP makes a finding that the precursor is significant. In contrast, NOX is presumed to be a significant contributor, unless the state and the EPA determine that transportation-related emissions of NOX are not a significant contributor (93.102(b)(2)(iv)).

    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 PM2.5 Plan, the BCAQMD requested that the EPA find that on-road emissions of direct PM2.5 and NOX are insignificant for conformity purposes, and therefore the District did not submit any budgets. The EPA is proposing to approve BCAQMD's insignificance demonstration for the on-road motor vehicle contribution of NOX and PM2.5 emissions to the overall PM2.5 emissions in the maintenance plan.

    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/m3 in 2008, to 33 μg/m3 in 2012, to 28 μg/m3 in 2014, and to 26 μg/m3 in 2016. NOX emissions from on-road mobile sources are predicted to decrease by 70 percent from 2015-2030 and PM2.5 emissions are predicted to decrease by 24 percent during the same time frame. In addition, the 2030 on-road PM2.5 emissions will account for less than three percent of the total direct non-dust PM2.5 emissions from all sources in the Chico nonattainment area. Because on-road NOX emissions account for a larger percentage (28 percent) of the total emissions, the plan includes a sensitivity analysis that demonstrates that the NOX emissions from on-road mobile sources would need to increase by 600 percent from 2015 levels before the area would violate the 2006 24-hour PM2.5 standard in the Chico nonattainment area. Our detailed evaluation and conclusions are as follows.

    (1) The Chico Area Is Attaining the PM2.5 NAAQS

    The EPA determined that the Chico nonattainment area attained the 2006 24-hour PM2.5 standard on September 10, 2013 (78 FR 55225). This finding was based on ambient air quality data for the period of 2010 to 2012. More recently on May 10, 2017, the EPA determined that the Chico nonattainment area met the 2006 24-hour PM2.5 standard by its attainment date of December 31, 2015 (82 FR 21711). This finding was based on air quality data for the period from 2013 to 2015. Since that period the air quality has remained well below the 2006 24-hour PM2.5 standard. Table 5 summarizes the air quality design values for the 2014-2016 period.

    Table 5—Summary of Design Values for the 24-hour PM2.5 NAAQS in the Chico Nonattainment Area (μg/m3) 2014 2015 2016 28 29 26 Source: Plan, Table 3-1. (2) Motor Vehicle Control Measures Were Not Adopted for the Purpose of Bringing the Area Into Attainment

    As discussed in more detail in sections V.C. and V.D.2. of this document, the control measures relied upon in the Chico PM2.5 plan to bring the area into attainment are primarily associated with residential wood burning. While there are statewide motor vehicle emission controls (smog check and vehicle standards) that apply throughout California, those measures were not adopted specifically to bring this area into attainment.

    (3) Historical Trends and Future Projections Indicate Motor Vehicle PM2.5 Emissions Are Decreasing

    Trends and projections in emissions of PM2.5 and precursors are presented in several sections of the Chico PM2.5 plan. Table 3.3 of the Chico PM2.5 plan shows reductions of total NOX, PM2.5 and SOX emissions from 2006-2015. During this period, total wintertime emissions of PM2.5 decreased 11.8 percent while NOX emissions decreased by 41.3 percent and SOX emissions decreased by 45.3 percent. These trends are projected to continue as shown in Table 6, below. Emissions of NOX, for the period from the attainment year of 2015 to the maintenance year of 2030, are estimated to decrease 47 percent and total non-dust PM2.5 emissions are projected to decrease by 1 percent. On-road motor vehicle emissions decrease even further. Emissions of on-road NOX and PM2.5 are projected to decrease 70 percent and 24 percent, respectively, from 2015 to 2030. These reductions are projected to occur even while vehicle miles travelled are predicted to increase 40 percent from 2014-2040. These reductions are due to federal and California motor vehicle regulations such as heavy-duty highway vehicle standards and fuel standards.

    Table 6—NOX and PM2.5 Emissions [tons per winter day] 2015 2025 2030 Percent change from 2015 Total NOX 13.2 7.9 6.9 −47 On-Road NOX 6.3 2.4 1.9 −70 Total Non-Dust PM2.5 4.47 4.5 4.43 −1 Direct PM from On-Road Motor Vehicles (exhaust, tire wear, and brake wear) 0.17 0.13 0.13 −4 Source: Plan, Tables 4-5 and 4-6. (4) The Percentage of Motor Vehicle Emissions in the Context of the Total SIP Inventory Decreases Over Time

    As shown in Table 7, the percentage contribution of motor vehicle emissions to total emissions for both NOX and PM2.5 generally decreases over time. In the 2015 attainment year, emissions of NOX from on-road motor vehicles contribute 48 percent of the total Chico NOX emission inventory. By 2030, the contribution of on-road NOX is reduced to 28 percent. The overall contribution of on-road motor vehicles to the PM2.5 inventory is very small. In the 2015 attainment year, emissions of PM2.5 from on-road motor vehicles contributed only 3.9 percent of the Chico total non-dust emission inventory. By 2030, the percentage declines to 3.0 percent.

    Table 7—Percent Contribution of NOX and PM2.5 Emissions 2015 2025 2030 Percent On-Road Contribution to Total NOX Emission 47.7% 30.4% 27.5% Percent On-Road Contribution to Non-Dust Total PM2.5 Emissions 3.9% 2.8% 3.0% Source: Plan, Tables 4.5 and 4.6.

    Although both the total NOX inventory and the percentage contribution to the NOX inventory from mobile sources decline over time, on-road NOX will account for over 27 percent of the total NOX inventory in 2030. As verification that this would not affect maintenance of the standard, the Plan includes a modified roll-back analysis that was conducted to determine how much on-road NOX emissions would need to increase before the Chico PM2.5 nonattainment area would experience violations of the 2006 PM2.5 NAAQS (Attachment F). The roll-back analysis demonstrates that on-road NOX emissions would have to increase by approximately 600 percent from 2015 NOX emission levels before violations of the PM2.5 NAAQS would occur in 2030. With NOX emissions for the area trending downward, it is highly unlikely that on-road NOX emissions could increase 600 percent by 2030.

    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 PM2.5 and NOX contributions from motor vehicle emissions to the PM2.5 pollution for the Chico nonattainment area are insignificant.

    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 PM2.5 or NOX as part of future PM2.5 conformity determinations for the 2006 24-hour PM2.5 NAAQS for the Chico area (the subject of today's proposed action). The EPA's insignificance finding should, however, be noted in the transportation conformity documentation that is prepared for this area. Areas with insignificant regional motor vehicle emissions for a pollutant or precursor are still required to make a conformity determination that satisfies other relevant conformity requirements such as financial constraint, timely implementation of transportation control measures and project level conformity.

    VI. Proposed Action and Request for Public Comment

    Pursuant to sections 107(d)(3)(E) and 175A of the CAA and based on our review of the Chico PM2.5 Plan submitted by the State, air quality monitoring data, and other relevant materials, the EPA is proposing to find that the State has addressed all the necessary requirements for redesignation of the Chico nonattainment area to attainment of the 24-hour PM2.5 NAAQS.

    First, under CAA section 107(d)(3)(D), we are proposing to approve CARB's request, which accompanied the submittal of the Chico PM2.5 Plan, to redesignate the Chico PM2.5 nonattainment area to attainment for the 2006 24-hour PM2.5 NAAQS. We are doing so based on our conclusion that the area has met the five criteria for redesignation under CAA section 107(d)(3)(E). Our conclusion is based on our proposed determination that the area has attained the 2006 24-hour PM2.5 NAAQS; that relevant portions of the California SIP are fully approved; that the improvement in air quality is due to permanent and enforceable reductions in emissions; that California has met all requirements applicable to the Chico PM2.5 nonattainment area with respect to section 110 and part D of the CAA; and is based on our proposed approval of the Chico PM2.5 Plan as part of this action.

    Second, in connection with the Chico PM2.5 Plan showing maintenance through 2030, the EPA is proposing to find that the maintenance demonstration, which documents how the area will continue to attain the 2006 24-hour PM2.5 NAAQS for 10 years beyond redesignation (i.e., through 2030) and the actions that BCAQMD will take if a future monitored violation triggers the contingency plan, meets all applicable requirements for maintenance plans and related contingency provisions in section 175A of the CAA. The EPA is also proposing to approve the determination that the PM2.5 and NOX contributions from motor vehicle emissions to the PM2.5 pollution for the Chico nonattainment area are insignificant.

    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 Federal Register and will consider these comments before taking final action.

    VII. Statutory and Executive Order Reviews

    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 et seq.);

    • 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 et seq.);

    • 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). 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 PM2.5 nonattainment area.

    List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Nitrogen dioxide, Particulate matter, Reporting and recordkeeping requirements, Sulfur oxides, Volatile organic compounds.

    List of Subjects in 40 CFR Part 81

    Environmental protection, Air pollution control, National parks, Wilderness areas.

    Authority:

    42 U.S.C. 7401 et seq.

    Dated: May 1, 2018. Alexis Strauss, Acting Regional Administrator, Region IX.
    [FR Doc. 2018-09792 Filed 5-8-18; 8:45 am] BILLING CODE 6560-50-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 55 [EPA-R01-OAR-2018-0011; FRL-9976-49—Region 1] Outer Continental Shelf Air Regulations; Consistency Update for Massachusetts; Reopening of Comment Period AGENCY:

    Environmental Protection Agency (EPA).

    ACTION:

    Proposed rule; reopening of the public comment period.

    SUMMARY:

    The Environmental Protection Agency (EPA) issued a proposed rule in the Federal Register on February 12, 2018, proposing to update a portion of the Outer Continental Shelf (OCS) Air Regulations that pertains to the requirements for OCS sources for which Massachusetts is the designated the Corresponding Onshore Area (COA). On March 9, 2018, the Commonwealth of Massachusetts amended certain regulatory provisions that pertain to the EPA's February 12, 2018 proposed rulemaking. This document reopens the comment period for 30 days and provides notice that the EPA has modified the proposed regulatory text for incorporation by reference in the EPA final rule for this action. The EPA has also added additional information to the docket.

    DATES:

    Written comments on the proposed rule published in the Federal Register on February 12, 2018 (83 FR 5971) should be received on or before June 8, 2018.

    ADDRESSES:

    Submit your comments, identified by Docket ID No. EPA-R01-OAR-2018-0011 at https://www.regulations.gov, or via email to [email protected]. For comments submitted at Regulations.gov, follow the online instructions for submitting comments. Once submitted, comments cannot be edited or removed from Regulations.gov. For either manner of submission, the EPA may publish any comment received to its public docket. Do not submit electronically any information you consider to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. Multimedia submissions (audio, video, etc.) must be accompanied by a written comment. The written comment is considered the official comment and should include discussion of all points you wish to make. The EPA will generally not consider comments or comment contents located outside of the primary submission (i.e. on the web, cloud, or other file sharing system). For additional submission methods, please contact the person identified in the For Further Information Contact section. For the full EPA public comment policy, information about CBI or multimedia submissions, and general guidance on making effective comments, please visit https://www.epa.gov/dockets/commenting-epa-dockets. Publicly available docket materials are available at https://www.regulations.gov or at the U.S. Environmental Protection Agency, EPA New England Regional Office, Office of Ecosystem Protection, Air Quality Planning Unit, 5 Post Office Square—Suite 100, Boston, MA. EPA requests that if at all possible, you contact the contact listed in the FOR FURTHER INFORMATION CONTACT section to schedule your inspection. The Regional Office's official hours of business are Monday through Friday, 8:30 a.m. to 4:30 p.m., excluding legal holidays.

    FOR FURTHER INFORMATION CONTACT:

    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, [email protected].

    SUPPLEMENTARY INFORMATION:

    Throughout this document whenever “we,” “us,” or “our” is used, we mean EPA.

    Table of Contents I. Background and Purpose II. Why is the EPA reopening the comment period? III. Incorporation by Reference I. Background and Purpose

    On February 12, 2018, the EPA published a proposed rulemaking in the Federal Register to update a portion of the OCS Air Regulations. See 83 FR 5971. As stated in the EPA's February 12, 2018 proposed rulemaking, requirements applying to OCS sources located within 25 miles of states' seaward boundaries must be updated periodically to remain consistent with the requirements of the COA, as mandated by section 328(a)(1) of the Clean Air Act. The portion of the OCS air regulations that is being updated in the proposed rulemaking pertains to the requirements for OCS sources for which Massachusetts is the designated COA. The intended effect of approving the OCS requirements for the Massachusetts Department of Environmental Protection (MassDEP) is to regulate emissions from OCS sources in accordance with the requirements for onshore sources. The Commonwealth of Massachusetts' requirements discussed in the EPA's proposed rulemaking will be incorporated by reference into the Code of Federal Regulations (CFR) and listed in the appendix to the OCS air regulations in 40 CFR part 55.

    II. Why is the EPA reopening the comment period?

    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 with the requirements in effect in the COA. Therefore, the EPA is including the Commonwealth's March 9, 2018 amended regulations for 310 CMR 7.00 in the EPA's proposed consistency update to 40 CFR part 55 in addition to the other regulations EPA proposed for inclusion in the February 12, 2018 proposed rulemaking. The EPA has added the amended regulations at 310 CMR 7.00 to the docket and is reopening the comment period to give all interested persons the opportunity to comment on the incorporation by reference of the amended regulations at 310 CMR 7.00.1 This document reopens the public comment period established in the Federal Register document on February 12, 2018 (83 FR 5971) (FRL-9974-28—Region 1).

    1 The EPA is required to submit a true copy of the regulations, attested by the Commonwealth of Massachusetts, to the Office of the Federal Register for incorporation by reference in the final rule. The EPA obtained a true copy of the amended regulations in effect as of March 9, 2018. The Commonwealth of Massachusetts State Bookstore bundles 310 CMR 6.00, 310 CMR 7.00, and 310 CMR 8.00 into a single package for the purpose of attesting a true copy. Although the regulations at 310 CMR 6.00 and 310 CMR 8.00 were not part of the March 9, 2018 amendments, the EPA has updated the effective date for 310 CMR 6.00-8.00 in the regulatory text proposed for incorporation by reference for consistency with the updated true copy of the regulations. The true copy of the regulations for 310 CMR 6.00-8.00 obtained by the EPA has been added to the docket for this action.

    To submit comments, or access the docket, please follow the detailed instructions provided in the ADDRESSES section of this Federal Register. Please refer to the EPA's February 12, 2018 (83 FR 5971) proposed rulemaking for more detailed information regarding this rulemaking action.

    III. Incorporation by Reference

    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 www.regulations.gov and at the EPA New England Region 1 Office (please contact the person identified in the FOR FURTHER INFORMATION CONTACT section of this document for more information).

    List of Subjects in 40 CFR Part 55

    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.

    Dated: April 19, 2018. Alexandra Dunn, Regional Administrator, EPA Region 1.

    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:

    PART 55—OUTER CONTINENTAL SHELF AIR REGULATIONS 1. The authority citation for part 55 continues to read as follows: Authority:

    Section 328 of the Clean Air Act (42 U.S.C. 7401 et seq.) as amended by Public Law 101-549.

    2. Section 55.14 is amended by revising paragraph (e)(11)(i)(A) to read as follows:
    § 55.14 Requirements that apply to OCS sources located within 25 miles of States' seaward boundaries, by State.

    (e) * * *

    (11) * * *

    (i) * * *

    (A) Commonwealth of Massachusetts Requirements Applicable to OCS Sources, March 9, 2018.

    3. Appendix A to part 55 is amended by revising paragraph (a)(1) under the heading “Massachusetts” to read as follows: Appendix A to Part 55—Listing of State and Local Requirements Incorporated by Reference Into Part 55, by State Massachusetts

    (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:

    310 CMR 4.00: Timely Action Schedule and Fee Provisions Section 4.01: Purpose, Authority and General Provisions (Effective 3/24/2017) Section 4.02: Definitions (Effective 3/24/2017) Section 4.03: Annual Compliance Assurance Fee (Effective 3/24/2017) Section 4.04: Permit Application Schedules and Fee (Effective 3/24/2017) Section 4.10: Appendix: Schedules for Timely Action and Permit Application Fees (Effective 3/24/2017) 310 CMR 6.00: Ambient Air Quality Standards for the Commonwealth of Massachusetts Section 6.01: Definitions (Effective 3/9/2018) Section 6.02: Scope (Effective 3/9/2018) Section 6.03: Reference Conditions (Effective 3/9/2018) Section 6.04: Standards (Effective 3/9/2018) 310 CMR 7.00: Air Pollution Control Section 7.00: Statutory Authority; Legend; Preamble; Definitions (Effective 3/9/2018) Section 7.01: General Regulations to Prevent Air Pollution (Effective 3/9/2018) Section 7.02: U Plan Approval and Emission Limitations (Effective 3/9/2018) Section 7.03: U Plan Approval Exemptions: Construction Requirements (Effective 3/9/2018) Section 7.04: U Fossil Fuel Utilization Facilities (Effective 3/9/2018) Section 7.05: U Fuels All Districts (Effective 3/9/2018) Section 7.06: U Visible Emissions (Effective 3/9/2018) Section 7.07: U Open Burning (Effective 3/9/2018) Section 7.08: U Incinerators (Effective 3/9/2018) Section 7.09: U Dust, Odor, Construction and Demolition (Effective 3/9/2018) Section 7.11: U Transportation Media (Effective 3/9/2018) Section 7.12: U Source Registration (Effective 3/9/2018) Section 7.13: U Stack Testing (Effective 3/9/2018) Section 7.14: U Monitoring Devices and Reports (Effective 3/9/2018) Section 7.18: U Volatile and Halogenated Organic Compounds (Effective 3/9/2018) Section 7.19: U Reasonably Available Control Technology (RACT) for Sources of Oxides of Nitrogen (NOX) (Effective 3/9/2018) Section 7.21: Sulfur Dioxide Emissions Limitations (Effective 3/9/2018) Section 7.22: Sulfur Dioxide Emissions Reductions for the Purpose of Reducing Acid Rain (Effective 3/9/2018) Section 7.24: U Organic Material Storage and Distribution (Effective 3/9/2018) Section 7.25: U Best Available Controls for Consumer and Commercial Products (Effective 3/9/2018) Section 7.26: Industry Performance Standards (Effective 3/9/2018) Section 7.60: U Severability (Effective 3/9/2018) Section 7.00: Appendix A (Effective 3/9/2018) Section 7.00: Appendix B (Effective 3/9/2018) Section 7.00: Appendix C (Effective 3/9/2018) 310 CMR 8.00: The Prevention and/or Abatement of Air Pollution Episode and Air Pollution Incident Emergencies Section 8.01: Introduction (Effective 3/9/2018) Section 8.02: Definitions (Effective 3/9/2018) Section 8.03: Air Pollution Episode Criteria (Effective 3/9/2018) Section 8.04: Air Pollution Episode Potential Advisories (Effective 3/9/2018) Section 8.05: Declaration of Air Pollution Episodes and Incidents (Effective 3/9/2018) Section 8.06: Termination of Air Pollution Episodes and Incident Emergencies (Effective 3/9/2018) Section 8.07: Emission Reductions Strategies (Effective 3/9/2018) Section 8.08: Emission Reduction Plans (Effective 3/9/2018) Section 8.15: Air Pollution Incident Emergency (Effective 3/9/2018) Section 8.30: Severability (Effective 3/9/2018)

    (2) [Reserved]

    [FR Doc. 2018-09646 Filed 5-8-18; 8:45 am] BILLING CODE 6560-50-P
    83 90 Wednesday, May 9, 2018 Notices DEPARTMENT OF AGRICULTURE Commodity Credit Corporation Foreign Agricultural Service Notice of Funding Availability: Inviting Applications for the Quality Samples Program SUMMARY:

    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 Grants.gov website.

    DATES:

    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.

    FOR FURTHER INFORMATION CONTACT:

    Applicants needing assistance should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected]. Information is also available on the FAS website at http://www.fas.usda.gov/programs/quality-samples-program-qsp.

    SUPPLEMENTARY INFORMATION:

    A. Funding Opportunity Description

    Announcement Type: New.

    Award Instrument: Grant.

    Catalog of Federal Domestic Assistance (CFDA) Number: 10.605.

    Authority: The QSP is authorized under Section 5(f) of the Commodity Credit Corporation Charter Act, 15 U.S.C. 714c(f).

    Purpose: The QSP is designed to encourage the development and expansion of export markets for U.S. agricultural commodities by assisting U.S. entities in providing commodity samples to potential foreign importers to promote a better understanding and appreciation for the high quality of U.S. agricultural commodities.

    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.

    B. Eligibility and Qualification Information

    1. Eligible Organizations: Any United States private or government entity with a demonstrated role and interest in exporting U.S. agricultural commodities may apply to the program. Government organizations consist of Federal, State, and local agencies. Private organizations include non-profit trade associations, universities, agricultural cooperatives, state regional trade groups, and profit-making entities.

    2. General Scope of QSP Projects: QSP projects encompass the activities undertaken by a QSP participant to provide an appropriate sample of a U.S. agricultural commodity to a foreign importer, or a group of foreign importers, in a given market. The purpose of these projects is to provide information to the target audience regarding the attributes, characteristics, and proper use of the U.S. commodity. A QSP project is limited to a single market/commodity combination.

    3. Qualification Information: To be found eligible for consideration, QSP proposals must address the following criteria:

    • 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 (e.g., not more than a full commercial mill run in the destination country); and

    • 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 (e.g., because of improper specification, blending, formulation, sanitary, or phytosanitary issues);

    • 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.

    4. Cost-Sharing: Although highly encouraged, there is no cost share requirement for QSP proposals. FAS will, however, consider the applicant's willingness to contribute resources towards the project, including cash, goods, and services of the U.S. industry and foreign third parties, when determining which proposals are approved for funding.

    5. Funding Limits: Individual projects that include further processing or substantial transformation of the sample will be limited to $75,000 of QSP reimbursement per project, while projects comprised only of technical preparation seminars will be limited to $15,000 of QSP reimbursement. Financial assistance will be made available on a reimbursement basis only; cash advances will not be made available to any QSP participant.

    6. Other: Proposals should include a justification for funding assistance from the program—an 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. Applicants may submit more than one proposal, and the number of projects per participant will not be limited. FAS will not reimburse unreasonable expenditures or expenditures made prior to the approval of a proposal.

    7. Intergovernmental Review: An intergovernmental review may be required. Applicants must contact their state's Single Point of Contact (SPOC) to comply with their state's process under Executive Order 12372 (see http://www.fws.gov/policy/library/rgeo12372.pdf). To ensure currency, the names and addresses of the SPOCs are maintained at the Office of Management and Budget's home page at http://www.whitehouse.gov/omb/grants_spoc.

    C. Award Information

    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.

    D. Application and Submission Information

    1. Address to Submit Application Package: Organizations must submit their QSP proposals to FAS through the web-based Uniform Export Strategy (UES) system. The UES allows applicants to submit a single consolidated and strategically coordinated proposal that incorporates requests for funding for all of the FAS market development programs. The suggested UES format encourages applicants to examine the constraints or barriers to trade that they face, identify activities that would help overcome such impediments, consider the entire pool of complementary marketing tools and program resources, and establish realistic export goals.

    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: https://www.fas.usda.gov/ues/webapp/.

    Applicants experiencing difficulty or otherwise needing assistance applying to the program should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected].

    2. Content and Form of Application Submission: To be considered for the QSP, an applicant must submit to FAS, via the UES, the information detailed in this notice. Incomplete proposals or proposals that do not otherwise conform to this announcement will not be accepted for review.

    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 (i.e., commodity, quantity, quality, type, and grade), including a justification for why a sample with such characteristics is needed (this justification should explain why the project would not be effective with a smaller sample);

    • 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.

    3. Other Required Information: In accordance with the Office of Management and Budget's policy directive (68 FR 38402 (June 27, 2003)) regarding the need to identify entities that are receiving government awards, all applicants must submit a Dun and Bradstreet Data Universal Numbering System (DUNS) number. An applicant may request a DUNS number at no cost by calling the dedicated toll-free DUNS number request line at (866) 705-5711.

    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.

    4. Submission Dates and Times: QSP applications are reviewed on a rolling basis during the fiscal year as long as QSP funding is available as set forth below:

    • 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.

    E. Application Review Information

    1. Criteria and Review Process: FAS will use the following criteria in evaluating QSP proposals, each weighted at 10%:

    • 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. Review and Selection Process: Proposals will be evaluated by the appropriate Commodity Branch in FAS' Cooperator Programs Division. The Commodity Branches will review each proposal against the factors described above. The purpose of this review is to identify meritorious proposals, recommend an appropriate funding level for each proposal based upon these factors, and submit the proposals and funding recommendations to the Deputy Administrator, Office of Trade Programs.

    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.”

    F. Award Administration Information

    1. Award Notices: FAS will notify each applicant in writing of the final disposition of the submitted application. FAS will send an approval letter and agreement to each approved applicant. The approval letter and agreement will incorporate the details of each project as approved by FAS. Each agreement will identify the terms and conditions pursuant to which FAS will reimburse certain costs of each project. Agreements will also outline the responsibilities of the participant, including, but not limited to, procurement (or arranging for procurement) of the commodity sample at a fair market price, arranging for transportation of the commodity sample within the time limit specified in the agreement (organizations should endeavor to ship commodities within 6 months of the effective date of the agreement), compliance with cargo preference requirements (shipment on United States flag vessels, as required), compliance with the Fly America Act requirements (shipment on United States air carriers, as required), timely and effective implementation of technical assistance, and submission of a written evaluation report within 90 days of expiration or termination of the agreement.

    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: https://www.fas.usda.gov/grants/general_terms_and_conditions/default.asp. The applicable Standard Administrative Terms and Conditions will be for the last year specified at that URL, unless the application is to continue an award first awarded in an earlier year. In that event, the terms and conditions that apply will be those in effect for the year in which the award was originally made unless explicitly stated otherwise in subsequent mutually-agreed amendments to the award.

    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.

    2. Reporting: A written evaluation report must be submitted via the UES within 90 days of the expiration or termination of each participant's QSP agreement. Evaluation reports should address all performance measures that were presented in the proposal and must include the following standard performance measures: (1) The number of people/organizations/companies trained, (2) the percent of trainees that have a better understanding of the commodity qualities and uses, and (3) the number of people requesting additional information about the commodity by the date of the final report. In addition, a final financial report must be submitted no later than 90 days after completion of the project. This report must provide a final accounting of all project expenditures by cost category and include the accounting of actual contributions made to the project by the applicant and all other participating entities.

    G. Agency Contact(s)

    1. Application Submission Contact(s) and Program Support: For additional information and assistance, contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service, U.S. Department of Agriculture by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected].

    2. Grants Management Contact(s): Eric Bozoian, Grants Management Specialist, Foreign Agricultural Service, United States, Department of Agriculture, Email: [email protected], Office: (202) 378-1054.

    Signed at Washington, DC, on the 6 of April, 2018. Bobby Richey, Jr., Acting Administrator, Foreign Agricultural Service, and Acting Vice President, Commodity Credit Corporation.
    [FR Doc. 2018-09869 Filed 5-8-18; 8:45 am] BILLING CODE 3410-10-P
    DEPARTMENT OF AGRICULTURE Commodity Credit Corporation Foreign Agricultural Service Notice of Funding Availability: Inviting Applications for the Technical Assistance for Specialty Crops Program SUMMARY:

    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 Grants.gov website.

    DATES:

    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.

    FOR FURTHER INFORMATION CONTACT:

    Applicants needing assistance should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected]. Information is also available on the FAS website at http://www.fas.usda.gov/programs/technical-assistance-specialty-crops-tasc.

    SUPPLEMENTARY INFORMATION: A. Funding Opportunity Description

    Announcement Type: New.

    Award Instrument: Grant.

    Catalog of Federal Domestic Assistance (CFDA) Number: 10.604.

    Authority: The TASC program is authorized by section 3205 of Public Law 107-171. The TASC regulations appear at 7 CFR part 1487.

    Purpose: The TASC program is designed to assist U.S. organizations by providing funding for projects that seek to remove, resolve, or mitigate sanitary, phytosanitary, or technical barriers that prohibit or threaten the export of U.S. specialty crops. U.S. specialty crops, for the purpose of the TASC program, are defined to include all cultivated plants, or the products thereof, produced in the United States except wheat, feed grains, oilseeds, cotton, rice, peanuts, sugar, and tobacco.

    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.

    B. Eligibility and Qualification Information

    1. Eligible Organizations: Any U.S. organization, private or government, with a demonstrated role or interest in exporting U.S. agricultural specialty crops may apply to the program. Government organizations consist of Federal, State, and local agencies. Private organizations may include non-profit trade associations, universities, agricultural cooperatives, state regional trade groups, and private companies.

    Foreign organizations, whether government or private, may participate as third parties in activities carried out by eligible organizations, but are not eligible for direct funding assistance through the program.

    2. Qualification Information: To be found eligible for consideration, TASC proposals must address the following criteria:

    • 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.

    3. Funding Limits: Proposals that request more than $500,000 in funding in a given year will not be considered.

    4. Limits on Proposals: Eligible organizations may submit multi-year proposals, although funding for continuing TASC projects is capped at five years. The five years do not have to be consecutive or conducted by the same entity, if the project is the same. Multi-year funding may, at FAS' discretion, be provided one year at a time with commitments beyond the first year subject to interim evaluations and funding availability. In order to validate funding eligibility, proposals must specify previous years of TASC funding for each proposed activity/title/market/constraint combination. Government entities are not eligible for multi-year funding.

    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.

    5. Cost-Sharing: Although highly encouraged, there is no cost share requirement for TASC proposals. FAS will, however, consider the applicant's willingness to contribute resources towards the project, including cash, goods, and services of the U.S. industry and foreign third parties, when determining which proposals are approved for funding.

    6. Funding Restrictions: Funded projects may take place in the United States or abroad. Examples of project expenses that FAS may agree to reimburse under the TASC program include, but are not limited to: Initial pre-clearance programs, export protocol and work plan support, seminars and workshops, study tours, field surveys, development of pest lists, pest, disease, and fumigant research, reasonable logistical and administrative support, and travel and per diem expenses. Certain types of expenses are not eligible for reimbursement by the program, such as the costs of market research, advertising, or other promotional expenses, and will be set forth in the written program agreement between FAS and the participant. FAS will also not reimburse unreasonable expenditures or any expenditure made prior to the approval of a proposal.

    7. Intergovernmental Review: An intergovernmental review may be required. Applicants must contact their state's Single Point of Contact (SPOC) to comply with their state's process under Executive Order 12372 (see http://www.fws.gov/policy/library/rgeo12372.pdf). To ensure currency, the names and addresses of the SPOCs are maintained at the Office of Management and Budget's home page at http://www.whitehouse.gov/omb/grants_spoc.

    C. Award Information

    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.

    D. Application and Submission Information

    1. Application through the Unified Export Strategy (UES) System: Organizations are strongly encouraged to submit their applications to FAS through the web-based UES application. Using the UES application process reduces paperwork and expedites FAS' processing and review time. Applicants planning to use the UES system must first contact FAS' Program Operations Division to obtain site access information, including a user ID and password. The UES internet-based application may be found at the following URL address: https://www.fas.usda.gov/ues/webapp/.

    Although FAS highly recommends applying via the web-based UES, applicants have the option of submitting an application to FAS via email at [email protected].

    Applicants experiencing difficulty or otherwise needing assistance applying to the program should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected].

    2. Content and Form of Application Submission: All TASC proposals must contain complete information about the proposed projects as described in § 1487.5(b) of the TASC program regulations. Incomplete proposals or proposals that do not otherwise conform to this announcement will not be accepted for review.

    3. Other Required Information: In accordance with the Office of Management and Budget's policy directive (68 FR 38402 (June 27, 2003)) regarding the need to identify entities that are receiving government awards, all applicants must submit a Dun and Bradstreet Data Universal Numbering System (DUNS) number. An applicant may request a DUNS number at no cost by calling the dedicated toll-free DUNS number request line at (866) 705-5711.

    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.

    4. Submission Dates and Times: TASC proposals are reviewed on a rolling basis during the fiscal year as long as TASC funding is available as set forth below. FAS will track the time and date of receipt of all proposals:

    • 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.

    E. Application Review Information

    1. Criteria: FAS follows the evaluation criteria set forth in § 1487.6 of the TASC regulations. Reviewers will evaluate according to the following criteria:

    (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%).

    2. Review and Selection Process: FAS will evaluate proposals for eligibility and will review each proposal deemed eligible against the criteria referenced above. The purpose of this review is to identify meritorious proposals, recommend an appropriate funding level for each proposal based upon these factors, and submit the proposals and funding recommendations to the Deputy Administrator, Office of Trade Programs. FAS may, when appropriate, request the assistance of other U.S. government subject area experts in evaluating the merits of a proposal.

    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.”

    F. Award Administration Information

    1. Federal Award Notices: FAS will notify each applicant in writing of the final disposition of the submitted application. FAS will send an approval letter and agreement to each approved applicant. The approval letter and agreement will specify the terms and conditions applicable to the project, including the details of each project, responsibilities of the participant, levels of funding, timelines for implementation, and reporting requirements. 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: https://www.fas.usda.gov/grants/general_terms_and_conditions/default.asp. The applicable Standard Administrative Terms and Conditions will be for the last year specified at that URL, unless the application is to continue an award first awarded in an earlier year. In that event, the terms and conditions that apply will be those in effect for the year in which the award was originally made unless explicitly stated otherwise in subsequent mutually-agreed amendments to the award.

    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.

    2. Reporting: TASC participants must provide interim and final performance reports for each approved project, each of which evaluate the TASC project using the performance measures presented in the approved proposal, as set forth in the written program agreement. An interim report must be submitted after each program year, and a separate final report no later than 90 days after the activity is completed. All performance reports must be submitted through the UES. In addition, a final financial report must be submitted no later than 90 days after completion of the project. This report must provide a final accounting of all project expenditures by cost category and include the accounting of actual contributions made to the project by the applicant and all other participating entities.

    G. Federal Awarding Agency Contacts

    1. Application Submission Contact(s) and Program Support: For additional information and assistance, contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service, U.S. Department of Agriculture by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected].

    2. Grants Management Contact(s): Eric Bozoian, Grants Management Specialist, Foreign Agricultural Service, United States, Department of Agriculture, Email: [email protected], Office: (202) 378-1054.

    Signed at Washington, DC, on the 26th of April, 2018. James Higgiston, Acting Administrator, Foreign Agricultural Service, and Acting Vice President, Commodity Credit Corporation.
    [FR Doc. 2018-09868 Filed 5-8-18; 8:45 am] BILLING CODE 3410-10-P
    DEPARTMENT OF AGRICULTURE Commodity Credit Corporation Foreign Agricultural Service Notice of Funding Availability: Inviting Applications for the Market Access Program SUMMARY:

    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.

    DATES:

    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.

    FOR FURTHER INFORMATION CONTACT:

    Applicants needing assistance should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected]. Information, including a copy of the program regulations, is also available on the FAS website at the following URL address: http://www.fas.usda.gov/programs/market-access-program-map.

    SUPPLEMENTARY INFORMATION: A. Funding Opportunity Description

    Announcement Type: New.

    Award Instrument: Grant.

    Catalog of Federal Domestic Assistance (CFDA) Number: 10.601.

    Authority:

    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.

    Purpose: The MAP is designed to encourage the development, maintenance, and expansion of commercial export markets for United States agricultural commodities and products through cost-share assistance. Under the MAP, FAS enters into agreements with eligible Participants to share the cost of certain overseas marketing and promotion activities. Financial assistance under the MAP is made available on a competitive basis, and applications are reviewed against the evaluation criteria contained herein and in the MAP regulations. All U.S. agricultural commodities, except tobacco, are eligible for consideration.

    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.

    Funding Available: The Agricultural Trade Act of 1978, as amended, provided up to $200 million annually for MAP through FY 2018. Congress has not yet determined funding levels for FY 2019. This NOFA is being released prior to Congress appropriating funding for the MAP 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.

    B. Eligibility Information

    1. Eligible Organizations: To participate in the MAP, an applicant must be a nonprofit U.S. agricultural trade organization, a nonprofit state regional trade group, a U.S. agricultural cooperative, or a state government agency. Small-sized private U.S. commercial entities may participate in a branded program through a MAP Participant.

    2. Eligible Activities: MAP Participants may receive assistance for generic or brand promotion activities. For generic activities, funding priority is given to organizations that have the broadest possible producer representation of the commodity being promoted and that are nationwide in membership and scope. For branded activities, only nonprofit U.S. agricultural trade organizations, nonprofit state regional trade groups (SRTGs), U.S. agricultural cooperatives, and state government agencies can participate directly in the brand program.

    3. Limits on Activities: MAP activities are approved for a single program year, with the approval dates specified in the allocation approval letter that is provided as part of the award approval package. Only those MAP activities that are approved in each applicant's allocation approval letter may be implemented, and those activities must be implemented during the 12-month program year specified in the allocation approval letter. Requests for activity changes during the program year must be approved in advance by FAS. MAP Participants must re-apply for the program every year.

    4. Funding Restrictions: Certain types of expenses are not eligible for reimbursement by the program, and there are limits on other categories of expenses. FAS also will not reimburse unreasonable expenditures or expenditures made prior to approval. Full details and a complete list of eligible and ineligible expenses may be found in the MAP regulations in section 1485.17.

    5. Cost-Sharing: To participate in the MAP, an applicant must agree to contribute resources towards its proposed promotional activities. The MAP is intended to supplement, not supplant, the efforts of the U.S. private sector. In the case of generic promotion, the contribution must be at least 10 percent of the value of resources provided by FAS for such generic promotion. In the case of branded promotion, the contribution must be at least 50 percent of the total cost of such brand promotion.

    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.

    6. Other: Applications should include a justification for funding assistance from the program—an explanation as to what specifically could not be accomplished without federal funding assistance and why participating organizations are unlikely to carry out the project without such assistance. The MAP generally operates on a reimbursement basis.

    7. Intergovernmental Review: An intergovernmental review may be required. Applicants must contact their state's Single Point of Contact (SPOC) to comply with their state's process under Executive Order 12372 (see http://www.fws.gov/policy/library/rgeo12372.pdf). To ensure currency, the names and addresses of the SPOCs are maintained at the Office of Management and Budget's home page at http://www.whitehouse.gov/omb/grants_spoc.

    C. Award Information

    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.

    D. Application and Submission Information

    1. Address to Submit Application Package: Organizations should submit their MAP applications to FAS through the web-based Unified Export Strategy (UES) system. The UES allows interested applicants to submit a single consolidated and strategically coordinated proposal that incorporates requests for funding under all of the FAS market development programs. The suggested UES format encourages applicants to examine the constraints or barriers to trade that they face, identify activities that would help overcome such impediments, consider the entire pool of complementary marketing tools and program resources, and establish realistic export goals. Applicants planning to use the UES must first contact FAS' Program Operations Division to obtain site access information. The web-based application may be found at the following URL address: https://www.fas.usda.gov/ues/webapp/.

    Applicants experiencing difficulty or otherwise needing assistance applying to the program should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected].

    2. Content and Form of Application Submission: To be considered for the MAP, an applicant must submit to FAS the information required by section 1485.13 of the MAP regulations. Incomplete applications or applications that do not otherwise conform to this announcement and the MAP regulations will not be accepted for review.

    3. Other Required Information: In accordance with the Office of Management and Budget's policy (68 FR 38402 (June 27, 2003)) regarding the need to identify entities that are receiving government awards, all applicants must submit a Dun and Bradstreet Data Universal Numbering System (DUNS) number. An applicant may request a DUNS number at no cost by calling the dedicated toll-free DUNS number request line at (866) 705-5711.

    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.

    4. Submission Dates and Times: All applications must be received by 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018. By the application deadline, all MAP applicants must also submit to FAS a signed certification statement as specified in 7 CFR 1485.13(a)(2)(i)(E). The completed certification statements can be sent via courier/delivery service to the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service, U.S. Department of Agriculture, Room 6512, 1400 Independence Ave. SW, Washington, DC 20250. Applicants can also email a scanned copy of the signed certification statement to: [email protected]. Applications or certifications received after the deadline will not be considered.

    E. Application Review Information

    1. Criteria and Review Process: A description of the FAS process for reviewing applications and the criteria for allocating available MAP funds is as follows:

    (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.”

    F. Award Administration Information

    1. Award Notices: FAS will notify each applicant in writing of the final disposition of its application. FAS will send an approval letter and program agreement to each approved applicant. The approval letter and program agreement will specify the terms and conditions applicable to the project, including the levels of MAP funding and cost-share contribution requirements. 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: https://www.fas.usda.gov/grants/general_terms_and_conditions/default.asp. The applicable Standard Administrative Terms and Conditions will be for the last year specified at that URL, unless the application is to continue an award first awarded in an earlier year. In that event, the terms and conditions that apply will be those in effect for the year in which the award was originally made unless explicitly stated otherwise in subsequent mutually-agreed amendments to the award.

    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.

    2. Reporting: FAS requires various reports and evaluations from MAP Participants. Required reports include an annual contributions report that identifies, by cost category and in U.S. dollar equivalents, contributions made by the Participant, the U.S. industry, and the States during that program year. All MAP Participants must also report annual results against their target market and/or regional constraint/opportunity performance measures and must provide program success stories on an annual basis, or more often when appropriate or required by FAS. There are additional reporting requirements for trip reports, evaluation reports, and research reports. Full reporting requirements are detailed in sections 1485.22 and 1485.23 of the MAP regulations.

    G. Agency Contact(s)

    1. Application Submission Contact(s) and Program Support: For additional information and assistance, contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service, U.S. Department of Agriculture by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected].

    2. Grants Management Contact(s): Eric Bozoian, Grants Management Specialist, Foreign Agricultural Service, United States, Department of Agriculture, Email: [email protected], Office: (202) 378-1054.

    Signed at Washington, DC, on the 26th of April, 2018. James Higgiston, Acting Administrator, Foreign Agricultural Service, and Acting Vice President, Commodity Credit Corporation.
    [FR Doc. 2018-09871 Filed 5-8-18; 8:45 am] BILLING CODE 3410-10-P
    DEPARTMENT OF AGRICULTURE Commodity Credit Corporation Foreign Agricultural Service Notice of Funding Availability: Inviting Applications for the Emerging Markets Program SUMMARY:

    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 behalf of CCC. The intended effect of this notice is to solicit proposals from the private sector and from 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 EMP will be made through the Grants.gov website.

    DATES:

    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.

    FOR FURTHER INFORMATION CONTACT:

    Applicants needing assistance should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected]. Information is also available on the Foreign Agricultural Service website at http://www.fas.usda.gov/programs/emerging-markets-program-emp.

    SUPPLEMENTARY INFORMATION:

    A. Funding Opportunity Description

    Announcement Type: New.

    Award Instrument: Grant.

    Catalog of Federal Domestic Assistance (CFDA) Number: 10.603.

    Authority: The EMP is authorized by section 1542(d)(1) of the Food, Agriculture, Conservation, and Trade Act of 1990, as amended. The EMP regulations appear at 7 CFR part 1486.

    Purpose. The EMP assists U.S. entities in developing, maintaining, or expanding exports of U.S. agricultural commodities and products by funding activities that enhance emerging markets' food and rural business systems, including reducing trade barriers. The EMP is intended primarily to support export market development efforts of the private sector, but EMP resources may also be used to assist public organizations.

    B. Eligibility and Qualification Information

    1. Eligible Organizations: Any U.S. private or government entity (e.g., universities, trade associations, agricultural cooperatives, state regional trade groups, state departments of agriculture, federal agencies, for-profit entities, and consulting businesses) with a demonstrated role or interest in the export of U.S. agricultural commodities or products may apply to the program. Proposals from research and consulting organizations will be considered if they provide evidence of substantial participation by and financial support from the U.S. industry. Foreign organizations whether government or private, may participate as third parties in activities carried out by U.S. organizations but are not eligible for direct funding assistance through the program.

    2. Eligible Commodities: All U.S. agricultural commodities, except tobacco, are eligible for consideration. Agricultural product(s) should be comprised of at least 50 percent U.S. origin content by weight, exclusive of added water, to be eligible for funding. Proposals that seek support for multiple U.S. commodities are also eligible.

    3. Eligible Markets. Only proposals that target countries or regional groups made up of countries classified below the World Bank's threshold for upper middle-income economies will be considered for funding. Countries classified as high income are not eligible markets under EMP. World Bank income limits and country classifications can change from year to year, with the result that a given country may qualify under the legislative and administrative criteria one year, but not the next. Therefore, applicants should consult the current World Bank country classification list for guidance. In addition, due to political sensitivities a few countries technically qualify as emerging markets but may require a separate determination before funding can be considered.

    4. Eligible Activities. All EMP projects must fall into at least one of the following four categories:

    (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.

    5. Ineligible Activities: EMP funding may only be used for generic activities. For-profit entities may not use program funds to conduct private business, promote private self-interests, supplement the costs of normal sales activities, or promote their own products or services beyond specific uses approved by FAS in a given project. EMP funds may not be used to support normal operating costs of individual organizations, nor as a source to recover pre-award costs or prior expenses from previous or ongoing projects. Certain types of expenses are not eligible for reimbursement by the program, and there are limits on other categories of expenses, such as indirect overhead charges, travel expenses, and consulting fees. FAS will also not reimburse unreasonable expenditures or expenditures made prior to approval of a proposal. For a complete description of ineligible expenditures, please refer to the EMP regulations at 7 CFR 1486.

    6. Funding Limits: This NOFA is being released prior to the EMP program being reauthorized by Congress 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 EMP program funding for FY 2019 is provided. The EMP is a relatively small program intended for focused projects with specific activities, rather than expansive concept papers that contain only broad ideas. While there is no minimum or maximum amount set for EMP-funded projects, most projects are funded at $500,000 or less and are typically approved for a duration of one year. Private entities may submit multi-year proposals requesting higher levels of funding, although funding in such cases is generally provided one year at a time with commitments beyond the first year subject to interim evaluations and funding availability. Proposals from government entities are not eligible for multi-year funding. Funding for continuing and substantially similar projects is capped at five years. After that time, the project is assumed to have proven its viability and, if necessary, should be continued by the recipient with its own or with alternative sources of funding.

    7. Cost Sharing: As the EMP is intended to complement, not supplant, the efforts of the U.S. private sector, all private sector proposals must include a cost-share element from the applicant and/or U.S. partners. Cost-share may be actual cash invested or in-kind contributions to the project. While there is no minimum or maximum amount of cost-share, the degree of commitment to a proposed project, represented by the amount and type of private funding, is one factor used in determining which proposals will be approved for funding. Proposals for which private industry is willing to commit cash, rather than in-kind contributions such as staff resources, will be given priority consideration. Contributions from USDA or other government agencies or programs may not be counted as cost-share by other applicants. Similarly, contributions from foreign (non-U.S.) organizations may not be counted toward the cost-share requirement, but may be counted in the total cost of the project.

    8. Other Eligibility Information: EMP funding may not be used to support the export of another country's products to the United States, or to promote the development of a foreign economy as a primary objective. Proposals should include a justification for funding assistance from the program—an 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. Proposals that counter national strategies or duplicate activities planned or already underway by U.S. non—profit agricultural commodity or trade associations will not be considered. Applicants may submit more than one proposal.

    9. Intergovernmental Review: An intergovernmental review may be required. Applicants must contact their state's Single Point of Contact (SPOC) to comply with their state's process under Executive Order 12372 (see http://www.fws.gov/policy/library/rgeo12372.pdf). To ensure currency, the names and addresses of the SPOCs are maintained at the Office of Management and Budget's home page at http://www.whitehouse.gov/omb/grants_spoc.

    C. Award Information

    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.

    Note:

    EMP funds awarded to government agencies must be expended or otherwise obligated by close of business September 30, 2019.

    D. Application and Submission Information

    1. Address to Submit Application Package: EMP applicants have the opportunity to utilize the Unified Export Strategy (UES) system for the application process. The UES is an online system that provides a means for interested applicants to submit a consolidated and strategically coordinated single proposal that incorporates funding requests for all of the market development programs administered by FAS.

    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: https://www.fas.usda.gov/ues/webapp/.

    Although FAS highly recommends applying via the UES, applicants also have the option of submitting an electronic application to FAS via email to [email protected].

    Applicants experiencing difficulty or otherwise needing assistance applying to the program should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected].

    2. Content and Form of Application Submission: To be considered for the EMP, an applicant must submit to FAS information required by this Notice of Funding Availability and the EMP regulations at 7 CFR part 1486. The EMP regulations and additional information are available at the following URL address: http://www.fas.usda.gov/programs/emerging-markets-program-emp.

    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:

    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.

    (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 (e.g., under the MAP, Cooperator program, or other government programs like food aid or USAID development programs and studies);

    (s) Detailed line item activity budgets:

    • Individual expense items (e.g., salaries, travel expenses, consultant fees, administrative costs, etc.) should be listed on separate line items, each clearly indicating:

    (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.

    3. Other Required Information: In accordance with the Office of Management and Budget's issuance of a final policy (68 FR 38402 (June 27, 2003)) regarding the need to identify entities that are receiving government awards, all applicants must submit a Dun and Bradstreet Data Universal Numbering System (DUNS) number. An applicant may request a DUNS number at no cost by calling the dedicated toll-free DUNS number request line at (866) 705-5711.

    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.

    4. Submission Dates and Times: EMP proposals are reviewed on a rolling basis during the fiscal year as long as EMP funding is available as set forth below:

    • 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.

    E. Application Review Information

    1. Review and Selection Process: All proposals deemed eligible for the program will undergo a multi-phase review within FAS by appropriate FAS experts and field offices to rate the qualifications, quality, and appropriateness of projects, determine the reasonableness of project budgets, and make recommendations on meritorious proposals for funding.

    2. Evaluation criteria and weight: FAS will consider a number of factors when reviewing proposals, including:

    • Appropriateness of the Activity (30%), which will vary based on the type of proposal but will include:

    For assessment proposals: Does the proposal present a methodology that is likely to result in the needed recommendations and identification of specific opportunities and projects? Is the assessment team comprised of credible U.S. experts with experience in assessing food and rural business systems?

    For travel proposals: Is the exchange of knowledge and expertise clearly described in terms of enhancements to the emerging market's food and rural business systems? Do we understand how travelers are selected?

    For technical assistance proposals: Are the proposed activities identified in the supporting assessment? Is the potential for the proposed activities to enhance the effectiveness of the emerging market's food and rural business systems sufficiently justified?;

    • 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 market share for the agricultural commodity/product; and the demonstration of how a proposed project will benefit the industry as a whole; 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.

    3. Other Review Information: 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.”

    F. Federal Award Administration Information

    1. Award Notices: FAS will notify each applicant in writing of the final disposition of the submitted proposal. FAS will send an approval letter and project agreement to each approved applicant. The approval letter and agreement will specify the terms and conditions applicable to the project, including the levels of EMP funding and cost-share contribution requirements. 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: https://www.fas.usda.gov/grants/general_terms_and_conditions/default.asp. The applicable Standard Administrative Terms and Conditions will be for the last year specified at that URL, unless the application is to continue an award first awarded in an earlier year. In that event, the terms and conditions that apply will be those in effect for the year in which the award was originally made unless explicitly stated otherwise in subsequent mutually-agreed amendments to the award.

    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.

    2. Reporting. EMP participants must provide interim and final performance reports for each approved project. An interim report must be submitted after each program year, and a separate final report no later than 90 days after the activity is completed. All performance reports must be submitted through the UES. In addition, a final financial report must be submitted no later than 90 days after completion of the project. This report must provide a final accounting of all project expenditures by cost category and include the accounting of actual contributions made to the project by the applicant and all other participating entities.

    G. Federal Awarding Agency Contact(s)

    1. Application Submission Contact(s) and Program Support: For additional information and assistance, contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service, U.S. Department of Agriculture by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected].

    2. Grants Management Contact(s): Eric Bozoian, Grants Management Specialist, Foreign Agricultural Service, United States, Department of Agriculture, Email: [email protected], Office: (202) 378-1054.

    Signed at Washington, DC on 26th day of April, 2018. James Higgiston, Acting Administrator, Foreign Agricultural Service and Acting Vice President, Commodity Credit Corporation.
    [FR Doc. 2018-09866 Filed 5-8-18; 8:45 am] BILLING CODE 3410-10-P
    DEPARTMENT OF AGRICULTURE Commodity Credit Corporation Foreign Agricultural Service Notice of Funding Availability: Inviting Applications for the Foreign Market Development Cooperator Program SUMMARY:

    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.

    DATES:

    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.

    FOR FURTHER INFORMATION CONTACT:

    Applicants needing assistance should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service by courier: Room 6512, 1400 Independence Ave SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by email: [email protected]. Information, including a copy of the program regulations, is also available on the FAS website at the following URL address: http://www.fas.usda.gov/programs/foreign-market-development-program-fmd.

    SUPPLEMENTARY INFORMATION: A. Funding Opportunity Description

    Announcement Type: New.

    Award Instrument: Grant.

    Catalog of Federal Domestic Assistance (CFDA) Number: 10.600.

    Authority: The Cooperator program is authorized by Title VII of the Agricultural Trade Act of 1978 (7 U.S.C. 5722), as amended. Cooperator program regulations appear at 7 CFR part 1484.

    Purpose: The Cooperator program is designed to maintain and develop foreign markets for United States agricultural commodities and products through cost-share assistance. Financial assistance under the Cooperator program will be made available on a competitive basis and applications will be reviewed against the evaluation criteria contained herein and in the Cooperator program regulations. All U.S. agricultural commodities, except tobacco, are eligible for consideration.

    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.

    Funding Available: The Agricultural Trade Act of 1978, as amended, provided up to $34.5 million annually for the Cooperator program through FY 2018. Congress has not yet determined funding levels for FY 2019. This NOFA is being released prior to Congress appropriating funding for the Cooperator 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.

    B. Eligibility Information

    1. Eligible Organizations: To participate in the Cooperator program, an applicant must be a nonprofit U.S. agricultural trade organization. Funding priority is given to organizations that have the broadest possible producer representation of the commodity being promoted and that are nationwide in membership and scope.

    2. Eligible Activities: Under the Cooperator program, FAS enters into agreements with eligible nonprofit U.S. trade organizations to share the cost of certain overseas marketing and promotion activities. Cooperators may receive assistance only for generic activities that do not involve promotions targeted directly to consumers purchasing in their individual capacity. The Cooperator program generally operates on a reimbursement basis.

    3. Limits on Activities: Cooperator program activities are approved for a single program year, with the approval dates specified in the allocation approval letter that is provided as part of the award approval package. Only those Cooperator program activities that are approved in each applicant's allocation approval letter may be implemented, and those activities must be implemented during the 12-month program year specified in the allocation approval letter. Requests for activity changes during the program year must be approved in advance by FAS. Cooperator program participants must re-apply for the program every year.

    4. Funding Restrictions: Certain types of expenses are not eligible for reimbursement by the program, and there are limits on other categories of expenses. FAS also will not reimburse unreasonable expenditures or expenditures made prior to approval. Full details are available in sections 1484.54 and 1484.55 of the Cooperator program regulations.

    5. Cost-Sharing: To participate in the Cooperator program, an applicant must agree to contribute resources to its proposed promotional activities. The Cooperator program is intended to supplement, not supplant, the efforts of the U.S. private sector. The contribution must be at least 50 percent of the value of resources provided by FAS for activities conducted under the project agreement.

    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.

    6. Other: Applications should include a justification for funding assistance from the program—an explanation as to what specifically could not be accomplished without federal funding assistance and why participating organization(s) are unlikely to carry out the project without such assistance.

    7. Intergovernmental Review: An intergovernmental review may be required. Applicants must contact their state's Single Point of Contact (SPOC) to comply with their state's process under Executive Order 12372 (see http://www.fws.gov/policy/library/rgeo12372.pdf). To ensure currency, the names and addresses of the SPOCs are maintained at the Office of Management and Budget's home page at http://www.whitehouse.gov/omb/grants_spoc.

    C. Award Information

    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.

    D. Application and Submission Information

    1. Address to Submit Application Package: Organizations should submit their Cooperator program applications to FAS through the web-based Unified Export Strategy (UES) system. The UES allows applicants to submit a single consolidated and strategically coordinated proposal that incorporates requests for funding under all of the FAS market development programs. The suggested UES format encourages applicants to examine the constraints or barriers to trade that they face, identify activities that would help overcome such impediments, consider the entire pool of complementary marketing tools and program resources, and establish realistic export goals. Applicants planning to use the UES must first contact FAS' Program Operations Division to obtain site access information. The web-based application may be found at the following URL address: https://www.fas.usda.gov/ues/webapp/.

    Applicants experiencing difficulty or otherwise needing assistance applying to the program should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by e-mail: [email protected].

    2. Content and Form of Application Submission: To be considered for the Cooperator program, an applicant must submit to FAS the information required by section 1484.20 of the Cooperator program regulations. Incomplete applications or applications that do not otherwise conform to this announcement or the Cooperator program regulations will not be accepted for review.

    3. Other Required Information: In accordance with the Office of Management and Budget's policy (68 FR 38402 (June 27, 2003)) regarding the need to identify entities that are receiving government awards, all applicants must submit a Dun and Bradstreet Data Universal Numbering System (DUNS) number. An applicant may request a DUNS number at no cost by calling the dedicated toll-free DUNS number request line at (866) 705-5711.

    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.

    4. Submission Dates and Times: All applications must be received by 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018. By the application deadline, all Cooperator program applicants must also submit to FAS a signed certification statement as specified in 7 CFR 1484.20(a)(14). The completed certification statements can be sent via courier/delivery service to the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service, U.S. Department of Agriculture, Room 6512, 1400 Independence Ave. SW, Washington, DC 20250. Applicants can also send a scanned copy of the signed certification statement via e-mail to: [email protected]. Applications or certifications received after the deadline will not be considered.

    E. Application Review Information

    1. Criteria and Review and Selection Process: A description of the FAS process for reviewing applications and the criteria for allocating available Cooperator program funds is as follows:

    (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 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.

    (2) Phase 2--Competitive Review

    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) Applicant's Contribution Level (40): The applicant's 6-year average share (2014-2019) of all contributions under the Cooperator program compared to the applicant's 6-year average share (2014-2019) of the funding level for all Cooperator program participants.

    (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.

    (d) Future Demand Expansion Goals (10): The total dollar value of projected world trade of the commodities being promoted by the applicant for the year 2024 compared to the applicant's requested funding level.

    (e) Accuracy of Past Demand Expansion Projections (10): The actual dollar value share of world trade of the commodities being promoted by the applicant for the year 2017 as reported in the 2019 Cooperator program application compared to the projection of world trade of the commodities being promoted by the applicant for 2017 as specified in the applicant's 2014 Cooperator program 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.”

    F. Award Administration Information

    1. Award Notices: FAS will notify each applicant in writing of the final disposition of its application. FAS will send an approval letter and project agreement to each approved applicant. The approval letter and project agreement will specify the terms and conditions applicable to the project, including the levels of Cooperator program funding and cost-share contribution requirements. 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: https://www.fas.usda.gov/grants/general_terms_and_conditions/default.asp. The applicable Standard Administrative Terms and Conditions will be for the last year specified at that URL, unless the application is to continue an award first awarded in an earlier year. In that event, the terms and conditions that apply will be those in effect for the year in which the award was originally made unless explicitly stated otherwise in subsequent mutually-agreed amendments to the award.

    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.

    2. Reporting: FAS requires various reports and evaluations from Cooperators. Required reports include an annual contributions report that identifies contributions made by the Cooperator and the U.S. industry during that marketing plan year. All Cooperators must also complete at least one program evaluation each year and must provide program success stories on an annual basis, or more often when appropriate or required by FAS. There are additional reporting requirements for trip reports, evaluation reports, and research reports. Reporting requirements are detailed in the Cooperator program regulations in sections 1484.53, 1484.70, and 1484.72.

    G. Agency Contact(s)

    1. Application Submission Contact(s) and Program Support: For additional information and assistance, contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service, U.S. Department of Agriculture by courier: Room 6512, 1400 Independence Ave. SW, Washington, DC 20250, or by phone: (202) 720-4327, or by fax: (202) 720-9361, or by e-mail: [email protected].

    2. Grants Management Contact(s): Eric Bozoian, Grants Management Specialist, Foreign Agricultural Service, United States, Department of Agriculture, Email: [email protected], Office: (202) 378-1054.

    Signed at Washington, DC on the 26th of April, 2018. James Higgiston Acting Administrator, Foreign Agricultural Service, and Acting Vice President, Commodity Credit Corporation.
    [FR Doc. 2018-09867 Filed 5-8-18; 8:45 am] BILLING CODE 3410-10-P
    DEPARTMENT OF COMMERCE National Institute of Standards and Technology [Docket No. 180319295-8295-01] National Cybersecurity Center of Excellence (NCCoE) Securing Picture Archiving and Communication System (PACS) Cybersecurity for the Healthcare Sector AGENCY:

    National Institute of Standards and Technology, Department of Commerce.

    ACTION:

    Notice.

    SUMMARY:

    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.

    DATES:

    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.

    ADDRESSES:

    The NCCoE is located at 9700 Great Seneca Highway, Rockville, MD 20850. Letters of interest must be submitted to [email protected] or via hardcopy to National Institute of Standards and Technology, NCCoE, 9700 Great Seneca Highway, Rockville, MD 20850. Organizations whose letters of interest are accepted in accordance with the process set forth in the SUPPLEMENTARY INFORMATION section of this notice will be asked to sign a consortium Cooperative Research and Development Agreement (CRADA) with NIST. An NCCoE consortium CRADA template can be found at: http://nccoe.nist.gov/node/138.

    FOR FURTHER INFORMATION CONTACT:

    Andrea Arbelaez via email to [email protected]; by telephone 301-975-0214; or by mail to National Institute of Standards and Technology, NCCoE, 9700 Great Seneca Highway, Rockville, MD 20850. Additional details about the healthcare sector program are available at https://nccoe.nist.gov/projects/use-cases/health-it/pacs.

    SUPPLEMENTARY INFORMATION:

    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 https://nccoe.nist.gov/projects/use-cases/health-it/pacs announcing the completion of the use case and informing the public that it will no longer accept letters of interest for this use case.

    Background: The NCCoE, part of NIST, is a public-private collaboration for accelerating the widespread adoption of integrated cybersecurity tools and technologies. The NCCoE brings together experts from industry, government, and academia under one roof to develop practical, interoperable cybersecurity approaches that address the real-world needs of complex Information Technology (IT) systems. By accelerating dissemination and use of these integrated tools and technologies for protecting IT assets, the NCCoE will enhance trust in U.S. IT communications, data, and storage systems; reduce risk for companies and individuals using IT systems; and encourage development of innovative, job-creating cybersecurity products and services.

    Process: NIST is soliciting responses from all sources of relevant security capabilities (see below) to enter into a Cooperative Research and Development Agreement (CRADA) 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. The full use case can be viewed at: https://nccoe.nist.gov/projects/use-cases/health-it/pacs.

    Interested parties should contact NIST using the information provided in the FOR FURTHER INFORMATION CONTACT section of this notice. NIST will then provide each interested party with a letter of interest template, which the party must complete, certify that it is accurate, and submit to NIST. NIST will contact interested parties if there are questions regarding the responsiveness of the letters of interest to the use case objective or requirements identified below. NIST will select participants who have submitted complete letters of interest on a first come, first served basis within each category of product components or capabilities listed below up to the number of participants in each category necessary to carry out this use case. However, there may be continuing opportunity to participate even after initial activity commences. Selected participants will be required to enter into a consortium CRADA with NIST (for reference, see ADDRESSES section above). NIST published a notice in the Federal Register on October 19, 2012 (77 FR 64314) inviting U.S. companies to enter into National Cybersecurity Excellence Partnerships (NCEPs) in furtherance of the NCCoE. For this demonstration project, NCEP partners will not be given priority for participation.

    Use Case Objective

    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: https://nccoe.nist.gov/projects/use-cases/health-it/pacs.

    Requirements: Each responding organization's letter of interest should identify which security platform component(s) or capability(ies) it is offering. Letters of interest should not include company proprietary information, and all components and capabilities must be commercially available. Components are listed 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) and include, but are not limited to:

    • PACS Servers, special applications (including web services), and workstations • Vendor Neutral Archive (VNA) • data storage • modality or modality simulator • radiology information system (RIS) or RIS simulator • notification system • Electronic Health Record (EHR)/Electronic Medical Record (EMR) • load balancer • managed service model and remote service connectivity • certificate management • authentication mechanism • session management • data encryption • endpoint protection ○ encryption ○ malware/virus protection ○ Host Intrusion Prevention System (HIPS)/Host Intrusion Detection System (HIDS) • logging, monitoring, security information and event management (SIEM) • network infrastructure controls • asset management • web services

    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).

    Identify (ID) • Asset Management—includes identification of assets on network and management of the assets to be deployed to workstations • Risk Assessment—includes risk management strategy Protect (PR) • Access Control—includes user account management, remote access ○ controlling (and auditing) user accounts ○ controlling (and auditing) access by external users ○ enforcing least privilege for all (internal and external) users ○ enforcing separation of duties policies Privileged Access Management (PAM) with an emphasis on the segregation of duties ○ enforcing least functionality • User Identification and Authentication ○ multifactor authentication for the system that aligns with the sensitive information and function that PACS performs; NIST-recommended algorithms; usability; impact on system performance; and raising the assurance profile, and higher NIST Special Publication (SP) 800-63-3 levels, bring a higher level of assurance ○ viable federated identity management ○ credential management • Data Security—includes data confidentiality, integrity, and availability ○ securing and monitoring storage of data—includes data encryption (for data at rest) access control on data data-at-rest controls should implement some form of a data security manager that would allow for policy application to encrypted data, inclusive of access control policy ○ securing the distribution of data—includes data encryption (for data in transit) and data loss prevention mechanism ○ controls that promote data integrity ○ cryptographic modules validated as meeting NIST Federal Information Processing Standard (FIPS) 140-2 are preferred ○ physical security provided by an access controlled data center to host the PACS servers and storage • Information Protection Processes and Procedures—includes data backup, endpoint protection for workstations • Maintenance—local and remote maintenance • Protective Technology—host-based intrusion prevention, solutions for malware (malicious code detection), audit logging, (automated) audit log review, and physical protection • Communications and Network Security—communications and control networks are protected (e.g., firewall, network access control, network infrastructure controls) ○ Securing and monitoring connections with the Health Delivery Organization (HDO) ecosystem Network segmentation ○ Securing and monitoring connections to and from external systems Detect (DE) • Anomalies and Events—analysis of detected events (from logs, monitoring results, SIEM) ○ Centralized mechanism to capture and analyze system and network events • Security Continuous Monitoring—monitoring for unauthorized personnel, devices, software, connections ○ vulnerability management—includes vulnerability scanning and remediation ○ patch management ○ system configuration security settings ○ user account usage (local and remote) and user behavioral analytics Respond (RS) • Response Planning—response plan executed after an event, mitigation of security issues Recover (RC) • Recovery and Restoration—recovery and restoration activities executed after an event ○ business continuity and business resumption processes In addition to restoration capability from archival media, the project should consider high availability and continuity for data storage. Implicitly, disk arrays used for image storage should have the capability to implement various Redundant Array of Independent Disks (RAID) configurations. RAID 0, 1, 5, 6, and 1+0 should be supported. Disk arrays should also be made available for cold or warm restore/failover capability. Other data storage solutions that provide the same (or better) reliability and durability are considered.

    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: https://nccoe.nist.gov/projects/use-cases/health-it/pacs.

    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 http://nccoe.nist.gov/. The expected outcome of the demonstration is to improve securing picture archiving and communications system (PACS) cybersecurity across an entire healthcare sector enterprise. Participating organizations will gain from the knowledge that their products are interoperable with other participants' offerings.

    For additional information on the NCCoE governance, business processes, and NCCoE operational structure, visit the NCCoE website http://nccoe.nist.gov/.

    Kevin A. Kimball, Chief of Staff.
    [FR Doc. 2018-09897 Filed 5-8-18; 8:45 am] BILLING CODE 3510-13-P
    DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration Proposed Information Collection; Comment Request; Observer Programs' Information That Can Be Gathered Only Through Questions AGENCY:

    National Oceanic and Atmospheric Administration (NOAA), Commerce.

    ACTION:

    Notice.

    SUMMARY:

    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.

    DATES:

    Written comments must be submitted on or before July 9, 2018.

    ADDRESSES:

    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 [email protected]).

    FOR FURTHER INFORMATION CONTACT:

    Requests for additional information or copies of the information collection instrument and instructions should be directed to Liz Chilton, (301) 427-8201 or [email protected].

    SUPPLEMENTARY INFORMATION: I. Abstract

    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).

    II. Method of Collection

    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.

    III. Data

    OMB Control Number: 0648-0593.

    Form Number: None.

    Type of Review: Regular submission.

    Affected Public: Business or other for-profit organizations.

    Estimated Number of Respondents: 20,643.

    Estimated Time per Response: 51 minutes. Information will be collected for observed fishing trips and deployments to fish processing plants; therefore, there will be multiple responses for some respondents, but counted as one response per trip or plant visit.

    Estimated Total Annual Burden Hours: 26,172.

    Estimated Total Annual Cost to Public: $1,160.

    IV. Request for Comments

    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.

    Dated: May 3, 2018. Sarah Brabson, NOAA PRA Clearance Officer.
    [FR Doc. 2018-09835 Filed 5-8-18; 8:45 am] BILLING CODE 3510-22-P
    DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration Proposed Extension of a Currently Approved Information Collection; Comment Request; Aleutian Islands Pollock Fishery AGENCY:

    National Oceanic and Atmospheric Administration (NOAA), Commerce.

    ACTION:

    Notice.

    SUMMARY:

    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.

    DATES:

    Written comments must be submitted on or before July 9, 2018.

    ADDRESSES:

    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 [email protected]).

    FOR FURTHER INFORMATION CONTACT:

    Requests for additional information or copies of the information collection instrument and instructions should be directed to Gabrielle Aberle, 907-586-7228.

    SUPPLEMENTARY INFORMATION: I. Abstract

    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. The Aleut Corporation is identified in Public Law 108-199 as a business incorporated pursuant to the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq.). Regulations implementing the FMP appear at 50 CFR part 679.

    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.

    II. Method of Collection

    The Aleut Corporation submits the participant letter to NMFS by mail.

    III. Data

    OMB Control Number: 0648-0513.

    Form Number(s): None.

    Type of Review: Regular submission (extension of a current information collection).

    Affected Public: Business or other for-profit organizations.

    Estimated Number of Respondents: 1.

    Estimated Time per Response: Annual Aleutian Islands Fishery Participant Letter, 5 minutes.

    Estimated Total Annual Burden Hours: 1.

    Estimated Total Annual Cost to Public: $1 in recordkeeping/reporting costs.

    IV. Request for Comments

    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.

    Dated: May 3, 2018. Sarah Brabson, NOAA PRA Clearance Officer.
    [FR Doc. 2018-09834 Filed 5-8-18; 8:45 am] BILLING CODE 3510-22-P
    DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration Submission for OMB Review; Comment Request

    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).

    Agency: National Oceanic and Atmospheric Administration (NOAA).

    Title: Florida Fishing and Boating Survey.

    OMB Control Number: 0648-xxxx.

    Form Number(s): None.

    Type of Request: Regular (request for a new information collection).

    Number of Respondents: 4,335.

    Average Hours per Response: 5 minutes.

    Burden Hours: 361.

    Needs and Uses: This request is for a new information collection.

    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 (e.g., seniors). We plan to independently sample from the frame designed for the Fishing Effort Survey (FES) of the Marine Recreational Fishing Program (MRIP). Anglers will be mailed a postcard that directs them to a website to complete the survey.

    Affected Public: Individuals or households.

    Frequency: One time.

    Respondent's Obligation: Voluntary.

    This information collection request may be viewed at reginfo.gov. Follow the instructions to view Department of Commerce collections currently under review by OMB.

    Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice to [email protected] or fax to (202) 395-5806.

    Dated: May 3, 2018. Sarah Brabson, NOAA PRA Clearance Officer.
    [FR Doc. 2018-09836 Filed 5-8-18; 8:45 am] BILLING CODE 3510-22-P
    DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration RIN 0648-XG218 Taking and Importing Marine Mammals; Taking Marine Mammals Incidental to Construction and Operation of the Liberty Drilling and Production Island, Beaufort Sea, Alaska AGENCY:

    National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.

    ACTION:

    Notice; receipt of application for Letter of Authorization; request for comments and information.

    SUMMARY:

    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.

    DATES:

    Comments and information must be received no later than June 8, 2018.

    ADDRESSES:

    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 [email protected].

    Instructions: NMFS is not responsible for comments sent by any other method, to any other address or individual, or received after the end of the comment period. Comments received electronically, including all attachments, must not exceed a 25-megabyte file size. Attachments to electronic comments will be accepted in Microsoft Word or Excel or Adobe PDF file formats only. All comments received are a part of the public record and will generally be posted online at https://www.fisheries.noaa.gov/node/23111 without change. All personal identifying information (e.g., name, address) voluntarily submitted by the commenter may be publicly accessible. Do not submit confidential business information or otherwise sensitive or protected information.

    FOR FURTHER INFORMATION CONTACT:

    Jaclyn Daly, Office of Protected Resources, NMFS, (301) 427-8401. An electronic copy of the Hilcorp's application may be obtained online at https://www.fisheries.noaa.gov/node/23111. In case of problems accessing these documents, please call the contact listed above.

    SUPPLEMENTARY INFORMATION:

    Background

    Sections 101(a)(5)(A) and (D) of the MMPA (16 U.S.C. 1361 et seq.) direct the Secretary of Commerce (as delegated to NMFS) to allow, upon request, the incidental, but not intentional, taking of small numbers of marine mammals by U.S. citizens who engage in a specified activity (other than commercial fishing) within a specified geographical region if certain findings are made and either regulations are issued or, if the taking is limited to harassment, a notice of a proposed authorization is provided to the public for review.

    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).

    Summary of Request

    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.

    Specified Activities

    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 (e.g., ice roads, pipeline). Ice roads would be constructed annually and begin November 2019 (execute year 1). Island construction, which requires impact and vibratory pile driving, is proposed to take place in 2020 (or execute year 2 of the project). Pile driving would primarily occur during ice-covered season; however, up to two weeks of pile driving may occur during the open-water season. Pipeline installation is anticipated to occur in 2021 (or execute year three of the project). Drilling is proposed to occur from 2021 through 2024 (or execute years three through five). These activities have the potential to harass bowhead whales (Balaena mysticetus), gray whales (Eschrichtius robustus), beluga whales (Delphinapterus leucas), ringed seals (Phoca hispida), bearded seals (Erignathus barbatus), and spotted seals (Phoca largha). Ice road construction may also result in the mortality of ringed seals.

    Information Solicited

    Interested persons may submit information, suggestions, and comments concerning Hilcorp's request (see ADDRESSES). NMFS will consider all information, suggestions, and comments related to the request during the development of proposed regulations governing the incidental taking of marine mammals by Hilcorp, if appropriate.

    Dated: May 4, 2018. Donna S. Wieting, Director, Office of Protected Resources, National Marine Fisheries Service.
    [FR Doc. 2018-09904 Filed 5-8-18; 8:45 am] BILLING CODE 3510-22-P
    DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration Submission for OMB Review; Comment Request

    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).

    Agency: National Oceanic and Atmospheric Administration (NOAA).

    Title: Washington Steelhead Anglers Survey.

    OMB Control Number: 0648-xxxx.

    Form Number(s): None.

    Type of Request: Regular (request for a new information collection).

    Number of Respondents: 1,652.

    Average Hours per Response: Screening survey, 5 minutes; non-angler survey, 10 minutes; angler survey, 25 minutes.

    Burden Hours: 444.

    Needs and Uses: The Northwest Fisheries Science Center and Southwest Fisheries Science Center are undertaking an economics research project to assess the preferences of recreational steelhead anglers for trip attributes including opportunities for catching wild and hatchery steelhead. The Economic Survey of Recreational Steelhead Fishermen (ESRSF) will yield information on angling preferences that will inform management of recreational steelhead resources and steelhead hatchery operations in The Pacific Northwest. More specifically, the ESRSF will collect data needed to (1) assess the socioeconomic characteristics of recreational anglers; (2) assess the economic value of steelhead recreational fishing trips through statistical estimation of models; and (3) assess the change in these values associated with possible changes in recreational steelhead angling opportunities, including catch rates of wild and hatchery fish, site attributes, and travel costs.

    Affected Public: Individuals or households.

    Frequency: Once every five years.

    Respondent's Obligation: Voluntary.

    This information collection request may be viewed at reginfo.gov. Follow the instructions to view Department of Commerce collections currently under review by OMB.

    Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice to [email protected] or fax to (202) 395-5806.

    Dated: May 3, 2018. Sarah Brabson, NOAA PRA Clearance Officer.
    [FR Doc. 2018-09837 Filed 5-8-18; 8:45 am] BILLING CODE 3510-22-P
    COMMODITY FUTURES TRADING COMMISSION Renewal of the Market Risk Advisory Committee AGENCY:

    Commodity Futures Trading Commission.

    ACTION:

    Notice of renewal.

    SUMMARY:

    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.

    FOR FURTHER INFORMATION CONTACT:

    Alicia L. Lewis, MRAC Designated Federal Officer and Special Counsel to Commissioner Rostin Behnam, at 202-418-5862 or [email protected].

    SUPPLEMENTARY INFORMATION:

    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 www.cftc.gov.

    Dated: May 4, 2018. Christopher Kirkpatrick, Secretary of the Commission.
    [FR Doc. 2018-09891 Filed 5-8-18; 8:45 am] BILLING CODE 6351-01-P
    BUREAU OF CONSUMER FINANCIAL PROTECTION Community Bank Advisory Council Meeting AGENCY:

    Bureau of Consumer Financial Protection.

    ACTION:

    Notice of public meeting.

    SUMMARY:

    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.

    DATES:

    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.

    ADDRESSES:

    The meeting location is the Bureau of Consumer Financial Protection, 1700 G Street NW, Washington, DC 20552.

    FOR FURTHER INFORMATION CONTACT:

    Crystal Dully, Outreach and Engagement Associate, 202-435-9588, [email protected], Consumer Advisory Board and Councils Office, External Affairs, 1700 G Street NW, Washington, DC 20552. If you require this document in an alternative electronic format, please contact [email protected].

    SUPPLEMENTARY INFORMATION:

    I. Background

    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.”

    II. Agenda

    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 [email protected], 202-435-9EEO, 1-855-233-0362, or 202-435-9742 (TTY) at least ten business days prior to the meeting or event to request assistance. The request must identify the date, time, location, and title of the meeting or event, the nature of the assistance requested, and contact information for the requester. CFPB will strive to provide, but cannot guarantee that accommodation will be provided for late requests.

    Written comments will be accepted from interested members of the public and should be sent to [email protected], a minimum of seven (7) days in advance of the meeting. The comments will be provided to the CBAC members for consideration. Individuals who wish to attend the Community Bank Advisory Council meeting must RSVP to [email protected] by noon, Wednesday, May 24, 2018. Members of the public must RSVP by the due date and must include “CBAC” in the subject line of the RSVP.

    III. Availability

    The Council's agenda will be made available to the public on Wednesday May 9, 2018, via consumerfinance.gov. Individuals should express in their RSVP if they require a paper copy of the agenda.

    A recording and summary of this meeting will be available after the meeting on the Bureau's website consumerfinance.gov.

    Dated: April 24, 2018. Kirsten Sutton, Chief of Staff, Bureau of Consumer Financial Protection.
    [FR Doc. 2018-09735 Filed 5-8-18; 8:45 am] BILLING CODE 4810-AM-P
    DEPARTMENT OF DEFENSE Department of the Army [Docket ID: USA-2018-HQ-0004] Submission for OMB Review; Comment Request AGENCY:

    Department of the Army, DOD.

    ACTION:

    30-day information collection notice.

    SUMMARY:

    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.

    DATES:

    Consideration will be given to all comments received by June 8, 2018.

    ADDRESSES:

    Comments and recommendations on the proposed information collection should be emailed to Ms. Jasmeet Seehra, DoD Desk Officer, at [email protected]. Please identify the proposed information collection by DoD Desk Officer, Docket ID number, and title of the information collection.

    FOR FURTHER INFORMATION CONTACT:

    Fred Licari, 571-372-0493, or [email protected].

    SUPPLEMENTARY INFORMATION:

    Title; Associated Form; and OMB Number: Service Members Transitioning from Active Duty to Veterans Status; OMB Control Number 0702-XXXX.

    Type of Request: New.

    Number of Respondents: 600.

    Responses per Respondent: 1.

    Annual Responses: 600.

    Average Burden per Response: 35 minutes.

    Annual Burden Hours: 350.

    Needs and Uses: This study, exploratory in nature, is designed to capture baseline data prior to transition and at three subsequent data points after the transition out of service. The purpose of data capture before, during, and after transition is to allow the researchers to monitor how transition stressors change over time and what factors might influence their course. This information will be enormously useful in attempts to design and implement interventions that might target these stressors.

    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.

    Affected Public: Individuals or Households.

    Frequency: Annually.

    Respondent's Obligation: Voluntary.

    OMB Desk Officer: Ms. Jasmeet Seehra.

    You may also submit comments and recommendations, identified by Docket ID number and title, by the following method:

    Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

    Instructions: All submissions received must include the agency name, Docket ID number, and title for this Federal Register document. The general policy for comments and other submissions from members of the public is to make these submissions available for public viewing on the internet at http://www.regulations.gov as they are received without change, including any personal identifiers or contact information.

    DOD Clearance Officer: Mr. Frederick Licari.

    Requests for copies of the information collection proposal should be sent to Mr. Licari at [email protected].

    Dated: May 3, 2018. Shelly E. Finke, Alternate OSD Federal Register, Liaison Officer, Department of Defense.
    [FR Doc. 2018-09811 Filed 5-8-18; 8:45 am] BILLING CODE 3710-08-P
    DEPARTMENT OF DEFENSE Office of the Secretary [Docket ID DOD-2018-OS-0023] Proposed Collection; Comment Request AGENCY:

    Office of the Under Secretary of Defense for Acquisition and Sustainment, DoD.

    ACTION:

    Information collection notice.

    SUMMARY:

    In compliance with the Paperwork Reduction Act of 1995, the Office of Economic Adjustment announces a proposed public information collection and seeks public comment on the provisions thereof. 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 of the proposed information collection; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the information collection on respondents, including through the use of automated collection techniques or other forms of information technology.

    DATES:

    Consideration will be given to all comments received by July 9, 2018.

    ADDRESSES:

    You may submit comments, identified by docket number and title, by any of the following methods:

    Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

    Mail: Department of Defense, Office of the Chief Management Officer, Directorate for Oversight and Compliance, 4800 Mark Center Drive, Mailbox #24 Suite 08D09, Alexandria, VA 22350-1700.

    Instructions: All submissions received must include the agency name, docket number and title for this Federal Register document. The general policy for comments and other submissions from members of the public is to make these submissions available for public viewing on the internet at http://www.regulations.gov as they are received without change, including any personal identifiers or contact information.

    FOR FURTHER INFORMATION CONTACT:

    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 [email protected].

    SUPPLEMENTARY INFORMATION:

    Title; Associated Form; and OMB Number: Base Realignment and Closure (BRAC) Military Base Reuse Status; DD Form 2740; OMB Control Number 0790-0003.

    Needs and Uses: Through the Office of Economic Adjustment (OEA), Department of Defense (DoD) funds are provided to communities for economic adjustment planning in response to closures and realignments of military installations. A measure of program evaluation is the monitoring of civilian job creation, and the type of redevelopment at former military installations. The respondents to the annual survey will generally be a single point of contact at the local level that is responsible for overseeing the base redevelopment effort. If this data is not collected, OEA will have no accurate, timely information regarding the civilian reuse of former military bases. As the administrator of the Defense Economic Adjustment Program, OEA has a responsibility to encourage private sector use of lands and buildings to generate jobs as military activity diminishes, and to serve as a clearinghouse for reuse data.

    Affected Public: Business or other for-profit; State, local, or tribal government.

    Annual Burden Hours: 100.

    Number of Respondents: 100.

    Responses per Respondent: 1.

    Annual Responses: 100.

    Average Burden per Response: 1 hour.

    Frequency: Annually.

    Dated: May 3, 2018. Shelly E. Finke, Alternate OSD Federal Register, Liaison Officer, Department of Defense.
    [FR Doc. 2018-09823 Filed 5-8-18; 8:45 am] BILLING CODE 5001-06-P
    DEPARTMENT OF EDUCATION [Docket No. ED-2018-ICCD-0016] Agency Information Collection Activities; Submission to the Office of Management and Budget for Review and Approval; Comment Request; Assurance of Compliance—Civil Rights Certificate AGENCY:

    Office for Civil Rights (OCR), Department of Education (ED).

    ACTION:

    Notice.

    SUMMARY:

    In accordance with the Paperwork Reduction Act of 1995, ED is proposing an extension of an existing information collection.

    DATES:

    Interested persons are invited to submit comments on or before June 8, 2018.

    ADDRESSES:

    To access and review all the documents related to the information collection listed in this notice, please use http://www.regulations.gov by searching the Docket ID number ED-2018-ICCD-0016. Comments submitted in response to this notice should be submitted electronically through the Federal eRulemaking Portal at http://www.regulations.gov by selecting the Docket ID number or via postal mail, commercial delivery, or hand delivery. Please note that comments submitted by fax or email and those submitted after the comment period will not be accepted. Written requests for information or comments submitted by postal mail or delivery should be addressed to the Director of the Information Collection Clearance Division, U.S. Department of Education, 400 Maryland Avenue SW, LBJ, Room 216-32, Washington, DC 20202-4537.

    FOR FURTHER INFORMATION CONTACT:

    For specific questions related to collection activities, please contact Elizabeth Wiegman, 202-453-6039.

    SUPPLEMENTARY INFORMATION:

    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.

    Title of Collection: Assurance of Compliance—Civil Rights Certificate.

    OMB Control Number: 1870-0503

    Type of Review: An extension of an existing information collection.

    Respondents/Affected Public: Private Sector; State, Local, and Tribal Governments.

    Total Estimated Number of Annual Responses: 25.

    Total Estimated Number of Annual Burden Hours: 8.

    Abstract: The Office for Civil Rights (OCR) has enforcement responsibilities under several civil rights laws, including Title VI, Title IX, Section 504, the Age Discrimination Act, and the Boy Scouts of America Equal Access Act. To meet these responsibilities, OCR collects assurances of compliance from applicants for Federal financial assistance from, and applicants for funds made available through, the Department of Education, as required by regulations. These entities include, for example, State educational agencies, local education agencies, and postsecondary educational institutions. If a recipient violates one or more of these civil rights laws, OCR and the Department of Justice can used the signed assurances of compliance in an enforcement proceeding.

    Dated: May 3, 2018. Stephanie Valentine, Acting Director, Information Collection Clearance Division, Office of the Chief Privacy Officer, Office of Management.
    [FR Doc. 2018-09833 Filed 5-8-18; 8:45 am] BILLING CODE 4000-01-P
    DEPARTMENT OF EDUCATION National Assessment Governing Board AGENCY:

    National Assessment Governing Board, U.S. Department of Education.

    ACTION:

    Announcement of open and closed meetings.

    SUMMARY:

    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.

    DATES:

    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.

    ADDRESSES:

    Embassy Suites Montgomery Hotel and Conference Center, 300 Tallapoosa Street, Montgomery, Alabama 36104.

    FOR FURTHER INFORMATION CONTACT:

    Munira Mwalimu, Executive Officer/Designated Federal Official for the Governing Board, 800 North Capitol Street NW, Suite 825, Washington, DC 20002, telephone: (202) 357-6938, fax: (202) 357-6945, email: [email protected].

    SUPPLEMENTARY INFORMATION:

    Statutory Authority and Function: The Governing Board is established under the National Assessment of Educational Progress Authorization Act, Title III of Public Law 107-279. Written comments may be submitted electronically or in hard copy to the attention of the Executive Officer/Designated Federal Official (see contact information noted above). Information on the Governing Board and its work can be found at www.nagb.gov.

    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.

    May 17-19, 2018 Committee Meetings

    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 https://www.nagb.gov/governing-board/quarterly-board-meetings.html.

    Detailed Meeting Agenda: May 17-19, 2018 May 17: Committee Meetings

    Ad Hoc Committee on Measures of Postsecondary Preparedness: Open Session: 3:00 p.m. to 5:00 p.m.

    Executive Committee: Open Session: 5:15 p.m. to 6:00 p.m.

    May 18: Full Governing Board and Committee Meetings

    Full Governing Board: Open Session: 8:30 a.m. to 10:15 a.m.; 1:15 p.m. to 5:00 p.m.

    Committee Meetings

    Assessment Development Committee (ADC): Open Session: 10:30 a.m. to 1:00 p.m.

    Reporting and Dissemination (R&D): Open Session 10:30 a.m. to 12:00 p.m.

    Committee on Standards, Design and Methodology (COSDAM): Open Session: 10:30 a.m. to 12:00 p.m.;

    Joint Session—R&D and COSDAM: Open Session: 12:00 p.m. to 1:00 p.m.

    May 19: Full Governing Board and Committee Meetings

    Nominations Committee: Closed Session: 7:30 a.m. to 8:15 a.m.

    Full Governing Board: Open Session: 8:30 a.m. to 10:30 a.m.

    Ad Hoc Screening Committee on Executive Director Search: Closed Session 11:00 a.m. to 1:00 p.m.

    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.

    Access to Records of the Meeting: Pursuant to FACA requirements, the public may also inspect the meeting materials at www.nagb.gov beginning on Thursday, May 17, 2018, by 10:00 a.m. EST. The official verbatim transcripts of the public meeting sessions will be available for public inspection no later than 30 calendar days following the meeting.

    Reasonable Accommodations: The meeting site is accessible to individuals with disabilities. If you will need an auxiliary aid or service to participate in the meeting (e.g., interpreting service, assistive listening device, or materials in an alternate format), notify the contact person listed in this notice no later than 21 days prior to the meeting.

    Electronic Access to this Document: The official version of this document is the document published in the Federal Register. Internet access to the official edition of the Federal Register and the Code of Federal Regulations is available via the Federal Digital System at: www.thefederalregister.org/fdsys. At this site you can view this document, as well as all other documents of this Department published in the Federal Register, in text or Adobe Portable Document Format (PDF). To use PDF, you must have Adobe Acrobat Reader, which is available free at the Adobe website. You may also access documents of the Department published in the Federal Register by using the article search feature at: www.federalregister.gov. Specifically, through the advanced search feature at this site, you can limit your search to documents published by the Department.

    Authority:

    Pub. L. 107-279, Title III—National Assessment of Educational Progress § 301.

    Dated: May 3, 2018. Munira Mwalimu, Executive Officer, delegated authority as Designated Federal Official, National Assessment Governing Board (NAGB), U.S. Department of Education.
    [FR Doc. 2018-09831 Filed 5-8-18; 8:45 am] BILLING CODE 4000-01-P
    DEPARTMENT OF ENERGY [FE Docket Nos. 11-162-LNG, 15-67-LNG, 15-90-LNG, and 16-34-LNG] Change in Control: Cameron LNG, LLC AGENCY:

    Office of Fossil Energy, DOE.

    ACTION:

    Notice of change in control.

    SUMMARY:

    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).

    DATES:

    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.

    ADDRESSES:

    Electronic Filing by email: [email protected].

    Regular Mail U.S. Department of Energy (FE-34), Office of Regulation and International Engagement, Office of Fossil Energy, P.O. Box 44375, Washington, DC 20026-4375.

    Hand Delivery or Private Delivery Services (e.g., FedEx, UPS, etc.) 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.

    FOR FURTHER INFORMATION CONTACT:

    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.

    SUPPLEMENTARY INFORMATION:

    Summary of Change in Control

    Cameron LNG filed a Notice of Proposed Change in Control in the above-referenced dockets.1 In the Notice, Cameron LNG states that it is a direct, wholly-owned subsidiary of Cameron LNG Holdings, LLC (Cameron Holdings). According to Cameron LNG, the following entities currently hold direct membership interests in Cameron Holdings: Sempra LNG Holdings II, LLC, 50.2% interest; ENGIE Cameron LNG Corporation, 16.6% interest; Mitsui & Co. Cameron LNG Investment LLC, 16.6% interest; and Japan LNG Investment, LLC, 16.6% interest.2

    1 Cameron LNG, LLC, FE Docket Nos. 11-162-LNG, et al., Statement of Proposed Change in Control (Mar. 23, 2018) [hereinafter Cameron LNG Notice.].

    2See id. at 2.

    Cameron LNG describes a proposed transaction involving ENGIE Cameron LNG Corporation (ENGIE Member).3 The ENGIE member is a Delaware corporation and an indirect, wholly owned subsidiary of ENGIE, S.A (ENGIE).4 Specifically, Cameron LNG states that another entity, Total S.A., is planning to acquire a portion of ENGIE's global LNG business (Proposed Transaction). The U.S. component of this Proposed Transaction would confer to Total S.A. a 100% indirect ownership interest in the ENGIE Member.5 Total S.A. and ENGIE contemplate that this Proposed Transaction will close by the end of June 2018.6

    3See id.

    4See id. at n.6.

    5 Cameron LNG is advised that its described change in control may also require the approval of the Committee on Foreign Investment in the United States (CFIUS). DOE expresses no opinion regarding the need for review by CFIUS. Additional information may be obtained at: http://www.treasury.gov/resource-center/international/Pages/Committee-on-Foreign-Investment-in-US.aspx.

    6See Cameron LNG Notice at 3-6.

    Additional details can be found in Cameron LNG's Notice, posted on the DOE/FE website at: https://www.energy.gov/sites/prod/files/2018/03/f50/Cameron%20LNG%20CIC%2003_23_18.pdf.

    DOE/FE Evaluation

    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).7 Consistent with the CIC Revised Procedures, this Notice addresses only the authorizations granted to Cameron LNG to export liquefied natural gas (LNG) to non-free trade agreement (non-FTA) countries in DOE/FE Order Nos. 3391-A (FE Docket No. 11-162-LNG), 3797 (FE Docket No. 15-67-LNG), 3846 (FE Docket No. 15-90-LNG), and the non-FTA portion of the authorization issued in DOE/FE Order No. 3904 (FE Docket No. 16-34-LNG).8 If no interested person protests the change in control and DOE takes no action on its own motion, the change in control will be deemed granted 30 days after publication in the Federal Register. If one or more protests are submitted, DOE will review any motions to intervene, protests, and answers, and will issue a determination as to whether the proposed change in control has been demonstrated to render the underlying authorization inconsistent with the public interest.

    7 79 FR 65541 (Nov. 5, 2014).

    8 Cameron LNG's Notice also applies to its FTA authorizations (see Cameron LNG Notice at 6), but DOE/FE has responded to that portion of the Notice separately pursuant to its Change in Control Procedures, 79 FR 65542.

    Public Comment Procedures

    Interested persons will be provided 15 days from the date of publication of this notice in the Federal Register in order to move to intervene, protest, and answer Cameron LNG's Notice. Protests, motions to intervene, notices of intervention, and written comments are invited in response to this notice only as to the change in control described in Cameron LNG's Notice, and only with respect to Cameron LNG's non-FTA authorizations in DOE/FE Order Nos. 3391-A, 3797, 3846, and 3904. All protests, comments, motions to intervene, or notices of intervention must meet the requirements specified by DOE's regulations in 10 CFR part 590.

    Filings may be submitted using one of the following methods: (1) Preferred method: emailing the filing to [email protected], with the individual FE Docket Number(s) in the title line, or Cameron LNG Change in Control in the title line to include all applicable dockets in this notice; (2) mailing an original and three paper copies of the filing to the Office of Regulation and International Engagement at the address listed in ADDRESSES; or (3) hand delivering an original and three paper copies of the filing to the Office of Regulation and International Engagement at the address listed in ADDRESSES. All filings must include a reference to the individual FE Docket Number(s) in the title line, or Cameron LNG Change in Control in the title line to include all applicable dockets in this notice. Please note: If submitting a filing via email, please include all related documents and attachments (e.g., exhibits) in the original email correspondence. Please do not include any active hyperlinks or password protection in any of the documents or attachments related to the filing. All electronic filings submitted to DOE must follow these guidelines to ensure that all documents are filed in a timely manner. Any hardcopy filing submitted greater in length than 50 pages must also include, at the time of the filing, a digital copy on disk of the entire submission.

    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: http://www.fe.doe.gov/programs/gasregulation/index.html.

    Issued in Washington, DC, on May 3, 2018. Amy Sweeney, Director, Division of Natural Gas Regulation, Office of Fossil Energy.
    [FR Doc. 2018-09873 Filed 5-8-18; 8:45 am] BILLING CODE 6450-01-P
    DEPARTMENT OF ENERGY National Nuclear Security Administration 229 Boundary Notice for the Pantex Plant Administrative Support Complex AGENCY:

    National Nuclear Security Administration, Department of Energy (DOE).

    ACTION:

    Notice of 229 Boundary revisions for the Pantex Plant Administrative Support Complex.

    SUMMARY:

    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.

    DATES:

    This action is effective on May 9, 2018.

    FOR FURTHER INFORMATION CONTACT:

    Larry Warner, U.S. Department of Energy, National Nuclear Security Administration, P.O. Box 30030, Amarillo, TX 79120. Email: [email protected]. Phone: 806-573-7129.

    SUPPLEMENTARY INFORMATION:

    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 Federal Register. The Pantex Plant property description was revised on July 31, 1985 (50 FR 31004) (as corrected on December 16, 1985 (50 FR 51283)), and was again revised on September 20, 1991 (56 FR 47746). By publishing this Notice, DOE hereby adds the property described below to its previously published property descriptions of the Pantex Plant, and prohibits the unauthorized entry upon and the unauthorized introduction of weapons, explosives, dangerous materials, or dangerous instruments, into and upon, the Pantex Plant. Section 860.5 of Title 10 of the Code of Federal Regulations provides that conviction for willful unauthorized entry into or upon areas enclosed by a fence, wall, floor, roof or other structural barrier can result in a fine not to exceed $100,000 or imprisonment for not more than one year, or both. Section 860.5 also provides that conviction for willful unauthorized entry into areas not enclosed by a fence, wall, floor, roof, or other such structural barrier may result in a fine of not more than $5,000. Per § 860.7, the prohibitions of §§ 860.3 and 860.4 are effective upon publication of this Notice and with posting in accordance with § 860.6.

    The addition is described in further detail in the paragraphs that follow.

    Property Description:

    A 52.26 Acre tract of land out of the northern portion of section 30 and the south half of section 31, block M-4, J. H. Gibson Survey, Carson County, Texas, and more particularly described as follows:

    Beginning at a 1/2″; Iron Rod with a yellow cap inscribed “RPLS 4263” (such type cap and rod hereafter referred to as an OJD Cap) found on the west right-of-way line of F.M. NO. 2373 same being on the north line of said south half of said Section 31 which bears S 00° 12′ 30″ E a distance of 2644.40 feet and S 89° 21′ 01″ W a distance of 58.19 feet from a Railroad Spike found at the northeast corner of said Section 31 for the northeast corner of this tract.

    Thence S 00° 11′ 06″ E, along said west right-of-way line, a distance of 2626.71 feet to an OJD Cap found on said west right-of-way line for an angle corner of this tract.

    Thence S 00° 05′ 06″ E, continuing along said west right-of-way line, a distance of 1018.47 feet to an OJD Cap found on said west right-of-way line for the southeast corner of this tract.

    Thence S 89° 54′ 54″ W a distance of 1281.57 feet to an OJD Cap found for the southwest corner of this tract.

    Thence N 00° 05′ 06″ W a distance of 1698.80 feet to an OJD Cap found for the most westerly northwest corner of this tract.

    Thence N 89° 48′ 54″ E a distance of 1230.38 feet to an OJD Cap found for an angle corner of this tract.

    Thence N 00° 11′ 06″ W a distance of 1893.74 feet to an OJD Cap found for an angle corner of this tract.

    Thence N 45° 25′ 02″ W a distance of 70.43 feet to an OJD Cap found on said north line for the most northerly northwest corner of this tract.

    Thence N 89° 21′ 01″ E a distance of 100.00 feet to the place of beginning and containing 52.26 acres of land.

    This description is in addition to the descriptions contained in the Federal Register notices published on October 19, 1965, July 31, 1985 (as corrected on December 16, 1985), and September 20, 1991, and includes all buildings, structures, installations, and parcels of real property therein.

    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.

    Issued in Carson County, Texas on May 1, 2018. Arnold E. Guevara, Assistant Manager for Safeguards and Security.
    [FR Doc. 2018-09876 Filed 5-8-18; 8:45 am] BILLING CODE 6450-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission [Docket No. OR18-22-000] Notice of Petition for Declaratory Order: Buckeye Pipe Line Company, L.P., Laurel Pipe Line Company, L.P.

    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 http://www.ferc.gov. Persons unable to file electronically should submit an original and 5 copies of the protest or intervention to the Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426.

    This filing is accessible on-line at http://www.ferc.gov, using the “eLibrary” link and is available for review in the Commission's Public Reference Room in Washington, DC. There is an “eSubscription” link on the website that enables subscribers to receive email notification when a document is added to a subscribed docket(s). For assistance with any FERC Online service, please email [email protected], or call (866) 208-3676 (toll free). For TTY, call (202) 502-8659.

    Comment Date: 5:00 p.m. Eastern time on May 30, 2018.

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09860 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission Combined Notice of Filings #1

    Take notice that the Commission received the following electric corporate filings:

    Docket Numbers: EC18-90-000.

    Applicants: Washington County Power, LLC.

    Description: Application for Authorization of Transaction Under Section 203 of the Federal Power Act, and Requests for Expedited Action, et. al. of Washington County Power, LLC.

    Applicants: 5/1/18.

    Accession Number: 20180501-5417.

    Comments Due: 5 p.m. ET 5/22/18.

    Take notice that the Commission received the following electric rate filings:

    Docket Numbers: ER10-3194-006; ER10-3195-006.

    Applicants: MATEP LLC, MATEP Limited Partnership.

    Description: Notice of Non-Material Change in Status of MATEP LLC, et al.

    Applicants: 4/30/18.

    Accession Number: 20180430-5522.

    Comments Due: 5 p.m. ET 5/21/18.

    Docket Numbers: ER16-1346-004.

    Applicants: Midcontinent Independent System Operator, Inc.

    Description: Compliance filing: 2018-05-02_SA 2911 LEPA-MISO External NRIS (J373) Compliance (4th Sub) to be effective 4/6/2016.

    Applicants: 5/2/18.

    Accession Number: 20180502-5154.

    Comments Due: 5 p.m. ET 5/23/18.

    Docket Numbers: ER16-1817-005.

    Applicants: Midcontinent Independent System Operator, Inc.

    Description: Compliance filing: 2018-05-02_Additional Compliance filing of E-NRIS pro forma (5th) to be effective 4/5/2016.

    Applicants: 5/2/18.

    Accession Number: 20180502-5153.

    Comments Due: 5 p.m. ET 5/23/18.

    Docket Numbers: ER17-256-004; ER17-242-004; ER17-243-004; ER17-245-004; ER17-652-004

    Applicants: Darby Power, LLC, Gavin Power, LLC, Lawrenceburg Power, LLC, Lightstone Marketing LLC, Waterford Power, LLC.

    Description: Notice of Change in Status of Darby Power, LLC, et. al.

    Applicants: 4/30/18.

    Accession Number: 20180430-5521.

    Comments Due: 5 p.m. ET 5/21/18.

    Docket Numbers: ER18-1217-001.

    Applicants: Southwestern Electric Power Company.

    Description: Tariff Amendment: Amended and Restated NTEC PSA to be effective 5/31/2018.

    Applicants: 5/3/18.

    Accession Number: 20180503-5012.

    Comments Due: 5 p.m. ET 5/24/18.

    Docket Numbers: ER18-1511-000.

    Applicants: PJM Interconnection, L.L.C.

    Description: § 205(d) Rate Filing: Second Revised ISA, SA No. 3483; Queue No. AA2-069 to be effective 4/2/2018.

    Applicants: 5/2/18.

    Accession Number: 20180502-5150.

    Comments Due: 5 p.m. ET 5/23/18.

    Docket Numbers: ER18-1512-000.

    Applicants: Virginia Electric and Power Company.

    Description: Compliance filing: Informational Filing of Virginia Electric and Power Company to be effective N/A.

    Applicants: 5/3/18.

    Accession Number: 20180503-5001.

    Comments Due: 5 p.m. ET 5/24/18.

    Docket Numbers: ER18-1513-000

    Applicants: Entergy Arkansas, Inc., Entergy Louisiana, LLC, Entergy Mississippi, Inc., Entergy New Orleans, LLC, Entergy Texas, Inc.

    Description: Post-Retirement Benefits Other than Pensions for 2017 Test Year of Entergy Arkansas, Inc., et al.

    Applicants: 5/1/18.

    Accession Number: 20180501-5416.

    Comments Due: 5 p.m. ET 5/22/18.

    Take notice that the Commission received the following electric securities filings:

    Docket Numbers: ES18-36-000; ES18-37-000.

    Applicants: Entergy Arkansas, LLC, Entergy Mississippi, LLC.

    Description: Joint Application for Section 204 Authorizations of Entergy Arkansas, LLC, et al.

    Applicants: 4/30/18.

    Accession Number: 20180430-5519.

    Comments Due: 5 p.m. ET 5/21/18.

    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: http://www.ferc.gov/docs-filing/efiling/filing-req.pdf. For other information, call (866) 208-3676 (toll free). For TTY, call (202) 502-8659.

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09861 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission Before Commissioners: Cheryl A. LaFleur, Neil Chatterjee, Robert F. Powelson, and Richard Glick CinCap V, LLC Docket No. ER10-1325-008 Duke Energy Beckjord, LLC Docket No. ER17-1968-000 Duke Energy Carolinas, LLC Docket No. ER17-1967-000 Duke Energy Commercial Enterprises, Inc Docket No. ER17-1970-000 Duke Energy Florida, LLC Docket No. ER17-1971-000 Duke Energy Progress, LLC Docket No. ER17-1964-000 Duke Energy Renewable Services, LLC Docket No. ER17-1972-000 Duke Energy SAM, LLC Docket No. ER17-1973-000 Louisville Gas and Electric Company Docket No. ER10-1511-007 Kentucky Utilities Company Docket No. ER10-2231-006 LG&E Energy Marketing Inc Docket No. ER10-1714-009 Florida Power & Light Company Docket No. ER10-1852-017 Live Oak Solar, LLC Docket No. ER16-1354-003 NextEra Energy Marketing, LLC Docket No. ER17-838-001 NEPM II, LLC Docket No. ER11-4462-026 River Bend Solar, LLC Docket No. ER16-1913-002 White Oak Solar, LLC Docket No. ER16-1293-003 White Pine Solar, LLC Docket No. ER16-1277-003 South Carolina Electric & Gas Company Docket No. ER10-2498-004 Alabama Power Company Docket No. ER10-2881-031 Southern Power Company Docket No. ER10-2882-033 Mississippi Power Company Docket No. ER10-2883-031 Georgia Power Company Docket No. ER10-2884-031 Gulf Power Company Docket No. ER10-2885-031 Oleander Power Project, Limited Partnership Docket No. ER10-2641-030 Southern Company-Florida, LLC Docket No. ER10-2663-031 Mankato Energy Center, LLC Docket No. ER10-1874-005 Tampa Electric Company Docket No. ER10-1437-006 Order Accepting Simultaneous Transmission Import Limit Values for the Southeast Region and Providing Clarification on Simultaneous Transmission Import Limit Studies

    1. In June 2017,1 CinCap V, LLC, Duke Energy Beckjord, LLC, Duke Energy Carolinas, LLC, Duke Energy Commercial Enterprises, Inc., Duke Energy Florida, LLC, Duke Energy Progress, LLC, Duke Energy Renewable Services, LLC, Duke Energy SAM, LLC; Louisville Gas and Electric Company, Kentucky Utilities Company, LG&E Energy Marketing Inc.; Florida Power & Light Company, Live Oak Solar, LLC, NextEra Energy Marketing, LLC, NEPM II, LLC, River Bend Solar, LLC, White Oak Solar, LLC, White Pine Solar, LLC; South Carolina Electric & Gas Company; Southern Company Services, Inc. (Southern Company), acting as agent for Alabama Power Company, Southern Power Company, Mississippi Power Company, Georgia Power Company, Gulf Power Company, and their affiliates, Oleander Power Project, Limited Partnership, Southern Company—Florida LLC, Mankato Energy Center, LLC; and Tampa Electric Company (collectively, the Southeast Transmission Owners) submitted updated market power analyses for the Southeast region in accordance with the regional reporting schedule.2 The Southeast Transmission Owners included Simultaneous Transmission Import Limit (SIL) values for the December 2014-November 2015 study period for balancing authority areas in the Southeast region.

    1 We note that some of the Southeast Transmission Owners submitted amendments to their filings.

    2See Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, Order No. 697, FERC Stats. & Regs. ¶ 31,252, at P 882, clarified, 121 FERC ¶ 61,260 (2007), order on reh'g, Order No. 697-A, FERC Stats. & Regs. ¶ 31,268, clarified, 124 FERC ¶ 61,055, order on reh'g, Order No. 697-B, FERC Stats. & Regs. ¶ 31,285 (2008), order on reh'g, Order No. 697-C, FERC Stats. & Regs. ¶ 31,291 (2009), order on reh'g, Order No. 697-D, FERC Stats. & Regs. ¶ 31,305 (2010), aff'd sub nom. Montana Consumer Counsel v. FERC, 659 F.3d 910 (9th Cir. 2011), cert. denied, 133 S. Ct. 26 (2012). See also Refinements to Policies and Procedures for Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, Order No. 816, FERC Stats. & Regs. ¶ 31,374, at P 353 (2015), order on reh'g, Order No. 816-A, FERC Stats. & Regs. ¶ 31,382 (2016).

    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.3

    3See, e.g., Alcoa Power Generating Inc., Docket No. ER10-3069-007 (Dec. 1, 2017) (delegated order).

    4. Additionally in this order, we provide clarification on the calculation of SIL values.

    I. Background

    5. In Order No. 697, the Commission adopted a regional filing schedule for filing updated market power analyses.4 The Commission explained that the transmission-owning utilities have the information necessary to perform SIL studies and therefore determined that such utilities would be required to file their updated market power analyses in advance of other entities in each region.5

    4 Order No. 697, FERC Stats. & Regs. ¶ 31,252 at P 882.

    5Id. P 889.

    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),6 PowerSouth Energy Cooperative, South Carolina Public Service Authority (Santee Cooper), Seminole Electric Cooperative, and the Tennessee Valley Authority.

    6 This order does not address SIL values for the MISO market. The SIL values for the MISO market are addressed in a separate order. Entergy Arkansas, Inc., Docket No. ER10-1763-003 (Apr. 11, 2018) (delegated order).

    II. Discussion

    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.7 In those cases, we have selected the values submitted by the Tampa Electric Company.8

    7 Conflicting SIL values were submitted for the Florida Power & Light Company, Duke Energy Florida, and the Jacksonville Electric Authority balancing authority areas.

    8 Tampa Electric Company's SIL study utilized case studies based on models provided by the Florida Reliability Coordinating Council.

    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.9 The Commission has stated that transfer capability should also include any other limits (such as stability, voltage, capacity benefit margin (CBM), transmission reserve margin (TRM)) as defined in the OATT and that existed during each seasonal peak.10 In addition, the Commission has stated that the transmission owner must utilize the Open Access Same-Time Information System (OASIS) practices consistent with the administration of its tariff.11 The Commission has clarified that the term “OASIS practices” refers to the operating practices historically used by the first-tier and study area transmission providers to calculate and post available transfer capability (ATC) and to evaluate requests for firm transmission service.12 The Commission has specified that the SIL study should not deviate from and must reasonably reflect the seller's OASIS operating practices.13 The Commission emphasizes here that each transmission owner's SIL values must reflect TRM and CBM in the same manner as utilized to calculate and post ATC and to evaluate requests for firm transmission service.14

    9AEP Power Marketing, Inc., 107 FERC ¶ 61,018, at P 84, order on reh'g, 108 FERC ¶ 61,026 (2004).

    10Id.

    11 Order No. 816, FERC Stats. & Regs. ¶ 31,374 at 154.

    12Id.

    13 Order No. 697, FERC Stats. & Regs. ¶ 31,252 at P 354.

    14 The SIL values that Southern Company derived in its January 16, 2018 sensitivity analysis for the Southern Company balancing authority area are consistent with the clarification provided in this order and therefore are the SIL values accepted by the Commission.

    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 15 for one or more of a particular seller's screens differ if the seller-supplied SIL value is used instead of the Commission-accepted SIL value, the order on that particular filing will examine the seller-supplied SIL study and address whether the seller-supplied SIL value is acceptable. However, when the overall results of the screens would be unchanged, i.e., the seller would pass using either set of SIL values or fail using either set of SIL values, the Commission-accepted SIL values found in Appendix A will be used and the order would not address the seller-supplied SIL values.

    15 Results refer to the results of the market share and/or pivotal supplier screens. For example, if a seller fails the market share screen for a particular season in a particular market using either SIL value, we would consider the result unchanged. Similarly, if the seller passes the screen using either value, the result is also unchanged.

    The Commission orders:

    (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 Federal Register.

    By the Commission. Chairman McIntyre is not participating.

    Issued: May 1, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09854 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission Combined Notice of Filings

    Take notice that the Commission has received the following Natural Gas Pipeline Rate and Refund Report filings:

    Filings Instituting Proceedings

    Docket Numbers: RP18-783-000.

    Applicants: Northern Natural Gas Company.

    Description: § 4(d) Rate Filing: 20180501 Winter PRA Fuel Rates to be effective 11/1/2018.

    Filed Date: 5/1/18.

    Accession Number: 20180501-5380.

    Comments Due: 5 p.m. ET 5/14/18.

    Docket Numbers: RP18-784-000.

    Applicants: Columbia Gas Transmission, LLC.

    Description: § 4(d) Rate Filing: TCO Virginia Power Negotiated Rate Amendment to be effective 5/1/2018.

    Filed Date: 5/1/18.

    Accession Number: 20180501-5382.

    Comments Due: 5 p.m. ET 5/14/18.

    Docket Numbers: RP18-785-000.

    Applicants: Columbia Gas Transmission, LLC.

    Description: § 4(d) Rate Filing: CNX Antero Amendment Filing to be effective 5/1/2018.

    Filed Date: 5/1/18.

    Accession Number: 20180501-5383.

    Comments Due: 5 p.m. ET 5/14/18.

    Docket Numbers: RP18-786-000.

    Applicants: ETC Tiger Pipeline, LLC.

    Description: § 4(d) Rate Filing: Fuel Filing on 5-1-18 to be effective 6/1/2018.

    Filed Date: 5/1/18.

    Accession Number: 20180501-5394.

    Comments Due: 5 p.m. ET 5/14/18.

    Docket Numbers: RP18-787-000.

    Applicants: Fayetteville Express Pipeline LLC.

    Description: § 4(d) Rate Filing: Fuel Filing on 5-1-18 to be effective 6/1/2018.

    Filed Date: 5/1/18.

    Accession Number: 20180501-5397.

    Comments Due: 5 p.m. ET 5/14/18.

    Docket Numbers: RP18-788-000.

    Applicants: Tennessee Gas Pipeline Company, L.L.C.

    Description: § 4(d) Rate Filing: Volume No. 2—Triad Expansion Project to be effective 6/1/2018.

    Filed Date: 5/1/18.

    Accession Number: 20180501-5400.

    Comments Due: 5 p.m. ET 5/14/18.

    Docket Numbers: RP18-789-000.

    Applicants: Cheniere Corpus Christi Pipeline, LP.

    Description: Compliance filing CCPL Compliance Filing for Docket No. CP12-508-000 to be effective 6/1/2018.

    Filed Date: 5/1/18.

    Accession Number: 20180501-5402.

    Comments Due: 5 p.m. ET 5/14/18.

    Docket Numbers: RP18-790-000.

    Applicants: Enable Gas Transmission, LLC.

    Description: § 4(d) Rate Filing: Negotiated Rate Filing—May 2018 Spire 1005896 to be effective 5/1/2018.

    Filed Date: 5/1/18.

    Accession Number: 20180501-5404.

    Comments Due: 5 p.m. ET 5/14/18.

    Docket Numbers: RP18-791-000.

    Applicants: Cheniere Corpus Christi Pipeline, LP.

    Description: § 4(d) Rate Filing: CCPL/CCL Negotiated Rate to be effective 6/1/2018.

    Filed Date: 5/2/18.

    Accession Number: 20180502-5044.

    Comments Due: 5 p.m. ET 5/14/18.

    Docket Numbers: RP18-792-000.

    Applicants: Northern Natural Gas Company.

    Description: § 4(d) Rate Filing: 20180502 Negotiated Rate to be effective 5/2/2018.

    Filed Date: 5/2/18.

    Accession Number: 20180502-5147.

    Comments Due: 5 p.m. ET 5/14/18.

    Docket Numbers: RP18-793-000.

    Applicants: Granite State Gas Transmission, Inc.

    Description: § 4(d) Rate Filing: Amendment Settlement Filing to be effective 7/31/2018.

    Filed Date: 5/2/18.

    Accession Number: 20180502-5148.

    Comments Due: 5 p.m. ET 5/14/18.

    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: http://www.ferc.gov/docs-filing/efiling/filing-req.pdf. For other information, call (866) 208-3676 (toll free). For TTY, call (202) 502-8659.

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09850 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission [Docket No. IC18-5-000] Commission Information Collection Activities (FERC-917 and FERC-918); Comment Request; Extension AGENCY:

    Federal Energy Regulatory Commission.

    ACTION:

    Comment request.

    SUMMARY:

    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 Federal Register 2/6/2018 requesting public comments. The Commission received no comments on the FERC-917 nor the FERC-918 and is making this notation in its submittal to OMB.

    DATES:

    Comments on the collection of information are due by June 8, 2018.

    ADDRESSES:

    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: [email protected]. Attention: Federal Energy Regulatory Commission Desk Officer. The Desk Officer may also be reached via telephone at 202-395-8528.

    A copy of the comments should also be sent to the Commission, in Docket No. IC18-5-000, by either of the following methods:

    eFiling at Commission's website: http://www.ferc.gov/docs-filing/efiling.asp.

    Mail/Hand Delivery/Courier: Federal Energy Regulatory Commission, Secretary of the Commission, 888 First Street NE, Washington, DC 20426.

    Instructions: All submissions must be formatted and filed in accordance with submission guidelines at: http://www.ferc.gov/help/submission-guide.asp. For user assistance contact FERC Online Support by email at [email protected], or by phone at: (866) 208-3676 (toll-free), or (202) 502-8659 for TTY.

    Docket: Users interested in receiving automatic notification of activity in this docket or in viewing/downloading comments and issuances in this docket may do so at http://www.ferc.gov/docs-filing/docs-filing.asp.

    FOR FURTHER INFORMATION CONTACT:

    Ellen Brown may be reached by email at [email protected], by telephone at (202) 502-8663, and by fax at (202) 273-0873.

    SUPPLEMENTARY INFORMATION:

    Title: FERC-917 (Electric Transmission Facilities) and FERC-918 (Standards for Business Practices and Communication Protocols for Public Utilities.

    OMB Control No.: 1902-0233.

    Type of Request: Three-year extension of the FERC-917 and FERC-918 information collection requirements with no changes to the reporting requirements.

    Abstract: On February 17, 2007, the Commission issued Order No. 890 1 to address and remedy opportunities for undue discrimination under the pro forma Open Access Transmission Tariff (OATT) adopted in 1996 by Order No. 888.2 Through Order No. 890, the Commission:

    1 Final Rule in Docket Nos. RM05-17-000 and RM05-25-000, issued 2/16/2007.

    2 Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & Regs. ¶ 31,036 (1996), order on reh'g, Order No. 888-A, 62 FR 12274 (Mar. 14, 1997), FERC Stats. & Regs. ¶ 31,048 (1997), order on reh'g, Order No. 888-B, 81 FERC ¶ 61,248 (1997), order on reh'g, Order No. 888-C, 82 FERC ¶ 61,046 (1998), aff'd in relevant part sub nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 (2002).

    • 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 determine the level of secured and unsecured credit required.

    The Commission required a NERC/NAESB 3 team to draft and review Order No. 890 reliability standards and business practices. The team was to solicit comment from each utility on developed standards and practices and utilities were to implement each, after Commission approval. Public utilities, working through NERC, were to revise reliability standards to require the exchange of data and coordination among transmission providers and, working through NAESB, were to develop complementary business practices.

    3 NAESB is the North American Energy Standards Board.

    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).

    Type of Respondents: Provide information on any types of entities who respond to the information collection.

    Estimate of Annual Burden4 : The estimated annual public reporting burdens for FERC-917 (requirements in 18 CFR 35.28) and FERC-918 (requirements in 18 CFR 37.6 and 37.7) are reduced from the original estimates made three years ago. The reductions are due to the incorporation and completion of:

    4 The Commission defines burden as the total time, effort, or financial resources expended by persons to generate, maintain, retain, or disclose or provide information to or for a Federal agency. For further explanation of what is included in the information collection burden, reference 5 Code of Federal Regulations 1320.3.

    • 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:

    5 Burden is defined as the total time, effort, or financial resources expended by persons to generate, maintain, retain, or disclose or provide information to or for a Federal agency. For further explanation of what is included in the information collection burden, refer to 5 Code of Federal Regulations 1320.3.

    FERC information collection Annual
  • number of
  • respondents
  • Average
  • number of
  • reponses per
  • respondent
  • Average
  • burden 5 hours
  • per response
  • Total annual
  • burden hours
  • (1) (2) (3) (1)×(2)×(3) 18 CFR 35.28 (FERC-917) Conforming tariff changes 0 0 0 0 Revision of Imbalance Charges 0 0 0 0 ATC revisions 0 0 0 0 Planning (Attachment K) 134 1 100 13,400 Congestion studies 134 1 300 40,200 Attestation of network resource commitment 134 1 1 134 Capacity reassignment 134 1 100 13,400 Operational Penalty annual filing 134 1 10 1,340 Creditworthiness—include criteria in the tariff 0 0 0 0 FERC-917—Sub Total Part 35 68,474 18 CFR 37.6 & 37.7 (FERC-918) ATC-related standards: NERC/NAESB Team to develop 0 0 0 0 Review and comment by utility 0 0 0 0 Implementation by each utility 0 0 0 0 Mandatory data exchanges 134 1 80 10,720 Explanation of change of ATC values 134 1 100 13,400 Reevaluate CBM and post quarterly 134 1 20 2,680 Post OASIS metrics; requests accepted/denied 134 1 90 12,060 Post planning redispatch offers and reliability redispatch data 134 1 20 2,680 Post curtailment data 134 1 10 1,340 Post Planning and System Impact Studies 134 1 5 670 Posting of metrics for System Impact Studies 134 1 100 13,400 Post all rules to OASIS 134 1 5 670 FERC-918—Recordkeeping Requirements 134 1 40 5,360 FERC-918 -Sub Total of Part 37 Reporting Requirements 57,620 FERC-918—Sub Total of Reporting and Recordkeeping Requirements 62,980 Total FERC-917 and FERC-918 (Part 35 + Part 37, Reporting and Recordkeeping Requirements) 131,454

    Comments: Comments are invited on: (1) Whether the collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (2) the accuracy of the agency's estimate of the burden and cost of the collection of information, including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility and clarity of the information collection; and (4) ways to minimize the burden of the collection of information on those who are to respond, including the use of automated collection techniques or other forms of information technology.

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09859 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission Combined Notice of Filings #2

    Take notice that the Commission received the following electric rate filings:

    Docket Numbers: ER10-2641-031; ER10-1874-007; ER10-2663-032; ER10-2881-032; ER10-2882-034; ER10-2883-032; ER10-2884-032; ER10-2885-032; ER16-2509-003; ER17-2400-003; ER17-2401-003; ER17-2403-003; ER17-2404-003.

    Applicants: Oleander Power Project, Limited Partnership, Southern Company—Florida LLC, Mankato Energy Center, LLC, Alabama Power Company, Southern Power Company, Mississippi Power Company, Georgia Power Company, Gulf Power Company, Rutherford Farm, LLC, SP Butler Solar, LLC, SP Decatur Parkway Solar, LLC, SP Pawpaw Solar, LLC, SP Sandhills Solar, LLC.

    Description: Notification of Change in Status of Oleander Power Project, Limited Partnership, et al.

    Filed Date: 5/3/18.

    Accession Number: 20180503-5091.

    Comments Due: 5 p.m. ET 5/24/18.

    Docket Numbers: ER18-1464-002.

    Applicants: Midcontinent Independent System Operator, Inc.

    Description: Tariff Amendment: 2018-05-03_2nd Amendment to Sub-Regional Power Balance Constraints filing to be effective 6/27/2018.

    Filed Date: 5/3/18.

    Accession Number: 20180503-5111.

    Comments Due: 5 p.m. ET 5/24/18.

    Docket Numbers: ER18-1482-001.

    Applicants: Pacific Gas and Electric Company.

    Description: Tariff Amendment: Errata to Q1 2018 Quarterly Filing of City and County of San Francisco's WDT SA to be effective 3/31/2018.

    Filed Date: 5/3/18.

    Accession Number: 20180503-5053.

    Comments Due: 5 p.m. ET 5/24/18.

    Docket Numbers: ER18-1507-000.

    Applicants: PJM Interconnection, L.L.C.

    Description: § 205(d) Rate Filing: First Revised ISA, SA No. 2013, Queue No. AC2-018 to be effective 4/11/2018.

    Filed Date: 5/2/18.

    Accession Number: 20180502-5186.

    Comments Due: 5 p.m. ET 5/23/18.

    Docket Numbers: ER18-1514-000.

    Applicants: Southern California Edison Company.

    Description: § 205(d) Rate Filing: GIA & DSA Goleta Energy Center Project SA Nos. 1004-1005 to be effective 5/4/2018.

    Filed Date: 5/3/18.

    Accession Number: 20180503-5050.

    Comments Due: 5 p.m. ET 5/24/18.

    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: http://www.ferc.gov/docs-filing/efiling/filing-req.pdf. For other information, call (866) 208-3676 (toll free). For TTY, call (202) 502-8659.

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09849 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission Notice of Document Labelling Guidance for Documents Submitted to or Filed With the Commission or Commission Staff

    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), see 18 CFR 388.113, should include in a top center header of each page of the document the following text: CUI//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 information type in a top center header of each page of the document in the following format: CUI//[Information Type]/[Additional Information Type], e.g., CUI//CEII/PRIV.

    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). See Fixing America's Surface Transportation Act, Public Law 114-94, 61,003, 129 Stat. 1312, 1773-1779 (2015); see also 18 CFR 388.113(d)(1)(i-ii).

    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 (i.e., lines or individual words or numbers)—containing such material. See 18 CFR 388.112(b).

    This notice supersedes and clarifies an earlier notice issued April 14, 2017. (See Notice of Document Labelling Guidance for Documents Submitted to or Filed with the Commission or Commission Staff, April 14, 2017)

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09856 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission [Docket Nos. CP18-102-000 & CP18-103-000] 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

    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 (i.e., CP18-102-000 and/or CP18-103-000) to ensure they are considered as part of this proceeding.

    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 (www.ferc.gov).

    Public Participation

    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 [email protected]. Please carefully follow these instructions so that your comments are properly recorded.

    (1) You can file your comments electronically using the eComment feature on the Commission's website (www.ferc.gov) under the link to Documents and Filings. This is an easy method for submitting brief, text-only comments on a project;

    (2) You can file your comments electronically by using the eFiling feature on the Commission's website (www.ferc.gov) under the link to Documents and Filings. With eFiling, you can provide comments in a variety of formats by attaching them as a file with your submission. New eFiling users must first create an account by clicking on “eRegister.” If you are filing a comment on a particular project, please select “Comment on a Filing” as the filing type; or

    (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 1.1

    1 The appendices referenced in this notice will not appear in the Federal Register. Copies of the appendices were sent to all those receiving this notice in the mail and are available at www.ferc.gov using the link called “eLibrary” or from the Commission's Public Reference Room, 888 First Street NE, Washington, DC 20426, or call (202) 502-8371. For instructions on connecting to eLibrary, refer to the last page of this notice.

    Summary of the Proposed Projects

    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. CP18-103-000) would include additional natural gas compression facilities at the existing Cheyenne Hub to enable deliveries between Rockies Express and other interconnected pipelines at the Cheyenne Hub. According to the applicants, their Cheyenne Connector Pipeline and Cheyenne Hub Enhancement Projects are needed to transport and move growing natural gas production originating in Weld County to national markets.

    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.

    Land Requirements for Construction

    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 EA Process

    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 2 to discover and address concerns the public may have about proposals. This process is referred to as “scoping.” The main goal of the scoping process is to focus the analysis in the EA on the important environmental issues. By this notice, the Commission requests public comments on the scope of the issues to be addressed in the EA. We will consider all filed comments during the preparation of the EA.

    2 “We,” “us,” and “our” refer to the environmental staff of the Commission's Office of Energy Projects.

    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.3 Agencies that would like to request cooperating agency status should follow the instructions for filing comments provided under the Public Participation section of this notice.

    3 The Council on Environmental Quality regulations addressing cooperating agency responsibilities are at Title 40, Code of Federal Regulations, Part 1501.6.

    Consultations Under Section 106 of the National Historic Preservation Act

    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.4 We will define the project-specific Area of Potential Effects (APE) in consultation with the SHPO as the projects develop. On natural gas facility projects, the APE at a minimum encompasses all areas subject to ground disturbance (examples include construction right-of-way, contractor/pipe storage yards, compressor stations, and access roads). Our EA for these projects will document our findings on the impacts on historic properties and summarize the status of consultations under section 106.

    4 The Advisory Council on Historic Preservation's regulations are at Title 36, Code of Federal Regulations, Part 800. Those regulations define historic properties as any prehistoric or historic district, site, building, structure, or object included in or eligible for inclusion in the National Register of Historic Places.

    Environmental Mailing List

    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).

    Becoming an Intervenor

    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. Motions to intervene are more fully described at http://www.ferc.gov/resources/guides/how-to/intervene.asp.

    Additional Information

    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 www.ferc.gov using the “eLibrary” link. Click on the eLibrary link, click on “General Search” and enter the docket number, excluding the last three digits in the Docket Number field (i.e., CP18-102 or CP18-103). Be sure you have selected an appropriate date range. For assistance, please contact FERC Online Support at [email protected] or toll free at (866) 208-3676, or for TTY, contact (202) 502-8659. The eLibrary link also provides access to the texts of formal documents issued by the Commission, such as orders, notices, and rulemakings.

    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 www.ferc.gov/docs-filing/esubscription.asp.

    Finally, public sessions or site visits will be posted on the Commission's calendar located at www.ferc.gov/EventCalendar/EventsList.aspx along with other related information.

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09858 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission [Docket No. EL18-136-000] Notice of Institution of Section 206 Proceeding and Refund Effective Date; NRG Wholesale Generation LP

    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. NRG Wholesale Generation LP, 163 FERC ¶ 61,086 (2018).

    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 Federal Register.

    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.

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09852 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission [Docket No. AD18-9-000] Notice of Electric Quarterly Report Users Group Meeting

    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 [email protected].

    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 http://www.ferc.gov/whats-new/registration/06-05-18-form.asp. There is no registration fee. Anyone with internet access can listen to the meeting by navigating to www.ferc.gov's Calendar of Events, locating the EQR Users Group Meeting on the Calendar, and clicking on the link to the webcast. The webcast will allow persons to listen to the technical conference and send questions during the meeting to [email protected]. In the event you would also like to participate in the meeting dialogue by phone please select the telephone option when registering. If you have already registered for the meeting, and would like to participate by phone, please re-register and select the telephone option.

    Commission conferences are accessible under section 508 of the Rehabilitation Act of 1973. For accessibility accommodations, please send an email to [email protected] or call toll free 1-866-208-3372 (voice) or 202-208-1659 (TTY), or send a FAX to 202-208-2106 with the required accommodations.

    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 [email protected].

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary. Agenda EQR Users Group Meeting Commission Meeting Room Tuesday, June 5, 2018 1:00-1:15 p.m. Welcome, Introductions, and Logistics —Agenda Review —Ex Parte Limitations —Meeting Rules for Comments and Questions 1:15-1:45 p.m. Updates Since Last Meeting —New Frequently Asked Questions posted to EQR website —RTO/ISO Data Alignment Project Update 1:45-2:30 p.m. Common EQR Audit Findings 2:30-3:15 p.m. EQR Data Access —Methods for accessing EQR data —Feedback from EQR users on accessing EQR data 3:15-3:30 p.m. Break 3:30-4:15 p.m. EQR Data Uses —Applications of EQR data —Feedback from EQR users on EQR data uses 4:15-4:45 p.m. Data Interpretation —Interpreting EQR data using additional data sources —Feedback from EQR users on interpreting EQR data 4:45-5:00 p.m. Open Discussion 5:00 p.m. End of Meeting—Closing Remarks
    [FR Doc. 2018-09857 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission [Docket Nos. EL17-64-000; EL17-65-000; ER18-87-000; ER18-87-001] 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

    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.1 The parties are requested to file with the Secretary of the Commission complete responses to the questions 2 in the attached request within 30 days of the date of this notice.3

    1 This request for additional information is issued pursuant to 18 CFR 375.307(b)(3)(ii) (2017) and is interlocutory. This request for information is not subject to rehearing under 18 CFR 385.713.

    2 If a response to a question includes numeric values, where possible, please provide corresponding graphs, charts or tables to provide context.

    3 To the extent that some of the requested information may include Critical Energy Infrastructure Information or other privileged or confidential information, please submit a nonpublic version in addition to a public version for Commission review, in accordance with 18 CFR 388.112 (2017).

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09851 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission Notice of Commission Staff Attendance

    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):

    NYISO Electric System Planning Working Group Meeting May 10, 2018, 1:00 p.m.-3:00 p.m. (EST)

    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: http://www.nyiso.com/public/committees/documents.jsp?com=bic_espwg&directory=2018-05-10.

    NYISO Business Issues Committee Meeting May 16, 2018, 10:00 a.m.-4:00 p.m. (EST)

    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: http://www.nyiso.com/public/committees/documents.jsp?com=bic&directory=2018-05-16.

    NYISO Operating Committee Meeting May 17, 2018, 10:00 a.m.-4:00 p.m. (EST)

    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: http://www.nyiso.com/public/committees/documents.jsp?com=oc&directory=2018-05-17.

    NYISO Electric System Planning Working Group Meeting May 22, 2018, 10:00 a.m.-4:00 p.m. (EST)

    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: http://www.nyiso.com/public/committees/documents.jsp?com=bic_espwg&directory=2018-05-22.

    NYISO Management Committee Meeting May 30, 2018, 10:00 a.m.-2:00 p.m. (EST)

    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: http://www.nyiso.com/public/committees/documents.jsp?com=mc&directory=2018-05-30.

    The discussions at the meetings described above may address matters at issue in the following proceedings:

    New York Independent System Operator, Inc., Docket No. ER13-102.

    New York Independent System Operator, Inc., Docket No. ER15-2059.

    New York Independent System Operator, Inc., Docket No. ER17-2327.

    For more information, contact James Eason, Office of Energy Market Regulation, Federal Energy Regulatory Commission at (202) 502-8622 or [email protected].

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09855 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    DEPARTMENT OF ENERGY Federal Energy Regulatory Commission [Docket No. EL18-137-000] Notice of Institution of Section 206 Proceeding and Refund Effective Date; NRG Energy Center Dover LLC

    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. NRG Energy Center Dover LLC, 163 FERC ¶ 61,085 (2018).

    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 Federal Register.

    Any interested person desiring to be heard in Docket No. EL18-137-000 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.

    Dated: May 3, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-09853 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    FEDERAL DEPOSIT INSURANCE CORPORATION Notice of Termination of Receiverships

    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.

    Notice of Termination of Receiverships Fund Receivership name City State Termination
  • date
  • 10075 Rock River Bank Oregon IL 5/1/2018 10176 Columbia River Bank The Dalles OR 5/1/2018 10253 Peninsula Bank Englewood FL 5/1/2018 10344 Citizens Bank Of Effingham Springfield GA 5/1/2018 10399 The Riverbank Wyoming MN 5/1/2018

    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.

    Dated at Washington, DC, on May 3, 2018. Federal Deposit Insurance Corporation. Robert E. Feldman, Executive Secretary.
    [FR Doc. 2018-09808 Filed 5-8-18; 8:45 am] BILLING CODE 6714-01-P
    FEDERAL RESERVE SYSTEM Change in Bank Control Notices; Acquisitions of Shares of a Bank or Bank Holding Company

    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. Federal Reserve Bank of Chicago (Colette A. Fried, Assistant Vice President) 230 South LaSalle Street, Chicago, Illinois 60690-1414:

    1. Ronald L. Hansen, Durant, Iowa, individually and as a group acting in concert with Thomas O. Hansen Living Trust, Thomas O. Hansen, Trustee, both of Enoch, Utah and the Hansen Grandchildren's Trust, Durant, Iowa, Ronald L. Hansen and Thomas O. Hansen, co-trustees; to acquire shares of Liberty Bancorporation, Durant, Iowa and thereby indirectly acquire Liberty Trust and Savings Bank, Durant, Iowa.

    B. Federal Reserve Bank of Kansas City (Dennis Denney, Assistant Vice President) 1 Memorial Drive, Kansas City, Missouri 64198-0001:

    1. Diane Athey, Enid, Oklahoma, individually and as co-trustee of several trusts; the Linda Ann Athey Non-Exempt QTip Trust and the Linda Ann Athey GST Exemption Q-Tip Trust, both of Enid, Oklahoma; for approval as members of the Athey Control Group; to acquire shares of Security Financial Services Corporation, and thereby acquire shares of Security National Bank, both of Enid, Oklahoma.

    Board of Governors of the Federal Reserve System, May 4, 2018. Yao-Chin Chao, Assistant Secretary of the Board.
    [FR Doc. 2018-09886 Filed 5-8-18; 8:45 am] BILLING CODE P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES Agency for Healthcare Research and Quality Common Formats for Patient Safety Data Collection AGENCY:

    Agency for Healthcare Research and Quality (AHRQ), Department of Health and Human Services (HHS).

    ACTION:

    Notice of Availability—New Common Formats.

    SUMMARY:

    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 Common Formats for Surveillance—Hospital Version 0.2 Beta for public review and comment.

    DATES:

    Ongoing public input.

    ADDRESSES:

    The Common Formats for Surveillance—Hospital Version 0.2 Beta can be accessed electronically at the following website: http://www.qualityforum.org/Project_Pages/Common_Formats_for_Patient_Safety_Data.aspx.

    FOR FURTHER INFORMATION CONTACT:

    Dr. Hamid Jalal, Center for Quality Improvement and Patient Safety, AHRQ, 5600 Fishers Lane, Rockville, MD 20857; Telephone (toll free): (866) 403-3697; Telephone (local): (301) 427-1111; TTY (toll free): (866) 438-7231; TTY (local): (301) 427-1130; Email: [email protected].

    SUPPLEMENTARY INFORMATION:

    Background on Common Formats Development

    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 Federal Register on November 21, 2008, 73 FR 70731-70814, provide for the formation of Patient Safety Organizations (PSOs), which collect, aggregate, and analyze confidential information regarding the quality and safety of health care delivery. The collection of patient safety work product allows for the aggregation of data that help to identify and address underlying causal factors of patient safety and quality issues.

    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: https://www.ahrq.gov/news/blog/ahrqviews/new-system-aims-to-improve-patient-safety-monitoring.html.

    Commenting on Common Formats: Common Formats for Surveillance—Hospital Version 0.2 Beta

    AHRQ is specifically interested in receiving feedback in order to guide the improvement of the Common Formats. Information on how to comment on the Common Formats for Surveillance—Hospital Version 0.2 Beta is available at: http://www.qualityforum.org/Project_Pages/Common_Formats_for_Patient_Safety_Data.aspx.

    Additional information about the Common Formats can be obtained through AHRQ's PSO website: https://pso.ahrq.gov/.

    Francis D. Chesley, Jr., Acting Deputy Director.
    [FR Doc. 2018-09870 Filed 5-8-18; 8:45 am] BILLING CODE 4160-90-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services [Document Identifier: CMS-10102] Agency Information Collection Activities: Proposed Collection; Comment Request AGENCY:

    Centers for Medicare & Medicaid Services, HHS.

    ACTION:

    Notice.

    SUMMARY:

    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 Federal Register concerning each proposed collection of information (including each proposed extension or reinstatement of an existing collection of information) and to allow 60 days for public comment on the proposed action. Interested persons are invited to send comments regarding our burden estimates or any other aspect of this collection of information, including the necessity and utility of the proposed information collection for the proper performance of the agency's functions, the accuracy of the estimated burden, ways to enhance the quality, utility, and clarity of the information to be collected, and the use of automated collection techniques or other forms of information technology to minimize the information collection burden.

    DATES:

    Comments must be received by July 9, 2018.

    ADDRESSES:

    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. Electronically. You may send your comments electronically to http://www.regulations.gov. Follow the instructions for “Comment or Submission” or “More Search Options” to find the information collection document(s) that are accepting comments.

    2. By regular mail. You may mail written comments to the following address:

    CMS, Office of Strategic Operations and Regulatory Affairs, Division of Regulations Development, Attention: Document Identifier/OMB Control Number ____, Room C4-26-05, 7500 Security Boulevard, Baltimore, Maryland 21244-1850.

    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 https://www.cms.gov/Regulations-and-Guidance/Legislation/PaperworkReductionActof1995/PRA-Listing.html.

    2. Email your request, including your address, phone number, OMB number, and CMS document identifier, to [email protected].

    3. Call the Reports Clearance Office at (410) 786-1326.

    FOR FURTHER INFORMATION CONTACT:

    William Parham at (410) 786-4669.

    SUPPLEMENTARY INFORMATION:

    Contents

    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 ADDRESSES).

    CMS-10102 National Implementation of the Hospital CAHPS Survey

    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 Federal Register concerning each proposed collection of information, including each proposed extension or reinstatement of an existing collection of information, before submitting the collection to OMB for approval. To comply with this requirement, CMS is publishing this notice.

    Information Collection

    1. Type of Information Collection Request: Extension of a currently approved collection; Title of Information Collection: National Implementation of the Hospital CAHPS Survey; Use: The HCAHPS (Hospital Consumer Assessment of Healthcare Providers and Systems) Survey, also known as the CAHPS® Hospital Survey or Hospital CAHPS®, is a standardized survey instrument and data collection methodology that has been in use since 2006 to measure patients' perspectives of hospital care. While many hospitals collect information on patient satisfaction, HCAHPS created a national standard for the collection and public reporting of information that enables valid comparisons to be made across all hospitals to support consumer choice. Form Number: CMS-10102 (OMB control number 0938-0981); Frequency: Occasionally; Affected Public: Private sector (Business or other for-profits and Not-for-profit institutions); Number of Respondents: 4,200; Total Annual Responses: 3,100,000; Total Annual Hours: 413,230. (For policy questions regarding this collection contact William Lehrman at 410-786-1037.)

    Dated: May 2, 2018. William N. Parham, III, Director, Paperwork Reduction Staff, Office of Strategic Operations and Regulatory Affairs.
    [FR Doc. 2018-09686 Filed 5-8-18; 8:45 am] BILLING CODE 4120-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES Food and Drug Administration [Docket No. FDA-2018-D-1434] Waivers, Exceptions, and Exemptions From the Requirements of Section 582 of the Federal Food, Drug, and Cosmetic Act; Draft Guidance for Industry; Availability AGENCY:

    Food and Drug Administration, HHS.

    ACTION:

    Notice of availability.

    SUMMARY:

    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.

    DATES:

    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.

    ADDRESSES:

    You may submit comments on any guidance at any time as follows:

    Electronic Submissions

    Submit electronic comments in the following way:

    Federal eRulemaking Portal: https://www.regulations.gov. Follow the instructions for submitting comments. Comments submitted electronically, including attachments, to https://www.regulations.gov will be posted to the docket unchanged. Because your comment will be made public, you are solely responsible for ensuring that your comment does not include any confidential information that you or a third party may not wish to be posted, such as medical information, your or anyone else's Social Security number, or confidential business information, such as a manufacturing process. Please note that if you include your name, contact information, or other information that identifies you in the body of your comments, that information will be posted on https://www.regulations.gov.

    • 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”).

    Written/Paper Submissions

    Submit written/paper submissions as follows:

    Mail/Hand delivery/Courier (for written/paper submissions): Dockets Management Staff (HFA-305), Food and Drug Administration, 5630 Fishers Lane, Rm. 1061, Rockville, MD 20852.

    • 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.”

    Instructions: All submissions received must include the Docket No. FDA-2018-D-1434 for “Waivers, Exceptions, and Exemptions from the Requirements of Section 582 of the Federal Food, Drug, and Cosmetic Act; Draft Guidance for Industry.” Received comments will be placed in the docket and, except for those submitted as “Confidential Submissions,” publicly viewable at https://www.regulations.gov or at the Dockets Management Staff between 9 a.m. and 4 p.m., Monday through Friday.

    • 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 submission. You should submit two copies total. One copy will include the information you claim to be confidential with a heading or cover note that states “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.” The Agency will review this copy, including the claimed confidential information, in its consideration of comments. The second copy, which will have the claimed confidential information redacted/blacked out, will be available for public viewing and posted on https://www.regulations.gov. Submit both copies to the Dockets Management Staff. If you do not wish your name and contact information to be made publicly available, you can provide this information on the cover sheet and not in the body of your comments and you must identify this information as “confidential.” Any information marked as “confidential” will not be disclosed except in accordance with 21 CFR 10.20 and other applicable disclosure law. For more information about FDA's posting of comments to public dockets, see 80 FR 56469, September 18, 2015, or access the information at: https://www.thefederalregister.org/fdsys/pkg/FR-2015-09-18/pdf/2015-23389.pdf.

    Docket: For access to the docket to read background documents or the electronic and written/paper comments received, go to https://www.regulations.gov and insert the docket number, found in brackets in the heading of this document, into the “Search” box and follow the prompts and/or go to the Dockets Management Staff, 5630 Fishers Lane, Rm. 1061, Rockville, MD 20852.

    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 SUPPLEMENTARY INFORMATION section for electronic access to the draft guidance document.

    FOR FURTHER INFORMATION CONTACT:

    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, [email protected].

    SUPPLEMENTARY INFORMATION:

    I. Background

    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 (i.e., manufacturer, repackager, wholesale distributor, or dispenser) may request a waiver from certain requirements in section 582 if it would result in an undue economic hardship or for emergency medical reasons; (2) a manufacturer or repackager may request an exception to the section 582 requirements related to product identifiers if a product package is too small or otherwise unable to accommodate a label with sufficient space; and (3) FDA may determine other products or transactions shall be exempt from certain requirements in section 582.

    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.

    II. Paperwork Reduction Act of 1995

    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 Federal Register concerning each proposed collection of information before submitting the collection to OMB for approval. To comply with this requirement, FDA is publishing notice of the proposed collection of information set forth in this document.

    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.

    III. Waivers, Exceptions, and Exemptions From the Requirements of Section 582 of the FD&C Act

    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 approximately 800 hours (see table 1, row 1).

    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).

    Table 1—Estimated Annual Reporting Burden 1 Waivers, Exceptions, and Exemptions from section 582 of the FD&C Act—Draft Guidance Number of
  • respondents
  • Number of
  • responses per
  • respondent
  • Total annual
  • responses
  • Average
  • burden per
  • response
  • Total hours
    Requests to FDA for a Waiver, Exception, or Exemption 20 1 20 40 800 Notification to FDA of a Material Change in Circumstances Warranting the Waiver, Exception, or Exemption 1 1 1 16 16 Requests to FDA to Renew a Waiver, Exception, or Exemption 1 1 1 16 16 Total 832 1 There are no capital costs or operating and maintenance costs associated with this collection of information.
    III. Electronic Access

    Persons with access to the internet may obtain the draft guidance at either https://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/default.htm, https://www.fda.gov/BiologicsBloodVaccines/GuidanceComplianceRegulatoryInformation/Guidances/default.htm, or https://www.regulations.gov.

    Dated: May 3, 2018. Leslie Kux, Associate Commissioner for Policy.
    [FR Doc. 2018-09843 Filed 5-8-18; 8:45 am] BILLING CODE 4164-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES Health Resources and Service Administration National Advisory Council on the National Health Service Corps; Notice of Meeting AGENCY:

    Health Resources and Service Administration (HRSA), Department of Health and Human Services (HHS).

    ACTION:

    Notice of Advisory Committee meeting.

    SUMMARY:

    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.

    DATES:

    Tuesday, May 15, 2018, 2:00 p.m. to 5:30 p.m. ET.

    ADDRESSES:

    The meeting is a teleconference and webinar. The conference call-in number is 1-800-619-2521; passcode: 9271697. The webinar link is https://hrsa.connectsolutions.com/nacnhsc.

    FOR FURTHER INFORMATION CONTACT:

    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: [email protected].

    SUPPLEMENTARY INFORMATION:

    Background: NACNHSC consults, advises, and makes recommendations to the Secretary of HHS and HRSA's Administrator, with respect to their responsibilities under Subpart II, Part D of Title III of the Public Health Service Act, as amended (NHSC and Health Professional Shortage Area Designations). The NACNHSC also reviews and comments on regulations promulgated by the Secretary under Subpart II.

    Agenda: During the May 15, 2018, meeting, NACNHSC will discuss issues related to current focus areas of the NHSC. Information about the NACNHSC, a roster of members, the meeting agenda, as well as past meeting summaries is located on the NACNHSC website: https://nhsc.hrsa.gov/corpsexperience/aboutus/nationaladvisorycouncil/.

    Public Participation: Members of the public and interested parties may request to participate in the meeting or provide oral public comment during the meeting by contacting Monica-Tia Bullock via email at [email protected] by May 10, 2018. Public comment will be limited to three (3) minutes per speaker.

    Public participants may also submit written statements in advance of the scheduled meeting. Written statements are due to Monica-Tia Bullock at [email protected] by May 10, 2018. Please be advised that committee members will receive copies of all written statements submitted from the public. Any further public participation will be at the sole discretion of the Chair, with approval from the DFO.

    Amy P. McNulty, Acting Director, Division of the Executive Secretariat.
    [FR Doc. 2018-09825 Filed 5-8-18; 8:45 am] BILLING CODE 4165-15-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES Meeting of the Chronic Fatigue Syndrome Advisory Committee AGENCY:

    Department of Health and Human Services, Office of the Secretary, Office of the Assistant Secretary for Health.

    ACTION:

    Notice.

    SUMMARY:

    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.

    DATES:

    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).

    ADDRESSES:

    This meeting will be broadcasted to the public as a webinar. A webinar is a virtual meeting. Registration is not required for the webinar.

    FOR FURTHER INFORMATION CONTACT:

    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 [email protected].

    SUPPLEMENTARY INFORMATION:

    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 http://www.hhs.gov/ash/advisory-committees/cfsac/meetings/index.html.

    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 [email protected] by Wednesday, June 13, 2018. The email should contain the speaker's name and the telephone number that will be used for public comments.

    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.

    Dated: April 27, 2018. Gustavo Ceinos, Commander, USPHS, Designated Federal Officer.
    [FR Doc. 2018-09844 Filed 5-8-18; 8:45 am] BILLING CODE 4150-42-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health National Institute on Drug Abuse; Notice of Closed Meetings

    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.

    Name of Committee: National Institute on Drug Abuse Special Emphasis Panel Identification of Biomarkers of HIV-1 Pathogenesis and Substance Abuse Comorbidity (R01-Clinical Trials Not Allowed).

    Date: June 6, 2018.

    Time: 12:00 p.m. to 3:30 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, Neuroscience Center, 6001 Executive Boulevard, Rockville, MD 20852, (Telephone Conference Call).

    Contact Person: Hiromi Ono, Ph.D., Scientific Review Officer, Office of Extramural Policy and Review, National Institute on Drug Abuse, National Institutes of Health, DHHS, 6001 Executive Boulevard, Room 4238, MSC 9550, Bethesda, MD 20892, 301-827-5820, [email protected].

    Name of Committee: National Institute on Drug Abuse Special Emphasis Panel Improving Implementation of Seek, Test, Treat & Retain Strategies Among People Who Inject Drugs in Low to Middle Income Countries (R01-Clinical Trial Required).

    Date: June 14, 2018.

    Time: 12:00 p.m. to 2:30 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, Neuroscience Center. 6001 Executive Boulevard, Rockville, MD 20852, (Telephone Conference Call).

    Contact Person: Hiromi Ono, Ph.D., Scientific Review Officer, Office of Extramural Policy and Review, National Institute on Drug Abuse, National Institutes of Health, DHHS, 6001 Executive Boulevard, Room 4238, MSC 9550, Bethesda, MD 20892, 301-827-5820, [email protected].

    Name of Committee: National Institute on Drug Abuse Special Emphasis Panel Identification of Genetic and Genomic Variants by Next-Gen Sequencing in Non-Human Animal Models (U01).

    Date: June 21, 2018.

    Time: 12:00 p.m. to 2:00 p.m.

    Agenda: To review and evaluate cooperative agreement applications.

    Place: National Institutes of Health, Neuroscience Center, 6001 Executive Boulevard, Rockville, MD 20852, (Telephone Conference Call).

    Contact Person: Gerald L. McLaughlin, Ph.D., Scientific Review Officer, Office of Extramural Policy and Review, National Institute on Drug Abuse, NIH, DHHS, 6001 Executive Blvd., Room 4238, MSC 9550, Bethesda, MD 20892-9550, 301-827-5819, [email protected].

    (Catalogue of Federal Domestic Assistance Program Nos.: 93.279, Drug Abuse and Addiction Research Programs, National Institutes of Health, HHS)
    Dated: May 4, 2018. Natasha M. Copeland, Program Analyst, Office of Federal Advisory Committee Policy.
    [FR Doc. 2018-09900 Filed 5-8-18; 8:45 am] BILLING CODE 4140-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health National Institute on Drug Abuse; Notice of Closed Meeting

    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.

    Name of Committee: National Institute on Drug Abuse Special Emphasis Panel; Rodent Testing to Identify Pharmacotherapies for Substance Dependence (8936).

    Date: May 24, 2018.

    Time: 10:00 a.m. to 12:00 p.m.

    Agenda: To review and evaluate contract proposals.

    Place: National Institutes of Health, Neuroscience Center, 6001 Executive Boulevard, Rockville, MD 20852 (Telephone Conference Call).

    Contact Person: Lyle Furr, Scientific Review Officer, Office of Extramural Affairs, National Institute on Drug Abuse, NIH, DHHS, Room 4227, MSC 9550, 6001 Executive Boulevard, Bethesda, MD 20892-9550, (301) 827-5702, lf33c.nih.gov.

    (Catalogue of Federal Domestic Assistance Program No.: 93.279, Drug Abuse and Addiction Research Programs, National Institutes of Health, HHS)
    Dated: May 4, 2018. Natasha M. Copeland, Program Analyst, Office of Federal Advisory Committee Policy.
    [FR Doc. 2018-09901 Filed 5-8-18; 8:45 am] BILLING CODE 4140-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health Center for Scientific Review; Notice of Closed Meetings

    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.

    Name of Committee: Center for Scientific Review Special Emphasis Panel;RFA Panel: African Health Professional Education Partnership Initiative.

    Date: May 22, 2018.

    Time: 10:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health,6701 Rockledge Drive,Bethesda, MD 20892,(Virtual Meeting).

    Contact Person: Shalanda A Bynum, Ph.D., MPH,Scientific Review Officer,Center for Scientific Review,National Institutes of Health,6701 Rockledge Drive, Room 3206,Bethesda, MD 20892,301-755-4355,[email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel;RFA 17-245: Mammalian Models for Translational Research.

    Date: May 22, 2018.

    Time: 11:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health,6701 Rockledge Drive,Bethesda, MD 20892(Virtual Meeting).

    Contact Person: Careen K Tang-Toth, Ph.D.,Scientific Review Officer,Center for Scientific Review,National Institutes of Health,6701 Rockledge Drive, Room 6214, MSC 7804,Bethesda, MD 20892,(301) 435-3504,[email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel;RFA-CA-17-038: Accelerating Colorectal Cancer Screening and Follow-up: The Moonshot Initiative.

    Date: May 30, 2018.

    Time: 8:00 a.m. to 6:30 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Embassy Suite by Hilton Washington DC,Chevy Chase Pavilion,4300 Military Road NW,Washington, DC 20015.

    Contact Person: Shalanda A Bynum, Ph.D., MPH,Scientific Review Officer,Center for Scientific Review,National Institutes of Health,6701 Rockledge Drive, Room 3206,Bethesda, MD 20892,301-755-4355,[email protected].

    Name of Committee: Population Sciences and Epidemiology Integrated Review Group;Behavioral Genetics and Epidemiology Study Section.

    Date: May 30, 2018.

    Time: 8:30 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: InterContinental Chicago Hotel,505 North Michigan Avenue,Chicago, IL 60611.

    Contact Person: Suzanne Ryan, Ph.D.,Scientific Review Officer,Center for Scientific Review,National Institutes of Health,6701 Rockledge Drive, Room 3139, MSC 7770,Bethesda, MD 20892,(301) 435-1712,[email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel;Behavioral Genetics and Epidemiology: Collaborative Applications.

    Date: May 30, 2018.

    Time: 8:30 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: InterContinental Chicago Hotel,505 North Michigan Avenue,Chicago, IL 60611.

    Contact Person: Suzanne Ryan, Ph.D.,Scientific Review Officer,Center for Scientific Review,National Institutes of Health,6701 Rockledge Drive, Room 3139, MSC 7770,Bethesda, MD 20892,(301) 435-1712,[email protected].

    Name of Committee: Surgical Sciences, Biomedical Imaging and Bioengineering Integrated Review Group;Biomedical Imaging Technology B Study Section.

    Date: May 31-June 1, 2018.

    Time: 8:00 a.m. to 6:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Hilton Washington/Rockville,1750 Rockville Pike,Rockville, MD 20852.

    Contact Person: Mehrdad Mohseni, MD,Scientific Review Officer,Center for Scientific Review,National Institutes of Health,6701 Rockledge Drive, Room 5211, MSC 7854,Bethesda, MD 20892,301-435-0484,[email protected].

    Name of Committee: Surgical Sciences, Biomedical Imaging and Bioengineering Integrated Review Group;Medical Imaging Study Section.

    Date: May 31-June 1, 2018.

    Time: 8:00 a.m. to 6:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Hyatt Regency Bethesda,One Bethesda Metro Center,7400 Wisconsin Avenue,Bethesda, MD 20814.

    Contact Person: Xiang-Ning Li, MD, Ph.D.,Scientific Review Officer,Center for Scientific Review,National Institutes of Health,6701 Rockledge Drive, Room 5112, MSC 7854,Bethesda, MD 20892,301-435-1744,[email protected].

    Name of Committee: Vascular and Hematology Integrated Review Group; Molecular and Cellular Hematology Study Section.

    Date: June 4-5, 2018.

    Time: 8:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Crowne Plaza Houston River Oaks, 2712 Southwest Freeway, Houston, TX 77098.

    Contact Person: Luis Espinoza, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 6183, MSC 7804, Bethesda, MD 20892, 301-495-1213, [email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel; PAR-18-681: Fundamental Mechanism of Affective and Decisional Process in Cancer Control.

    Date: June 5, 2018.

    Time: 10:30 a.m. to 2:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Royal Sonesta Harbor Court Baltimore, 550 Light Street, Baltimore, MD 21202.

    Contact Person: Marc Boulay, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 3110, MSC 7808, Bethesda, MD 20892, (301) 300-6541, [email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel; PAR17-029: Dynamic Interactions between Systemic or Non-Neuronal Systems and the Brain in Aging and in Alzheimer's Disease.

    Date: June 5, 2018.

    Time: 11:00 a.m. to 4:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, 6701 Rockledge Drive, Bethesda, MD 20892 (Telephone Conference Call).

    Contact Person: Inese Z Beitins, MD, Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 6152, MSC 7892, Bethesda, MD 20892, 301-435-1034, [email protected].

    Name of Committee: Surgical Sciences, Biomedical Imaging and Bioengineering Integrated Review Group; Surgery, Anesthesiology and Trauma Study Section.

    Date: June 6-7, 2018.

    Time: 7:30 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Hyatt Regency Bethesda, One Bethesda Metro Center, 7400 Wisconsin Avenue, Bethesda, MD 20814.

    Contact Person: Weihua Luo, MD, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 5114, MSC 7854, Bethesda, MD 20892, (301) 435-1170, [email protected].

    Name of Committee: Digestive, Kidney and Urological Systems Integrated Review Group; Xenobiotic and Nutrient Disposition and Action Study Section.

    Date: June 6, 2018.

    Time: 8:00 a.m. to 8:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Bethesda North Marriott Hotel & Conference Center, 5701 Marinelli Road, Bethesda, MD 20852.

    Contact Person: Martha Garcia, Ph.D., Scientific Reviewer Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 2186, Bethesda, MD 20892, 301-435-1243, [email protected].

    Name of Committee: Bioengineering Sciences & Technologies Integrated Review Group; Modeling and Analysis of Biological Systems Study Section.

    Date: June 6, 2018.

    Time: 8:00 a.m. to 7:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Hyatt Regency Bethesda, One Bethesda Metro Center, 7400 Wisconsin Avenue, Bethesda, MD 20814.

    Contact Person: Craig Giroux, Ph.D., Scientific Review Officer, BST IRG, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 5150, Bethesda, MD 20892, 301-435-2204, [email protected].

    Name of Committee: Infectious Diseases and Microbiology Integrated Review Group; Vector Biology Study Section.

    Date: June 6, 2018.

    Time: 8:00 a.m. to 6:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Residence Inn Bethesda, 7335 Wisconsin Avenue, Bethesda, MD 20814.

    Contact Person: Liangbiao Zheng, Ph.D, Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 3214, MSC 7808, Bethesda, MD 20892, 301-402-5671, [email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel; National Swine Resource and Research Center Review.

    Date: June 6, 2018.

    Time: 1:00 p.m. to 3:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, 6701 Rockledge Drive, Bethesda, MD 20892 (Telephone Conference Call).

    Contact Person: Katherine M Malinda, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 4140, MSC 7814, Bethesda, MD 20892, 301-435-0912, [email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel; FOA Title: Development of Appropriate Pediatric Formulations and Pediatric Drug.

    Date: June 6, 2018.

    Time: 2:00 p.m. to 4:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, 6701 Rockledge Drive, Bethesda, MD 20892 (Telephone Conference Call).

    Contact Person: Paek-Gyu Lee, Ph.D, Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 4201, MSC 7812, Bethesda, MD 20892, (301) 613-2064, [email protected].

    (Catalogue of Federal Domestic Assistance Program Nos. 93.306, Comparative Medicine; 93.333, Clinical Research, 93.306, 93.333, 93.337, 93.393-93.396, 93.837-93.844, 93.846-93.878, 93.892, 93.893, National Institutes of Health, HHS)
    Dated: May 3, 2018. Melanie J. Pantoja, Program Analyst, Office of Federal Advisory Committee Policy.
    [FR Doc. 2018-09812 Filed 5-8-18; 8:45 am] BILLING CODE 4140-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health National Institute of Biomedical Imaging and Bioengineering; Notice of Closed Meeting

    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.

    Name of Committee: National Institute of Biomedical Imaging and Bioengineering Special Emphasis Panel, P41 BTRC Application Review (2018/10 (2018/10).

    Date: May 30, 2018.

    Time: 10:00 a.m. to 6:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, 6707 Rockledge Drive, Bethesda, MD 20892.

    Contact Person: John P. Holden, Ph.D., Scientific Review Officer, 6707 Democracy Boulevard, Room 920, Democracy Two, Bethesda, MD 20892, (301) 496-8775, [email protected].

    Dated: May 3, 2018. David D. Clary, Program Analyst, Office of Federal Advisory Committee Policy.
    [FR Doc. 2018-09899 Filed 5-8-18; 8:45 am] BILLING CODE 4140-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health National Institute of Diabetes and Digestive and Kidney Diseases Notice of Closed Meetings

    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.

    Name of Committee: National Institute of Diabetes and Digestive and Kidney Diseases Initial Review Group; Kidney, Urologic and Hematologic Diseases D Subcommittee.

    Date: June 12-14, 2018.

    Time: 5:00 p.m. to 2:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Warwick Seattle Hotel, 401 Lenora Street, Seattle, WA 98121.

    Contact Person: Barbara A. Woynarowska, Ph.D., Scientific Review Administrator, Review Branch, DEA, NIDDK, National Institutes Of Health, Room 7007, 6707 Democracy Boulevard, Bethesda, MD 20892-5452, (301) 402-7172, [email protected].

    Name of Committee: National Institute of Diabetes and Digestive and Kidney Diseases Initial Review Group; Diabetes, Endocrinology and Metabolic Diseases B Subcommittee.

    Date: June 19-21, 2018.

    Time: 5:30 p.m. to 12:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Hyatt Place Orlando FL Airport, 5435 Forbes Place, Orlando, FL 34786.

    Contact Person: John F. Connaughton, Ph.D., Chief, Scientific Review Branch, Review Branch, DEA, NIDDK, National Institutes of Health, Room 7007, 6707 Democracy Boulevard, Bethesda, MD 20892-5452, (301) 594-7797, [email protected].

    Name of Committee: National Institute of Diabetes and Digestive and Kidney Diseases Initial Review Group; Digestive Diseases and Nutrition C Subcommittee.

    Date: June 20-22, 2018.

    Time: 6:00 p.m. to 12:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Residence Inn Bethesda, 7335 Wisconsin Avenue, Bethesda, MD 20814.

    Contact Person: Maria E. Davila-Bloom, Ph.D., Scientific Review Officer, Review Branch, DEA, NIDDK, National Institutes of Health, Room 7017, 6707 Democracy Boulevard, Bethesda, MD 20892-5452, (301) 594-7637, [email protected].

    (Catalogue of Federal Domestic Assistance Program Nos. 93.847, Diabetes, Endocrinology and Metabolic Research; 93.848, Digestive Diseases and Nutrition Research; 93.849, Kidney Diseases, Urology and Hematology Research, National Institutes of Health, HHS)
    Dated: May 3, 2018. David D. Clary, Program Analyst, Office of Federal Advisory Committee Policy.
    [FR Doc. 2018-09815 Filed 5-8-18; 8:45 am] BILLING CODE 4140-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health National Institute of Diabetes and Digestive and Kidney Diseases; Notice of Closed Meetings

    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.

    Name of Committee: National Institute of Diabetes and Digestive and Kidney Diseases Special Emphasis Panel; Diabetic Foot Consortium.

    Date: May 31, 2018.

    Time: 9:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Doubletree Hotel Bethesda (Formerly Holiday Inn Select), 8120 Wisconsin Avenue, Bethesda, MD 20814.

    Contact Person: Michele L. Barnard, Ph.D., Scientific Review Officer, Review Branch, DEA, NIDDK, National Institutes of Health, Room 7353, 6707 Democracy Boulevard, Bethesda, MD 20892-2542, (301) 594-8898, [email protected].

    Name of Committee: National Institute of Diabetes and Digestive and Kidney Diseases Special Emphasis Panel; Time-Sensitive Obesity Policy and Program Evaluation.

    Date: June 5, 2018.

    Time: 1:00 p.m. to 2:30 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, Two Democracy Plaza, 6707 Democracy Boulevard, Bethesda, MD 20892 (Telephone Conference Call).

    Contact Person: Michele L. Barnard, Ph.D., Scientific Review Officer, Review Branch, DEA, NIDDK, National Institutes of Health, Room 7353, 6707 Democracy Boulevard, Bethesda, MD 20892-2542, (301) 594-8898, [email protected].

    Name of Committee: National Institute of Diabetes and Digestive and Kidney Diseases Special Emphasis Panel; Fellowships in Diabetes, Endocrinology and Metabolism.

    Date: June 6-7, 2018.

    Time: 8:00 a.m. to 6:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Hilton Garden Inn Bethesda, 7301 Waverly Street, Bethesda, MD 20814.

    Contact Person: Thomas A. Tatham, Ph.D., Scientific Review Officer, Review Branch, DEA, NIDDK, National Institutes of Health, Room 7021, 6707 Democracy Boulevard, Bethesda, MD 20892-5452, (301) 594-3993, [email protected].

    Name of Committee: National Institute of Diabetes and Digestive and Kidney Diseases Special Emphasis Panel; R13 Conference Grant Applications.

    Date: June 28, 2018.

    Time: 11:00 a.m. to 12:30 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, Two Democracy Plaza, 6707 Democracy Boulevard, Bethesda, MD 20892 (Telephone Conference Call).

    Contact Person: Jian Yang, Ph.D., Scientific Review Officer, Review Branch, DEA, NIDDK, National Institutes of Health, Room 7111, 6707 Democracy Boulevard, Bethesda, MD 20892-5452, (301) 594-7799, [email protected].

    Name of Committee: National Institute of Diabetes and Digestive and Kidney Diseases Special Emphasis Panel; Renal and Urologic Clinical Small Business Applications.

    Date: June 29, 2018.

    Time: 1:30 p.m. to 3:30 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, Two Democracy Plaza, 6707 Democracy Boulevard, Bethesda, MD 20892 (Telephone Conference Call).

    Contact Person: Ryan G. Morris, Ph.D., Scientific Review Officer, Review Branch, DEA, NIDDK, National Institutes of Health, Room 7015, 6707 Democracy Boulevard, Bethesda, MD 20892-2542, 301-594-4721, [email protected].

    Name of Committee: National Institute of Diabetes and Digestive and Kidney Diseases Special Emphasis Panel; Ancillary Studies to the NIDDK IBDGC Review.

    Date: July 19, 2018.

    Time: 11:00 a.m. to 3:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, Two Democracy Plaza, 6707 Democracy Boulevard, Bethesda, MD 20892 (Telephone Conference Call).

    Contact Person: Jian Yang, Ph.D., Scientific Review Officer, Review Branch, DEA, NIDDK, National Institutes of Health, Room 7111, 6707 Democracy Boulevard, Bethesda, MD 20892-5452, (301) 594-7799, [email protected].

    (Catalogue of Federal Domestic Assistance Program Nos. 93.847, Diabetes, Endocrinology and Metabolic Research; 93.848, Digestive Diseases and Nutrition Research; 93.849, Kidney Diseases, Urology and Hematology Research, National Institutes of Health, HHS)
    Dated: May 3, 2018. David D. Clary, Program Analyst, Office of Federal Advisory Committee Policy.
    [FR Doc. 2018-09814 Filed 5-8-18; 8:45 am] BILLING CODE 4140-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health Office of The Director, National Institutes of Health; Notice of Meeting

    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.

    Name of Committee: Advisory Committee to the Director, National Institutes of Health.

    Date: June 14, 2018.

    Time: 9:00 a.m. to 5:30 p.m.

    Agenda: NIH Director's Report, IC Director Report, ACD Working Group Reports.

    Place: National Institutes of Health, Building 31, 6th Floor Conference Room 6C, 31 Center Drive, Bethesda, MD 20892.

    Contact Person: Gretchen Wood, Staff Assistant, National Institutes of Health, Office of the Director, One Center Drive, Building 1, Room 126, Bethesda, MD 20892, 301-496-4272, [email protected].

    Name of Committee: Advisory Committee to the Director, National Institutes of Health.

    Date: June 15, 2018.

    Time: 9:00 a.m. to 1:00 p.m.

    Agenda: Other Business of the Committee.

    Place: National Institutes of Health, Building 31, 6th Floor Conference Room 6C, 31 Center Drive, Bethesda, MD 20892.

    Contact Person: Gretchen Wood, Staff Assistant, National Institutes of Health, Office of the Director, One Center Drive, Building 1, Room 126, Bethesda, MD 20892, 301-496-4272, [email protected].

    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: http://acd.od.nih.gov, where an agenda and any additional information for the meeting will be posted when available.

    (Catalogue of Federal Domestic Assistance Program Nos. 93.14, Intramural Research Training Award; 93.22, Clinical Research Loan Repayment Program for Individuals from Disadvantaged Backgrounds; 93.232, Loan Repayment Program for Research Generally; 93.39, Academic Research Enhancement Award; 93.936, NIH Acquired Immunodeficiency Syndrome Research Loan Repayment Program; 93.187, Undergraduate Scholarship Program for Individuals from Disadvantaged Backgrounds, National Institutes of Health, HHS)
    Dated: May 3, 2018. David D. Clary, Program Analyst, Office of Federal Advisory Committee Policy.
    [FR Doc. 2018-09816 Filed 5-8-18; 8:45 am] BILLING CODE 4140-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health National Institute on Aging; Notice of Closed Meeting

    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.

    Name of Committee: National Institute on Aging Initial Review Group; Clinical Aging Review Committee NIA-C.

    Date: June 6-7, 2018.

    Time: 3:00 p.m. to 3:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Embassy Suites by Hilton Denver International Airport, 7001 Yampa Street, Denver, CO 80249.

    Contact Person: Alicja L. Markowska, Ph.D., DSC, National Institute on Aging, National Institutes of Health, Gateway Building 2C212, 7201 Wisconsin Avenue, Bethesda, MD 20892, 301-496-9666, [email protected].

    (Catalogue of Federal Domestic Assistance Program Nos. 93.866, Aging Research, National Institutes of Health, HHS)
    Dated: May 3, 2018. Melanie J. Pantoja, Program Analyst, Office of Federal Advisory Committee Policy.
    [FR Doc. 2018-09813 Filed 5-8-18; 8:45 am] BILLING CODE 4140-01-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES National Institutes of Health Center for Scientific Review; Notice of Closed Meetings

    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.

    Name of Committee: Biobehavioral and Behavioral Processes Integrated Review Group; Biobehavioral Mechanisms of Emotion, Stress and Health Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Palomar Hotel, 2121 P Street NW, Washington, DC 20037.

    Contact Person: Maribeth Champoux, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 3182, MSC 7759, Bethesda, MD 20892, 301-594-3163, [email protected].

    Name of Committee: Digestive, Kidney and Urological Systems Integrated Review Group; Kidney Molecular Biology and Genitourinary Organ Development.

    Date: June 7, 2018.

    Time: 8:00 a.m. to 6:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Embassy Suites by Hilton Chicago Downtown, 600 North State Street, Chicago, IL 60654.

    Contact Person: Ganesan Ramesh, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 2182 MSC 7818, Bethesda, MD 20892, 301-827-5467, [email protected].

    Name of Committee: Infectious Diseases and Microbiology Integrated Review Group; Host Interactions with Bacterial Pathogens Study Section.

    Date: June 7, 2018.

    Time: 8:00 a.m. to 6:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Cambria Suites, 1 Helen Heneghan Way, Rockville, MD 20850.

    Contact Person: Fouad A El-Zaatari, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 3186, MSC 7808, Bethesda, MD 20892, (301) 435-1149, [email protected].

    Name of Committee: Genes, Genomes, and Genetics Integrated Review Group; Molecular Genetics A Study Section.

    Date: June 7, 2018.

    Time: 8:00 a.m. to 6:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Admiral Fell Inn, 888 South Broadway, Baltimore, MD 21231.

    Contact Person: Richard A. Currie, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 2204, MSC 7890, Bethesda, MD 20892, (301) 435-1219, [email protected].

    Name of Committee: Endocrinology, Metabolism, Nutrition and Reproductive Sciences Integrated Review Group; Clinical and Integrative Diabetes and Obesity Study Section.

    Date: June 7, 2018.

    Time: 8:00 a.m. to 7:30 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Hilton Providence, 21 Atwells Avenue, Providence, RI 02903.

    Contact Person: Hui Chen, MD, Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Bethesda, MD 20892, 301-435-1044, [email protected].

    Name of Committee: Bioengineering Sciences & Technologies Integrated Review Group; Biomaterials and Biointerfaces Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Embassy Suites, Alexandria Old Town, 1900 Diagonal Road, Alexandria, VA 22314.

    Contact Person: Joseph D. Mosca, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 5158, MSC 7808, Bethesda, MD 20892, (301) 408-9465, [email protected].

    Name of Committee: Emerging Technologies and Training Neurosciences Integrated Review Group; Neuroscience and Ophthalmic Imaging Technologies Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Embassy Suites at the Chevy Chase Pavilion, 4300 Military Road NW, Washington, DC 20015.

    Contact Person: Yvonne Bennett, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 5199, MSC 7846, Bethesda, MD 20892, 301-379-3793, [email protected].

    Name of Committee: Biological Chemistry and Macromolecular Biophysics Integrated Review Group; Macromolecular Structure and Function A Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Marriott Wardman Park Washington DC Hotel, 2660 Woodley Road NW, Washington, DC 20008.

    Contact Person: David R. Jollie, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 4166, MSC 7806, Bethesda, MD 20892, (301) 408-9072, [email protected].

    Name of Committee: Molecular, Cellular and Developmental Neuroscience Integrated Review Group; Cellular and Molecular Biology of Neurodegeneration Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 4:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Embassy Suites Chicago Downtown, 600 N State Street, Chicago, IL 60654.

    Contact Person: Laurent Taupenot, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 4183, MSC 7850, Bethesda, MD 20892, 301-435-1203, [email protected].

    Name of Committee: Integrative, Functional and Cognitive Neuroscience Integrated Review Group; Neurotoxicology and Alcohol Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 4:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Cambria Suites Washington, DC/Convention Center, 899 O St. NW, Washington, DC 20001.

    Contact Person: Jana Drgonova, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 5213, Bethesda, MD 20892, 301-827-2549, [email protected].

    Name of Committee: Cell Biology Integrated Review Group; Membrane Biology and Protein Processing Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 1:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: The Warwick Allerton Chicago Hotel, 701 N Michigan Avenue, Chicago, IL 60611.

    Contact Person: Janet M. Larkin, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 5142, MSC 7840, Bethesda, MD 20892, 301-806-2765, [email protected].

    Name of Committee: Brain Disorders and Clinical Neuroscience Integrated Review Group; Clinical Neuroimmunology and Brain Tumors Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Embassy Suites at the Chevy Chase Pavilion, 4300 Military Road NW, Washington, DC 20015.

    Contact Person: Wei-Qin Zhao, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 5181, MSC 7846, Bethesda, MD 20892-7846, 301-435-1236, [email protected].

    Name of Committee: Brain Disorders and Clinical Neuroscience Integrated Review Group; Developmental Brain Disorders Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Beacon Hotel and Corporate Quarters, 615 Rhode Island Avenue NW, Washington, DC 20036.

    Contact Person: Pat Manos, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 5200, MSC 7846, Bethesda, MD 20892, 301-408-9866, [email protected].

    Name of Committee: Brain Disorders and Clinical Neuroscience Integrated Review Group; Clinical Neuroscience and Neurodegeneration Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Courtyard by Marriott, 5520 Wisconsin Avenue, Chevy Chase, MD 20815.

    Contact Person: Alessandra C. Rovescalli, Ph.D., Scientific Review Officer, National Institutes of Health, Center for Scientific Review, 6701 Rockledge Drive, Rm 5205 MSC7846, Bethesda, MD 20892, (301) 435-1021, [email protected].

    Name of Committee: Molecular, Cellular and Developmental Neuroscience Integrated Review Group; Synapses, Cytoskeleton and Trafficking Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 3:30 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Hilton Alexandria Old Town, 1767 King Street, Alexandria, VA 22314.

    Contact Person: Christine A. Piggee, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 4186, MSC 7850, Bethesda, MD 20892, 301-435-0657, [email protected].

    Name of Committee: Musculoskeletal, Oral and Skin Sciences Integrated Review Group; Skeletal Biology Development and Disease Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Sheraton BWI (Baltimore), 1100 Old Elkridge Landing Road, Baltimore, MD 21090.

    Contact Person: Aruna K. Behera, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 4211, MSC 7814, Bethesda, MD 20892, 301-435-6809, [email protected].

    Name of Committee: Integrative, Functional and Cognitive Neuroscience Integrated Review Group; Neurobiology of Motivated Behavior Study Section.

    Date: June 7-8, 2018.

    Time: 8:00 a.m. to 6:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Sheraton Seattle Hotel, 1400 Sixth Avenue, Seattle, WA 20817.

    Contact Person: Jasenka Borzan, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive Room 4214 MSC 7814, Bethesda, MD 20892-7814, 301-435-1260, [email protected].

    Name of Committee: Infectious Diseases and Microbiology Integrated Review Group; Pathogenic Eukaryotes Study Section.

    Date: June 7-8, 2018.

    Time: 8:30 a.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Bethesda North Marriott Hotel & Conference Center, Montgomery County Conference Center Facility, 5701 Marinelli Road, North Bethesda, MD 20852.

    Contact Person: Tera Bounds, DVM, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 3198, MSC 7808, Bethesda, MD 20892, 301 435-2306, [email protected].

    Name of Committee: Biobehavioral and Behavioral Processes Integrated Review Group; Adult Psychopathology and Disorders of Aging Study Section.

    Date: June 7-8, 2018.

    Time: 8:30 a.m. to 2:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Marines' Memorial Club & Hotel, 609 Sutter Street, San Francisco, CA 94102.

    Contact Person: Serena Chu, Ph.D., Scientific Review Officer, BBBP IRG, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 3178, MSC 7848, Bethesda, MD 20892, (301) 500-5829, [email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel; Small Business: HIV/AIDS Innovative Research Applications.

    Date: June 7, 2018.

    Time: 1:00 p.m. to 5:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: National Institutes of Health, 6701 Rockledge Drive, Bethesda, MD 20892 (Telephone Conference Call).

    Contact Person: Jingsheng Tuo, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 5207, Bethesda, MD 20892, 301-451-8754, [email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel; PAR-18-596: Molecular and Cellular Alzheimer's Applications.

    Date: June 8, 2018.

    Time: 8:00 a.m. to 12:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Hilton Alexandria Old Town, 1767 King Street, Alexandria, VA 22314.

    Contact Person: Christine A. Piggee, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 4186, MSC 7850, Bethesda, MD 20892, 301-435-0657, [email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel; Molecular and Cellular Endocrinology Study Section.

    Date: June 8, 2018.

    Time: 11:00 a.m. to 12:00 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Melrose Hotel, 2430 Pennsylvania Ave. NW, Washington, DC 20037.

    Contact Person: Elaine Sierra-Rivera, Ph.D., Scientific Review Officer, EMNR IRG, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 6182 MSC 7892, Bethesda, MD 20892, 301 435-2514, [email protected].

    Name of Committee: Center for Scientific Review Special Emphasis Panel; PAR 18-349: Short-term Mentored Career Enhancement Awards for Mid-Career Investigators to Integrate Basic Behavioral and Social Sciences (K18).

    Date: June 8, 2018.

    Time: 12:00 p.m. to 12:30 p.m.

    Agenda: To review and evaluate grant applications.

    Place: Palomar Hotel, 2121 P Street NW, Washington, DC 20037.

    Contact Person: Maribeth Champoux, Ph.D., Scientific Review Officer, Center for Scientific Review, National Institutes of Health, 6701 Rockledge Drive, Room 3170, MSC 7848, Bethesda, MD 20892, 301-594-3163, [email protected].

    (Catalogue of Federal Domestic Assistance Program Nos. 93.306, Comparative Medicine; 93.333, Clinical Research, 93.306, 93.333, 93.337, 93.393-93.396, 93.837-93.844, 93.846-93.878, 93.892, 93.893, National Institutes of Health, HHS)
    Dated: May 4, 2018. Sylvia L. Neal, Program Analyst, Office of Federal Advisory Committee Policy.
    [FR Doc. 2018-09898 Filed 5-8-18; 8:45 am] BILLING CODE 4140-01-P
    INTERNATIONAL TRADE COMMISSION [Investigation Nos. 731-TA-1378-1379 (Final)] Low Melt Polyester Staple Fiber (PSF) From Korea and Taiwan; Revised Schedule for Final Investigations AGENCY:

    United States International Trade Commission.

    ACTION:

    Notice.

    APPLICABLE DATE:

    May 2, 2018.

    FOR FURTHER INFORMATION CONTACT:

    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 (https://www.usitc.gov). The public record for this investigation may be viewed on the Commission's electronic docket (EDIS) at https://edis.usitc.gov.

    SUPPLEMENTARY INFORMATION:

    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 Federal Register (83 FR 8295). The Commission is revising its schedule.

    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).

    Authority:

    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.

    Issued: May 3, 2018. Katherine Hiner, Supervisory Attorney.
    [FR Doc. 2018-09819 Filed 5-8-18; 8:45 am] BILLING CODE P
    INTERNATIONAL TRADE COMMISSION [Investigation No. 337-TA-1065] 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 AGENCY:

    U.S. International Trade Commission.

    ACTION:

    Notice.

    SUMMARY:

    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.

    FOR FURTHER INFORMATION CONTACT:

    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 https://www.usitc.gov. The public record for this investigation may be viewed on the Commission's electronic docket (EDIS) at https://edis.usitc.gov. Hearing-impaired persons are advised that information on this matter can be obtained by contacting the Commission's TDD terminal on (202) 205-1810.

    SUPPLEMENTARY INFORMATION:

    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.

    Issued: May 3, 2018. Katherine Hiner, Supervisory Attorney.
    [FR Doc. 2018-09818 Filed 5-8-18; 8:45 am] BILLING CODE 7020-02-P
    DEPARTMENT OF JUSTICE Notice of Lodging of Proposed Consent Decree Under the Clean Water Act

    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 United States of America v. WCC Energy Group, LLC and Sammy Garrard, Civil Action No. 3:18-cv-00515-JWD-EWD.

    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 United States of America v. WCC Energy Group, LLC and Sammy Garrard, D.J. Ref. No. 90-5-1-1-11281/1. Comments may be submitted by either email or by mail:

    To submit comments: Send them to: By email [email protected]. By mail Acting Assistant Attorney General, U.S. DOJ-ENRD, P.O. Box 7611, Washington, D.C. 20044-7611.

    During the public comment period, the proposed Consent Decree may be examined and downloaded at this Justice Department website: https://www.justice.gov/enrd/consent-decrees. We will provide a paper copy of the proposed Consent Decree upon written request and payment of reproduction costs. Please mail your request and payment to: Consent Decree Library, U.S. DOJ-ENRD, P.O. Box 7611, Washington, DC 20044-7611.

    Please enclose a check or money order for $7.50 (25 cents per page reproduction cost) payable to the United States Treasury.

    Thomas Carroll, Assistant Section Chief, Environmental Enforcement Section, Environment and Natural Resources Division.
    [FR Doc. 2018-09842 Filed 5-8-18; 8:45 am] BILLING CODE 4410-15-P
    DEPARTMENT OF LABOR Occupational Safety and Health Administration [Docket No. OSHA-2011-0186] Inorganic Arsenic Standard; Extension of the Office of Management and Budget's (OMB) Approval of Information Collection (Paperwork) Requirements AGENCY:

    Occupational Safety and Health Administration (OSHA), Labor.

    ACTION:

    Request for public comments.

    SUMMARY:

    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.

    DATES:

    Comments must be submitted (postmarked, sent, or received) by July 9, 2018.

    ADDRESSES:

    Electronically: You may submit comments and attachments electronically at http://www.regulations.gov, which is the Federal eRulemaking Portal. Follow the instructions online for submitting comments.

    Facsimile: If your comments, including attachments, are not longer than 10 pages, you may fax them to the OSHA Docket Office at (202) 693-1648.

    Mail, hand delivery, express mail, messenger, or courier service: When using this method, you must submit your comments and attachments to the OSHA Docket Office, Docket No. OSHA-2011-0186, U.S. Department of Labor, Occupational Safety and Health Administration, Room N-3653, 200 Constitution Avenue NW, Washington, DC 20210. Deliveries (hand, express mail, messenger, and courier service) are accepted during the Docket Office's normal business hours, 10:00 a.m. to 3:00 p.m., ET.

    Instructions: All submissions must include the Agency name and OSHA docket number (OSHA-2011-0186) for the Information Collection Request (ICR). All comments, including any personal information you provide, are placed in the public docket without change, and may be made available online at http://www.regulations.gov. For further information on submitting comments see the “Public Participation” heading in the section of this notice titled SUPPLEMENTARY INFORMATION.

    Docket: To read or download comments or other material in the docket, go to http://www.regulations.gov or the OSHA Docket Office at the address above. All documents in the docket (including this Federal Register notice) are listed in the http://www.regulations.gov index; however, some information (e.g., copyrighted material) is not publicly available to read or download through the website. All submissions, including copyrighted material, are available for inspection and copying at the OSHA Docket Office. You also may contact Theda Kenney at the phone number below to obtain a copy of the ICR.

    FOR FURTHER INFORMATION CONTACT:

    Theda Kenney, Directorate of Standards and Guidance, OSHA, U.S. Department of Labor, telephone (202) 693-2222.

    SUPPLEMENTARY INFORMATION:

    I. Background

    The Department of Labor, as part of its continuing effort to reduce paperwork and respondent (i.e., employer) burden, conducts a preclearance consultation program to provide the public with an opportunity to comment on proposed and continuing information collection requirements in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3506(c)(2)(A)). This program ensures that information is in the desired format, reporting burden (time and costs) is minimal, collection instruments are clearly understood, and OSHA's estimate of the information collection burden is accurate. The Occupational Safety and Health Act of 1970 (the OSH Act) (29 U.S.C. 651 et seq.) authorizes information collection by employers as necessary or appropriate for enforcement of the OSH Act, or for developing information regarding the causes and prevention of occupational injuries, illnesses, and accidents (29 U.S.C. 657). The OSH Act also requires that OSHA obtain such information with minimum burden upon employers, especially those operating small businesses, and to reduce to the maximum extent feasible unnecessary duplication of efforts in obtaining information (29 U.S.C. 657).

    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.

    II. Special Issues for Comment

    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.

    III. Proposed Actions

    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.

    Type of Review: Extension of a currently approved collection.

    Title: Inorganic Arsenic Standard (29 CFR 1910.1018).

    OMB Number: 1218-0104.

    Affected Public: Business or other for-profits.

    Number of Respondents: 889.

    Frequency of Response: On occasion; quarterly; semi-annually; annually.

    Total Responses: 16,463.

    Average Time per response: Various.

    Estimated Total Burden Hours: 10,546.

    Estimated Cost (Operation and Maintenance): $1,121,959.

    IV. Public Participation—Submission of Comments on This Notice and Internet Access to Comments and Submissions

    You may submit comments in response to this document as follows: (1) Electronically at http://www.regulations.gov, which is the Federal eRulemaking Portal; (2) by facsimile; or (3) by hard copy. All comments, attachments, and other material must identify the Agency name and the OSHA docket number for this ICR (Docket No. OSHA-2011-0186). You may supplement electronic submissions by uploading document files electronically. If you wish to mail additional materials in reference to an electronic or facsimile submission, you must submit them to the OSHA Docket Office (see the section of this notice titled ADDRESSES). The additional materials must clearly identify your electronic comments by your name, date, and docket number so the Agency can attach them to your comments.

    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 http://www.regulations.gov. Therefore, OSHA cautions commenters about submitting personal information such as social security numbers and dates of birth. Although all submissions are listed in the http://www.regulations.gov index, some information (e.g., copyrighted material) is not publicly available to read or download through this website. All submissions, including copyrighted material, are available for inspection and copying at the OSHA Docket Office. Information on using the http://www.regulations.gov website to submit comments and access the docket is available at the website's “User Tips” link. Contact the OSHA Docket Office for information about materials not available through the website, and for assistance in using the internet to locate docket submissions.

    V. Authority and Signature

    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 et seq.) and Secretary of Labor's Order No. 1-2012 (77 FR 3912).

    Signed at Washington, DC, on May 3, 2018. Loren Sweatt, Deputy Assistant Secretary of Labor for Occupational Safety and Health.
    [FR Doc. 2018-09832 Filed 5-8-18; 8:45 am] BILLING CODE 4510-26-P
    LEGAL SERVICES CORPORATION Notice of Funds and Request for Applications for 2017 Hurricanes and Wildfires Disaster-Response Legal Services Grants AGENCY:

    Legal Services Corporation.

    ACTION:

    Notice.

    SUMMARY:

    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.

    DATES:

    Applications must be submitted by 11:59 p.m. E.S.T. on Monday, June 4, 2018.

    ADDRESSES:

    Application must be submitted electronically at lscgrants.lsc.gov.

    FOR FURTHER INFORMATION CONTACT:

    Application instructions are in the Notice of Funds and Request for Applications available at www.lsc.gov/disastergrants. For more information or technical issues with LSC Grants, please send an email to [email protected]. To reach a member of the Disaster team, please send an email to [email protected].

    SUPPLEMENTARY INFORMATION:

    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 www.lsc.gov/disastergrants. LSC will post all additional information regarding this grant process at that website.

    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.

    LSC strongly encourages existing LSC grantees to apply for funding through these grants for any activities that meet the grant criteria. For disaster-related needs that are beyond the scope of these grants, LSC grantees may also apply for grants from LSC's Disaster Relief Emergency Grant Program, which is not limited to specific disasters or specific types of activities. www.lsc.gov/disastergrants. LSC has only $2,000,000 available for those Disaster Relief grants. Entities applying to both the 2017 Hurricanes and California Wildfires and LSC's Disaster Relief Emergency Grant Programs should submit those applications at the same time and explain how the activities described in each application relate to each other in addition to the information requested in the full Request for Applications at Appendices III—Rating Criteria and IV—Budget Instructions.

    Dated: May 4, 2018. Mark F. Freedman, Senior Associate General Counsel.
    [FR Doc. 2018-09881 Filed 5-8-18; 8:45 am] BILLING CODE 7050-01-P
    NATIONAL AERONAUTICS AND SPACE ADMINISTRATION [Notice 18-45] Notice of Intent To Grant Partially Exclusive Patent License; Correction AGENCY:

    National Aeronautics and Space Administration.

    ACTION:

    Notice; correction.

    SUMMARY:

    NASA published a document in the Federal Register of May 1, 2018, concerning its intent to grant a partially exclusive patent license to Vigilant Aerospace Systems, Inc. The document contained an incorrect phone number.

    DATES:

    The correction is valid May 9, 2018.

    SUPPLEMENTARY INFORMATION:

    Correction

    In the Federal Register of May 1, 2018, in FR Doc. 18-09183, on page 19116, in the first column, correct the FOR FURTHER INFORMATION CONTACT caption to read:

    FOR FURTHER INFORMATION CONTACT:

    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.

    Deborah F. Bloxon, Federal Liaison Officer.
    [FR Doc. 2018-09790 Filed 5-8-18; 8:45 am] BILLING CODE 7510-13-P
    NUCLEAR REGULATORY COMMISSION [Docket No. 50-263; NRC-2018-0090] Northern States Power Company: Monticello Nuclear Generating Plant AGENCY:

    Nuclear Regulatory Commission.

    ACTION:

    Exemption; issuance.

    SUMMARY:

    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.

    DATES:

    The exemption was issued on May 1, 2018.

    ADDRESSES:

    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:

    Federal Rulemaking Web Site: Go to http://www.regulations.gov and search for Docket ID NRC-2018-0090. Address questions about NRC dockets to Jennifer Borges; telephone: 301-287-9127; email: [email protected]. For technical questions, contact the individual listed in the FOR FURTHER INFORMATION CONTACT section of this document.

    NRC's Agencywide Documents Access and Management System (ADAMS): You may obtain publicly-available documents online in the ADAMS Public Documents collection at http://www.nrc.gov/reading-rm/adams.html. To begin the search, select “ADAMS Public Documents” and then select “Begin Web-based ADAMS Search.” For problems with ADAMS, please contact the NRC's Public Document Room (PDR) reference staff at 1-800-397-4209, 301-415-4737, or by email to [email protected]. The ADAMS accession number for each document referenced (if it is available in ADAMS) is provided the first time that it is mentioned in the attached exemption. In addition, for the convenience of the reader, the ADAMS accession numbers are provided in a table in the “Availability of Documents” section of the exemption.

    NRC's PDR: You may examine and purchase copies of public documents at the NRC's PDR, Room O1-F21, One White Flint North, 11555 Rockville Pike, Rockville, Maryland 20852.

    FOR FURTHER INFORMATION CONTACT:

    Robert F. Kuntz, Office or Nuclear Reactor Regulation, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001; telephone: 301-415-3733, email: [email protected].

    SUPPLEMENTARY INFORMATION:

    The text of the exemption is attached.

    Dated at Rockville, Maryland, this 3rd day of May 2018.

    For the Nuclear Regulatory Commission.

    Robert F. Kuntz, Senior Project Manager, Plant Licensing Branch III, Division of Operating Reactor Licensing, Office of Nuclear Reactor Regulation.
    Attachment—Exemption NUCLEAR REGULATORY COMMISSION Docket No. 50-263 Northern States Power Company Monticello Nuclear Generating Plant Exemption I. Background

    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.

    II. Request/Action

    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 Code of Federal Regulations (10 CFR), Part 50, Appendix R, Section III.G.2, which requires that where redundant trains of systems necessary to achieve and maintain hot shutdown conditions are located within the same fire area outside of primary containment, that one of the redundant trains remains free of fire damage by either a 3-hour rated barrier; or 20 feet horizontal separation, no intervening combustibles, and detection and suppression system; or a 1-hour barrier, and detection and suppression systems. The licensee requested NRC approval for Monticello to use a method to maintain a hot shutdown train free of fire damage that is not one of the acceptable methods listed in 10 CFR part 50, Appendix R, Section III.G.2. The licensee's exemption request is intended to justify why the proposed alternative, the use of a shorting switch, is acceptable in accordance with the requirements of 10 CFR 50.12, Specific Exemptions.

    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 protected in accordance with an acceptable option provided in 10 CFR part 50, Appendix R, Section III.G.2. In 2012, the licensee installed a modification, called a shorting switch, to mitigate the lack of protection. The shorting switch modification had been approved for use at some plants that had adopted a risk-informed (RI), performance-based (PB) fire protection program (FPP) under 10 CFR 50.48(c)(4). Although Monticello had at one time expressed intent to adopt a 10 CFR 50.48(c)(4) FPP (ADAMS Accession No. ML053460342), Monticello later withdrew its letter of intent (ADAMS Accession No. ML102000433).

    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.

    III. Discussion

    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.

    3.1 Deterministic Technical Evaluation

    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.

    3.1.1 Explanation of Postulated Scenario and Shorting Switch Modification

    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.

    3.2 Risk-Informed Technical Evaluation

    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.

    3.2.1 Proposed Change to the Appendix R Program

    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 description of the modification is provided in Enclosure 1, Section 3.1, of the licensee's exemption request.

    3.2.2 Engineering Analysis

    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.

    Fire Protection DID

    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.

    Fire Protection DID Element 1—Preventing Fires

    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.

    Fire Protection DID Element 2—Detecting and Extinguishing Fires

    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.

    Fire Protection DID Element 3—Safe Shutdown

    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.

    Safety Margins

    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.

    3.2.3 PRA

    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.

    Technical Adequacy of the PRA

    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.

    Risk Impact Assessment

    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 have to occur to fail a shorting switch are considered extremely unlikely.

    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.

    PRA Results and Comparison with Risk Guidelines

    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.

    3.2.4 Implementation and Monitoring

    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.

    3.2.5 Integrated Decision-making

    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.

    3.3 Technical Evaluation Conclusion

    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.

    3.4 Authorized by Law

    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 Commission's regulations. Therefore, the exemption is authorized by law.

    3.5 No Undue Risk to Public Health and Safety

    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.

    3.6 Consistent with Common Defense and Security

    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.

    3.7 Special Circumstances

    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.

    IV. Environmental Considerations.

    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).

    Requirements in 10 CFR 51.22(c)(9)(i)

    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.

    Requirements in 10 CFR 51.22(c)(9)(ii) and (iii)

    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 not result in a significant change in the types or amount of effluents that may be released and does not result in any additional occupational exposure. Therefore, the requirements of 10 CFR51.22(c)(9)(ii) and (iii) are met.

    V. Conclusions.

    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.

    VI. Availability of Documents.

    The documents identified in the following table are available in ADAMS.

    Document ADAMS
  • Accession
  • No.
  • Risk-Informed Request for Exemption from 10 CFR 50, Appendix R, III.G.2 Requirements for Multiple Spurious Operations of Drywell Spray Motor-Operated Valves ML17096A599 Request for additional information RE: Monticello Request for Exemption from Appendix R Requirements (CAC NO. MF9586; EPID L-2017-LLE-00012) ML17293A091 Response to Request for Additional Information regarding Risk-Informed Request for Exemption from 10 CFR 50, Appendix R, III.G.2 Requirements for Multiple Spurious Operations of Drywell Spray Motor-Operated Valves (CAC No. MF9586) ML17324B361 Monticello Nuclear Generating Plant Triennial Fire Protection Inspection Report 05000263/2014008 ML14119A216 Letter of Intent to Transition to 10 CFR 50.48(c)—National Fire Protection Association Standard NFPA 805. “Performance-based Standards for Fire Protection for Light Water Reactor Electric Generating Plants.” 2001 Edition ML053460342 Notice of Withdrawal of Letter of Intent to Transition to 10 CFR 50.48(c)” ML102000433 NRC Regulatory Issue Summary 2007-06 Regulatory Guide 1.200 Implementation ML070650428 NEI 05-04, Rev. 2 Process for Performing Internal Events PRA Peer Reviews Using the ASME/ANS PRA Standard ML083430462 NEI 07-12 [REV 1] Fire Probabilistic Risk Assessment (FPRA) Peer Review Process Guidelines ML102230070 NUREG/CR-7150, Vol. 2 Joint Assessment of Cable Damage and Quantification of Effects from Fire (JACQUE-FIRE) ML14141A129 Browns Ferry Nuclear Plant, Units 1, 2, And 3—Issuance of Amendments Regarding Transition to a Risk-Informed, Performance-Based Fire Protection Program in Accordance with 10 CFR 50.48(c) (CAC NOS. MF1185, MF1186, AND MF1187) ML15212A796 Arkansas Nuclear One, Unit 1—Issuance of Amendment Regarding Transition to a Risk-Informed, Performance-Based Fire Protection Program in Accordance with 10 CFR 50.48(c) (CAC NO. MF3419) ML16223A481 Regulatory Guide 1.189 “Fire Protection for Nuclear Power Plants,” Revision 2 ML092580550 Regulatory Guide 1.174 “An Approach for Using Probabilistic Risk Assessment in Risk-Informed Decisions on Plant-Specific Changes to the Licensing Basis,” Revision 2 ML100910006 Regulatory Guide 1.200 “An Approach for Determining the Technical Adequacy of Probabilistic Risk Assessment Results for Risk-Informed Activities,” Revision 2 ML090410014 Monticello Nuclear Generating Station: Evaluation of Risk Significance of Permanent Integrated Leak Rate Test Extension ML16047A273

    Dated at Rockville, Maryland, this 1st day of May 2018.

    For the Nuclear Regulatory Commission.

    Gregory F. Suber,

    Acting Director, Division of Operating Reactor Licensing, Office of Nuclear Reactor Regulation.
    [FR Doc. 2018-09801 Filed 5-8-18; 8:45 am] BILLING CODE 7590-01-P
    SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83165; File No. SR-CBOE-2018-038] Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Renew the Nonstandard Expirations Pilot Program May 3, 2018.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),1 and Rule 19b-4 thereunder,2 notice is hereby given that on May 2, 2018, Cboe Exchange, Inc. (the “Exchange” or “Cboe Options”) filed with the Securities and Exchange Commission (the “Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a “non-controversial” proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b-4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

    1 15 U.S.C. 78s(b)(1).

    2 17 CFR 240.19b-4.

    3 15 U.S.C. 78s(b)(3)(A)(iii).

    4 17 CFR 240.19b-4(f)(6).

    I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

    The Exchange proposes to renew an existing pilot program until November 5, 2018.

    (additions are italicized; deletions are [bracketed]) Cboe Exchange, Inc. Rules Rule 24.9. Terms of Index Option Contracts

    (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]November 5, 2018.

    (4) (No change).

    . . . Interpretations and Policies:

    .01-.14 (No change).

    The text of the proposed rule change is also available on the Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the Secretary, and at the Commission's Public Reference Room.

    II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

    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.

    A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose

    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.5 On January 14, 2016, the Commission approved a Cboe Options proposal to expand the pilot program to allow P.M.-settled options on broad-based indexes to expire on any Wednesday of month, other than those that coincide with an EOM.6 On August 10, 2016, the Commission approved a Cboe Options proposal to expand the pilot program to allow P.M.-settled options on broad-based indexes to expire on any Monday of month, other than those that coincide with an EOM.7 Under the terms of the Nonstandard Expirations Pilot Program (“Program”), Weekly Expirations and EOMs are permitted on any broad-based index that is eligible for regular options trading. Weekly Expirations and EOMs are cash-settled and have European-style exercise. The proposal became effective on a pilot basis for a period of fourteen months that commenced on the next full month after approval was received to establish the Program 8 and was subsequently extended.9 The Program is scheduled to expire on May 3, 2018. The Exchange believes that the Program has been successful and well received by its Trading Permit Holders and the investing public during that the time that it has been in operation. The Exchange hereby proposes to extend the Program until November 5, 2018. This proposal does not request any other changes to the Program.

    5See Securities Exchange Act Release 62911 (September 14, 2010), 75 FR 57539 (September 21, 2010) (order approving SR-CBOE-2009-075).

    6See Securities Exchange Act Release 76909 (January 14, 2016), 81 FR 3512 (January 21, 2016) (order approving SR-CBOE-2015-106).

    7See Securities Exchange Act Release 78531 (August 10, 2016), 81 FR 54643 (August 16, 2016) (order approving SR-CBOE-2016-046).

    8Id.

    9See Securities Exchange Act Release 65741 (November 14, 2011), 76 FR 72016 (November 21, 2011) (immediately effective rule change extending the Program through February 14, 2013). See also Securities Exchange Act Release 68933 (February 14, 2013), 78 FR 12374 (February 22, 2013) (immediately effective rule change extending the Program through April 14, 2014); 71836 (April 1, 2014), 79 FR 19139 (April 7, 2014) (immediately effective rule change extending the Program through November 3, 2014); 73422 (October 24, 2014), 79 FR 64640 (October 30, 2014) (immediately effective rule change extending the Program through May 3, 2016); 76909 (January 14, 2016), 81 FR 3512 (January 21, 2016) (extending the Program through May 3, 2017); and 80387 (April 6, 2017), 82 FR 17706 (April 12, 2017) (extending the Program through May 3, 2018).

    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.

    2. Statutory Basis

    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.10 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 11 requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitation transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 12 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.

    10 15 U.S.C. 78f(b).

    11 15 U.S.C. 78f(b)(5).

    12Id.

    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.

    B. Self-Regulatory Organization's Statement on Burden on Competition

    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 consistency, thereby reducing burdens on the marketplace and facilitating investor protection.

    C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the proposed rule change.

    III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

    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 13 and Rule 19b-4(f)(6) thereunder.14

    13 15 U.S.C. 78s(b)(3)(A).

    14 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to give the Commission written notice of the Exchange's intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement.

    A proposed rule change filed under Rule 19b-4(f)(6) 15 normally does not become operative for 30 days after the date of filing. However, pursuant to Rule 19b-4(f)(6)(iii),16 the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. 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 such waiver will allow the Exchange 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.17

    15 17 CFR 240.19b-4(f)(6).

    16 17 CFR 240.19b-4(f)(6)(iii).

    17 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

    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.

    IV. Solicitation of Comments

    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:

    Electronic Comments

    • Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or

    • Send an email to [email protected]. Please include File Number SR-CBOE-2018-038 on the subject line.

    Paper Comments

    • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

    All submissions should refer to File Number SR-CBOE-2018-038. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CBOE-2018-038, and should be submitted on or before May 30, 2018.

    For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18

    18 17 CFR 200.30-3(a)(12).

    Eduardo A. Aleman, Assistant Secretary.
    [FR Doc. 2018-09829 Filed 5-8-18; 8:45 am] BILLING CODE 8011-01-P
    SECURITIES AND EXCHANGE COMMISSION Proposed Collection; Comment Request Upon Written Request, Copies Available From: Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736 Extension: Rule 17g-7, SEC File No. 270-563, OMB Control No. 3235-0656.

    ** This corrected notice replaces the notice published on May 2, 2018 in the Federal Register Vol. 83, No. 85, page 19370.

    Notice is hereby given that pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange Commission (“Commission”) has submitted to the Office of Management and Budget (“OMB”) a request for approval of extension of the previously approved collection of information provided for in Rule 17g-7 under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).1

    1See 17 CFR 240.17g-1 and 17 CFR 249b.300.

    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: www.reginfo.gov. Comments should be directed to: (i) Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10102, New Executive Office Building, Washington, DC 20503, or by sending an email to: [email protected]; and (ii) Pamela Dyson, Director/Chief Information Officer, Securities and Exchange Commission, c/o Remi Pavlik-Simon, 100 F St. NE, Washington, DC 20549 or send an email to: [email protected]. Comments must be submitted to OMB within 30 days of this notice.

    Dated: May 4, 2018. Eduardo A. Aleman, Assistant Secretary.
    [FR Doc. 2018-09884 Filed 5-8-18; 8:45 am] BILLING CODE 8011-01-P
    SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83167; File No. SR-Phlx-2018-20] 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 May 3, 2018. I. Introduction

    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”) 1 and Rule 19b-4 thereunder,2 a proposed rule change amending Phlx's Rule 1079, relating to FLEX Options, and Phlx Rule 1059, relating to accommodation transactions. The proposed rule change was published for comment in the Federal Register on March 19, 2018.3 The Commission received no comment letters on the proposed rule change. This order approves the proposed rule change.

    1 15 U.S.C. 78s(b)(1).

    2 17 CFR 240.19b-4.

    3See Securities Exchange Act Release No. 82866 (Mar. 13, 2018), 83 FR 12058 (Mar. 19, 2018) (“Notice”).

    II. Description of the Proposed Rule Change

    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.4 Further, Phlx Rule 1079(a)(4) requires that bids or offers in FLEX trades be made at the minimum increments specified in Phlx Rule 1034.5 Generally, the minimum increments for stock, index and exchange traded fund options are either $.10 or $.05, unless such options are subject to a penny pilot set forth in the rule.

    4See Phlx Rule 1079. See also Notice, supra note 3, at 12059. Pursuant to Phlx Rule 1079, investors can specify the characteristics for FLEX Option contracts such as the expiration date, the strike price, and the exercise-style.

    5 Phlx Rule 1034 (a) provides that with certain exceptions, “all options on stocks, index options, and Exchange Traded Fund Shares quoting in decimals at $3.00 or higher shall have a minimum increment of $.10, and all options on stocks and index options quoting in decimals under $3.00 shall have a minimum increment of $.05.”

    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 6 (“ROT”).7 Thus, cabinet trades are generally effectuated at less than the minimum increments required for FLEX options, as described above, under the Phlx Rules 1079 and 1034. According to Phlx, cabinet trading is intended to accommodate persons wishing to effect closing transactions in options for which there is no auction market. Cabinet trading, according to the Exchange, allows market participants to close listed options on the Exchange that are of minimal value or worthless, or not actively traded, often for the purpose of establishing tax losses.8

    6See Phlx Rule 1014(b). An ROT is a regular member or a foreign currency options participant of the Exchange located on the trading floor who has received permission from the Exchange to trade in options for his own account. Each ROT electing to engage in Exchange options transactions shall be assigned by the Exchange one or more classes of options, and Exchange options transactions initiated by such ROT on the Floor for any account in which he had an interest shall to the extent prescribed by the Exchange be in such assigned classes.

    7See Phlx Rule 1059(a). Commentary .02 to Phlx Rule 1059 provides that limit orders with a price of at least $0 but less than $1 per option contract may also trade under the terms and conditions in Phlx Rule 1059, subject to certain limitations.

    8See Notice, supra note 3, at 12059 n.3. A cabinet trade is a transaction in which the per-contract value of the cabinet trade is less than the per-contract value of a trade at the specified minimum increment for the option contract. See id.

    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.9 The Exchange further proposed that a FLEX option cabinet order may be executed against contra side interest that closes the FLEX option position or, to the extent permitted by the cabinet rule (specifically Phlx Rule 1059(a)(iii)), against contra side interest that opens a FLEX option position.10

    9See proposed Phlx Rule 1079(g) and proposed Commentary .03 to Phlx Rule 1059.

    10See id. Phlx Rule 1059(a)(iii) provides that floor brokers would represent the orders in the crowd. See Phlx Rule 1059(a).

    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.11 According to the Exchange, Phlx Rule 1079(a), which sets forth the potential characteristics of FLEX options, such as underlying interest and the quote format, would not be applicable for the closing of FLEX options in the cabinet because the characteristics of the FLEX options in the cabinet would already be known.12 Further, Phlx stated that because FLEX options trading in the cabinet would be governed by the cabinet trading rules set forth in Phlx Rule 1059, except for the provisions of Phlx Rule 1079 noted below which will continue to apply, Phlx Rule 1079(b), which covers procedures for quoting and trading FLEX options, and the provisions of Phlx Rule 1079(a) defining aspects of a FLEX request for the RFQ process, are not applicable.13

    11See proposed Phlx Rule 1079(g) and proposed Commentary .03 to Phlx Rule 1059.

    12See Notice, supra note 3, at 12059 n.6.

    13See id.

    Under the Phlx's proposal, Phlx Rules 1079(c)-(f) would, however, continue to apply to FLEX option cabinet transactions.14 Phlx Rule 1079(c) restricts participation in FLEX cabinet trades to entities that meet the requirements set forth in this subsection,15 and Phlx Rules 1079(d) and (e) govern position limits and exercise limits.16

    14See proposed Phlx Rule 1079(g) and proposed Commentary .03 to Phlx Rule 1059.

    15See Phlx Rule 1079(c), which sets forth requirements for ROTs and specialists to be assigned to FLEX Options as well as financial requirements for floor brokers to trade FLEX Options.

    16See Notice, supra note 3, at 12059 n.6. Phlx Rule 1079(f) relates to the exercise-by-exception procedure of Rule 805 of the Options Clearing Corporation.

    III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act 17 and the rules and regulations thereunder applicable to a national securities exchange.18 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,19 which requires that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.

    17 15 U.S.C. 78f.

    18 In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

    19 15 U.S.C. 78f(b)(5).

    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.20 The Exchange also noted in its proposal that recently market participants have expressed an interest in closing FLEX options under the Phlx's cabinet rule.21 The proposed rule change, will therefore, provide market participants with an opportunity to liquidate FLEX option positions that are of minimal or no value prior to the FLEX options expiration, similar to that currently permitted by other market participants holding standardized options.

    20 As noted above, currently the FLEX rules do not permit Flex options to be traded as a cabinet order. Among other issues under the FLEX rules, the minimum size increments required under the FLEX rules essentially prohibit accommodation transactions in FLEX options.

    21See Notice, supra note 3, at 12059-60.

    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.22 The Commission expects Phlx to monitor FLEX cabinet orders to ensure that the lack of equity option position limits and aggregation with standardized positions do not present risks that would require the Exchange to impose additional margin as permitted under Phlx Rule 1079(d)(2) governing FLEX options. In addition, we request Phlx to monitor positions opened to accommodate a FLEX cabinet closing limit order to ensure that such open positions do not create any additional market risk that would need to be addressed through Phlx rules, such as requiring the aggregation of positions in standardized options with FLEX opening orders to accommodate a FLEX cabinet order. We would also expect Phlx to inform us generally of any other concerns that have arisen in allowing FLEX options to be executed under the cabinet trading rules.

    22See Phlx Rule 1079(d)(2)-(4).

    For the reasons above, the Commission finds that the proposed rule change is consistent with the Act.

    IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act,23 that the proposed rule change (SR-Phlx-2018-20) be, and hereby is, approved.

    23 15 U.S.C. 78s(b)(2).

    24 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.24

    Eduardo A. Aleman, Assistant Secretary.
    [FR Doc. 2018-09838 Filed 5-8-18; 8:45 am] BILLING CODE 8011-01-P
    SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83163; File No. SR-BOX-2018-13] 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 May 3, 2018.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),1 and Rule 19b-4 thereunder,2 notice is hereby given that on April 25, 2018, BOX Options Exchange LLC (the “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

    1 15 U.S.C. 78s(b)(1).

    2 17 CFR 240.19b-4.

    I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change

    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 http://boxoptions.com.

    II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

    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.

    A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose

    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.3 The Exchange is proposing debit/credit checks and price validation for eligible Complex Orders.4 The proposed Complex Order price check parameters will apply to all Complex Orders, including auctions (COPIP, Facilitation, and Solicitation) and Complex Qualified Open Outcry Orders (“Complex QOO Orders”).5

    3See Chicago Board Options Exchange, Incorporated (“Cboe”) Interpretations and Polices .08(c) and (g) to Rule 6.53C. The Exchange notes that the proposed rules determine whether a Complex Order is debit or credit by using a slightly different process than that employed by Cboe. Specifically, CBOE will group the legs of a Complex Order into pairs and compare multiple pairs to determine whether the Complex Order is a credit or debit while the Exchange is proposing to create groups (which may include more than two legs) based on expiration date. However, the ultimate determination of whether a Complex Order is a debit or credit is the same under the different processes. Therefore, the Exchange believes the proposed rule change is substantially similar to the rules of Cboe. The proposed Maximum Price protection is based on Cboe Rule 6.53C.08(g).

    4See proposed IM-7240-1.

    5 Under Exchange rules, a Complex QOO Order is not executed until it is processed by the system. See Rule 7600(a). The system applies the proposed price check parameters upon receipt of a Complex QOO Order. Therefore, the proposed protections apply to Complex QOO Orders in the same way as any other Complex Order received by the system.

    Debit/Credit Checks

    The Exchange is proposing a debit/credit check that will prevent the execution of certain Complex Orders at erroneous prices.6 Specifically, the system will reject a Complex Limit Order for a credit strategy with a net debit price or a Complex Limit Order for a debit strategy with a net credit price.

    6See proposed IM-7240-1(a).

    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.7 If, at all price levels, the profit or loss for the group is break-even or loss, then the group is a credit.8 If all the groups of a Complex Order are a debit(credit), then the Complex Order is a debit(credit).9

    7See proposed IM-7240-1(a)(1)(i). The reason that the group is a debit is because an investor would expect to pay for a strategy that produced a profit.

    8See proposed IM-7240-1(a)(1)(ii). The reason that the group is a credit is because an investor would expect to be compensated for a strategy that produced a loss.

    9See proposed IM-7240-1(a)(2).

    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 (i.e., the net sale proceeds from the Jan $2 and $3 calls are larger than the net purchase cost from the Jan $1 and $4 calls). Since all legs have the same expiration, they will be grouped together and the potential profit or loss will be calculated for the group. If, at all price levels, the profit or loss for the group is break-even or profit, then the Complex Order is a debit. If, at all price levels, the profit or loss for the group is break-even or loss, then the Complex Order is a credit. Upon evaluating the group, the system will determine that the Complex Order appears to be erroneously priced as a net credit; it should instead be a net debit because the profit or loss for the group is break-even or profit for each price level. Specifically, as shown in the table below, the net purchase cost of the Jan $1 and $4 XYZ calls is larger than or equal to the net sale proceeds from the Jan $2 and $3 calls at each strike price level.

    Profit or Loss Strike Price Level ($) 1 2 3 4 Buy $1 Call 0 1 2 3 Sell $2 Call 0 0 −1 −2 Sell $3 Call 0 0 0 −1 Buy $4 Call 0 0 0 0 Total Profit & Loss 0 1 1 0

    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.10 The system will first convert all legs to the same expiration and then compare the profit or loss, as provided in proposed IM-7240-1(a)(i), while taking into account the conversion of the expiration date of the leg(s). The system will evaluate the converted leg(s) based on the fact that an option with a farther expiration has a higher value when compared to an option with the same exercise price but a closer expiration. For example, if a sell leg is converted to a farther expiration and the strategy still yields a profit when the system evaluates the potential profit or loss of the strategy, the strategy is a debit because even by increasing the value of a sell leg the strategy still yields a profit.

    10See proposed IM-7240-1(a)(3).

    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 (i.e., the net sale proceeds from the Jan $2 and $3 calls is larger than the net purchase cost from the Feb $1 and $4 calls). Since not all legs have the same expiration, they will be grouped by expiration date first. The Feb $1 and $4 calls would be one group and the Jan $2 and $3 calls would be the other group. This would yield one group as a debit (Feb $1 and $4 calls) and one as a credit (Jan $2 and $3 calls). Therefore, the system would not be able to determine if the Complex Order is a debit or credit based on the groups since not all of the groups are a debit or credit. Instead, the system will determine if the Complex Order is a debit or credit by comparing all the legs of the Complex Order together. The first step is to convert the Jan $2 and $3 calls to Feb $2 and $3 calls so all legs have the same expiration and therefore the potential profit or loss can be calculated pursuant to proposed IM-7240-1(a)(1). Upon evaluating all legs collectively, the system will determine that the Complex Order appears to be erroneously priced as a net credit; it should instead be a net debit because the profit or loss for all the legs is break-even or profit for each price level. Specifically, as shown in the table below, the net purchase cost of the Feb $1 and $4 XYZ calls are larger than or equal to the net sale proceeds from the converted Feb $2 and$3 calls at each underlying price level. After calculating the profit or loss, the system will determine if the outcome would change based on the converted leg (i.e., the Jan $2 and $3 calls being converted to Feb $2 and $3 calls). The system will determine that the outcome is correct because the conversion of the Jan $2 and $3 calls to more expensive Feb $2 and $3 calls still yielded a break-even or profit for each price level even though the converted Feb $2 and $3 calls are more expensive than the actual Jan $2 and $3 calls. Therefore, since selling more expensive call options (i.e., Feb $2 and $3 calls) still yielded a break-even or profit at all price levels, it can easily be deduced that selling the actual, less expensive, Jan $2 and $3 calls would yield the same result.

    Profit or Loss Strike Price Level ($) 1 2 3 4 Buy $1 Call 0 1 2 3 Sell $2 Call 0 0 −1 −2 Sell $3 Call 0 0 0 −1 Buy $4 Call 0 0 0 0 Total Profit & Loss 0 1 1 0

    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).11

    11See proposed IM-7240-1(a)(4).

    Maximum Price

    After a Complex Order passes the debit/credit check, the system will then calculate a maximum price for certain Complex Orders.12 Specifically, the system will calculate a maximum price for true butterfly spreads, vertical spreads, and box spreads. After calculating the maximum price, the system will reject a Complex Limit Order that is a true butterfly spread, vertical spread, or a box spread if the absolute value of the Complex Order's limit price is greater than the maximum price. For a Complex Market Order that is a true butterfly spread, vertical spread, or a box spread, the system will reject the Complex Market Order if the absolute value of the execution price is greater than the maximum price. As described in greater detail below, the maximum price value is calculated by adding a price buffer to the absolute value of a true butterfly spread, vertical spread, or box spread.

    12See proposed IM-7240-1(b).

    The price buffer is calculated by taking a specified percentage of the absolute value of the strategy.13 The system will provide a minimum and maximum value for the price buffer. If the price buffer is below the minimum value, then the minimum is used by the system when calculating the maximum price value. If the price buffer is above the maximum value, then the maximum is used by the system when calculating the maximum price value. The specified percentage, minimum value, and maximum value shall be the same for all classes. Unless determined otherwise by the Exchange and announced to Participants via Circular, the specified percentage is 5%, the minimum value is $0.10, and the maximum value is $1.00.

    13See proposed IM-7240-1(b)(1).

    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.14 The absolute value for a true butterfly spread is the absolute difference between the middle leg exercise price and the exercise price of the leg on either side.15 The absolute value for a box spread is the absolute difference between the exercise prices of each pair of legs.16

    14See proposed IM-7240-1(b)(2).

    15See proposed IM-7240-1(b)(3).

    16See proposed IM-7240-1(b)(4).

    Vertical Spread Example

    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.

    True Butterfly Spread Example

    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.

    Box Spread Example

    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.

    2. Statutory Basis

    The Exchange believes that the proposal is consistent with the requirements of Section 6(b) of the Securities Exchange Act of 1934 (the “Act”),17 in general, and Section 6(b)(5) of the Act,18 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest.

    17 15 U.S.C. 78f(b).

    18 15 U.S.C. 78f(b)(5).

    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.

    B. Self-Regulatory Organization's Statement on Burden on Competition

    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.19 Additionally, the Exchange believes the proposed rule change is beneficial to Participants as it will provide increased protections that will prevent the execution of certain Complex Orders that were entered in error. The Exchange believes the proposal is pro-competitive and should serve to attract additional Complex Orders to the Exchange. Further, the Exchange does not believe the proposed change will not impose a burden on intramarket competition because it is available to all Participants.

    19See supra, note 3.

    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.

    C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received comments on the proposed rule change.

    III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

    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 20 and Rule 19b-4(f)(6) thereunder.21

    20 15 U.S.C. 78s(b)(3)(A).

    21 17 CFR 240.19b-4(f)(6). As required under Rule 19b-4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change, along with a brief description and the text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission.

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act 22 normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) 23 permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposed rule change may become operative upon filing. The Exchange states that waiver of the operative delay would be consistent with the protection of investors and the public interest because it will allow the Exchange to immediately provide Participants with additional protections for Complex Orders submitted and executed on the Exchange. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. Therefore, the Commission hereby waives the operative delay and designates the proposal as operative upon filing.24

    22 17 CFR 240.19b-4(f)(6).

    23 17 CFR 240.19b-4(f)(6)(iii).

    24 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

    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.

    IV. Solicitation of Comments

    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:

    Electronic Comments

    • Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or

    • Send an email to [email protected]. Please include File Number SR-BOX-2018-13 on the subject line.

    Paper Comments

    • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

    All submissions should refer to File Number SR-BOX-2018-13. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-BOX-2018-13, and should be submitted on or before May 30, 2018.

    25 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25

    Eduardo A. Aleman, Assistant Secretary.
    [FR Doc. 2018-09806 Filed 5-8-18; 8:45 am] BILLING CODE 8011-01-P
    SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83166; File No. SR-CBOE-2018-036] 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 May 3, 2018.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),1 and Rule 19b-4 thereunder,2 notice is hereby given that on May 2, 2018, Cboe Exchange, Inc. (the “Exchange” or “Cboe Options”) filed with the Securities and Exchange Commission (the “Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a “non-controversial” proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b-4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

    1 15 U.S.C. 78s(b)(1).

    2 17 CFR 240.19b-4.

    3 15 U.S.C. 78s(b)(3)(A)(iii).

    4 17 CFR 240.19b-4(f)(6).

    I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

    The Exchange proposes to extend the operation of its SPXPM pilot program. The text of the proposed rule change is provided below.

    (additions are italicized; deletions are [bracketed]) Cboe Exchange, Inc. Rules Rule 24.9. Terms of Index Option Contracts

    (No change).

    . . . Interpretations and Policies:

    .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]November 5, 2018.

    The text of the proposed rule change is also available on the Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the Secretary, and at the Commission's Public Reference Room.

    II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

    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.

    A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose

    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”).5 On July 31, 2013, the Exchange received approval of a rule change that amended the Pilot Program to allow the Exchange to 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”) 6 (together, SPXPM and P.M.-settled XSP to be referred to herein as the “Pilot Products”).7 The Exchange has extended the pilot period four times, which is currently set to expire on the earlier of May 3, 2018 or the date on which the pilot program is approved on a permanent basis.8 The Exchange hereby proposes to further extend the end date of the pilot period to November 5, 2018.

    5See Securities Exchange Act Release No. 68888 (February 8, 2013), 78 FR 10668 (February 14, 2013) (SR-CBOE-2012-120) (the “SPXPM Approval Order”). Pursuant to Securities Exchange Act Release No. 80060 (February 17, 2017), 82 FR 11673 (February 24, 2017) (SR-CBOE-2016-091), the Exchange moved third-Friday P.M.-settled options into the S&P 500 Index options class, and as a result, the trading symbol for P.M.-settled S&P 500 Index options that have standard third Friday-of-the-month expirations changed from “SPXPM” to “SPXW.” This change went into effect on May 1, 2017, pursuant to Cboe Options Regulatory Circular RG17-054.

    6See Securities Exchange Act Release No. 70087 (July 31, 2013), 78 FR 47809 (August 6, 2013) (SR-CBOE-2013-055) (the “P.M.-settled XSP Approval Order”).

    7 For more information on the Pilot Products or the Pilot Program, see the SPXPM Approval Order and the P.M.-settled XSP Approval Order.

    8See Securities Exchange Act Release Nos. 71424 (January 28, 2014), 79 FR 6249 (February 3, 2014) (SR-CBOE-2014-004); 73338 (October 10, 2014), 79 FR 62502 (October 17, 2014) (SR-CBOE-2014-076); 77573 (April 8, 2016), 81 FR 22148 (April 14, 2016) (SR-CBOE-2016-036); and 80386 (April 6, 2017), 82 FR 17704 (April 12, 2017) (SR-CBOE-2017-025).

    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”).9

    9 5 U.S.C. 552.

    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.

    Finally, for series that exceed certain minimum parameters, the annual reports contain the following analysis related to index price changes and underlying share trading volume at the close on Expiration Fridays:

    (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 minimum open interest parameters, control sample, time intervals, method for randomly selecting the component securities, and sample periods are determined by the Exchange and the Commission. In proposing to extend the Pilot Program, the Exchange will continue to abide by the reporting requirements described herein, as well as in the SPXPM Approval Order and the P.M.-settled XSP Approval Order.10 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 Pilot Program is consistent with the Exchange Act. The Exchange will make public all data and analyses previously submitted to the Commission under the Pilot Program, as well as any data and analyses it makes to the Commission under the Pilot Program in the future.

    10 Pursuant to Securities Exchange Act Release No. 75914 (September 14, 2015), 80 FR 56522 (September 18, 2015) (SR-CBOE-2015-079), the Exchange added SPXPM and P.M.-settled XSP options to the list of products approved for trading during Extended Trading Hours (“ETH”). The Exchange will also include the applicable information regarding SPXPM and P.M.-settled XSP options that trade during ETH in its annual and interim reports.

    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 well-received by its Trading Permit Holders and the investing public, and the Exchange would like to continue to provide investors with the ability to trade SPXPM and P.M.-settled XSP options. All terms regarding the trading of the Pilot Products shall continue to operate as described in the SPXPM Approval Order and the P.M.-settled XSP Approval Order. The Exchange merely proposes herein to extend the term of the Pilot Program to November 5, 2018.

    2. Statutory Basis

    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.11 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 12 requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Additionally, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 13 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.

    11 15 U.S.C. 78f(b).

    12 15 U.S.C. 78f(b)(5).

    13Id.

    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.

    B. Self-Regulatory Organization's Statement on Burden on Competition

    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.

    C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the proposed rule change.

    III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

    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 14 and Rule 19b-4(f)(6)(iii) thereunder.15

    14 15 U.S.C. 78s(b)(3)(A).

    15 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change, along with a brief description and the text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission.

    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.16

    16 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

    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.

    IV. Solicitation of Comments

    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:

    Electronic Comments

    • Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or

    • Send an email to [email protected]. Please include File Number SR-CBOE -2018-036 on the subject line.

    Paper Comments

    • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

    All submissions should refer to File No. SR-CBOE-2018-036. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR-CBOE-2018-036 and should be submitted on or before May 30, 2018.

    For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17

    17 17 CFR 200.30-3(a)(12).

    Eduardo A. Aleman, Assistant Secretary.
    [FR Doc. 2018-09830 Filed 5-8-18; 8:45 am] BILLING CODE 8011-01-P
    SMALL BUSINESS ADMINISTRATION Meeting of the Advisory Committee on Veterans Business Affairs AGENCY:

    U.S. Small Business Administration.

    ACTION:

    Notice of open Federal Advisory Committee Meeting.

    SUMMARY:

    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.

    DATES:

    Thursday, June 7, 2018, from 9:00 a.m. to 4:00 p.m.

    Where:

    Eisenhower Conference Room B, located on the concourse level.

    Contact Info:

    (Teleconference Dial-in) 1-888-858-2144, Access Code: 7805798; (Webinar) https://connect16.uc.att.com/sba/meet/?ExEventID=87805798; Access Code: 7805798.

    SUPPLEMENTARY INFORMATION:

    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.

    Additional Information: This meeting is open to the public. Advance notice of attendance is requested. Anyone wishing to attend and/or make comments to the ACVBA must contact SBA's Office of Veterans Business Development no later than June 1, 2018 at [email protected]. Comments for the record will be limited to five minutes to accommodate as many participants as possible. Written comments should be sent to the above by June 1, 2018. Special accommodation requests should also be directed to SBA's Office of Veterans Business Development at (202) 205-6773 or [email protected].

    For more information on veteran owned small business programs, please visit www.sba.gov/veterans.

    Dated: May 3, 2018. John Woodard, SBA Committee Management Officer.
    [FR Doc. 2018-09824 Filed 5-8-18; 8:45 am] BILLING CODE P
    SMALL BUSINESS ADMINISTRATION Meeting of the Interagency Task Force on Veterans Small Business Development AGENCY:

    U.S. Small Business Administration.

    ACTION:

    Notice of open Federal Interagency Task Force meeting.

    SUMMARY:

    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.

    DATE AND TIME:

    Wednesday, June 6, 2018, from 1:00 p.m. to 4:00 p.m.

    ADDRESSES:

    U.S. Small Business Administration, 409 3rd Street SW, Washington, DC 20416. Where: Eisenhower Conference Room B, located on the concourse level.

    CONTACT INFO:

    (Teleconference Dial-In) 1-888-858-2144, Access Code: 7805798; (Webinar) https://connect16.uc.att.com/sba/meet/?ExEventID=87805798; Access Code: 7805798.

    SUPPLEMENTARY INFORMATION:

    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.

    Additional Information: This meeting is open to the public. Advance notice of attendance is requested. Anyone wishing to attend and/or make comments to the Task Force must contact SBA's Office of Veterans Business Development no later than June 1, 2018 at [email protected]. Comments for the record should be applicable to the “six focus areas” of the Task Force and will be limited to five minutes in the interest of time and to accommodate as many participants as possible. Written comments should also be sent to the above email no later than June 1, 2018. Special accommodations requests should also be directed to SBA's Office of Veterans Business Development at (202) 205-6773 or to [email protected].

    For more information on veteran owned small business programs, please visit www.sba.gov/veterans.

    Dated: May 3, 2018. John Woodard, SBA Committee Management Officer.
    [FR Doc. 2018-09827 Filed 5-8-18; 8:45 am] BILLING CODE P
    SOCIAL SECURITY ADMINISTRATION [Docket No: SSA-2018-0020] Agency Information Collection Activities: Proposed Request and Comment Request

    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.

    (OMB)

    Office of Management and Budget, Attn: Desk Officer for SSA, Fax: 202-395-6974, Email address: [email protected].

    (SSA)

    Social Security Administration, OLCA, Attn: Reports Clearance Director, 3100 West High Rise, 6401 Security Blvd., Baltimore, MD 21235, Fax: 410-966-2830, Email address: [email protected].

    Or you may submit your comments online through www.regulations.gov, referencing Docket ID Number [SSA-2018-0020].

    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.

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency of response Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    SSA-7011-F4 500 1 20 167

    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,

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency of response Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    SSA-632—Waiver of Overpayment (If completing entire paper form, including the AFI authorization) 400,000 1 120 800,000 Regional Application (New York Debt Management) 30,000 1 120 60,000 Internet Instructions 430,000 1 5 35,833 SSA-634—Requesting change in repayment rate (completing paper form) 100,000 1 45 75,000 Internet Instructions 100,000 1 5 8,333 Totals 1,060,000 979,166

    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).

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    SSA-795 305,500 1 15 76,375

    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.

    Type of Request: Revision of an OMB-approved information collection.

    Application scenario Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    Respondents who do not have to provide parents' SSNs 10,500,000 1 8.5 1,487,500 *Adult U.S. Citizens requesting a replacement card with no changes through new iSSNRC modality 1,500,000 1 5 125,000 Respondents whom we ask to provide parents' SSNs (when applying for original SSN cards for children under age 18) 400,000 1 9 60,000 Applicants age 12 or older who need to answer additional questions so SSA can determine whether we previously assigned an SSN 1,500,000 1 9.5 237,500 Applicants asking for a replacement SSN card beyond the new allowable limits (i.e., who must provide additional documentation to accompany the application) 900 1 60 900 Authorization to SSA to obtain personal information cover letter 500 1 15 125 Authorization to SSA to obtain personal information follow-up cover letter 500 1 15 125 Totals 13,901,900 1,911,150

    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.

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    SSA-788 130,000 1 10 21,667

    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.

    Type of Request: Revision of an OMB approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    SSA-25 30,000 1 2 1,000

    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.

    Type of Request: Extension of an OMB approved information collection.

    CFR citation Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    404.1204(a) & (b) 52 1 30 26 404.1215 52 1 60 52 404.1216(a) & (b) 52 1 60 52 Total 156 130

    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.

    Type of Request: Extension of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    Physician's Certifications and Statements from Other Respondents 60,000 1 5 5,000

    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 allow individuals access to their personal information through our internet and Automated Telephone Services. SSA asks individuals and third parties who seek personal information from SSA records, or who register to participate in SSA's online business services, to provide certain identifying information. As an extra measure of protection, SSA asks requestors who use the internet and telephone services to provide additional identifying information unique to those individuals so SSA can authenticate their identities before releasing personal information. The respondents are current beneficiaries who are requesting personal information from SSA, and individuals and third parties who are registering for SSA's online business services.

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    Internet Requestors 2,903,902 1 2.5 120,996 Telephone Requestors 9,795,655 1 4 653,044 *Change of Address (on hold) 1 1 *Screen Splash (on hold) 1 1 Totals 12,699,559 774,042 * One-hour placeholder burdens; Screen Splash and Change of Address applications are on hold.

    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.

    Type of Request: Extension of an OMB-approved information collection.

    CFR citation Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    404.2011(a)(1); 416.611(a)(1) 250 1 15 63 404.2025; 416.625 3,000 1 6 300 Totals 3,250 363

    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.

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    SSA-3373-BK 1,734,635 1 61 1,763,546

    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.

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    SSA-1694—Paper Version 750 1 10 125 SSA-1694—Business Services Online Submission 150 1 10 25 Totals 900 150

    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.

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated total annual burden (hours)
    SSA-640 10 1 120 20

    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:

    • Age requirements (e.g. birth certificate, court documents) • Insured status (e.g. earnings, employer verification) • Marriage or divorce information • Pension offsets • Wages verification • Annuities • Property information • Benefit verification from a State agency or third party • Immigration status (rare instances) • Income verification from public agencies or private individuals • Unemployment benefits • Insurance policies

    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.

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated
  • total
  • annual
  • burden
  • (hours)
  • Paper SSA-8510 for general evidence purposes 19,800 1 5 1650 Personal Information Authorization web page 140,145 1 5 11, 679 Totals 163,445 13,621

    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 [email protected].

    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 unfavorable disability cessation determination.

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated
  • total
  • annual
  • burden
  • (hours)
  • SSA-789-U4 30,000 1 13 6,500

    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.

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated
  • total
  • annual
  • burden
  • (hours)
  • SSA-773-U4 200 1 3 10

    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.

    Type of Request: Revision of an OMB-approved information collection.

    Modality of completion Number of
  • respondents
  • Frequency
  • of response
  • Number of
  • responses
  • Average
  • burden per
  • response
  • (minutes)
  • Estimated
  • total
  • annual
  • burden
  • (hours)
  • SSNVS 41,387 60 2,483,220 5 206,935
    Dated: May 3, 2018. Naomi R. Sipple, Reports Clearance Officer, Social Security Administration.
    [FR Doc. 2018-09802 Filed 5-8-18; 8:45 am] BILLING CODE 4191-02-P
    DEPARTMENT OF STATE [Public Notice: 10406] Imposition of Nonproliferation Measures Against Rosoboronexport, Including a Ban on U.S. Government Procurement AGENCY:

    Department of State.

    ACTION:

    Notice.

    SUMMARY:

    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.

    DATES:

    April 30, 2018.

    FOR FURTHER INFORMATION CONTACT:

    On general issues: Pam Durham, Office of Missile, Biological, and Chemical Nonproliferation, Bureau of International Security and Nonproliferation, Department of State, Telephone (202) 647-4930, [email protected]. For U.S. Government procurement ban issues: Eric Moore, Office of the Procurement Executive, Department of State, Telephone: (703) 875-4079, [email protected].

    SUPPLEMENTARY INFORMATION:

    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.

    Christopher A. Ford, Assistant Secretary of State for International Security and Nonproliferation.
    [FR Doc. 2018-09928 Filed 5-8-18; 8:45 am] BILLING CODE 4710-27-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Eighty Eighth RTCA SC-147 Plenary Session Joint With EUROCAE WG-75 AGENCY:

    Federal Aviation Administration (FAA), U.S. Department of Transportation (DOT).

    ACTION:

    Eighty Eighth RTCA SC-147 Plenary Session Joint with EUROCAE WG-75.

    SUMMARY:

    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.

    DATES:

    The meeting will be held May 18, 2018 9:00 a.m.-3:30 p.m.

    ADDRESSES:

    The meeting will be held at: RTCA Headquarters, 1150 18th Street NW, Suite 910, Washington, DC 20036.

    FOR FURTHER INFORMATION CONTACT:

    Al Secen at [email protected] or 202-330-0647, or The RTCA Secretariat, 1150 18th Street NW, Suite 910, Washington, DC 20036, or by telephone at (202) 833-9339, fax at (202) 833-9434, or website at http://www.rtca.org.

    SUPPLEMENTARY INFORMATION:

    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:

    1. Thursday, May 17 (and possibly Friday, May 18), 2018 2. Opening Plenary Session a. Chairmen's Opening Remarks/Introductions b. DFO Statement and RTCA Policies c. Approval of Minutes from 87th meeting of SC-147 d. Approval of Agenda e. Future meeting scheduling 3. Updates on TSO schedule, cert plan and final products (30 min/945-1015) 4. SC-147 TOR Revisions a. Final MASPS for Interoperability of Collision Avoidance Systems language 5. ACAS Xa/Xo MOPS 6. Final Review and Comment/Open Consultation Overview 7. Working Group Comment Resolution Review and Status 8. Open Comments a. Discussion 9. ACAS Xa/Xo MOPS Approval Consideration 10. Next Steps a. Comment Resolution Implementation Work-plan b. European Validation Process/Schedule 11. ACAS Xu a. Report from ACAS Xu WG 12. Summary and Adjourn 13. Note: Plenary MAY continue TO Friday, May 18th only if all business is not concluded on Thursday, May 17th.

    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 FOR FURTHER INFORMATION CONTACT section. Members of the public may present a written statement to the committee at any time.

    Issued in Washington, DC on April 12, 2018. Michelle Swearingen, Systems and Equipment Standards Branch, AIR-6B0, Policy and Innovation Division, AIR-600, Federal Aviation Administration.
    [FR Doc. 2018-09444 Filed 5-8-18; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Thirty Sixth RTCA SC-214 Standards for Air Traffic Data Communications Services Plenary AGENCY:

    Federal Aviation Administration (FAA), U.S. Department of Transportation (DOT).

    ACTION:

    Thirty Sixth RTCA SC-214 Standards for Air Traffic Data Communications Services Plenary.

    SUMMARY:

    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.

    DATES:

    The meeting will be held June 25-28, 2018 9:00 a.m.-5:00 p.m.

    ADDRESSES:

    The meeting will be held at: EUROCAE, 9-23 rue Paul Lafargue, “Le Trangle” building, 93200, Saint-Denis, France.

    FOR FURTHER INFORMATION CONTACT:

    Karan Hofmann at [email protected] or 202-330-0680, or The RTCA Secretariat, 1150 18th Street NW, Suite 910, Washington, DC 20036, or by telephone at (202) 833-9339, fax at (202) 833-9434, or website at http://www.rtca.org.

    SUPPLEMENTARY INFORMATION:

    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:

    1. Welcome and Administrative Remarks 2. Introductions 3. Agenda Review 4. Meeting-Minutes Review 5. Review/Resolution of DO-224D FRAC Comments 6. Review/Resolution of DO-281C and ED-92C Final Review and Comment(FRAC)/Open Consultation Comments 7. Approve release of DO-224D for presentation to PMC 8. Approve release of DO-281C for presentation to PMC and ED-92C to Council 9. Industry Presentation: Connectionless VDL2 Network 10. Schedule Update 11. Date, Place and Time of Next Meeting 12. Other Topics 13. Adjourn Plenary

    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 FOR FURTHER INFORMATION CONTACT section. Members of the public may present a written statement to the committee at any time.

    Issued in Washington, DC, on April 30, 2018. Michelle Swearingen, Systems and Equipment Standards Branch, AIR-6B0, Policy and Innovation Division, AIR-600, Federal Aviation Administration.
    [FR Doc. 2018-09445 Filed 5-8-18; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration RTCA PMC Program Management Committee Plenary AGENCY:

    Federal Aviation Administration (FAA), U.S. Department of Transportation (DOT).

    ACTION:

    RTCA PMC Program Management Committee Plenary.

    SUMMARY:

    The FAA is issuing this notice to advise the public of a meeting of RTCA PMC Program Management Committee Plenary.

    DATES:

    The meeting will be held June 21, 2018 8:30 a.m.-4:30 p.m.

    ADDRESSES:

    The meeting will be held at: RTCA Headquarters, 1150 18th Street NW, Suite 910, Washington, DC 20036.

    FOR FURTHER INFORMATION CONTACT:

    Karan Hofmann at [email protected] or 202-330-0680, or The RTCA Secretariat, 1150 18th Street NW, Suite 910, Washington, DC, 20036, or by telephone at (202) 833-9339, fax at (202) 833-9434, or website at http://www.rtca.org.

    SUPPLEMENTARY INFORMATION:

    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:

    1. Welcome and Introductions 2. Review/Approve a. Meeting Summary March 22, 2018 b. Administrative SC TOR Revisions 3. Publication Consideration/Approval a. New Document—MOPS for GNSS Active Antenna in the L1/E1 and L5/E5A Bands prepared by SC-159 (Navigation Equipment Using the Global Navigation Satellite System (GNSS)) b. DO-356A—Airworthiness Security Methods and Considerations prepared by SC-216, Aeronautical Systems Security c. DO-213A Change 1—Minimum Operational Performance Standards for Nose-Mounted Radomes prepared by SC-230 (Weather Detection Systems) d. DO-220A Change 1—Minimum Operational Performance Standards (MOPS) for Airborne Weather Radar Systems prepared by SC-230 (Weather Detection Systems) 4. Integration and Coordination Meeting (ICC) 5. Cross Cutting Committee (CCC) 6. Past Action Item Review 7. Discussion a. SC-206—Aeronautical Information and Meteorological Data Link Services—Discussion—Revised TOR b. SC-213—Enhanced Flight Vision Systems/Synthetic Vision—Discussion—Possible Revised TOR c. SC-230—Weather Detection Systems—Discussion—Revised TOR d. SC-236—Standards for Wireless Avionics Intra-Communication System (WAIC) within 4300-4400 MHz—Discussion—Revised TOR e. NAC—Status Update f. DAC—Status Update g. FAA Actions Taken on Previously Published Documents—Report h. Special Committees—Chairmen's Reports and Active Inter-Special Committee Requirements Agreements (ISRA)—Review i. European/EUROCAE Coordination—Status Update 8. Other Business 9. Schedule for Committee Deliverables and Next Meeting Date 10. New Action Item Summary

    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 FOR FURTHER INFORMATION CONTACT section. Members of the public may present a written statement to the committee at any time.

    Issued in Washington, DC, on May 3, 2018. Michelle Swearingen, Systems and Equipment Standards Branch, AIR-6B0, Policy and Innovation Division, AIR-600, Federal Aviation Administration.
    [FR Doc. 2018-09828 Filed 5-8-18; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 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 AGENCY:

    Federal Aviation Administration (FAA), Department of Transportation.

    ACTION:

    Notice of submission deadline.

    SUMMARY:

    Under this notice, the FAA announces the submission deadline of May 17, 2018, for winter 2018/2019 flight schedules at Chicago O'Hare International Airport (ORD), John F. Kennedy International Airport (JFK), Los Angeles International Airport (LAX), Newark Liberty International Airport (EWR), and San Francisco International Airport (SFO). The deadline coincides with the schedule submission deadline for the International Air Transport Association (IATA) Slot Conference for the winter 2018/2019 scheduling season.

    DATES:

    Schedules must be submitted no later than May 17, 2018.

    ADDRESSES:

    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: [email protected].

    FOR FURTHER INFORMATION CONTACT:

    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: [email protected].

    SUPPLEMENTARY INFORMATION:

    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, 2018.1 The FAA intends to extend the effective date of the JFK Order prior to the expiration of the current Order.

    1 Operating Limitations at John F. Kennedy International Airport, 73 FR 3510 (Jan. 18, 2008), as amended 81 FR 40167 (June 21, 2016).

    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.

    General Information for All Airports

    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 ad hoc operations, and other operational factors that may limit a carrier's timing flexibility. In addition, Congress, the Department of Transportation (DOT), through the FAA and the Office of the Secretary (OST), and the Department of Justice have adopted a number of measures to promote competition and new entry at U.S. slot controlled airports and, likewise, the WSG has priorities to consider new entry and competition at Level 3 airports. The FAA prioritizes new entrant flights within the scheduling limits for the airport.

    Generally, the FAA uses average hourly runway capacity throughput for airports and performance metrics in its schedule reviews at Level 2 airports.2 The FAA also considers other factors that can affect operations, such as capacity changes due to runway, taxiway, or other airport construction, air traffic control procedural changes, airport surface operations, or historical or projected flight delays and congestion. At JFK, the scheduling limit of 81 operations per hour is established in the FAA Order.

    2 The FAA typically determines an airport's average adjusted runway capacity or throughput for Level 2 and Level 3 airports by reviewing hourly data on the arrival and departure rates that air traffic control indicates could be accepted for that hour, commonly known as “called” rates. We also review the actual number of arrivals and departures that operated in the same hour. Generally, the FAA uses the higher of the two numbers, called or actual, for identifying trends and schedule review purposes. Some dates are excluded from analysis, such as during periods when extended airport closures or construction could affect capacity.

    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 http://www.iata.org/policy/slots/Pages/slot-guidelines.aspx.

    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 disclosure under the Freedom of Information Act (FOIA). The WSG also provides for release of information at certain stages of slot coordination and schedule facilitation. In general, once it takes action, the FAA may release information on slot allocation or similar slot transactions or schedule information reviewed as part of the schedule facilitation process. The FAA does not expect that practice to change and most slot and schedule information would not be exempt from release under FOIA. The FAA recognizes that some airlines may submit information on schedule plans that is not available to the public and may be considered by the carrier to be proprietary. Carriers that submit slot or schedule information deemed proprietary should clearly mark such information accordingly. The FAA will take the necessary steps to protect properly designated information to the extent allowable by law.

    JFK Schedules

    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.

    EWR Schedules

    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 2016.3 Delays in summer 2016 increased over summer 2015, in part because allocated slots in the afternoon and evening hours were used at higher rates than in 2015. Subsequently, as expected, delays further increased as a result of new entry at EWR enabled by the change to Level 2. However, compared to summer 2007 when the airport operated without scheduling limits and slots 4 , most performance metrics for summer 2017 were better than summer 2007 despite the additional flights under Level 2. The FAA recognizes there have been a number of changes in the NYC area since 2007, including changes in airspace and procedures, regulatory changes such as crew flight and duty time and long flight (tarmac) delays, and network management by airlines. The FAA is reviewing the current performance goals as well as any related capacity and operational impacts caused by these changes.

    3 Change of Newark Liberty International Airport (EWR) Designation, 81 FR 19861 (Apr. 6, 2016).

    4 Order Limiting Scheduled Operations at Newark Liberty International Airport, 73 FR 29550 (May 21, 2008). The EWR Order took effect in June 2008. In addition to reviewing performance metrics on a year-over-year basis for the busiest summer months, one FAA goal in adopting the Order was to manage schedules and keep delays from exceeding summer 2007 levels. In summer 2017, the number of arriving flights delayed by two hours or more increased by 5.5 percent compared to summer 2007.

    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.5 The FAA is seeking voluntary cooperation by all carriers to retime flights within the described limits. Based on the average winter 2017/2018 schedules, modest changes would be needed in only a few periods to be within these limits. Additional flights could be approved in hours that are below the scheduling limits.

    5 The half-hour and arrival and departure limits are approximately 55 percent of the typical hourly adjusted airport capacity.

    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 1400 to 2159 local hours (1900 to 0259 UTC). Requests for new flights will not be approved unless the hourly scheduled operations are within the previously described hourly limits. Consistent with the WSG, carriers should be prepared to adjust schedules to meet the hourly limits in order to minimize potential congestion and delay.

    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.

    Issued in Washington, DC, on May 4, 2018. Jeffrey Planty, Deputy Vice President, System Operations Services.
    [FR Doc. 2018-09894 Filed 5-8-18; 8:45 am] BILLING CODE 4910-13-P
    DEPARTMENT OF TRANSPORTATION Federal Highway Administration [Docket No. FHWA-2018-0032] Agency Information Collection Activities: Request for Comments for a New Information Collection AGENCY:

    Federal Highway Administration (FHWA), DOT.

    ACTION:

    Notice and request for comments.

    SUMMARY:

    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 Federal Register by the Paperwork Reduction Act of 1995.

    DATES:

    Please submit comments by July 9, 2018.

    ADDRESSES:

    You may submit comments identified by DOT Docket ID Number 2018-0032 by any of the following methods:

    Website: For access to the docket to read background documents or comments received go to the Federal eRulemaking Portal: Go to http://www.regulations.gov.

    Follow the online instructions for submitting comments.

    Fax: 1-202-493-2251.

    Mail: Docket Management Facility, U.S. Department of Transportation, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590-0001.

    Hand Delivery or Courier: U.S. Department of Transportation, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590, between 9 a.m. and 5 p.m. ET, Monday through Friday, except Federal holidays.

    FOR FURTHER INFORMATION CONTACT:

    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.

    SUPPLEMENTARY INFORMATION:

    Title: Biennial Performance Reporting for the TPM Program.

    Background: The MAP-21 (Pub. L. 112-141) and FAST Act (Pub. L. 114-94) transformed the Federal-aid highway program by establishing new requirements for transportation performance management (TPM) to ensure the most efficient investment of Federal transportation funds. Prior to MAP-21, there were no explicit requirements for State DOTs to demonstrate how their transportation program supported national performance outcomes. State DOTs were not required to measure condition or performance, establish targets, assess progress toward targets, or report on condition or performance in a nationally consistent manner that FHWA could use to assess the entire system. It has been difficult for FHWA to examine the effectiveness of the Federal-aid highway program as a means to address surface transportation performance at a national level without States reporting on the above factors. The new TPM requirements, as established by MAP-21 and FAST Act, change this paradigm and require states to measure condition or performance, establish targets, assess progress towards targets and report on condition or performance.

    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 1 implementing the MAP-21 and FAST Act requirements, FHWA evaluated all of the Biennial Reporting requirements in the individual regulatory impact assessments (RIA) and determined the following:

    1 2nd National Performance Management Measures Rule (PM2): Assessing Pavement Condition for National Highway Performance Program and Bridge Condition for National Highway Performance Program; Assessing Performance of National Highway System, etc. (RIN: 2125-AF53) https://www.regulations.gov/contentStreamer?documentId=FHWA-2013-0053-0222&contentType=pdf.

    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) https://www.regulations.gov/contentStreamer?documentId=FHWA-2013-0054-8287&contentType=pdf.

    Respondents: 52 State DOTs, including Washington DC and Puerto Rico.

    Frequency: Biennially.

    Estimated Average Burden per Response: Approximately 2,128 hours annually for an individual State DOT to compile, organize, and submit the report to FHWA.

    Estimated Total Annual Burden Hours: Approximately 110,656 hours annually.

    Public Comments Invited: You are asked to comment on any aspect of this information collection, including: (1) Ways for the FHWA to enhance the quality, usefulness, and clarity of the collected information; and (2) ways that the burden could be minimized,, without reducing the quality of the collected information. The agency will summarize and/or include your comments in the request for OMB's clearance of this information collection.

    Authority:

    The Paperwork Reduction Act of 1995; 44 U.S.C. Chapter 35, as amended; and 49 CFR 1.48.

    Issued On: May 3, 2018. Michael Howell, Information Collection Officer.
    [FR Doc. 2018-09872 Filed 5-8-18; 8:45 am] BILLING CODE 4910-22-P
    DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency Agency Information Collection Activities: Information Collection Renewal; Submission for OMB Review; Customer Complaint Form AGENCY:

    Office of the Comptroller of the Currency (OCC), Treasury.

    ACTION:

    Notice and request for comment.

    SUMMARY:

    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.

    DATES:

    You should submit written comments by June 8, 2018.

    ADDRESSES:

    Comments by any of the following methods:

    Email: [email protected].

    Mail: Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency, Attention: 1557-0232, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.

    Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218, Washington, DC 20219.

    Fax: (571) 465-4326.

    Instructions: You must include “OCC” as the agency name and “1557-0232” in your comment. In general, the OCC will publish them on www.reginfo.gov without change, including any business or personal information that you provide, such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

    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 [email protected].

    You may review comments and other related materials that pertain to this information collection 1 following the close of the 30-Day comment period for this notice by any of the following methods:

    1 On February 2, 2018, the OCC published a 60-Day notice for this information collection.

    Viewing Comments Electronically: Go to www.reginfo.gov. Click on the “Information Collection Review” tab. Underneath the “Currently under Review” section heading, from the drop-down menu, select “Department of Treasury” and then click “submit.” This information collection can be located by searching by OMB control number “1557-0232” or “Customer Complaint Form.” Upon finding the appropriate information collection, click on the related “ICR Reference Number.” On the next screen, select “View Supporting Statement and Other Documents” and then click on the link to any comment listed at the bottom of the screen.

    • For assistance in navigating www.reginfo.gov, please contact the Regulatory Information Service Center at (202) 482-7340.

    Viewing Comments Personally: You may personally inspect comments at the OCC, 400 7th Street SW, Washington, DC. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 649-6700 or, for persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect comments.

    FOR FURTHER INFORMATION CONTACT:

    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.

    SUPPLEMENTARY INFORMATION:

    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.

    Title: Customer Complaint Form.

    OMB Control No.: 1557-0232.

    Description: The customer complaint form was developed as a courtesy for customers who contact the OCC's Consumer Assistance Group (CAG) and wish to file a formal, written complaint. The form offers a template for consumers to use to focus their issues and identify the information necessary to provide a complete picture of their concerns. Use of the form is entirely voluntary; however, use of the form helps to avoid the processing delays associated with incomplete complaints and allows CAG to process complaints more efficiently.

    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.

    Type of Review: Regular.

    Affected Public: Businesses or other for-profit.

    Number of Respondents: 10,000.

    Total Annual Burden Hours: 830.

    Frequency of Response: On occasion.

    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.

    Dated: May 3, 2018. Karen Solomon, Acting Senior Deputy Comptroller and Chief Counsel.
    [FR Doc. 2018-09875 Filed 5-8-18; 8:45 am] BILLING CODE 4810-33-P
    DEPARTMENT OF VETERANS AFFAIRS Health Services Research and Development Service Scientific Merit Review Board; Notice of Meeting

    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 [email protected]. For further information, please call Ms. Catucci at (202) 443-5797.

    Dated: May 3, 2018. LaTonya L. Small, Federal Advisory Committee Management Officer.
    [FR Doc. 2018-09822 Filed 5-8-18; 8:45 am] BILLING CODE P
    DEPARTMENT OF VETERANS AFFAIRS [OMB Control No. 2900-0080] Agency Information Collection Activity Under OMB Review: Funeral Arrangements AGENCY:

    Veterans Health Administration, Department of Veterans Affairs

    ACTION:

    Notice.

    SUMMARY:

    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.

    DATES:

    Comments must be submitted on or before June 8, 2018.

    ADDRESSES:

    Submit written comments on the collection of information through www.Regulations.gov, or to Office of Information and Regulatory Affairs, Office of Management and Budget, Attn: VA Desk Officer; 725 17th St. NW, Washington, DC 20503 or sent through electronic mail to [email protected]. Please refer to “OMB Control No. 2900-0080” in any correspondence.

    FOR FURTHER INFORMATION CONTACT:

    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 [email protected] Please refer to “OMB Control No. 2900-0080” in any correspondence.

    SUPPLEMENTARY INFORMATION:

    Authority: 38 U.S.C. 111, 1703, 1725, 1728.

    Title: Funeral Arrangements; VA Form 10-2065.

    OMB Control Number: 2900-0080.

    Type of Review: Reinstatement of a currently approved collection.

    Abstract: VA Form 10-2065 is part of the Decedent Affairs Package. The form is completed during the interview with relatives of the deceased, and identifies the funeral home to which the remains are to be released. The family signs the form designating that it reflects their wishes. It is used as a control document when VA is requested to arrange for the transportation of the deceased from the place of death to the place of burial, and/or when burial is requested in a National Cemetery.

    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 Federal Register Notice with a 60-day comment period soliciting comments on this collection of information was published at 82 FR 52970 on November 15, 2017, pages 52970 and 52971.

    Affected Public: Individuals and households.

    Estimated Annual Burden: 3,702 hours.

    Estimated Average Burden per Respondent: 10 minutes.

    Frequency of Response: On occasion.

    Estimated Number of Respondents: 22,213.

    By direction of the Secretary.

    Cynthia D. Harvey-Pryor, Department Clearance Officer, Office of Quality, Privacy and Risk, Department of Veterans Affairs.
    [FR Doc. 2018-09878 Filed 5-8-18; 8:45 am] BILLING CODE 8320-01-P
    83 90 Wednesday, May 9, 2018 Rules and Regulations Part II Department of Energy Federal Energy Regulatory Commission 18 CFR Part 37 Reform of Generator Interconnection Procedures and Agreements; Final Rule DEPARTMENT OF ENERGY Federal Energy Regulatory Commission 18 CFR Part 37 [Docket No. RM17-8-000; Order No. 845] Reform of Generator Interconnection Procedures and Agreements AGENCY:

    Federal Energy Regulatory Commission, DOE.

    ACTION:

    Final action.

    SUMMARY:

    In this final action, the Federal Energy Regulatory Commission (Commission) is amending the pro forma Large Generator Interconnection Procedures and the pro forma Large Generator Interconnection Agreement to improve certainty, promote more informed interconnection, and enhance interconnection processes. The reforms are intended to ensure that the generator interconnection process is just and reasonable and not unduly discriminatory or preferential.

    DATES:

    This action is effective July 23, 2018.

    FOR FURTHER INFORMATION CONTACT:  Tony Dobbins (Technical Information), Office of Energy Policy and Innovation, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-6630, [email protected]. Kathleen Ratcliff (Technical Information), Office of Energy Market Regulation, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-8018, [email protected]. Adam Pan (Legal Information), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426, (202) 502-6023, [email protected].
    SUPPLEMENTARY INFORMATION: Before Commissioners: Kevin J. McIntyre, Chairman; Cheryl A. LaFleur, Neil Chatterjee, Robert F. Powelson, and Richard Glick. Table of Contents Paragraph
  • Nos.
  • I. Introduction 1 II. Background 9 A. Order No. 2003 9 B. 2008 Order on Interconnection Queuing Practices 12 C. 2015 American Wind Energy Association Petition and 2016 Technical Conference 15 D. Notice of Proposed Rulemaking 18 III. Overview and Need for Reform 23 A. Comments on Overall Approach 26 B. Commission Determination 36 IV. Proposed Reforms 45 A. Improving Certainty for Interconnection Customers 45 1. Scheduled Periodic Restudies 46 2. The Interconnection Customer's Option To Build 73 3. Self-Funding by the Transmission Owner 114 4. Dispute Resolution 123 5. Capping Costs for Network Upgrades 172 B. Promoting More Informed Interconnection 191 1. Identification and Definition of Contingent Facilities 192 2. Transparency Regarding Study Models and Assumptions 221 3. Congestion and Curtailment Information 247 4. Definition of Generating Facility in the Pro Forma LGIP and Pro Forma LGIA 273 5. Interconnection Study Deadlines 290 6. Improving Coordination With Affected Systems 335 C. Enhancing Interconnection Processes 342 1. Requesting Interconnection Service Below Generating Facility Capacity 343 2. Provisional Interconnection Service 424 3. Utilization of Surplus Interconnection Service 453 4. Material Modification and Incorporation of Advanced Technologies 510 5. Modeling of Electric Storage Resources for Interconnection Studies 537 D. Other Issues 545 1. Whether Proposed Reforms Should Be Applied to Small Generation 545 2. Issues Not Raised in the NOPR 550 3. Process Considerations 552 4. Compliance and Implementation 554 V. Information Collection Statement 557 VI. Environmental Analysis 563 VII. Regulatory Flexibility Act 564 VIII. Document Availability 566 IX. Effective Date and Congressional Notification 569
    I. Introduction

    1. In this final action, the Commission revises its pro forma Large Generator Interconnection Procedures (LGIP) and the pro forma Large Generator Interconnection Agreement (LGIA) to implement ten specific reforms.

    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.1 Specifically, we expect these reforms to provide interconnection customers with better information and more options for obtaining interconnection service such that there are fewer interconnection requests overall and fewer interconnection requests that are unlikely to reach commercial operation. As a result, we expect transmission providers will be able to focus on those requests that are most likely to reach commercial operation.

    1 Transmission provider:

    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.

    Pro forma LGIP Section 1 (Definitions); pro forma LGIA Art. 1 (Definitions).

    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 pro forma LGIP and pro forma LGIA establish the terms and conditions under which public utilities that own, control, or operate facilities for transmitting electric energy in interstate commerce 2 must provide interconnection service to large generating facilities.3 Based on the record in this proceeding, we find it necessary under section 206 of the Federal Power Act (FPA) 4 to revise the pro forma LGIP and the pro forma LGIA to ensure that the rates, terms, and conditions pursuant to which public utilities provide interconnection service to large generating facilities are just and reasonable and not unduly discriminatory or preferential.

    2 A public utility is a utility that owns, controls, or operates facilities used for transmitting electric energy in interstate commerce, as defined by the Federal Power Act (FPA). See 16 U.S.C. 824(e) (2012). A non-public utility that seeks voluntary compliance with the reciprocity condition of an Open Access Transmission Tariff (OATT) may satisfy that condition by filing an OATT, which includes the pro forma LGIP and the pro forma LGIA. See Standardization of Generator Interconnection Agreements and Procedures, Order No. 2003, FERC Stats. & Regs. ¶ 31,146 (2003) (Order No. 2003), order on reh'g, Order No. 2003-A, FERC Stats. & Regs. ¶ 31,160, at P 774 (Order No. 2003-A), order on reh'g, Order No. 2003-B, FERC Stats. & Regs. ¶ 31,171 (2004) (Order No. 2003-B), order on reh'g, Order No. 2003-C, FERC Stats. & Regs. ¶ 31,190 (2005) (Order No. 2003-C), aff'd sub nom. Nat'l Ass'n of Regulatory Util. Comm'rs v. FERC, 475 F.3d 1277 (DC Cir. 2007), cert. denied, 552 U.S. 1230 (2008).

    3 A large generating facility is “a Generating Facility having a Generating Facility Capacity of more than 20 [megawatts].” Pro forma LGIA Art. 1.

    4 16 U.S.C. 824e (2012).

    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.5 In addition, there have been a number of developments that affect generator interconnection, including a changing resource mix driven by market forces and state and federal policies, and by the emergence of new technologies. At the same time, transmission providers have expressed concern that the interconnection study process can be difficult to manage because some interconnection customers submit requests for interconnection service associated with new generating facilities that the transmission providers maintain have little chance of reaching commercial operation. Consequently, we conclude that it is appropriate to adopt the revisions to the pro forma LGIP and the pro forma LGIA described in this final action to mitigate existing concerns and to ensure that the pro forma LGIP and pro forma LGIA are just and reasonable and not unduly discriminatory or preferential.

    5See, e.g., AWEA June 19, 2015 Petition at 2 (Petition).

    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, 2016,6 with certain modifications. Among other things, we have revised aspects of the reforms pertaining to dispute resolution, contingent facilities, model and assumption transparency, study deadline metrics, provisional interconnection service, utilization of surplus interconnection service, and material modification.7 Additionally, in this final action, as discussed more fully below, we withdraw or decline to move forward with the NOPR proposals pertaining to scheduled periodic restudies, self-funding by the transmission owner, congestion and curtailment information, and modeling electric storage resources. The Commission also held a technical conference on April 3 and 4, 2018 to gather additional information regarding transmission providers' and interconnection customers' coordination with affected systems.8 We conclude that the reforms adopted in this final action will help improve the efficiency of processing interconnection requests for both transmission providers and interconnection customers, maintain reliability, balance the needs of interconnection customers and transmission owners, and remove barriers to resource development.

    6Reform of Generator Interconnection Procedures and Agreements, 82 FR 4464 (Jan. 13, 2017), FERC Stats. & Regs. ¶ 32,719 (2017) (NOPR).

    7 The pro forma LGIP defines Material Modification as “those modifications that have a material impact on the cost or timing of any Interconnection Request with a later queue priority date.” See pro forma LGIP Section 1.

    8Reform of Affected System Coordination in the Generator Interconnection Process, Docket No. AD18-8-000 and EDF Renewable Energy, Inc. v. Midcontinent Independent System Operator, Inc., Southwest Power Pool, Inc., and PJM Interconnection, L.L.C., Docket No. EL18-26-000, Notice of Technical Conference (Feb. 2, 2018).

    II. Background A. Order No. 2003

    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.” 9 Prior to the issuance of Order No. 2003, the Commission addressed interconnection issues on a case-by-case basis through, for example, filings under section 205 of the FPA.10

    9 Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 11.

    10See Id. P 10.

    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 The Commission found that a standard set of procedures “will minimize opportunities for undue discrimination and expedite the development of new generation, while protecting reliability and ensuring that rates are just and reasonable.” 12

    11Id. P 9 (citing Tennessee Power Co., 90 FERC ¶ 61,238 (2000)).

    12Id. P 11.

    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 pro forma LGIP and pro forma LGIA and required all public utilities subject to Order No. 2003 to modify their OATTs to incorporate the pro forma LGIP and pro forma LGIA.

    B. 2008 Order on Interconnection Queuing Practices

    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

    13Interconnection Queuing Practices, Docket No. AD08-2-000, Notice of Technical Conference (Nov. 2, 2007).

    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 acknowledged that delays in processing interconnection queues were more pronounced in RTOs/ISOs that were attracting significant new entry.

    14Interconnection Queuing Practices, 122 FERC ¶ 61,252, at PP 16-18 (2008) (2008 Order).

    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 The Commission further stated that, although it “may need to [impose solutions] if the RTOs and ISOs do not act themselves,” each region would have an opportunity to work with stakeholders to develop its own solutions through “consensus proposals.” 16 Following the 2008 Order, RTOs/ISOs submitted multiple queue reform proposals to the Commission, some of which were intended to move away from a “first-come, first-served” approach to a “first-ready, first-served” approach.

    15 2008 Order, 122 FERC ¶ 61,252 at PP 16-18.

    16Id. P 8.

    C. 2015 American Wind Energy Association Petition and 2016 Technical Conference

    15. On June 19, 2015, AWEA filed a petition in Docket No. RM15-21-000 requesting that the Commission revise the pro forma LGIP and pro forma LGIA. On July 7, 2015, the Commission issued a Notice of Petition for Rulemaking in that docket to seek public comment on the petition. The Commission received thirty-five comments and three answers and reply comments.

    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.

    D. Notice of Proposed Rulemaking

    18. On December 15, 2016, the Commission issued the NOPR, proposing fourteen reforms focused on improving aspects of the pro forma LGIP and pro forma LGIA, the pro forma OATT, and the Commission's regulations. The Commission also sought comment on, but did not propose, tariff or regulatory revisions on other issues.

    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 pro forma LGIP to require transmission providers that conduct cluster studies to move toward a scheduled, periodic restudy process; (2) remove from the pro forma LGIA the limitation that interconnection customers may only exercise the option to build transmission provider's interconnection facilities and stand alone network upgrades if the transmission provider cannot meet the dates proposed by the interconnection customer; (3) modify the pro forma LGIA to require mutual agreement between the transmission owner and interconnection customer for the transmission owner to opt to initially self-fund the costs of the construction of network upgrades; and (4) require that RTOs/ISOs establish dispute resolution procedures for interconnection disputes. The Commission also sought comment on the extent to which a cap on the network upgrade costs for which interconnection customers are responsible can mitigate the potential for serial restudies without inappropriately shifting cost responsibility.

    20. Second, the Commission proposed five reforms to improve transparency by providing more detailed information for the benefit of all participants in the interconnection process. The Commission proposed to: (1) Require transmission providers to outline and make public a method for determining contingent facilities in their LGIPs and LGIAs based upon guiding principles in the NOPR; (2) require transmission providers to list in their LGIPs and on their Open Access Same-Time Information System (OASIS) sites the specific study processes and assumptions for forming the networking models used for interconnection studies; (3) require congestion and curtailment information to be posted in one location on each transmission provider's OASIS site; (4) revise the definition of “Generating Facility” in the pro forma LGIP and pro forma LGIA to explicitly include electric storage resources; and (5) create a system of reporting requirements for aggregate interconnection study performance. The Commission also sought comment on proposals or additional steps that the Commission could take to improve the resolution of issues that arise when a proposed interconnection impacts affected systems.17

    17 Affected system “shall mean an electric system other than the Transmission Provider's Transmission System that may be affected by the proposed interconnect.” Pro forma LGIP Section 1 (Definitions); pro forma LGIA Art. 1 (Definitions).

    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 (e.g., incorporation of a newer turbine model) without a change to the interconnection customer's queue position; and (5) require transmission providers to evaluate their methods for modeling electric storage resources for interconnection studies and report to the Commission why and how their existing practices are or are not sufficient.

    22. In response to the NOPR, sixty-three comments were filed.18 These comments have informed our determinations in this final action.

    18 Appendix A to Order No. 845 lists the entities that submitted comments on the NOPR and the shortened names used through this final action to describe those entities. Order No. 845 is available on the Commission's eLibrary and website.

    III. Overview and Need for Reform

    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.19

    19 NOPR, FERC Stats. & Regs. ¶ 32,719 at PP 24-25.

    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.20 For example, the Commission noted that many interconnection customers experience delays, and some interconnection queues have significant backlogs and long timelines.21 The Commission also recognized the recurring problem of late-stage interconnection request withdrawals that lead to interconnection restudies and consequent delays for lower-queued interconnection customers.22 The Commission further recognized that interconnection request withdrawals can lead to increased network upgrade cost responsibility for lower-queued interconnection customers, which, in turn, could result in cascading withdrawals. Moreover, the Commission stated that the lack of cost and timing certainty can hinder interconnection customers from obtaining financing, and that cost uncertainty is a significant obstacle, as some interconnection customers are less able to absorb unexpected and potentially higher costs.

    20Id. P 26.

    21Id. (citing, e.g., 2016 Technical Conference Tr. 210: 1-10 (discussion of delays up to a year)).

    22Id. (citing, e.g., 2016 Technical Conference Tr. 20:15-23 (discussion regarding MISO experiencing 50 percent withdrawal rates in many parts of the queue)).

    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.

    A. Comments on Overall Approach

    26. A number of parties express support for the proposals in the NOPR.23 For example, TAPS “generally support[s] the proposed reforms” and states that the NOPR proposals “reasonably balance the needs of interconnection customers with the needs of load and transmission providers.” 24 Generation Developers agree with the Commission's preliminary findings and argue that the NOPR “addresses critical items that directly impact: (i) The development of new generation; (ii) the rates; terms and conditions of interconnection service; and (iii) the rates to customers for wholesale electric products.” 25 Joint Renewable Parties and ESA ask the Commission to quickly proceed with a final rulemaking.26 ESA states that Order No. 2003's issuances predate the deployment of electric storage resources on the transmission system and that existing interconnection agreements and processes do not consider electric storage resources' attributes.27 ESA also states that the resulting undue uncertainty limits grid access for electric storage resources and prevents them from providing low cost reliability services.28 ESA asserts, however, that the Commission's NOPR proposals strike an effective balance between transmission provider flexibility and interconnection customer certainty.29

    23See e.g., Community Renewable Energy Association 2017 Comments at 1-2; Joint Renewable Commenters 2017 Comments at 1; Generation Developers 2017 Comments at 2; Renewable Energy Coalition 2017 Comments at 2; Renewable and Storage Associations 2017 Comments at 1-2; TAPS 2017 Comments at 1; TDU Systems 2017 Comments at 3-13, 16-30.

    24 TAPS 2017 Comments at 1.

    25 Generation Developers 2017 Comments at 2.

    26 Joint Renewable Commenters 2017 Comments at 1; ESA 2017 Comments at 19.

    27Id. at 5-6.

    28Id. at 6.

    29Id. at 19.

    27. IECA supports the majority of the Commission's proposed reforms.30 Invenergy supports many of the Commission's proposed reforms but states that the NOPR “leaves fundamental causes of these [interconnection] delays unaddressed.” 31 NEPOOL states that the proposed reforms could: (1) Address the time ISO-NE takes to evaluate, study, and approve new interconnections; and (2) facilitate market entry through more transparent and useful information regarding capacity and energy deliverability of potential new ISO-NE resources.32 Joint Renewable Parties contend that, despite existing rules, abusive interconnection practices impede the development of competitively supplied generation from renewable resources—particularly where the transmission provider is a vertically integrated utility.33 CAISO recognizes the need to nationalize many of the practices proposed in the NOPR.34

    30 IECA 2017 Comments at 2.

    31 Invenergy 2017 Comments at 1.

    32 NEPOOL 2017 Comments at 5.

    33 Joint Renewable Parties 2017 Comments at 1-2.

    34 CAISO 2017 Comments at 37.

    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.” 35 They object, however, to any changes that would impose cost caps for network upgrades and certain of the NOPR's proposed reforms.36 Additionally, California Energy Storage Alliance commends CAISO for the reforms already implemented in that region and suggests that other RTOs/ISOs should adopt these reforms.37 However, California Energy Storage Alliance also suggests that each RTO/ISO should decide upon the proposed solutions for themselves rather than through the establishment of new national policy.38

    35 Non-Profit Utility Trade Associations 2017 Comments at 4.

    36 Non-Profit Utility Trade Associations 2017 Comments at 4. These include the proposal for transparency regarding study models and assumptions, the proposal to allow interconnection customers to request interconnection service below generating facility capacity, and the proposal regarding the utilization of surplus interconnection service.

    37 California Energy Storage Alliance 2017 Comments at 1-2.

    38Id. at 13.

    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.39 It states that the volume of interconnection requests and the inherently speculative nature of generation development lead to queue delays, suspensions, and withdrawals.40 Imperial states that the NOPR could alter transmission owners' rights and raises concerns regarding the feasibility of processing interconnection requests.41 ISO-NE states that several of the proposed reforms may be overly prescriptive and may have unintended negative consequences.42 Southern argues that the NOPR fails to address problems or delays caused or exacerbated by interconnection customers.43

    39 EEI 2017 Comments at 9. AEP and Duke support the comments being filed by EEI in this proceeding. AEP 2017 Comments at 1; Duke 2017 Comments at 2.

    40 EEI 2017 Comments at 9.

    41 Imperial 2017 Comments at 1.

    42 ISO-NE 2017 Comments at 2.

    43 Southern 2017 Comments at 4-5.

    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.44 EEI requests that the Commission not deviate from its longstanding policy “that risks and costs associated with an interconnection request be borne by the interconnection customer.” 45 Similarly, Salt River states that the NOPR could undermine the Commission's non-discrimination policy as well as the cost causation principle.46 Southern asks the Commission to reconsider those proposals that “lack balance and would shift risks and add bureaucratic responsibilities to” transmission providers.47

    44 Non-Profit Utility Trade Associations 2017 Comments at 3; EEI 2017 Comments at 9-10; Salt River 2017 Comments at 1-2; Southern 2017 Comments at 4; Xcel 2017 Comments at 3-4; APS 2017 Comments at 5.

    45 EEI 2017 Comments at 9.

    46 Salt River 2017 Comments at 1-2.

    47 Southern 2017 Comments at 4.

    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.48 APS suggests that the Commission re-evaluate its revisions and additions to ensure that there are not potentially conflicting or otherwise limiting provisions elsewhere in the pro forma LGIP and pro forma LGIA.49

    48 APS 2017 Comments at 5-6.

    49Id. at 7.

    32. Duke, ISO-NE, and Southern support the NOPR to the extent that it allows procedures to vary according to differing regional needs.50 Similarly, MISO TOs state that each RTO/ISO's LGIP or LGIA is not simply a set of procedures tied to a pro forma agreement that is amenable to generic modifications but is instead a complex series of arrangements, accepted by the Commission, developed in consultation with stakeholders, and designed to meet the RTO/ISO's particular needs and circumstances.51

    50 Duke 2017 Comments at 29; ISO-NE 2017 Comments at 3; Southern 2017 Comments at 3.

    51 MISO TOs 2017 Comments at 4.

    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 pro forma rules to avoid unintended disruptions to market participants. NEPOOL states that, to the extent that the proposals would disrupt the integrated interconnection and FCM process in New England, they would not support the adoption of the NOPR in New England.52 Similarly, because of the unique interconnection issues in each region and significant regional variations, NYISO asks the Commission to allow parties to tailor appropriate tariff revisions and demonstrate how they are addressing, or plan to address, the Commission's concerns in a manner consistent with or superior to the NOPR's proposed revisions.53

    52 NEPOOL 2017 Comments at 6.

    53 NYISO 2017 Comments at 1.

    34. Southern recommends that the Commission issue a revised notice of proposed rulemaking to allow for another round of notice and comment.54 EEI asks the Commission to convene technical conferences to seek feedback on the portions of the LGIA and LGIP that require review and revision to ensure consistency, completeness, and applicability.55

    54 Southern 2017 Comments a 6.

    55 EEI 2017 Comments at 76.

    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 proposed interconnections; and (ii) provide generators with reasonable estimates within the time needed to effectuate interconnection and necessary supporting upgrades.” 56

    56 Duke 2017 Comments at 3.

    B. Commission Determination

    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 pro forma LGIP and the pro forma LGIA.57

    57 The final action revises the pro forma LGIP and pro forma LGIA in accordance with § 35.28(f)(1) of the Commission's regulations, which provides that every public utility that is required to have on file a non-discriminatory open access transmission tariff under the section must amend such tariff by adding the standard interconnection procedures and agreement and the standard small generator interconnection procedures and agreement required by Commission rulemaking proceedings promulgating and amending such interconnection procedures and agreements, or such other interconnection procedures and agreements as may be required by Commission rulemaking proceedings promulgating and amending the standard interconnection procedures and agreement and the standard small generator interconnection procedures and agreement. 18 CFR 35.28(f)(1) (2017). See Reactive Power Requirements for Non-Synchronous Generation, Order No. 827, FERC Stats. & Regs. ¶ 31,385 (cross-referenced at 155 FERC ¶ 61,277), order on clarification and reh'g, 157 FERC ¶ 61,003 (2016) (Order No. 827).

    37. Based on our analysis of the record, we adopt the NOPR's preliminary findings.58 We find that the record in this proceeding provides support for our findings that, without the reforms adopted here, the current interconnection process may hinder timely development of new generation,59 stifle competition,60 result in uncertainty 61 and inaccurate information,62 or potentially unduly discriminate against new technologies.63 Further, we find that, absent the reforms adopted in this final action, the existing defects and inefficiencies in generator interconnection processes that we have described could become exacerbated, resulting in longer delays in generation development, higher costs to customers, more uncertainty in the process, and less competition in the market. For these reasons, we conclude that these reforms are necessary to ensure that rates, terms, and conditions of service are just and reasonable and are not unduly discriminatory or preferential.

    58See supra P 26.

    59See, e.g., Invenergy 2017 Comments at 1 (stating that “many of the Commission's proposed reforms. . . . are small steps in the right direction toward reducing the current chronic queue delays); FTC 2017 Comments at 2 (stating that it supports the Commission's proposals “to facilitate generation interconnections to the grid).

    60See, e.g., FTC 2017 Comments at 2, 5 (stating that the NOPR “is a logical next step in [a] procompetitive process” and citing existing concerns about “anticompetitive behavior” in the interconnection process);

    61See, e.g., AFPA 2017 Comments at 6 (stating that the option to build proposal “should increase cost certainty”).

    62See, e.g., id. at 4 (stating that the provisional interconnection service, utilization of surplus interconnection service, and material modification reforms “have the potential to . . . improve the accuracy and reliability of interconnection studies”).

    63See, e.g. AWEA 2017 Comments at 4 (stating that “the current process . . . creates the potential for discriminatory interconnection processes as new technologies enter the generation sphere”); Public Interest Organizations 2017 Comments at 17 (stating that they agree that “[i]nterconnection customers involving `new technologies may be affected more by process and information uncertainty than incumbents' ”).

    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 both transmission providers and interconnection customers.

    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 pro forma LGIP and pro forma LGIA revisions, it neglects to further describe or explain the particulars of such revisions. The revisions to the pro forma LGIP and the pro forma LGIA adopted here are intended to effectuate the reforms discussed in this final action and to integrate the adopted reforms so that they do not unintentionally conflict with other portions of the pro forma LGIP and the pro forma LGIA. Nonetheless, to the extent that a particular transmission provider believes that additional revisions to its LGIP or LGIA are necessary, it may propose such revisions in a filing pursuant to section 205 of the FPA.

    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 difference rationale.” 64 However, if a non-RTO/ISO seeks a variation “for any other reason,” it must present its justification for the variation as “consistent with or superior to” the pro forma LGIA or pro forma LGIP.65 The Commission went on to say that, for RTOs/ISOs, it would allow independent entity variations for pricing and non-pricing provisions, and that RTOs/ISOs “shall have greater flexibility to customize [their] interconnection procedures and agreements to fit regional needs.” 66 In this final action, we make no changes to the variations allowed by Order No. 2003. Therefore, on compliance, transmission providers may argue that they qualify for the above-mentioned variations from the requirements of this final action.

    64 Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 826.

    65Id.

    66Id.

    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.67

    67 Duke 2017 Comments at 3.

    IV. Proposed Reforms A. Improving Certainty for Interconnection Customers

    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.

    1. Scheduled Periodic Restudies a. NOPR Proposal

    46. The Commission proposed to revise the pro forma LGIP to require transmission providers that conduct cluster studies 68 to conduct restudies on a scheduled, periodic basis (e.g., annually, semi-annually, quarterly, or a set number of days after the completion of the cluster study).69 Specifically, the Commission proposed to require each transmission provider that conducts cluster studies to revise Sections 6.4, 7.6, and 8.5 of the pro forma LGIP with time frames for periodic restudies.70 The Commission also sought comment on: (1) If the Commission's proposal were adopted, whether transmission providers that conduct cluster studies should be allowed to retain some discretion to conduct a restudy outside of the established schedule at the request of interconnection customers or under specific circumstances that make such schedule deviations necessary; and (2) when this discretion should be restricted and the circumstances under which such schedule deviations should be allowed.71 The Commission also sought comment on whether there are improvements to the pro forma LGIP necessary to clarify events that would trigger a restudy (restudy triggers).72

    68 Clustering allows transmission providers to simultaneously study all interconnection requests received during a specified period. See Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at PP 149-156.

    69 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 46.

    70Id. PP 48-49.

    71Id. P 50.

    72Id. P 51.

    b. Comments

    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.73 Some of these commenters assert that, because the withdrawal of higher-queued interconnection requests can create cascading restudies of lower-queued interconnection requests, regularly scheduled restudies would help alleviate the need for multiple ad hoc restudies, thereby helping to reduce uncertainty and delays.74

    73 AFPA 2017 Comments at 5; AVANGRID 2017 Comments at 5-6; AWEA 2017 Comments at 8-9; Generation Developers 2017 Comments at 6; NextEra 2017 Comments at 6; IECA 2017 Comments at 2.

    74 AFPA 2017 Comments at 5; AVANGRID 2017 Comments at 5-6; AWEA 2017 Comments at 8-9; Generation Developers 2017 Comments at 6; NextEra 2017 Comments at 6.

    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.75 NextEra explains that, in some cases, restudies have taken years to complete due to projects withdrawing from the queue, transmission project changes, inadequate transmission provider resources, and other factors.76 NextEra further notes that transmission providers then have to restart the study with the remaining members of the interconnection customer study group. NextEra contends that this occurrence can delay the interconnection customer's receipt of its study results and finalized GIA, which could prevent it from accurately evaluating the timing and costs of necessary network upgrades.77 NextEra suggests that a regularly scheduled restudy process will allow transmission providers to consider relevant changes on a set timetable and reduce the need for ad hoc restudies. NextEra also argues that, by ensuring that studies are completed, an interconnection customer will receive some network upgrade information that it would not receive if studies are restarted or delayed.78

    75 Generation Developers 2017 Comments at 6; NextEra 2017 Comments at 6.

    76 NextEra 2017 Comments at 6.

    77Id.

    78Id. at 6-7.

    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.79 NextEra suggests that periodic restudies should be conducted every six months, noting that, with that frequency, there should be little need for intervening studies, and yearly studies would be frequent enough.80

    79 AWEA 2017 Comments at 9-10.

    80 NextEra 2017 Comments at 7.

    50. Xcel supports the Commission's proposal but requests that the Commission clarify that restudies will commence within a specified time period (e.g., ninety days) of a triggering event, instead of after the completion of the cluster study. Xcel suggests that explicitly defining triggering events is not necessary and notes that determination of triggering events tends to vary between regions.81

    81 Xcel 2017 Comments at 7.

    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.82 AFPA supports regular cluster studies but believes that RTOs/ISOs should have the ability to avoid restudies and the associated costs where they can demonstrate no material change in relevant assumptions or inputs.83

    82 AVANGRID 2017 comments at 5-6.

    83 AFPA 2017 Comments at 3.

    52. APPA/LPPC states that a schedule detailing periodic restudies may provide added predictability that could be valuable to project developers.84 However, it argues that, where interconnection queues are short, there may be no need to await specified dates to perform restudies, and in those circumstances, a fixed schedule may hamper the interconnection process.85

    84 APPA/LPPC 2017 Comments at 5.

    85Id.

    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.86 Southern agrees with the Commission that transmission providers that do not conduct interconnection studies in clusters should not have to perform periodic restudies.87

    86 Duke 2017 Comments at 4.

    87 Southern 2017 Comments at 9.

    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.88 CAISO asserts that only with both of these mechanisms is it reasonable for interconnection customers to wait for an annual restudy to find out how their projects may have been affected by project withdrawals over the course of the prior year.89 CAISO states that, with the transmission owners picking up any costs above the cost cap, withdrawals can decrease or increase interconnection customers' network upgrade costs depending upon whether the upgrade is still necessary for other interconnection customers.90 CAISO states that costs decrease when sufficient interconnection customers withdraw and obviate the need for a network upgrade. However, CAISO states that costs may increase if the network upgrade is still necessary but fewer interconnection customers remain to finance it.91

    88 CAISO 2017 Comments at 7.

    89Id.

    90Id. at 7-8.

    91Id. at 8.

    55. CAISO asserts that imposing scheduled periodic restudies in other RTOs/ISOs that do not share CAISO's market features may be problematic.92 CAISO states that, as ISO-NE and others pointed out in response to the AWEA petition, an interconnection customer must wait for a periodic restudy to find out that its project costs have increased dramatically.93

    92Id.

    93Id.

    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.94

    94Id.

    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.95

    95 PG&E 2017 Comments at 3 (citing CAISO, eTariff, FERC Electric Tariff, OATT, app. DD Section 7.4 (6.0.0)).

    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.96 Similarly, EDP indicates that, although each transmission provider should be able to establish its own unique schedule, a pro forma restudy schedule should be developed that serves as the default schedule unless a transmission provider demonstrates the need for an alternative schedule.97

    96 Generation Developers 2017 Comments at 6-7.

    97 EDP 2017 Comments at 3.

    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.98 According to Invenergy, an important missing element in the restudy process is transparency for the interconnection customer. Invenergy suggests a requirement that RTOs/ISOs inform the customer of the restudy prior to its initiation. Invenergy suggests that the transmission provider should provide information in sufficient detail so that the customer can understand the need for restudy, including whether there is an addition or change to the necessary network upgrades.99

    98 Invenergy 2017 Comments at 5.

    99Id.

    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.100 PJM argues that, in a situation where a project withdraws during the system impact study, or prior to the completion of the facilities study, and restudy is necessary, the NOPR proposal would harm all subsequently queued projects. PJM explains that these projects would remain in a “holding pattern” until the scheduled, periodic restudy is complete.101 PJM states that improvements in transparency can achieve the intended goals of the NOPR proposal without the drawbacks.102

    100 PJM 2017 Comments at 5.

    101Id. at 4-5.

    102Id. at 5.

    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.103 However, PJM states that it does not oppose conducting periodic restudies within a cluster after the issuance of a system impact study report and receipt of an executed facilities study agreement from the projects that need to be restudied.104 PJM states that it could commit to post such restudy dates on its website.105

    103Id. at 3-4.

    104Id. at 4.

    105Id.

    63. PJM asserts that the pro forma LGIP appropriately requires restudied interconnection customers to bear the cost of restudy.106 PJM also states that, at the facilities study stage, interconnection customers should bear all costs, including any impacts caused to lower-queued projects by changes made to a higher-queued project.107

    106Id. at 6 (citing pro forma LGIP Sections 6.4, 7.6, and 8.5).

    107Id.

    64. PJM opposes the NOPR's 45/60 day restudy timeframe because restudies “come in all sizes and complexities.” 108 PJM states that committing to a strict timeframe would then necessitate granting the transmission provider the flexibility to extend the timeframe beyond the study period found in the tariff, regardless of whether a transmission provider is serially processing a restudy or restudying a cluster.109 PJM maintains that reporting and sharing of status information with the affected parties is more effective than inflexible restudy deadlines.110

    108Id. at 5.

    109Id.

    110Id. at 5-6.

    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.111

    111 NYISO 2017 Comments at 13; Indicated NYTOs 2017 Comments at 4-5.

    66. ISO-NE and NEPOOL state that the Commission should not adopt the NOPR proposal because it may not be appropriate in each region.112 As an example, ISO-NE states that the recent revisions to its interconnection procedures incorporate a clustering approach that does not include scheduled restudies.113 ISO-NE argues that a scheduled restudy would result in less certainty for interconnection customers because it would delay the study outcome. On the other hand, ISO-NE states that its clustering approach would still meet the objectives of the NOPR by establishing milestones that can serve as decision points for interconnection customers.114

    112 ISO-NE 2017 Comments at 15-16.

    113Id. at 16.

    114Id. at 16-17.

    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.115 ISO-NE states that its cluster study approach minimizes the need for restudy through provisions that allow for the participation of lower-queued requests in the event of withdrawals.116

    115Id.

    116Id. at 17.

    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.117 MISO states that the Commission should not deviate from its current requirement that allows transmission providers to use reasonable efforts. It also contends that the Commission should not impose inflexible timeframes on restudies, and asserts that a one-size-fits-all approach would not be appropriate here. MISO notes that in RTOs/ISOs, the interconnection process involves many parties, and imposing inflexible restudy deadlines would be counter-productive, particularly where delays are caused by third parties or by factors outside of the RTO/ISO's control.118 ITC urges the Commission to accept MISO's Definitive Planning Phase 119 process, which addresses restudies, as consistent with or superior to the revisions made to the pro forma LGIP in this proceeding.120

    117 MISO 2017 Comments at 12-13.

    118Id. at 13-14.

    119 Under MISO's Definitive Planning Phase process, MISO performs three sequential system impact studies after successive milestone payments to account for queue withdrawals.

    120 ITC 2017 Comments at 6.

    69. Imperial states that the Commission's proposal to require scheduled, periodic restudies for cluster studies would unduly burden smaller transmission providers.121 Imperial states that transmission providers may not be willing to memorialize an aggressive restudy commitment if they expect to experience variations in the number of interconnection requests that would be appropriate for cluster studies or restudies over a period of time.122 Additionally, for smaller transmission providers that conduct few restudies, such a proposal may be less efficient than studying each project individually as the need to restudy arises.123 Therefore, Imperial requests that the Commission allow transmission providers, particularly smaller transmission providers, the discretion to conduct periodic cluster restudies within their selected timeframes.124

    121 Imperial 2017 Comments at 15.

    122Id. at 16.

    123Id.

    124Id.

    c. Commission Determination

    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.125 We agree with the comments that, regardless of the restudy schedule, restudies that result from such actions by a higher-queued interconnection customer may not be foreseeable or preventable. Implementing a scheduled periodic restudy process may reduce timing uncertainty by creating decision points, but it would not eliminate the cost uncertainty created by the withdrawal or modification of a higher-queued project. In that case, restudy would be necessary to recalculate network upgrade cost distribution among the remaining customers, and restricting the timing of these restudies may cause, rather than prevent, unnecessary delays.

    125Pro forma LGIP Sections 6.4, 7.6, and 8.5.

    72. Accordingly, we decline to adopt revisions to the pro forma LGIP that would require transmission providers that conduct cluster studies to establish a schedule for conducting periodic restudies. We also decline to adopt revisions to the pro forma LGIP to address the transmission provider's discretion to conduct restudies outside of an established schedule, and decline to propose revisions to the restudy triggers in the pro forma LGIP.

    2. The Interconnection Customer's Option To Build a. NOPR Proposal

    73. In the NOPR, the Commission proposed modifications to the pro forma LGIA to allow interconnection customers to exercise the option to build regardless of whether the transmission provider can meet the interconnection customer's proposed dates.126

    126 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 52.

    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 pro forma LGIA, however, the interconnection customer has the option to build the transmission provider's interconnection facilities 127 and stand alone network upgrades,128 but only if the transmission provider notifies the interconnection customer that the transmission provider cannot complete construction of such facilities by the interconnection customer's proposed in-service date, initial synchronization date, or commercial operation date; this is termed the “option to build.” To expand the opportunity for interconnection customers to exercise the option to build to reduce costs or complete construction more quickly, the Commission proposed in the NOPR to allow the interconnection customer to exercise the option to build regardless of whether the transmission provider finds the interconnection customer's selected in-service date, initial synchronization date, and commercial operation date acceptable.

    127 According to the pro forma LGIA:

    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.

    Pro forma LGIA Art. 1.

    128 Stand alone 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.

    Id.

    75. Under the current pro forma LGIA, unless otherwise mutually agreed to by the parties, the interconnection customer selects the “In-Service Date, Initial Synchronization Date, and Commercial Date” 129 and “either the Standard Option or Alternative Option.” 130 Under both of these options, the transmission provider is responsible for construction of the transmission provider's interconnection facilities and all network upgrades.

    129 The In-Service Date is “the date upon which the Interconnection Customer reasonably expects it will be ready to begin use of the Transmission Provider's Interconnection Facilities to obtain back feed power.” Id. The Initial Synchronization Date is “the date upon which the Generating Facility is initially synchronized and upon which Trial Operation begins.” Id. The Commercial Operation Date is “the date on which the Generating Facility commences Commercial Operation as agreed to by the Parties pursuant to Appendix E to the Standard Large Generator Interconnection Agreement.” Id.

    130Pro forma LGIA Art. 5.1.

    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.” 131 Under the “alternate option,” the transmission provider may be liable for liquidated damages if it does not construct the transmission provider's interconnection facilities and “Network Upgrades according to the construction completion dates established by the Interconnection Customer.” 132

    131Pro forma LGIA Art. 5.1.1.

    132 The transmission provider has the ability to decline this option within 30 days of the LGIA's execution.

    77. Under the current pro forma LGIA, there are two additional options for assuming responsibility for constructing certain facilities, which are available if the transmission provider informs the interconnection customer that it cannot meet proposed construction completion dates: The option to build, described above, and the “negotiated option.” 133 The negotiated option, described in article 5.1.4 of the pro forma LGIA, applies if the transmission provider cannot meet the interconnection customer's proposed dates but the interconnection customer does not want to assume responsibility for construction of the transmission provider's interconnection facilities and stand alone network upgrades. In this case, the transmission provider would construct the transmission provider's interconnection facilities and all network upgrades.

    133Pro forma LGIA Art. 5.1.4.

    78. In the NOPR, the Commission proposed modifications to articles 5.1, 5.1.3, and 5.1.4 of the pro forma LGIA to allow interconnection customers to exercise the option to build with respect to the transmission provider's interconnection facilities and stand alone network upgrades regardless of whether the transmission provider can meet the interconnection customer's proposed dates. Specifically, the Commission proposed to modify the language in article 5.1 of the pro forma LGIA as follows (with proposed deletions in brackets and proposed additions in italics):

    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 the Standard Option or Alternate Option set forth below [for completion of Transmission Provider's Interconnection Facilities and Network Upgrades, as set forth in Appendix A, Interconnection Facilities and Network Upgrades,] and such dates and selected option shall be set forth in Appendix B, Milestones. At the same time, Interconnection Customer shall indicate whether it elects to exercise the Option to Build set forth in article 5.1.3 below. 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. Upon receipt of the notification that Interconnection Customer's designated dates are not acceptable to Transmission Provider, the Interconnection Customer shall notify the Transmission Provider within thirty (30) Calendar Days whether it elects to exercise the Option to Build if it has not already elected to exercise the Option to Build. 134

    134 In this final action, the adopted language differs slightly from the NOPR language because we remove the word “the” before “Transmission Provider” in the final sentence of this article.

    79. The Commission also proposed to modify the language in article 5.1.3 of the pro forma LGIA as follows (with proposed deletions in brackets):

    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 Upgrades on the dates specified in article 5.1.2. Transmission Provider and Interconnection Customer must agree as to what constitutes Stand Alone Network Upgrades and identify such Stand Alone Network Upgrades in Appendix A. Except for Stand Alone Network Upgrades, Interconnection Customer shall have no right to construct Network Upgrades under this option.

    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.135 For this reason, it proposed to revise the negotiated option to remove references to limitations on the option to build, to address scenarios in which an interconnection customer exercises the option to build and still wishes to negotiate completion times for network upgrades that are not stand alone network upgrades, and to address circumstances in which the interconnection customer does not wish to exercise the option to build. The Commission asserted that such revisions are necessary because the ability to exercise the option to build would no longer be contingent upon a transmission provider's inability to meet the interconnection customer's proposed dates. However, the Commission noted that the negotiated option must also contemplate the possibility that the transmission provider does not agree to the interconnection customer's proposed dates as to network upgrades that are not stand alone. That is, even if the interconnection customer elects to exercise the option to build, the transmission provider would still be responsible for the design, procurement, and construction of network upgrades that are not stand alone network upgrades.

    135 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 62.

    81. Therefore, the Commission also proposed to modify the language in article 5.1.4 of the pro forma LGIA as follows (with proposed deletions in brackets and proposed additions in italics):

    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] If the dates designated by Interconnection Customer are not acceptable to Transmission Provider, the Parties shall in good faith attempt to negotiate terms and conditions (including revision of the specified dates and liquidated damages, the provision of incentives, or the procurement and construction of [a portion of Transmission Provider's Interconnection Facilities and Stand Alone Network Upgrades by Interconnection Customer] all facilities other than Transmission Provider's Interconnection Facilities and Stand Alone Network Upgrades if the Interconnection Customer elects to exercise the Option to Build under article 5.1.3) [pursuant to which Transmission Provider is responsible for the design, procurement and construction of Transmission Provider's Interconnection Facilities and Network Upgrades]. If the Parties are unable to reach agreement on such terms and conditions, then, pursuant to article 5.1.1 (Standard Option), Transmission Provider shall assume responsibility for the design, procurement and construction of [Transmission Provider's Interconnection Facilities and Network Upgrades] all facilities other than Transmission Provider's Interconnection Facilities and Stand Alone Network Upgrades if the Interconnection Customer elects to exercise the Option to Build [pursuant to article 5.1.1, Standard Option].

    82. Consistent with article 5.2 of the current pro forma LGIA, the interconnection customer and transmission provider (and transmission owner, if applicable) would continue to reach agreement on the design and construction of the transmission provider's interconnection facilities and stand alone network upgrades; the Commission proposed no changes to article 5.2 in the NOPR.

    b. General i. Comments

    83. Many commenters support this proposal.136 AWEA states that the current restriction on when the option to build can be exercised is unnecessary, unjust, and unreasonable because it restricts an interconnection customer's ability to build interconnection facilities and stand alone network upgrades cost-effectively.137 Several commenters contend that the proposal will reduce costs and improve construction timelines.138 NextEra states that, in late 2016, one of its subsidiaries in SPP exercised the option to build and completed construction of facilities for a cost of approximately $12 million, even though the relevant transmission owner asserted that it could not complete such facilities until late 2017 for an estimated cost of $18 million. NextEra argues that if the Commission expanded interconnection customers' ability to exercise the option to build, there would be more instances where an interconnection customer constructs more efficiently than the transmission owner.139 AFPA asserts that the proposal will provide competitive and commercial discipline to utility cost estimates, construction timelines, and negotiating strategies.140 Competitive Suppliers and NEPOOL state that the proposal provides more flexibility to market participants and has the potential to increase efficiency.141 AFPA argues that the market for engineering and construction contractors is sufficiently robust that interconnection customers can often find cheaper and more efficient alternatives to utility construction.142 CAISO and PJM comment that they each currently allow this option to some degree.143 MISO and NYISO take no position on the proposal.144

    136 AFPA; AVANGRID; AWEA; Bonneville; CAISO; Joint Renewable Parties; Duke; Generation Developers; EDP; ELCON; Competitive Suppliers; FTC; IECA; NEPOOL; NextEra; PJM; Public Interest Organizations; SEIA; TDU Systems; TVA.

    137 AWEA 2017 Comments at 12-13.

    138Id. at 13; EDP 2017 Comments at 3-4; ELCON 2017 Comments at 3; Public Interest Organizations 2017 Comments at 5-8; Competitive Suppliers 2017 Comments at 4.

    139 NextEra 2017 Comments at 9.

    140 AFPA 2017 Comments at 4.

    141 Competitive Suppliers 2017 Comments at 4; NEPOOL 2017 Comments at 7.

    142 AFPA 2017 Comments at 6.

    143 CAISO 2017 Comments at 9; PJM 2017 Comments at 7 (citing PJM, Intra-PJM Tariffs, OATT, Attachment P, app. 2, Section 3.2.3 (3.0.0)).

    144 MISO 2017 Comments at 15; NYISO 2017 Comments at 14.

    84. A number of commenters also oppose the proposal.145 EEI, and MISO TOs argue that there has been no demonstration that the options under the existing pro forma LGIA result in unjust and unreasonable rates, undue discrimination, or preferential treatment.146 Both Imperial and MISO TOs question whether exercising the option to build would result in significant decreases in cost or construction time.147 AEP, Xcel, and National Grid argue that only transmission owners have the required knowledge, processes, and access to suppliers and contractors to properly construct network upgrades.148 Several commenters state that the additional coordination needed between transmission owners and interconnection customers may undercut the interconnection customer's ability to achieve lower costs or quicker construction.149 AEP contends that the Commission has “appropriately recognized [that] the expansion of an existing station should be treated differently than a green field construction project, and this is precisely why the Commission should not broaden the Option-to-Build.” 150

    145 AEP; AES; APPA/LPPC; EEI; Eversource; Imperial; Indicated NYTOs; ITC; MidAmerican; MISO TOs; National Grid; PG&E; NorthWestern; SoCal Edison; Southern; Xcel; Sunflower.

    146 EEI 2017 Comments at 17; MISO TOs 2017 Comments at 13.

    147 Imperial 2017 Comments at 17; MISO TOs 2017 Comments at 13.

    148 AEP 2017 Comments at 6; Xcel 2017 Comments at 8-10; National Grid 2017 Comments at 6-7.

    149 Duke 2017 Comments at 6; TVA 2017 Comments at 4; ITC 2017 Comments at 7; MidAmerican 2017 Comments at 9-10; NorthWestern 2017 Comments at 3; Southern 2017 Comments at 10-11; Xcel 2017 Comments at 8-9.

    150 AEP 2017 Comments at 6.

    ii. Commission Determination

    85. In this final action, we adopt the NOPR proposal to modify articles 5.1, 5.1.3, and 5.1.4 of the pro forma LGIA to allow interconnection customers to exercise the option to build with respect to the transmission provider's interconnection facilities and stand alone network upgrades regardless of whether the transmission provider can meet the interconnection customer's proposed dates. We conclude that this reform will benefit the interconnection process by providing interconnection customers more control and certainty during the design and construction phases of the interconnection process.151 Further, we find that limiting exercise of the option to build to circumstances where the transmission provider cannot meet the interconnection customer's requested dates is not just and reasonable. The limitation restricts an interconnection customer's ability to efficiently build the transmission provider's interconnection facilities and stand alone network upgrades in a cost-effective manner, which could result in higher costs for interconnection customers.

    151 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 58.

    86. In response to EEI's and MISO TOs' contention that there has been no demonstration that the options under the existing pro forma LGIA result in unjust and unreasonable rates, undue discrimination, or preferential treatment, we find that in circumstances where an interconnection customer cannot exercise the option to build, it may pay more and/or wait longer for the construction of the transmission provider's interconnection facilities and stand alone network upgrades. With regard to Imperial and MISO TOs' skepticism regarding the potential cost and construction efficiencies gained by exercising the option to build, the record suggests that such savings can occur and have already occurred. For example, NextEra states that its subsidiary exercised the option to build in SPP in 2016 and was able to complete the project one year sooner and for $6 million less than estimated by the transmission provider. NextEra also notes that its subsidiary used approved subcontractors, built to the transmission owner's specifications, and purchased components from vendors approved by the transmission owner.152

    152See, e.g., NextEra 2017 Comments at 9.

    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.”

    c. Reliability Concerns i. Comments

    88. APPA/LPPC, MidAmerican, EEI, ITC, National Grid, and Southern contend that this proposal could compromise grid reliability.153 EEI, ITC, MidAmerican, National Grid, and Southern argue that the proposal favors granting interconnection customers the potential for quicker or less costly construction over potential degradation of safety and reliability.154 APPA/LPPC state that the existing option to build provision sufficiently balances the needs of interconnection customers with best utility practice and reliability concerns.155 They argue that the NOPR proposal, however, will “alter dramatically” the risk to long-term reliability of transmission providers' systems and that the safeguards in article 5.2 of the pro forma LGIA lack a grasp of the “short- and long-term reliability implications associated with construction, interconnection and operation of interconnection facilities and network upgrades.” 156

    153 APPA/LPPC 2017 Comments at 4; MidAmerican 2017 Comments at 9-10; EEI 2017 Comments at 17; ITC 2017 Comments at 7; National Grid 2017 Comments at 6-7; Southern 2017 Comments at 10.

    154 EEI 2017 Comments at 17; ITC 2017 Comments at 7; MidAmerican 2017 Comments at 9-10; National Grid 2017 Comments at 6-7; Southern 2017 Comments at 10.

    155 APPA/LPPC 2017 Comments at 2.

    156Id. at 3.

    89. Three commenters state that article 5.2 of the pro forma LGIA does not fully cover the ongoing system operations, planning, and reliability requirements that are inherent in interconnection and network upgrades.157 CAISO asserts that interconnection customers must follow the transmission owners' existing standards as well as meet grid engineering and reliability standards.158 EEI requests that the Commission ensure that any facilities constructed by the interconnection customer that are transferred to the transmission provider comply with any applicable North American Electric Reliability Corporation (NERC) reliability standards.159

    157Id. at 4; MISO TOs 2017 Comments at 15; National Grid 2017 Comments at 6-7.

    158 CAISO 2017 Comments at 10.

    159 EEI 2017 Comments at 20.

    90. Other commenters disagree and argue that the expanded option to build would not affect system reliability.160 NextEra, for example, states that there is little evidence that the NOPR proposal would compromise grid reliability, and any contrary arguments ignore the fact that this proposal only loosens the conditions for exercising this right with regard to the option to build.161 AWEA asserts that expanding the option to build should not increase reliability concerns because it does not change existing approval requirements.162

    160 AWEA 2017 Comments at 14; Generation Developers 2017 Comments at 12; NextEra 2017 Comments at 10.

    161Id.

    162 AWEA 2017 Comments at 14.

    ii. Commission Determination

    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.163 There, in response to such concerns, the Commission established several safeguards.164 These safeguards, embodied in article 5.2 of the pro forma LGIA, require, among other things, that the interconnection customer exercise good utility practice and adhere to the standards and specifications provided in advance by the transmission providers. Further, these safeguards give the transmission provider the right to approve the engineering design, equipment acceptance tests, and the construction itself. In Order No. 2003-A, the Commission stated that vague reliability concerns about the option to build are misplaced, and that articles 5.2.1, 5.2.3, 5.2.5, and 5.2.6 of the pro forma LGIA are sufficient to guarantee the reliability of the facilities in question.165 In this final action, we make no changes to the requirements in article 5.2. Furthermore, we note that because article 5.2 already gives the transmission provider a significant role with regard to the option to build and provides sufficient safeguards to ensure reliable operations, we see no reason why the expanded option to build should cause a new reliability concern.

    163 Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 341.

    164Id. PP 356-357.

    165 Order No. 2003-A, FERC Stats. & Regs. ¶ 31,160 at P 232.

    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.”

    d. Liability and Cost Responsibility Concerns i. Comments

    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.166 Six commenters maintain that interconnection customers should assume all additional costs that may result from this proposal without cash, transmission credit, or congestion revenue right reimbursement.167 CAISO, NextEra, PG&E, and SoCal Edison also argue that the Commission should require that interconnection customers not receive such reimbursements to the extent that stand alone network upgrade costs exceed a specified cap.168

    166 EEI 2017 Comments at 23; Xcel 2017 Comments at 10; National Grid 2017 Comments at 8-11.

    167 CAISO 2017 Comments at 10; Bonneville 2017 Comments at 2-3; EEI 2017 Comments at 23-24; MISO TOs 2017 Comments at 16; Southern 2017 Comments at 12; SoCal Edison 2017 Comments at 5.

    168 CAISO 2017 Comments at 10; NextEra 2017 Comments at 11; PG&E 2017 Comments at 4; SoCal Edison 2017 Comments at 5.

    ii. Commission Determination

    94. In response to EEI's, Xcel's, and National Grid's comments, we note that article 5.2(7) of the pro forma LGIA requires the interconnection customer to “indemnify the Transmission Provider for claims arising from Interconnection Customer's construction of Transmission Provider's Interconnection Facilities and Stand Alone Upgrades.” We consider this provision sufficiently broad to address EEI's, Xcel's, and National Grid's concerns.169

    169 We note that the pro forma LGIA states that the term transmission provider “should be read to include the Transmission Owner when the Transmission Owner is separate from the Transmission Provider.” Pro forma LGIA Art.1 (Definitions).

    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 pro forma LGIA to allow interconnection customers to exercise the option to build regardless of whether the transmission provider can meet the interconnection customer's proposed dates, this final action makes no changes to the option to build process. In response to CAISO, NextEra, PG&E, and SoCal Edison, we note that the issue of cost caps is currently unique to CAISO; therefore, issues regarding the interaction of the option to build and the CAISO network upgrade cost cap would be better addressed when CAISO submits its compliance filing to this final action.

    e. Other i. Comments

    96. AES claims that the proposal increases the transmission provider's risk regarding security compliance and project management.170 APPA/LPPC, MISO TOs, and National Grid express concern that transmission owners will have to expend significant resources to perform the oversight functions in article 5.2 of the pro forma LGIA.171

    170 AES 2017 Comments at 7.

    171 ITC 2017 Comments at 7; MISO TOs 2017 Comments at 14; AES 2017 Comments at 7.

    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.172 APPA/LPPC note that interconnection customers may be constrained by state laws affecting the ability of non-utilities to exercise eminent domain to construct facilities and upgrades.173 CAISO states that later-queued projects may rely on network upgrades being built by interconnection customers and could be adversely affected if the customer withdraws from the queue or delays construction.174

    172 AWEA 2017 Comments at 15.

    173 APPA/LPPC 2017 Comments at 4.

    174 CAISO 2017 Comments at 9.

    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.175 To ensure that transmission providers cannot refuse to build facilities and force interconnection customers to do so, EDP recommends that the Commission clarify that a transmission provider retains the obligation to build unless and until an interconnection customer exercises its option to build.176

    175 AVANGRID 2017 Comments at 14-15; AWEA 2017 Comments at 14.

    176 EDP 2017 Comments at 4.

    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.177 Bonneville recommends the option to build only be available if the customer can demonstrate it can build the facilities more cost-effectively than the transmission provider or improve the timeline for construction.178

    177 AVANGRID 2017 Comments at 14-15.

    178 Bonneville 2017 Comments at 2-3.

    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.179 Duke recommends revising article 11.5 of the pro forma LGIA (Provision of Security) to include stand alone network upgrades, as well as article 26.1 of the pro forma LGIA to clarify that the transmission provider is not prevented from using subcontractors to perform its obligations under the LGIA. Duke also recommends adding language to require the transmission provider's approval of subcontractors.180 EEI requests that articles 5.1, 5.1.3, and 5.1.4 of the pro forma LGIA be revised to note that, if during the study process it is determined that upgrades and facilities need to be expedited, the option to build will be superseded.

    179 Duke 2017 Comments at 5; EEI 2017 Comments at 22.

    180 Duke 2017 Comments at 6.

    101. National Grid recommends that the Commission revise article 5.2 of the pro forma LGIA to require: (1) Transmission owner's prior written approval of all contractors and any information requested to evaluate the creditworthiness and technical capabilities of proposed contractors; (2) prior written transmission owner approval of agreements between interconnection customers and contractors and provisions that allow transmission owners to directly enforce the agreement against the contractor; and (3) that the interconnection customer and transmission owner enter into a written transfer agreement regarding the transfer of ownership of facilities built by the interconnection customer.181 Similarly, Eversource suggests that the Commission grant blanket authorization for the transfer of these facilities.182

    181 National Grid 2017 Comments at 8-11.

    182 Eversource 2017 Comments at 17.

    102. TVA and EEI suggest that interconnection customers should meet standards similar to those required under Order No. 1000 for transmission construction qualification.183 Generation Developers, NextEra, and EEI support transmission owners maintaining a list of pre-approved contractors.184 Some commenters suggest that the Commission require the transmission provider to post the standards and specifications used for the transmission provider's interconnection facilities and stand alone network upgrades on the transmission provider's website.185 Generation Developers state that there is a need for the transmission provider or interconnecting transmission owner to agree as to what constitutes a stand alone network upgrade.186 Generation Developers also request that transmission providers be required to provide written documentation and post on their website the reasons why they disagree that a facility is considered a stand alone network upgrade, in order to prevent undue discrimination.187 Eversource asks the Commission to require the interconnection customer to obtain transmission owner approval before ordering electrical material and equipment.188 Eversource and MISO recommend requiring that interconnection customers provide sufficient land rights for the transmission owners to access, operate, and maintain the transmission facilities and that the Commission terminate the interconnection customer's authority to construct during emergency situations.189

    183 TVA 2017 Comments at 4; EEI 2017 Comments at 18.

    184 Generation Developers 2017 Comments at 11; NextEra 2017 Comments at 11; EEI 2017 Comments at 21.

    185 Generation Developers 2017 Comments at 11; EDP 2017 Comments at 4; SEIA 2017 Comments at 14.

    186 Generation Developers 2017 Comments at 9-10.

    187Id. at 10.

    188 Eversource 2017 Comments at 9-11.

    189Id. at 1; MISO TOs 2017 Comments at 15-16.

    ii. Commission Determination

    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 pro forma LGIA. In response to concerns raised by APPA/LPPC, MISO TOs, and National Grid that transmission owners will have to expend significant resources to perform oversight functions, we note that the final action does not alter the role that the transmission provider would play in overseeing the option to build process. However, it may result in more interconnection customers exercising the expanded option to build.

    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 pro forma LGIP's existing limitation on the option to build. It is not to ensure that there are no jurisdictional or other legal barriers to construction by interconnection customers. Although more interconnection customers are likely to exercise the option to build as a result of the final action, there are still situations where an interconnection customer may not be able to do so due to jurisdictional or legal constraints. In those situations, we would not expect the interconnection customer to exercise its option to build if it could not do so effectively due to jurisdictional or legal constraints, such as limitations imposed by state law. Additionally, an interconnection customer might find that that there may be interconnection requests for which the option to build is unlikely to result in cost or time savings. Consequently, we believe that interconnection customers are in the best position to determine whether they will realize any cost or time savings from exercising the option to build for a particular interconnection request. Finally, the fact that this reform will not necessarily be useful to all interconnection requests does not mean that this reform will not afford an opportunity to some interconnection customers.

    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 pro forma LGIA, as modified by the final action, makes clear that the interconnection customer may exercise the option to build at its discretion with regard to transmission provider's interconnection facilities and stand alone network upgrades. If the interconnection customer does not exercise this discretion, pursuant to articles 5.1.1, 5.1.2, and 5.1.4, the transmission provider would be responsible for the construction of transmission provider's interconnection facilities and stand alone network upgrades.

    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 bear the costs of the transmission provider's interconnection facilities and the stand alone network upgrades; thus, they have more incentive than transmission providers to select the most cost effective option.

    108. We disagree with Duke and EEI regarding the need to revise article 9.7.1 of the pro forma LGIA to require parties to coordinate maintenance, testing, or installation actions for stand alone upgrades. Article 5.2 provides sufficient safeguards to ensure coordination of maintenance, testing, and installation by providing for transmission provider access and requiring the ultimate transfer of ownership. We also disagree with National Grid's and Eversource's proposals regarding the transfer of ownership because articles 5.2(8) and (9) already require the transfer of control and ownership to the transmission provider.

    109. Furthermore, we disagree with Duke's proposal to revise article 11.5 of the pro forma LGIA to include stand alone upgrades. Duke provides no reason why such revision is necessary. Additionally, we read the phrase “applicable portion” in article 11.5 to exclude facilities that an interconnection customer would construct pursuant to the option to build. Since the purpose of article 11.5 is for the interconnection customer to provide funds to the transmission provider for construction costs, there would be no need for the interconnection customer to provide security to the transmission provider for facilities the transmission provider will not construct (because the interconnection customer is exercising the option to build).

    110. We also see no need to revise article 26.1 of the pro forma LGIA, as Duke proposed, to limit the interconnection customer's ability to use subcontractors. Similarly, while we agree with Generation Developers, NextEra, and EEI that it could be helpful for transmission owners to maintain a list of contractors available to interconnection customers for the option to build, given the adequacy of the safeguards in article 5.2, we find that it is not necessary to require transmission owners to do so. We find the safeguards in article 5.2 to be sufficient because they give the transmission provider significant oversight authority to review and approve the design, equipment testing, and construction, “unrestricted access” to inspect the construction, and the ability to require the interconnection customer to remedy deficiencies that may arise at “any time during construction.” 190 Similarly, we do not agree with Duke's and National Grid's suggestion that the transmission provider should have the right to approve subcontractors because of the multiple preexisting protections in article 5.2. Further, we are not persuaded by EEI's contention that revisions are necessary to supersede the option to build if facilities need to be expedited. First, article 5.2 already obligates the interconnection customer to “remedy deficiencies” should “any phase of the engineering, equipment procurement, or construction . . . not meet the standards and specifications provided by Transmission Provider.” 191 Second, the option to build is limited to the construction of transmission provider's interconnection facilities and stand alone network upgrades, the latter of which the pro forma LGIA defines as those network upgrades that the interconnection customer “may construct without affecting day-to-day operations of the Transmission System during their construction.” 192 Together, these provisions minimize the likelihood that any delays in construction will adversely affect reliability.

    190Pro forma LGIA Articles 5.2 (3), (5), & (6).

    191Pro forma LGIA Art. 5.2(6).

    192Pro forma LGIA Art. 1 (Definitions).

    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.

    3. Self-Funding by the Transmission Owner a. NOPR Proposal

    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.193

    193 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 64.

    115. Prior to the revisions proposed in the NOPR, article 11.3 in the pro forma LGIA stated that “[u]nless Transmission Provider or Transmission Owner elects to fund the capital for the Network Upgrades, they shall be solely funded by Interconnection Customer.” This provision allowed the transmission provider or owner to unilaterally elect to “self-fund” network upgrades.

    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.194 In that proceeding, the Commission accepted MISO's proposal for a transmission owner that elects to initially fund network upgrades under MISO's pro forma GIA to recover the capital costs for network upgrades through a network upgrade charge assessed to the interconnection customer.195

    194Midcontinent Indep. Sys. Operator, Inc., 145 FERC ¶ 61,111 (2013) (Hoopeston).

    195Hoopeston, 145 FERC ¶ 61,111 at P 41.

    117. The Commission revisited that approach in the Otter Tail proceedings.196 In those proceedings, the Commission found that article 11.3 in MISO's pro forma GIA, which allows a transmission owner to self-fund network upgrades, to be unjust, unreasonable, and unduly discriminatory or preferential. Consequently, the Commission directed MISO to revise article 11.3 to require mutual agreement with the interconnection customer for the transmission owner to elect to initially fund network upgrades. Ameren Services Company, a transmission owner in MISO, challenged this order in the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit).

    196Midcontinent Indep. Sys. Operator, Inc., 151 FERC ¶ 61,220 (2015); Otter Tail Power Co. v. Midcontinent Indep. Sys. Operator, Inc., 153 FERC ¶ 61,352, at P 14 (2015); Otter Tail Power Co. v. Midcontinent Indep. Sys. Operator, Inc., 156 FERC ¶ 61,099 (2016) (collectively, the Otter Tail proceedings).

    118. In the NOPR in this proceeding, the Commission proposed to revise article 11.3 of the pro forma LGIA to require mutual agreement between the interconnection customer and the transmission owner for the transmission owner to initially fund the cost of network upgrades. Specifically, the Commission proposed in the NOPR to modify the language in article 11.3 of the pro forma LGIA as follows (with proposed additions in italics):

    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, which election shall only be available upon mutual agreement of Interconnection Customer and Transmission Owner or Transmission Provider, they shall be solely funded by Interconnection Customer.

    119. The Commission also sought comment on whether to limit the proposal to RTOs/ISOs or to apply it to all transmission providers.

    b. Comments

    120. A number of commenters support the proposal.197 A group of five commenters, predominantly from MISO, oppose the proposal and state that any action would be premature, given that, at the time that they filed their comments, the D.C. Circuit had not issued a decision in the Otter Tail proceedings. They ask the Commission to refrain from implementing this reform until the appellate decision is issued.198

    197 Non-Profit Utility Trade Associations; AFPA; AWEA; CAISO; Joint Renewable parties; Generation Developers; EDP; ELCON; FTC; IECA; NEPOOL; NextEra; PG&E; SEIA; TDU Systems.

    198 Duke 2017 Comments at 6-7; EEI 2017 Comments at n.20; ITC 2017 Comments at 8; MidAmerican 2017 Comments at 11; MISO TOs 2017 Comments at 17.

    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.199 On the other hand, Southern, TVA, Generation Developers, and Xcel state that self-funding by the transmission owner is not applicable to the pro forma OATT.200

    199 AWEA 2017 Comments at 19; Joint Renewable Parties 2017 Comments at 9-10; TDU Systems 2017 Comments at 7; AFPA Comments at 7.

    200 Southern 2017 Comments at 13-14; TVA 2017 Comments at 5; Generation Developers 2017 Comments at 15; Xcel 2017 Comments at 10-11.

    c. Commission Determination

    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 Otter Tail proceedings.201 In this decision, the court noted, among other things, that the Commission did not adequately respond to the argument that “involuntary generator funding compels [transmission owners] to . . . accept additional risk without corresponding return.” 202 The court further stated that the Commission's approved changes to the MISO tariff “open[ ] the floodgates to involuntary generator-funded interconnection projects.” 203 The court also referenced this proceeding, stating that the fact that the Commission “plans a rulemaking to consider interconnection problems and costs . . . suggests that it should approach those issues on a clean slate.” 204 In light of the D.C. Circuit's decision, we will not move forward with the proposal pertaining to self-funding at this time. We will, however, continue to evaluate the issue.

    201Ameren Servs. Co. v. FERC, 880 F.3d 571 (D.C. Cir. 2018).

    202Id. at 573-74.

    203Id. at 584.

    204Id. at 585.

    4. Dispute Resolution a. NOPR Proposal

    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.205

    205 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 78.

    124. Order No. 2003 created an arbitration process through the adoption of section 13.5 of the pro forma LGIP, which allows disputing parties to agree to arbitration “upon mutual agreement of the Parties” to the dispute.206 Pursuant to this process, arbitrators may interpret and apply the provisions of the LGIA and LGIP but have no power to modify those provisions.207 At the completion of this process, the arbitrator's decision is “final and binding upon the Parties, and judgment on the award may be entered in any court having jurisdiction.” Additionally, the decision may only “be appealed . . . on the grounds that the conduct of the arbitrator(s), or the decision itself, violated the standards set forth in the Federal Arbitration Act or the Administrative Dispute Resolution Act.” 208 While the arbitrator's decision is binding, “the final decision must still be filed with [the Commission] if it affects jurisdictional rates, terms and conditions of service, Interconnection Facilities, or Network Upgrades,” 209 and the Commission “retains the authority to review the arbitrator's decision.” 210 Participation in the section 13.5 arbitration process does not limit the ability of either party to bring a complaint about the same issues.211

    206Pro forma LGIP Section 13.5.1.

    207Pro forma LGIP Section 13.5.

    208Pro forma LGIP Section 13.5.3.

    209Id.

    210 Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 290.

    211 Specifically, it states that section 13.5 arbitration does not “circumscribe[ ] the Parties' right to avail themselves of the Commission's complaint process because under section 13.5.1, a party that does not agree to arbitration may exercise its rights, including its right to bring a complaint to the Commission.” Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 290.

    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 a new paragraph (g)(9), providing that every Commission-approved independent system operator or regional transmission organization tariff must contain provisions governing generator interconnection dispute resolution procedures to allow a disputing party to unilaterally initiate dispute resolution procedures under the respective tariff. Such provisions must provide for independent system operator or regional transmission organization staff member(s) or utilize subcontractor(s) to serve as the neutral decision-maker(s) or presiding staff member(s) or subcontractor(s) to the dispute resolution procedures. Such staff participating in dispute resolution procedures shall not have any current or past substantial business or financial relationships with any party. Additionally, such dispute resolution procedures must account for the time sensitivity of the generator interconnection process.

    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.212 The Commission also sought comment on the appropriateness of adopting procedures similar to section 4.2 of the pro forma SGIP, which allows parties to contact the Commission's Dispute Resolution Service (DRS) for assistance in resolving an interconnection dispute.213

    212 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 86.

    213 Section 4.2.4 of the pro forma SGIP states that DRS will assist in resolving a dispute or in selecting an appropriate dispute resolution venue. Additionally, section 4.2.6 states that if neither party elects to contact DRS or if the attempted dispute resolution fails, “either Party may exercise whatever rights and remedies it may have in equity or law consistent with the terms of these procedures.”

    127. The NOPR proposal represented a potential alternative to, and not a replacement of, section 13.5 of the pro forma LGIP.214 The Commission crafted its proposal in response to its observation that the arbitration process embodied in section 13.5 is effectively unavailable to an interconnection customer if a transmission owner opposes this arbitration process.215

    214Id.

    215Id. P 85.

    b. General i. Comments

    128. Multiple commenters support the proposal.216 The Non-Profit Utility Trade Associations state that they do not object to this proposal.217 Salt River states that the proposal is reasonable with regard to disputes between interconnection customers and RTOs/ISOs, RTO/ISO transmission owners, or affected system operators that are also RTO/ISO transmission owners.218 However, Salt River argues that if the dispute is with an autonomous neighboring affected system operator that is a non-RTO/ISO member, then the dispute resolution procedures in the affected system operator's OATT should apply.219

    216 AWEA 2017 Comments at 21; Joint Renewable Parties 2017 Comments at 2-3; IECA 2017 Comments at 3; Invenergy 2017 Comments at 15-16; AFPA 2017 Comments at 8; CAISO 2017 Comments at 11-12; SEIA 2017 Comments at 14-15; TDU Systems 2017 Comments at 11; AVANGRID 2017 Comments at 18.

    217 Non-Profit Utility Trade Associations 2017 Comments at 6.

    218 Salt River 2017 Comments at 8.

    219Id.

    129. AES asserts that RTOs/ISOs, not the Commission, should reexamine their existing dispute resolution procedures.220 Indicated NYTOs oppose the dispute resolution proposal, arguing that NYISO's existing dispute resolution provisions are adequate.221 NYISO also opposes the proposed revisions, stating that they would duplicate existing dispute resolution opportunities.222 ISO-NE and CAISO similarly argue that their current dispute resolution procedures are adequate.223 CAISO also notes that its tariff includes a dedicated dispute committee for generator interconnection issues.224 MidAmerican argues that the existing MISO tariff addresses the Commission's concerns about the ability of a party to unilaterally request dispute resolution.225

    220 AES 2017 Comments at 7-8.

    221 Indicated NYTOs 2017 Comments at 12-14.

    222 NYISO 2017 Comments at 17.

    223 ISO-NE 2017 Comments at 18; CAISO 2017 Comments at 12.

    224Id. (citing CAISO, eTariff, FERC Electric Tariff, OATT, Section 13 (0.0.0) & app. DD, Section 15.5 (1.0.0)).

    225 MidAmerican 2017 Comments at 7; see also MISO TOs 2017 Comments at 24.

    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.226 MISO TOs ask the Commission to clarify that the dispute resolution procedures are for genuine disputes only and should not be used to gain additional time to meet LGIP or LGIA obligations.227 PJM agrees with the dispute resolution proposal and believes that its dispute resolution procedures generally conform to it.228

    226 MISO 2017 Comments at 17-18.

    227 MISO TOs 2017 Comments at 24.

    228 PJM 2017 Comments at 8.

    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.229

    229 General Developers 2017 Comments at 19.

    ii. Commission Determination

    132. In this final action, we revise the pro forma LGIP to add new section 13.5.5, as discussed further below. We are taking this step because the record in this proceeding indicates that existing dispute resolution procedures may not be just and reasonable and may be unduly discriminatory or preferential because one disputing party may effectively prevent the other disputing party from pursuing dispute resolution.230 We thus disagree with those commenters that argue that transmission providers should simply reexamine their dispute resolution procedures. The reason is that, if the status quo provides little recourse for interconnection customers when a transmission provider does not agree to dispute resolution, then it would not be sufficient for transmission providers to merely reexamine their dispute resolution procedures with no guarantee that they would address this concern. Additionally, as discussed further below, we find that the record developed here demonstrates the need for generic dispute resolution reform, both inside and outside RTOs/ISOs. To avoid having dispute resolution requirements in multiple places, we are effectuating this reform through revisions to the pro forma LGIP as part of the existing dispute resolution provisions, rather than through changes to the Code of Federal Regulations.

    230 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 84.

    133. Therefore, this final action revises the pro forma LGIP by adding new section 13.5.5, which will read as follows:

    Non-binding dispute resolution procedures. If a Party has submitted a Notice of Dispute pursuant to section 13.5.1, and the Parties are unable to resolve the claim or dispute through unassisted or assisted negotiations within the thirty (30) Calendar Days provided in that section, and the Parties cannot reach mutual agreement to pursue the section 13.5 arbitration process, a Party may request that Transmission Provider engage in Non-binding Dispute Resolution pursuant to this section by providing written notice to Transmission Provider (“Request for Non-binding Dispute Resolution”). Conversely, either Party may file a Request for Non-binding Dispute Resolution pursuant to this section without first seeking mutual agreement to pursue the section 13.5 arbitration process. The process in section 13.5.5 shall serve as an alternative to, and not a replacement of, the section 13.5 arbitration process. Pursuant to this process, a transmission provider must within 30 days of receipt of the Request for Non-binding Dispute Resolution appoint a neutral decision-maker that is an independent subcontractor that shall not have any current or past substantial business or financial relationships with either Party. Unless otherwise agreed by the Parties, the decision-maker shall render a decision within sixty (60) Calendar Days of appointment and shall notify the Parties in writing of such decision and reasons therefore. This decision-maker shall be authorized only to interpret and apply the provisions of the LGIP and LGIA and shall have no power to modify or change any provision of the LGIP and LGIA in any manner. The result reached in this process is not binding, but, unless otherwise agreed, the Parties may cite the record and decision in the non-binding dispute resolution process in future dispute resolution processes, including in a section 13.5 arbitration, or in a Federal Power Act section 206 complaint. Each Party shall be responsible for its own costs incurred during the process and the cost of the decision-maker shall be divided equally among each Party to the dispute.

    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.231

    231 Initial and reply comments on the technical conference in Docket No. AD18-8-000 are due within 30 days and 45 days, respectively, from the date of the issuance of the Notice Inviting Post-Technical Conference Comments in that proceeding, which issued concurrently with this final action.

    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 pro forma LGIP adopted by this final action do not trump the existing language in section 13.5 of the pro forma LGIP. We establish the new non-binding dispute resolution process here primarily to address the concern that dispute resolution is unavailable where there is no mutual agreement to pursue a section 13.5 arbitration. This final action thus provides a dispute resolution avenue that one party may seek unilaterally. Disputing parties are free to determine which process they prefer, and disputing parties may pursue the non-binding process even if they have not previously sought a section 13.5 arbitration. Additionally, participation in the new section 13.5.5 process does not preclude the parties from pursuing arbitration after the conclusion of another process if they seek a binding result. Also, pursuing either process does not prevent either party from availing itself of the complaint process pursuant to section 206 of the FPA. Furthermore, we note that we do not restrict a party's ability to cite the record developed in the arbitration process described in section 13.5 of the pro forma LGIP in a complaint proceeding pursuant to section 206 of the FPA, and we see no reason to impose such a restriction for the non-binding dispute resolution provisions adopted in this final action. We note, however, that parties may mutually agree to restrict the use of the record created in a non-binding dispute resolution process.

    c. Extending the Dispute Resolution Proposal beyond RTOs/ISOs i. Comments

    140. Generation Developers, IECA, Competitive Suppliers, and TDU Systems argue that the Commission should also reform dispute resolution procedures outside of RTOs/ISOs.232 For example, Generation Developers state that problems that interconnection customers encounter pertaining to dispute resolution “are also encountered with a Transmission Provider outside of [an RTO/ISO].” 233 TDU Systems state that they have “found the current dispute resolution processes [outside of RTOs/ISOs] to be inadequate,” because, for example, in regions that lack an RTO/ISO-like entity “to assist in resolving disputes, the waiting period to access dispute resolutions is too long, and parties to disputes should have options beyond mutually-agreed upon arbitration.” 234 In non-RTO/ISO regions, AFPA recommends the establishment of a separate Commission dispute resolution service with expertise on these matters.235 Competitive Suppliers believe that the rules and protocols in organized markets are superior to those outside organized markets and encourage the Commission to uphold consistency and comparability unless there is an adequate reason to allow regional variation.236 MISO asserts that there is no basis to conclude that the procedures currently used in RTOs/ISOs are inferior to the procedures used by other transmission providers.237

    232 Generation Developers 2017 Comments at 18-20; IECA 2017 Comments at 3; Competitive Suppliers 2017 Comments at 6; TDU Systems 2017 Comments at 11.

    233 Generation Developers 2017 Comment at 20.

    234 TDU Systems 2017 Comments at 12.

    235 AFPA 2017 Comments at 8.

    236 Competitive Suppliers 2017 Comments at 5.

    237 MISO 2017 Comments at 17.

    141. TVA believes that the current dispute resolution process for non-RTOs/ISOs is sufficient, under both the pro forma LGIP and the pro forma SGIP.238 If the Commission decides that any final action should align more closely to the parameters of the NOPR, Competitive Suppliers argue that the proposed revisions to the dispute resolution changes should apply to all transmission owners and providers offering interconnection service.239

    238 TVA 2017 Comments at 6.

    239 Competitive Suppliers 2017 Comments at 6.

    ii. Commission Determination

    142. In this final action, we adopt the aforementioned pro forma LGIP language, which imposes the revised dispute resolution requirements on both RTOs/ISOs and non-RTOs/ISOs. As noted above, the Commission sought comment on the need for dispute resolution reform outside of RTOs/ISOs. We agree with commenters that there is a need for dispute resolution reform outside of RTO/ISOs.240 Outside of the RTOs/ISOs, the transmission provider and transmission owner are the same entity. Consequently, outside of RTOs/ISOs and without the presence of an independent RTO/ISO as a third party, it may be more difficult for the transmission provider and the interconnection customer to reach mutual agreement to seek dispute resolution. Under such circumstances, when a dispute arises, the process would benefit from a neutral decision-maker that can evaluate the dispute without an interest in the outcome. For this reason, the procedures adopted here apply generically, in both RTO/ISO regions and non-RTO/ISO regions. Finally, we have opted to include new pro forma LGIP section 13.5.5 in the pro forma LGIP instead of the Code of Federal Regulations, so that all generically applicable generator interconnection dispute resolution requirements are in the same place.

    240 Competitive Suppliers 2017 Comments at 5; MISO 2017 Comments at 17.

    d. RTO/ISO Neutrality i. Comments

    143. Multiple commenters question the neutrality of RTO/ISO staff or oppose allowing RTO/ISO staff as dispute resolution neutral decision-makers.241 AWEA, for instance, notes that RTOs/ISOs rely upon transmission owner assistance (for modeling and design information) and transmission owner membership (for financial support) and that, on occasion, RTOs/ISOs have refused to participate in dispute resolution.242 Another option that AWEA and NextEra suggest is for RTOs/ISOs to contract for staff from a disinterested RTO/ISO to oversee their dispute resolution.243 NextEra suggests adding a draft tariff provision that would allow for this arrangement.244

    241 FTC 2017 Comments at 11; AWEA 2017 Comments at 23-24; Generation Developers 2017 Comments at 18; EDP 2017 Comments at 5; NextEra 2017 Comments at 15; AVANGRID 2017 Comments at 18.

    242 AWEA 2017 Comments at 22-23.

    243Id. at 23; NextEra 2017 Comments at 20.

    244Id. at 17.

    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.245 EEI argues that having an RTO/ISO serve as a decision-maker in a dispute could potentially challenge its independence and neutrality.246 Similarly, Indicated NYTOs argue that entities like NYISO would be reluctant to resolve such disputes by making judgments in favor of either the developer or the transmission owner.247 ISO-NE and NEPOOL explain that ISO-NE fulfills the role of transmission provider for many functions but that participating transmission owners serve in this role when providing cost estimates for network upgrades.248 ISO-NE and NEPOOL also state that, given ISO-NE's transmission provider role, disputes can arise between ISO-NE and the interconnection customer or the transmission owner, and it would therefore be inappropriate to require ISO-NE to decide these disputes.249 NEPOOL also argues that having RTO/ISO staff resolve disputes could impair the RTO's/ISO's performance of its core duties.250 NextEra suggests that RTO/ISO staff serving in this role would need comparable status to the RTO's/ISO's independent market monitoring staff.251 TDU Systems state that RTO/ISO staff are likely adequately independent from all market participants and able to serve as a useful resource for resolving disputes.252 AVANGRID states that, while RTO/ISO staff are often “very good” at preventing and resolving disputes as they arise, they should not “be put in the position of determining the outcome of formal dispute resolution processes.” 253

    245 AWEA 2017 Comments at 24.

    246 EEI 2017 Comments at 28.

    247 Indicated NYTOs 2017 Comments at 14.

    248 ISO-NE 2017 Comments at 18-19; NEPOOL 2017 Comments at 8.

    249 ISO-NE 2017 Comments at 19.

    250 NEPOOL 2017 Comments at 8.

    251 NextEra 2017 Comments at 15.

    252 TDU Systems 2017 Comments at 11.

    253 AVANGRID 2017 Comments at 18.

    145. Generation Developers and NextEra argue that subcontractors could serve as neutral parties.254 AWEA also argues that the NOPR's neutrality standard may be too vague and that subcontractor vetting may resolve this concern.255 Generation Developers state that the RTO/ISO should maintain a long-term contract for dispute services to ensure that the subcontractor is neutral and not beholden to the RTO/ISO. Generation Developers propose that the RTO/ISO should have a list of subcontractors with substantial experience in interconnection and modeling matters that are available to serve as neutral third-parties, and that all RTO/ISO members should be allowed to propose to use the listed subcontractors. Generation Developers propose that subcontractor fees should be borne by interconnection customers to ensure that there is no tendency for a subcontractor to be beholden to the RTO/ISO.

    254 Generation Developers 2017 Comments at 18; NextEra 2017 Comments at 15-16; see also AVANGRID 2017 Comments at 18.

    255 AWEA 2017 Comments at 23.

    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.256 MISO states that the proposed independence requirements are unnecessary, as RTOs/ISOs are already subject to stringent independence requirements. MISO asserts that there has been no showing that the existing conflict of interest requirements are inadequate for purposes of dispute resolution. MISO proposes that the Commission permit RTOs/ISOs to rely on their existing standards of conduct and similar requirements for their dispute resolution staff.257

    256 MISO 2017 Comments at 19.

    257Id. at 18-19.

    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 (e.g., three years).258

    258Id. at 19.

    148. NYISO is concerned about instituting a framework that would outsource responsibility to subcontractors.259 It states that section 30.13.2 of its LGIP provides that, even when NYISO uses subcontractors, it must comply with the tariff's requirements. Therefore, NYISO objects to any process that would allow a subcontractor's determination—for example, regarding appropriate network upgrades—to override NYISO's judgment concerning tariff requirements and applicable reliability standards.260

    259 NYISO 2017 Comments at 18.

    260Id.

    ii. Commission Determination

    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 pro forma LGIP requires the same cost division as that established for the arbitration process described in section 13.5 of the pro forma LGIP. Thus, the cost of the decision-maker shall be divided equally among each party to the dispute. Each individual party to a dispute will be responsible for its own costs incurred during the process.

    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 pro forma LGIP. While MISO argues that this standard would limit the pool of eligible participants, we read MISO's comments to pertain to the NOPR proposal, which required RTOs/ISOs to have RTO/ISO staff serve as decision-makers. For this reason, the neutrality standard adopted in this final action will not be too burdensome, in light of the changes from the NOPR.

    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 pro forma LGIP, limits a decision-maker's authority so that it may only “interpret and apply the provisions of the LGIA and LGIP.” The subcontractor would therefore have no ability to alter NYISO's existing responsibilities.

    e. Binding Nature of the Proposal i. Comments

    153. AWEA indicates that, due to neutrality issues that are likely to remain, dispute resolution should be non-binding.261 Similarly, NextEra argues that it would not be appropriate for this “expeditious input” to be binding on the parties and cause them to lose rights under sections 205 or 206 of the FPA.262 NextEra also asserts that if the expedited dispute resolution were binding, there would be too much risk involved.263 NextEra views the process as similar to “input from a subject matter expert” rather than any form of litigation.264

    261 AWEA 2017 Comments at 24.

    262 NextEra 2017 Comments at 16.

    263Id.

    264Id.

    ii. Commission Determination

    154. In this final action, we adopt a non-binding dispute resolution process. The pro forma LGIP provisions adopted in this final action will be an alternative to, and not a replacement of, the existing arbitration process described in section 13.5 of the pro forma LGIP, which is a binding process. Specifically, section 13.5.3 of the pro forma LGIP states that “the decision of the arbitrator(s) shall be final and binding upon the Parties, and judgment on the award may be entered in any court having jurisdiction.” 265 Because the new process adopted in this final action does not require mutual agreement, we agree with AWEA and NextEra that this new process should be non-binding.266 Although the non-binding nature of the process could dampen its appeal, the process would still require disputing parties to participate in a process presided over by a neutral party. To this point, we agree with NextEra that the process would be beneficial because it would offer an opportunity for “input from a subject matter expert.” Additionally, we find that it would be inappropriate for the new, non-binding dispute resolution process to limit a party's ability to pursue a complaint pursuant to section 206 of the FPA.

    265Pro forma LGIP Section 13.5.3 (emphasis added).

    266 No other commenters discussed this issue. Although we are adopting a non-binding process in the pro forma LGIP, transmission providers that have binding dispute resolution processes that, on compliance, are able to demonstrate that their processes otherwise satisfactorily adhere to the tenets of this final action (i.e., that they do not require mutual agreement) may qualify for a variation from the pro forma LGIP provision adopted in this final action.

    f. Timing i. Comments

    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.267 Generation Developers argue that the proposed regulation fails to meaningfully address time sensitivity and contends that the process could be resolved within 30 days of initiation.268 FTC argues that the proposed requirement that RTOs/ISOs account for the time sensitivity of the generator interconnection process is likely to reduce a transmission provider's ability to delay interconnection dispute resolution.269 AVANGRID comments that any dispute resolution procedures must not result in “significant delay” of the generator interconnection process.270

    267 AWEA 2017 Comments at 24-25.

    268 General Developers 2017 Comments at 19.

    269 FTC 2017 Comments at 10. See NOPR, FERC Stats. & Regs. ¶ 32,719 at P 87.

    270 AVANGRID 2017 Comments at 18.

    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 resolve the dispute informally once other procedures are initiated, and given the time sensitivity of these issues, a shorter timeframe would be less prejudicial to the interconnection customer.271

    271 TDU Systems 2017 Comments at 12.

    157. TDU Systems state that the rules in section 13.5 of the pro forma LGIP and article 27 of the pro forma LGIA provide for a thirty-day period in which the parties will attempt to resolve a dispute, followed by the right for the parties to mutually agree to submit the dispute to arbitration; however, TDU Systems contend that the selection of the arbitrator can take up to thirty days, with the arbitration decision to be rendered within ninety days of appointment. TDU Systems note that, in contrast, article 10 of the SGIA and section 4.2 of the SGIP provide that if a dispute has not been resolved within two business days after receipt of a notice of the dispute, either party may contact FERC's Dispute Resolution Service for assistance in resolving the dispute.

    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.272

    272Id. at 13.

    ii. Commission Determination

    159. The pro forma LGIP provision adopted in this final action requires the appointment of a decision-maker within thirty days of the receipt of a request for non-binding dispute resolution and requires a decision within sixty days of the decision-maker's appointment. We note that this process would require a decision thirty days sooner than the arbitration process described in section 13.5 of the pro forma LGIP would require. While the Commission did not propose such a timeline in the NOPR, the Commission did express the view that any new dispute resolution process should “account for the time sensitivity of the generator interconnection process.” 273 The timeline adopted here is consistent with this position.

    273 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 84.

    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 pro forma SGIP dispute resolution process, we note that, as discussed more fully below, we decline to adopt the timing requirements in the pro forma SGIP dispute resolution process for the pro forma LGIP. Finally, we disagree with TDU Systems' request that we should require fast-track complaint procedures for generator interconnection disputes. Because of the fact-specific nature of every complaint, we do not support the request to have fast-track complaint procedure for one category of disputes.

    g. Mutual Agreement i. Comments

    161. Multiple commenters support the elimination of the mutual agreement requirement.274 MISO states that, while it does not oppose this requirement, in MISO, parties to a generator interconnection dispute can already commence dispute resolution unilaterally. MISO further notes that, while a disputing party may exit its procedures at certain designated points to pursue the Commission complaint process or other remedies, no party can veto another party's ability to pursue dispute resolution under the procedures.275 Similarly, PG&E believes this reform is not applicable to CAISO because CAISO allows any disputing party to trigger dispute resolution and does not require agreement from a transmission owner or CAISO.276

    274 Generation Developers 2017 Comments at 16; EDP 2017 Comments at 5; Invenergy 2017 Comments at 15-16; FTC 2017 Comments at 10; NEPOOL 2017 Comments at 8; NextEra 2017 Comments at 15; TDU Systems 2017 Comments at 11; AVANGRID 2017 Comments at 18.

    275 MISO 2017 Comments at 17-18.

    276 PG&E 2017 Comments at 5 (citing CAISO Tariff, eTariff, FERC Electric Tariff, OATT, app. DD, Section 15.5 (1.0.0)).

    162. EEI questions who should bear the costs for such unilateral activity or how such costs would be recovered.277 EEI states that the Commission has not explained how unilateral dispute resolution would work because it implies a non-consensual process, which is more akin to an adjudication.278 EEI is uncertain as to what authority an RTO/ISO would or should have in this process and whether this proposal is intended to limit a transmission provider's or interconnection customer's right to seek judicial relief.279

    277 EEI 2017 Comments at 28.

    278Id. at 27.

    279Id.

    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.280 ISO-NE argues that its current dispute resolution process provides a disputing party with recourse and minimizes the potential for unnecessary delays and uncertainty by allowing for dispute resolution through a section 206 complaint filed with the Commission.281 As a result, ISO-NE states that the current pro forma construct avoids disagreements being submitted to arbitration, which would consume significant ISO-NE resources.282

    280 ISO-NE 2017 Comments at 19; EEI 2017 Comments at 27.

    281 ISO-NE 2017 Comments at 19-20.

    282Id. at 20-21.

    ii. Commission Determination

    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 pro forma LGIP provisions, they may explain their positions in their compliance filings.

    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 pro forma LGIP, is non-binding and thus does not limit a party's right to seek judicial relief.

    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 pro forma LGIP. If transmission providers have agreed to participate in an arbitration process pursuant to section 13.5, other interconnection customers, including those in the same cluster as the disputing interconnection customer would experience a delay. Furthermore, as discussed above, multiple generation developers have alleged that the section 13.5 arbitration process is effectively unavailable to interconnection customers because transmission providers are disinclined to participate. It will benefit the interconnection process for there to be an available avenue of dispute resolution to resolve a genuine matter of dispute.

    167. Additionally, in response to ISO-NE's argument that it avoids delay by “allowing for” a section 206 complaint, we answer that the pro forma LGIP already allows parties to file a complaint pursuant to section 206 of the FPA, and this option is still available even if the disputing parties mutually agree to the arbitration process described in section 13.5 of the pro forma LGIP.283 Thus, we disagree with ISO-NE that “allowing for” the process pursuant to section 206 is sufficient to address our concerns with the status quo. The dispute resolution provisions adopted in this final action serve as an alternative to both the section 13.5 arbitration process and the FPA section 206 process. With regard to ISO-NE's suggestion that the NOPR proposal would consume significant ISO-NE resources, we note that the final action distributes the costs of the decision-maker overseeing the dispute resolution process equally among the parties to the dispute. Thus, even though transmission providers must allow for a dispute resolution process that a party may seek unilaterally, a transmission provider would only be responsible for costs if it is a party to the dispute. In such a scenario, the transmission provider would be responsible “for its own costs incurred” during the process (i.e., the cost to represent its position in the section 13.5.5 dispute resolution process) and the cost of the decision-maker “divided equally among each Party to the dispute.” Thus, if a transmission provider is not a party to a dispute, it would not be ultimately responsible for any costs related to the dispute resolution process. If the transmission provider is a party to a three party dispute, it would be responsible for “its own costs incurred” and one-third of the cost of the decision-maker.

    283 Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 290 (stating that invocation of the arbitration process does not “circumscribe[] the Parties' right to avail themselves of the Commission's complaint process”).

    h. SGIP DRS Process i. Comments

    168. Competitive Suppliers argue that the Commission should generically adopt the dispute resolution provisions of the pro forma SGIP, which allow disputing parties to contact DRS.284 Similarly, ISO-NE contends that, if the Commission determines that there is a need to revise the existing pro forma LGIP and pro forma LGIA dispute resolution provisions, then the Commission should adopt the same approach provided for in the pro forma SGIP.285 TDU Systems also contend that parties in non-RTO/ISO regions with disputes arising under the LGIP and LGIA, like parties to the pro forma SGIA and pro forma SGIP, should have the unilateral ability to seek DRS' assistance.286 For non-RTO/ISO regions, SEIA requests that the Commission clarify that DRS is available to resolve interconnection disputes and will abide by the same general structures as those proposed in the NOPR.287

    284 Competitive Suppliers 2017 Comments at 6.

    285 ISO-NE 2017 Comments at 19.

    286 TDU Systems 2017 Comments at 11-13.

    287 SEIA 2017 Comments at 14-15. We assume SEIA is referring to DRS.

    ii. Commission Determination

    169. In the NOPR, the Commission sought comment on “the appropriateness of adopting procedures similar to those outlined in the pro forma SGIP.” 288 The process described in section 4.2 of the pro forma SGIP allows parties to contact DRS for assistance in resolving an interconnection dispute. Section 4.2.4 of the pro forma SGIP states that DRS will assist in resolving a dispute or in selecting an appropriate dispute resolution venue. Additionally, section 4.2.6 of the pro forma SGIP states that if neither party elects to contact DRS or if the attempted dispute resolution fails, “either Party may exercise whatever rights and remedies it may have in equity or law consistent with the terms of these procedures.”

    288 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 86.

    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 pro forma SGIP. Nonetheless, nothing in this final action precludes disputing parties from contacting DRS if they wish to participate in dispute resolution through that avenue.

    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 pro forma LGIP, which is a non-DRS process.

    5. Capping Costs for Network Upgrades a. NOPR Request for Comments

    172. As part of the interconnection feasibility study and system impact study, the pro forma LGIP requires that transmission providers provide a good faith estimate of the cost of interconnection facilities and network upgrades needed to accommodate an interconnection customer's requested level of interconnection service.289 The transmission provider includes this cost estimate with the facilities study results, typically with a stated accuracy margin within 10 to 20 percent of the estimate.290 After completion of the construction of the transmission provider's interconnection facilities and network upgrades needed to interconnect a generating facility, the transmission provider conducts a true-up to assess the final cost of construction to the interconnection customer. The transmission provider provides a final invoice to the interconnection customer that details variations between actual and estimated costs. Overpayment by the interconnection customer results in a refund to the interconnection customer, or a surcharge in case of an underpayment.291

    289See, e.g., pro forma LGIP Sections 6.2 and 7.3.

    290Pro forma LGIP Section 8.3.

    291Pro forma LGIA Art. 12.

    173. The Commission sought comment on whether it should revise the pro forma LGIP and pro forma LGIA to provide for a cost cap that would limit an interconnection customer's network upgrade costs at the higher bound of a transmission provider's cost estimate plus a stated accuracy margin following a certain stage in the interconnection study process. Such a cap could permit the interconnection customer to assume costs that exceed the cap under limited circumstances, such as where there is demonstrable proof that the cause of a cost increase is beyond the transmission provider's control.292 The cost cap could also specify which party or parties would assume network upgrade costs in excess of the cap. The Commission further sought comment on how to minimize potential cost shifts to other parties if such a cost cap is imposed. The Commission also sought comments on alternative proposals, or additional steps that the Commission could take, to provide more cost certainty to interconnection customers during the interconnection study process.293

    292 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 95.

    293Id.

    b. Comments

    174. A minority of commenters,294 primarily renewable generation developers and transmission owners in CAISO, support the idea of network upgrade cost caps. AWEA notes that interconnection customers often pay costs that exceed the upper bound of a transmission provider's estimates, and this can significantly disrupt an interconnection customer's business model.295 AWEA argues that a cost cap would protect interconnection customers from cost overruns, allow them to accurately assess risk, and reduce the number of late-stage withdrawals due to increased cost certainty, which in turn would produce more accurate cost estimates.296 AWEA, Generation Developers, and NextEra assert that the imposition of a cost cap should incentivize more accurate cost estimates, and AWEA contends that cost shifts should be minimal if the transmission provider estimates costs more accurately.297

    294 These commenters include: AWEA 2017 Comments at 26; CAISO 2017 Comments at 13; First Solar 2017 Comments at 4; Joint Renewable Parties 2017 Comments at 3; Generation Developers 2017 Comments at 22-23; EDP 2017 Comments at 5-6; NextEra 2017 Comments at 17' and PG&E 2017 Comments at 5.

    295 AWEA 2017 Comments at 25.

    296Id. at 25-26.

    297Id. at 27; Generation Developers 2017 Comments at 23-24; NextEra 2017 Comments at 17-19.

    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.298 On the other hand, commenters that support cost caps argue that increased cost estimates can either be addressed or are a reasonable trade-off for implementing a cost cap.299

    298 APS 2017 Comments at 3; AVANGRID 2017 Comments at 20; Bonneville 2017 Comments at 3; EDP 2017 Comments at 5; Generation Developers 2017 Comments at 24; Invenergy 2017 Comments at 9; MISO TOs 2017 Comments at 10-11; NextEra 2017 Comments at 17; NorthWestern 2017 Comments at 4; Tri-State 2017 Comments at 5.

    299 Generation Developers 2017 Comments at 24, AWEA 2017 Comments at 27, and NextEra 2017 Comments at 18.

    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.300

    300 CAISO 2017 Comments at 13.

    178. Most responsive commenters 301 oppose revising the pro forma LGIP and pro forma LGIA to impose network upgrade cost caps. Several opposing commenters argue that cost caps would unfairly shift network upgrade costs from interconnection customers to load, transmission customers, or other interconnection customers that neither benefit from the generation nor caused the need for the upgrades.302 Several commenters also assert that cost caps would violate the Commission's “but for” and cost causation policies for the assignment of interconnection network upgrade costs.303 Duke, EEI, and NorthWestern contend that if the Commission establishes a cost cap and requires that transmission providers assume any excess costs, transmission providers could face challenges of whether such costs are prudent transmission investments.304 EEI, Non-Profit Utility Trade Associations, and TAPS argue that implementing cost caps will likely result in more frequent and contentious litigation.305

    301 Alliant 2017 Comments at 5; AEP 2017 Comments at 3; AFPA 2017 Comments at 5; AVANGRID 2017 Comments at 19; Bonneville 2017 Comments at 3; Competitive Suppliers 2017 Comments at 7; Duke 2017 Comments at 7; EEI 2017 Comments at 28; ELCON 2017 Comments at 2; Eversource 2017 Comments at 12; Imperial 2017 Comments at 18; IECA2017 Comments at 2; ISO-NE 2017 Comments at 21; ITC 2017 Comments at 12-13; MidAmerican 2017 Comments at 11-12; MISO 2017 Comments at 21; MISO TOs 2017 Comments at 7; Modesto 2017 Comments at 18; NEPOOL 2017 Comments at 9; Non-Profit Utility Trade Associations 2017 Comments at 6; NorthWestern 2017 Comments at 4; NYISO 2017 Comments at 19; PJM 2017 Comments at 9; PSEG/PPL 2017 Comments at 3; Salt River 2017 Comments at 9; Southern 2017 Comments at 15-16; TAPS 2017 Comments at 3; TDU Systems 2017 Comments at 14-16; Tri-State 2017 Comments at 5; TVA 2017 Comments at 6-7; Xcel 2017 Comments at 11.

    302 Alliant 2017 Comments at 6; AEP 2017 Comments at 3; Duke 2017 Comments at 7; EEI 2017 Comments at 29; ELCON 2017 Comments at 2,5; Idaho Power 2017 Comments at 2-3; Imperial 2017 Comments at 19; IECA 2017 Comments at 2; ISO-NE 2017 Comments at 22; MidAmerican 2017 Comments at 11-12; MISO 2017 Comments at 21; MISO TOs 2017 Comments at 7; Modesto 2017 Comments at 19; Non-Profit Utility Trade Associations 2017 Comments at 6; NorthWestern 2017 Comments at 4; PJM 2017 Comments at 10; PSEG/PPL 2017 Comments at 5; Salt River 2017 Comments at 9; Southern 2017 Comments at 15-16; TAPS 2017 Comments at 5; TDU Systems 2017 Comments at 14-16; TVA 2017 Comments at 6-7.

    303 AEP 2017 Comments at 5; AVANGRID 2017 Comments at 20; EEI 2017 Comments at 28-29; ITC 2017 Comments at 12-13; MISO 2017 Comments at 21; MISO TOs 2017 Comments at 7; PJM 2017 Comments at 9-10; PSEG/PPL 2017 Comments at 5; Salt River 2017 Comments at 9; Southern 2017 Comments at 15-16; TAPS 2017 Comments at 6; TDU Systems 2017 Comments at 14-16; TVA 2017 Comments at 6-7.

    304 Duke 2017 Comments at 7-8; EEI 2017 Comments at 29-30; NorthWestern 2017 Comments at 4.

    305 EEI 2017 Comments at 33-34; Non-Profit Utility Trade Associations 2017 Comments at 11; TAPS 2017 Comments at 7.

    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.306

    306 Modesto 2017 Comments at 19-20.

    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.307 AFPA argues that cost caps remove risk from interconnection customers and may remove the incentive for interconnection customers to mitigate cost overruns in network upgrades.308 IECA expresses concern that industrial consumers will have to pay for cost overruns resulting from a cost cap and that cost caps would encourage developers and utilities to be equally complacent about cost overruns.309

    307 AEP 2017 Comments at 3; Duke 2017 Comments at 7; EEI 2017 Comments at 30-32; ITC 2017 Comments at 14-15; MidAmerican 2017 Comments at 12; MISO 2017 Comments at 21; MISO TOs 2017 Comments at 10-11; PSEG/PPL 2017 Comments at 5; Salt River 2017 Comments at 9; Southern 2017 Comments at 16; Tri-State 2017 Comments at 5.

    308 AFPA 2017 Comments at 9.

    309 IECA 2017 Comments at 2.

    181. ITC, MISO, Non-Profit Utility Trade Associations, and Xcel state that well-defined milestones and milestone payments are preferable to a cost cap.310

    310 ITC 2017 Comments at 15; MISO 2017 Comments at 22-23; Non-Profit Utility Trade Associations 2017 Comments at 1-2, 4, 10-11; Xcel 2017 Comments at 12.

    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.311 Indicated NYTOs contend that NYISO's provisions encourage interconnection customers to efficiently locate their generating facility and strike a reasonable balance between providing certainty to interconnection customers and minimizing the imposition of unnecessary costs to load.312 NYISO asserts that adoption of bright line cost caps would likely require more detailed studies, cost estimates, and increased cost and time, contrary to the stated principles of the NOPR.313 NEPOOL notes that New England resolved its disputes over cost allocation for interconnections and regional transmission upgrades well over a decade ago through the interconnection cost allocation method in the ISO-NE OATT.314

    311 NYISO 2017 Comments at 19; Indicated NYTOs 2017 Comments at 5.

    312 Indicated NYTOs 2017 Comments at 6.

    313 NYISO 2017 Comments at 19.

    314 NEPOOL 2017 Comments at 9.

    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.315

    315 Salt River 2017 Comments at 10; TVA 2017 Comments at 6-7.

    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.316 CAISO notes that, in CAISO, the interconnection customer only provides the initial financing for its network upgrades.317 CAISO states that, upon reaching commercial operation, those costs are reimbursed by the transmission owner and included in that transmission owner's transmission revenue requirement paid by ratepayers.318

    316 CAISO 2017 Comments at 14.

    317Id.

    318Id.

    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.319

    319 AFPA 2017 Comments at 5; ELCON 2017 Comments at 5; ELCON 2017 Comments at 5; ITC 2017 Comments at 15; SEIA 2017 Comments at 15; Invenergy 2017 Comments at 9-10.

    186. Eversource suggests that the Commission instead explore the transmission provider's cost estimation process.320 Eversource suggests that, to improve cost estimates, the Commission should require interconnection customers to use the currently optional facilities study in the LGIP.321

    320 Eversource 2017 Comments at 13-14.

    321Id. at 15.

    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.322 Xcel further recommends limiting the interconnection customer's cost responsibility to the specific facilities identified in the signed LGIA, rather than allowing the RTO/ISO, as transmission provider, to later modify the list of required facilities. Xcel asserts that if facilities are identified after the interconnection customer and transmission provider sign an LGIA, the costs of those facilities should be recovered from transmission customers through the transmission expansion cost allocation processes in the RTO/ISO tariff. Xcel believes that the Commission should allow regions to determine if or when such costs are allocated either locally or regionally to transmission customers.323

    322 Xcel 2017 Comment at 12.

    323Id. at 12-13.

    188. TAPS opposes a generic rule establishing a cost cap and also opposes a generic rule that bars all cost caps.324 Duke states that transmission providers should be able to voluntarily adopt cost caps if done so through stakeholder processes.325

    324 TAPS 2017 Comments at 8.

    325 Duke 2017 Comments at 8.

    c. Commission Determination

    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 pro forma LGIP and pro forma LGIA to institute a cap on the cost of network upgrades required for interconnection. However, as suggested by Duke, we will not bar a transmission provider from proposing to establish cost caps for network upgrade costs within its footprint by submitting a separate filing pursuant to section 205 of the FPA.

    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.

    B. Promoting More Informed Interconnection

    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.

    1. Identification and Definition of Contingent Facilities a. NOPR Proposal

    192. The Commission currently requires transmission providers to identify for interconnection customers contingencies affecting interconnection studies 326 and list applicable contingent facilities in interconnection agreements.327 In the NOPR, the Commission proposed to revise the pro forma LGIP to require transmission providers to detail the methods they use to determine which facilities are contingent facilities. The Commission proposed that a method be transparent and sufficiently detailed to allow interconnection customers to determine why a specific contingent facility is included and how it impacts the interconnection request. The Commission also proposed that transmission providers provide the contingent facility list at the conclusion of the system impact study. The Commission further proposed that the transmission provider should, upon request, provide the estimated network upgrade costs and in-service completion time associated with each identified contingent facility when this information is not commercially sensitive. In particular, the Commission proposed to add a new section 3.8 to the pro forma LGIP as follows (with proposed additions in italics):

    326Pro forma LGIP Section 2.3.

    327 Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 409 (“[i]f it is apparent to the Parties . . . that contingencies (such as other Interconnection Customers terminating their LGIAs) might affect the financial arrangements, the Parties should include such contingencies in their LGIA and address the effect of such contingencies on their financial obligations”).

    3.8 Identification of Contingent Facilities

    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 not commercially sensitive.

    193. In addition, the Commission proposed to add the following new definition to section 1 of the pro forma LGIP (with proposed additions 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 not built, could cause a need for interconnection restudies or reassessments of the network upgrades, costs, or timing.

    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 pro forma LGIP (e.g., a five percent distribution factor).

    b. General i. Comments

    195. Most responsive commenters support 328 or do not oppose 329 the proposal to require transmission providers to publish a method for identifying contingent facilities in the LGIP. Several commenters state that the proposal will better inform the interconnection process and may lead to lower costs and fewer withdrawals.330 AWEA, Invenergy, and EDP cite inconsistent or non-transparent treatment of contingent facilities across regions.331 Several commenters assert that the proposal will reduce opportunities for undue discrimination and disputes.332

    328 Alevo 2017 Comments at 5-6; AFPA 2017 Comments at 10; Non-Profit Utility Trade Associations 2017 Comments at 12-13; AWEA 2017 Comments at 30; Bonneville 2017 Comments at 4; Joint Renewable Parties 2017 Comments at 10; Generation Developers at 25; SEIA 2017 Comments at 7; Portland 2017 Comments at 2; NEPOOL 2017 Comments at 9-10; NextEra 2017 Comments at 20; ITC 2017 Comments at 16; Invenergy 2017 Comments at 11.

    329 MISO TOs 2017 Comments at 26; Non-Profit Utility Trade Associations 2017 Comments at 12.

    330 AFPA 2017 Comments at 10; AWEA 2017 Comments at 30; NEPOOL 2017 Comments at 10; NextEra 2017 Comments at 20; Invenergy 2017 Comments at 12; EDP 2017 Comments at 6.

    331 EDP 2017 Comments at 6; AWEA 2017 Comments at 29; Invenergy 2017 Comments at 11.

    332 AFPA 2017 Comments at 10; EDP 2017 Comments at 6; AWEA 2017 Comments at 31; Invenergy 2017 Comments at 11.

    196. AWEA and NextEra contend that the proposal will place a minimal burden on transmission providers.333 ISO-NE comments that the proposal appropriately balances the need for regional flexibility to maintain the existing methods with the need to improve transparency regarding the interconnection process.334 CAISO states that information on contingent facilities is important to inform an interconnection customer about potential delays that might necessitate renegotiation of the interconnection customer's power purchase agreement. NextEra supports the Commission's guidance that a transmission provider's method to determine contingent facilities be detailed and states that an unverified list of contingent facilities creates uncertainty regarding potential restudies and revised cost responsibility for the interconnection customer.335

    333 AWEA 2017 Comments at 31; NextEra 2017 Comments at 21.

    334 ISO-NE 2017 Comments at 25.

    335 NextEra 2017 Comments at 20.

    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.336

    336 AWEA 2017 Comments at 34

    198. A minority of responsive commenters oppose the proposal.337 MISO and Southern request that the Commission permit transmission providers to post the proposed information in their business practice manuals or OASIS-posted business practices rather than in the LGIP, as this information is technical and more suitable for a business practice manual and may need frequent changes to address characteristics of new technologies.338 Several commenters state that no new procedures are necessary to identify and define contingent facilities.339

    337 Modesto 2017 Comments at 21; Southern 2017 Comments at 19; EEI 2017 Comments at 38.

    338 MISO 2017 Comments at 24-25; Southern 2017 Comments at 19.

    339 AES 2017 Comments at 8-9; Southern 2017 Comments at 19.

    ii. Commission Determination

    199. We adopt the NOPR proposal to add a new section 3.8 to the pro forma LGIP requiring transmission providers to publish a method for identifying contingent facilities in their LGIPs subject to clarification as outlined below. Specifically, the Commission adds section 3.8 to the pro forma LGIP as follows (with clarifying additions to the language originally proposed in the NOPR in italics):

    3.8 Identification of Contingent Facilities

    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 readily available and not commercially sensitive.

    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 facilities, the record indicates that this information may not be available from all transmission providers. We find that requiring transmission providers to publish a method for determining contingent facilities in the LGIP will ensure that there will be a transparent method applied on a non-discriminatory basis across all regions. We also disagree with MISO's and Southern's arguments that it would be more appropriate to publish methods for identifying contingent facilities in business practice manuals or on OASIS. The Commission's “rule of reason” policy 340 requires provisions that significantly affect rates, terms, and conditions should be in the filed tariff.341 The Commission finds, based on the record above, that information on contingent facilities materially affects rates, terms, and conditions, and therefore, needs to be part of the tariff. However, while transmission providers will have to publish their methods in the LGIP, certain technical implementation details relating to the methods that, consistent with the rule of reason, have less direct effect on rates, terms and conditions, may be published in a business practice manual.

    340See Pacificorp, 127 FERC ¶ 61,144, at P 11 (2009); City of Cleveland, Ohio v. FERC, 773 F.2d 1368, 1376 (D.C. Cir. 1985) (finding that utilities must file “only those practices that affect rates and service significantly, that are reasonably susceptible of specification, and that are not so generally understood in any contractual arrangement as to render recitation superfluous”); Public Serv. Comm'n of N.Y. v. FERC, 813 F.2d 448, 454 (D.C. Cir. 1987) (holding that the Commission properly excused utilities from filing policies or practices that dealt with only matters of “practical insignificance” to serving customers).

    341Cal. Indep. Sys. Operator Corp. 119 FERC ¶ 61,076, at P 656 (2007) (citing ANP Funding I, LLC v. ISO-NE, Inc., 110 FERC ¶ 61,040, at P 22 (2005); Prior Notice and Filing Requirements Under Part II of the Federal Power Act, 64 FERC ¶ 61,139, at 61,986-89, order on reh'g, 65 FERC ¶ 61,081 (1993)).

    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.

    c. Timing i. Comments

    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.342 AWEA comments that the timing for the identification of contingent facilities has been a major issue for interconnection customers. It argues that, currently, interconnection customers only receive relevant contingent facility information after signing an LGIA. AWEA asserts that the timing requirements in this proposal remove risk for the interconnection customer.343

    342 AWEA 2017 Comments at 31; Duke 2017 Comments at 8; Generation Developers 2017 Comments at 25; MISO 2017 Comments at 25-26; TDU Systems 2017 Comments at 26.

    343 AWEA 2017 Comments at 31.

    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.344

    344 MISO 2017 Comments at 26.

    ii. Commission Determination

    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.

    d. Requirements for Estimated Network Upgrade Costs and In-Service Completion Times i. Comments

    205. A majority of responsive commenters support the proposed requirement to provide the costs and in-service completion time for each identified contingent facility.345 AWEA states that interconnection customers use information about potential cost increases, as well as timing of necessary upgrades, to make business decisions and assess risk.346 Generation Developers explain that there is little value in identifying a contingent facility if the interconnection customer still has no information about its associated costs and timing.347 AWEA contends that non-disclosure agreements can address commercial sensitivities related to contingent facilities.348 Invenergy states that PJM, MISO, and SPP already provide this information in some form and that it is unaware of any commercially sensitive information that would need to be revealed in this process.349 Other commenters state that the burden on transmission providers would be minimal.350

    345 AWEA 2017 Comments at 32; Alevo 2017 Comments at 5-6; Forecasting Coalition 2017 Comments at 4; Generation Developers 2017 Comments at 26; TDU Systems 2017 Comments at 16-17; NEPOOL 2017 Comments at 10; NextEra 2017 Comments at 20; SEIA 2017 Comments at 7.

    346 AWEA 2017 Comments at 32.

    347 Generation Developers 2017 Comments at 26.

    348 AWEA 2017 Comments at 32.

    349 Invenergy 2017 Comments at 12.

    350 NextEra 2017 Comments at 20; AWEA 2017 Comments at 32.

    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.351 EEI argues that the Commission should address concerns related to potential commercially-sensitive information and Critical Energy/Electric Infrastructure Information (CEII). It asks the Commission to clarify that transmission providers need not disclose proprietary, commercially-sensitive, or CEII information without the appropriate consent and/or non-disclosure protections.352 EEI also has concerns about the proposal's costs and the appropriate recovery mechanisms.353 Duke states that schedules and cost estimates for milestones are available on OASIS via links to completed generator interconnection studies.354

    351 Duke 2017 Comments at 9-10; MidAmerican 2017 Comments at 8; EEI 2017 Comments at 38.

    352 EEI 2017 Comments at 39.

    353Id.

    354 Duke 2017 Comments at 8.

    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 interconnection study reports for the higher-queued projects that are primarily responsible for the cost of the contingent facility, and those reports are available to interconnection customers on the ISO-NE website.355 Bonneville states that it provides general estimates and schedules associated with contingent facilities in its study reports.356 MISO states that it already provides the estimated network upgrade costs and in-service completion time of each identified contingent facility via its MISO Transmission Expansion Plan process, updated quarterly and posted publicly.357 MidAmerican comments that it sees no value in providing this information and expresses concern about the potential administrative burden.358

    355 ISO-NE 2017 Comments at 24.

    356 Bonneville 2017 Comments at 4.

    357 MISO 2017 Comments at 25.

    358 MidAmerican 2017 Comments at 8.

    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.359 TVA adds that to provide this information at the system impact study phase would increase the cost and duration of all system impact study efforts.360

    359 TVA 2017 Comments at 8.

    360Id.

    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.361 Similarly, while Portland does not object to this aspect of the proposal, it argues that such information would be limited to the best information that the transmission provider has access to at the time.362

    361 NextEra 2017 Comments at 20.

    362 Portland 2017 Comments at 3.

    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.” 363 Alevo comments that this information may allow the interconnection customer to offer a more cost-effective solution (e.g., installing electric storage rather than building a new substation).364 Forecasting Coalition requests that the transmission provider identify the facility's limiting element along with the details on the electrical limiting element's rating.365

    363 Alevo 2017 Comments at 5-6.

    364Id.

    365 Forecasting Coalition 2017 Comments at 4.

    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.366

    366 AWEA 2017 Comments at 31-32; Generation Developers 2017 Comments at 25-26.

    ii. Commission Determination

    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 367 and not commercially sensitive. We are persuaded by comments that contend that this information helps interconnection customers to better assess the business risks associated with contingent facilities and may prevent instances of late-stage withdrawal. We find that these benefits, in turn, lead to a more efficient and informed interconnection process.

    367 In Order No. 792, the Commission defined “readily available” information as “information that the [t]ransmission [p]rovider currently has on hand,” which does not require that the transmission provider create new data. Small Generator Interconnection Agreements and Procedures, Order No. 792, 145 FERC ¶ 61,159, at PP 63-64 (2013), clarified, Order No. 792-A, 146 FERC ¶ 61,214 (2014) (Order No. 792-A).

    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.368 The aim of the requirements adopted here is to improve transparency and better inform interconnection customer decision-making. Thus, if the interconnection customer does not request cost or in-service completion date information, we find it unnecessary to require the transmission provider to produce this information.

    368 MidAmerican 2017 Comments at 8.

    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.

    e. Definition of Contingent Facility i. Comments

    217. AWEA and Generation Developers support the proposed definition of contingent facilities.369 MISO does not oppose the proposed definition.370 Southern suggests revising the definition to include a reference to the effect of delayed contingent facilities on an interconnection request.371

    369 AWEA 2017 Comments at 30; Generation Developers 2017 Comments at 25.

    370 MISO 2017 Comments at 24.

    371 Southern 2017 Comments at 20.

    ii. Commission Determination

    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 delayed or not built, could cause a need for restudies of the interconnection request or a reassessment of the interconnection facilities and/or network upgrades and/or costs and timing.

    f. Harmonization i. Comments

    219. Most responsive commenters oppose harmonization.372 AWEA supports a harmonized requirement but explains that it is more critical that each transmission provider detail the method it will use to determine contingent facilities.373 AWEA asserts that, if a three to five percent distribution factor test increases the availability of interconnection service, then it is a just and reasonable standard.374 Some commenters support a distribution factor test, similar to MISO's test.375 AFPA states that consistent standards across regions will reduce discrimination and disputes and supports a lower bound on the distribution factor where a facility would not be considered contingent (e.g., if a facility has a distribution factor below three percent, it will not be considered contingent).376 Portland supports the use of a standardized percentage power transfer distribution factor but comments that this measure is not typically used for this purpose. Portland opposes a specific percentage threshold, arguing that such a threshold could potentially be used to manipulate the interconnection process.377

    372See, e.g., Bonneville 2017 Comments at 5; Duke 2017 Comments at 10; Modesto 2017 Comments at 22; Non-Profit Utility Trade Associations 2017 Comments at 12-13; PJM 2017 Comments at 14.

    373 AWEA 2017 Comments at 32.

    374Id. at 34-35.

    375 ITC 2017 Comments at 17; AFPA 2017 Comments at 10; AWEA 2017 Comments at 33; Generation Developers 2017 Comments at 26; Portland 2017 Comments at 3.

    376 AFPA 2017 Comments at 10.

    377 Portland 2017 Comments at 3.

    ii. Commission Determination

    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.

    2. Transparency Regarding Study Models and Assumptions a. NOPR Proposal

    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 pro forma LGIPs and on OASIS.378 The Commission also proposed to require that transmission providers include a non-confidential network model supporting data on OASIS, including, but not limited to, shift factors, dispatch assumptions, load power factors, and power flows.379 To implement this, the Commission proposed to modify section 2.3 of the pro forma LGIP as follows (with proposed additions in italics):

    378 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 118.

    379Id. P 119.

    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. Additionally, Transmission Provider will maintain network models and underlying assumptions on its OASIS site for access by OASIS users. Transmission Provider is permitted to require that Interconnection Customer and OASIS site users sign a confidentiality agreement before the release of commercially sensitive information or Critical Energy Infrastructure Information in the Base Case data. Such databases and lists, hereinafter referred to as Base Cases, shall include all (1) generation projects and (ii) transmission projects, including merchant transmission projects that are proposed for the Transmission System for which a transmission expansion plan has been submitted and approved by the applicable authority.

    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 pro forma LGIP.380 The Commission also sought comment on whether and how transmission providers should provide notice of any variation from posted network model assumptions for a specific study, including whether the Commission should require notice of any variation to be submitted to the Commission.381 In addition, the Commission sought comment on any confidentiality or security concerns regarding the posting of specific model assumptions on OASIS or describing them in the pro forma LGIP.382 While the Commission recognized transmission providers' confidentiality and data security concerns, the Commission stated that there are likely safeguards that can satisfactorily address these concerns. The Commission also requested that commenters specify any data elements that should be subject to confidentiality or non-disclosure agreements.

    380Id. P 120.

    381Id.

    382Id. P 121.

    b. General i. Comments

    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.383 Joint Renewable Parties, AFPA, and IECA believe that the proposal decreases opportunities for discrimination.384 AFPA also states that the proposal will provide important information and analytical tools for interconnection customers to identify potential risks and benefits of project technologies, size, timing, and interconnection points.385 EDP states that information access improves the interconnection process and that an interconnection customer should not have to make major decisions without understanding how the transmission provider will evaluate its interconnection request.386 EDP notes that tariffs and business practice manuals often do not contain evaluation and information production practices utilized by transmission providers.387

    383 Alevo 2017 Comments at 6; Alliant 2017 Comments at 11; AFPA 2017 Comments at 11; AWEA 2017 Comments 36-37; CAISO 2017 Comments at 17; Joint Renewable Parties 2017 Comments at 10; Generation Developers 2017 Comments at 27; EDP 2017 Comments at 6; Forecasting Coalition 2017 Comments at 4; IECA 2017 Comments at 2; ITC 2017 Comments at 17; MidAmerican 2017 Comments at 13-14; NEPOOL 2017 Comments at 10; NextEra 2017 Comments at 22; SEIA 2017 Comments at 18; TDU Systems 2017 Comments at 18; Xcel 2017 Comment at 13-14.

    384 Joint Renewable Parties 2017 Comments at 11; AFPA 2017 Comments at 11; IECA 2017 Comments at 2.

    385 AFPA 2017 Comments at 11.

    386 EDP 2017 Comments at 6.

    387Id.

    224. MidAmerican asserts that the proposed reforms would assist customers in helping to verify the accuracy of required interconnection facilities and network upgrades.388 NextEra also notes that receiving the models could help to verify study results with unexpectedly high upgrade costs. NextEra argues that better information about models will lead to a greater ability to determine whether a site is appropriate for interconnection and thus will help reduce the number of “less favorable” interconnection requests.389 SEIA states that providing the interconnection customer directly with data will significantly reduce the need for study discussion and could eliminate several disputes.390

    388 MidAmerican 2017 Comments at 13-14.

    389 NextEra 2017 Comments at 22.

    390 SEIA 2017 Comments at 18.

    225. Xcel supports adding a description of the network model and assumptions in the pro forma attachments of the feasibility study agreement and the system impact study agreement. Xcel states that, if network model descriptions and assumptions and the study agreements are posted publicly, then interested interconnection customers can review those agreements to find how similarly situated generators were previously studied.391

    391 Xcel 2017 Comment at 13-14.

    226. Many commenters voice concerns regarding the proposed requirement that transmission providers post this information on OASIS.392 CAISO and NYISO state that they already provide network model and study assumptions on their respective websites.393

    392 CAISO 2017 Comments at 17; NYISO 2017 Comments at 22; TDU Systems 2017 Comments at 18-19; Xcel 2017 Comment at 14; Duke 2017 Comments at 11-12; EEI 2017 Comments at 40; NEPOOL 2017 Comments at 10; Non-Profit Utility Trade Associations 2017 Comments at 14-15; OATI 2017 Comments at 4; Salt River 2017 Comments at 12; Southern 2017 Comments at 20; TVA 2017 Comments at 9.

    393 CAISO 2017 Comments at 17; NYISO 2017 Comments at 22.

    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.394

    394Id.

    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.395

    395 MISO 2017 Comments at 27.

    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.396

    396 EEI 2017 Comments at 40-41.

    230. TDU Systems state that the Commission's pro forma CEII non-disclosure agreement would be appropriate and sufficient to protect against disclosure of CEII.397 Duke suggests that transmission providers' power flow models that have been filed with the Commission and identified as CEII be obtained through the Commission's CEII processes.398

    397 TDU Systems 2017 Comments at 18-19.

    398 Duke 2017 Comments at 12.

    231. Several commenters oppose the proposal and argue that current posting procedures are sufficient.399 For example, Duke suggests that interconnection customers request a study review to discuss the underlying study assumptions with the transmission provider.400 In addition, ISO-NE states that its website provides base cases and study assumptions, subject to CEII protections.401 MISO TOs state that, to the extent that additional information is necessary, the best way to accomplish this is through improved communications between the transmission provider, the transmission owner, and the interconnection customer.402 PG&E states that, although an interconnection customer may need to execute a non-disclosure agreement prior to obtaining this information, it is already generally available to them.403

    399 AES 2017 Comments at 8-9; Duke 2017 Comments at 11; ISO-NE 2017 Comments at 26; MISO TOs 2017 Comments at 27; PG&E 2017 Comments at 5; PJM 2017 Comments at 14; Southern 2017 Comments at 20; TVA 2017 Comments at 9.

    400 Duke 2017 Comments at11.

    401 ISO-NE 2017 Comments at 26.

    402 MISO TOs 2017 Comments at 27-28.

    403 PG&E 2017 Comments at 6.

    232. Commenters that oppose the proposal argue that it may be administratively burdensome.404 Duke argues, moreover, that the Commission should instead require transmission providers to review the information they already post on OASIS that provides a summary of the transmission planning processes. Then, if necessary, the Commission could augment that description with a high-level description of how transmission providers conduct interconnection studies.405 Similarly, EEI requests that the Commission only require transmission providers to furnish high-level descriptions on model development.406 EEI also argues that transmission providers should only have to post updates if there are material changes in the generally applied assumptions.407

    404 Duke 2017 Comments at 11; EEI 2017 Comments at 40; NorthWestern 2017 Comments at 4-6; NYISO 2017 Comments at 23; PG&E 2017 Comments at 5; Salt River 2017 Comments at 12; Tri-State 2017 Comments at 6-7.

    405 Duke 2017 Comments at 11.

    406 EEI 2017 Comments at 40.

    407Id. at 43.

    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.408 Further, NorthWestern states that requiring a non-disclosure agreement from each potential interconnection customer prior to the feasibility study would administratively burden transmission providers. It also argues that, in the West, interconnection customers seeking additional information about study benefits and assumptions currently have the ability to request model details from the Western Electricity Coordinating Council.409

    408 NorthWestern 2017 Comments at 5.

    409Id. at 6.

    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.410 Tri-State argues that large-scale system planning is dynamic and often requires changes to in-service dates, identification of new delivery points, project cancellations, generation assumptions, and assumed demand levels.411

    410 NYISO 2017 Comments at 23.

    411 Tri-State 2017 Comments at 6.

    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.412 Xcel also proposes that interconnection customers review the general process, as described in the LGIP or a business practice manual, as well as published study agreements to gain insights into expectations for modeling. Xcel states that the customer can discuss the specific modeling process and assumptions for its request with the transmission provider, and the agreement to be modeled would be memorialized in the agreements posted on OASIS. Xcel asserts that this process would provide significant transparency while allowing the use of the most appropriate studies and up-to-date assumptions for interconnection requests.413

    412 Xcel 2017 Comments at 13.

    413Id. at 14.

    ii. Commission Determination

    236. We adopt the NOPR proposal, with modifications. Specifically, this final action revises section 2.3 of the pro forma LGIP to read as follows (the bracketed text reflects deletions from, and the italicized text reflects additions to, the language proposed in the NOPR):

    Base Case Data. Transmission Provider shall maintain [provide] base power flow, short circuit and stability databases, including all underlying assumptions, and contingency list on either its OASIS site or a password-protected website, [upon request] subject to confidentiality provisions in LGIP Section 13.1. [Additionally]In addition, Transmission Provider shall [will] maintain network models and underlying assumptions on either its OASIS site or a password-protected website [for access by OASIS users]. Such network models and underlying assumptions should reasonably represent those used during the most recent interconnection study and be representative of current system conditions. If Transmission Provider posts this information on a password-protected website, a link to the information must be provided on Transmission Provider's OASIS site. Transmission Provider is permitted to require that Interconnection Customers [and], OASIS site users, and password-protected website users sign a confidentiality agreement before the release of commercially sensitive information or Critical Energy Infrastructure Information in the Base Case data. Such databases and lists, hereinafter referred to as Base Cases, shall include all (1) generation projects and (2 [ii]) [414] transmission projects, including merchant transmission projects that are proposed for the Transmission System for which a transmission expansion plan has been submitted and approved by the applicable authority.

    414 In this final action, we correct a typographical error in the pro forma LGIP.

    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.415 We believe the revisions to section 2.3 of the pro forma LGIP will reduce the possibility that some interconnection customers will have unduly discriminatory access to relevant information and will generally increase transparency for interconnection customers by requiring that network models and assumptions used by transmission providers be made available, subject to the appropriate confidentiality and information requirements. We expect that these revisions will allow interconnection customers to make more informed interconnection decisions while also holding transmission providers accountable as to which network models and assumptions they use to assess interconnection requests.

    415 NOPR, FERC Stats. & Regs. ¶ 32,719 at PP 111-112; see also NextEra 2017 Comments at 22; Alliant 2017 Comments at 11.

    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 pro forma LGIP require transmission providers to post network models and assumptions, subject to the appropriate confidentiality and information requirements, on OASIS and/or on a password-protected website. These revisions strike an appropriate balance by increasing transparency while also limiting the burden on transmission providers.

    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 pro forma LGIP will outweigh the burden placed on transmission providers to post and maintain up-to-date network models and underlying assumptions. Instead, we note that increasing transparency of network models and assumptions will allow interconnection customers to make informed interconnection decisions, which could potentially help interconnection customers avoid entering the queue with non-viable interconnection requests. Informed interconnection decisions will also allow transmission providers to improve queue management. Improved queue management, in turn, should aid in decreasing the administrative burden on transmission providers. In addition, increased transparency will also mitigate the potential for study disputes, re-studies and late-stage withdrawals, thus increasing the efficiency of the interconnection process.

    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 pro forma LGIP allows the transmission provider to require that the interconnection customer sign a confidentiality agreement before the release of commercially sensitive information. We agree with commenters that transmission providers should only provide commercially-sensitive information, such as contingency files and specific dispatch information, under a non-disclosure agreement. We note that the information that this final action requires transmission providers to post will be available on a password-protected website or on the transmission provider's OASIS site.

    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] submitted to or generated by the Commission.”  416 However, to the extent that certain information that is currently designated by the Commission as CEII is implicated by this portion of the final action, this final action makes no changes to that information's CEII designation or to the Commission's existing CEII requirements. Additionally, even if the information has been designated as CEII, § 388.113 of the Commission's regulations does not govern the transmission provider's handling, sharing, and disseminating of information that the transmission provider submitted for CEII designation, including how it disseminates that information on its OASIS site or password-protected website. We note, however, that nothing in § 388.113 of the Commission's regulations precludes a transmission provider from taking necessary steps to protect information within its custody or control to ensure the safety and security of the electric grid. Specifically, we note that pro forma LGIP section 2.3 permits transmission providers to require a confidentiality agreement for anyone that wishes to access “commercially sensitive information or [information that has been designated as CEII]” that may be posted in the base case data on the transmission provider's OASIS site or password-protected website.

    416 18 CFR 388.113 (2017) (emphasis added).

    242. Upon consideration of the comments, we withdraw the NOPR proposal to require transmission providers to post information “including, but not limited to, shift factors, dispatch assumptions, load power factors, and power flows.” 417 Such a requirement could result in transmission providers posting certain information that is not informative to interconnection customers and which could delay or otherwise burden the interconnection study process. For example, NYISO states that shift factors generally only pertain to power flow and thermal analyses, which are more applicable to interconnections in RTOs/ISOs that offer physical transmission rights.418

    417 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 119.

    418 NYISO 2017 Comments at 23.

    c. Suggested Modifications to Transparency Regarding Study Models and Assumptions Proposal i. Comments

    243. Multiple commenters support the proposal but offer suggestions to increase transparency.419 For example, AWEA suggests that transmission providers should have to review interconnection study models and assumptions every two years and submit a filing pursuant to section 205 of the FPA justifying the model and assumptions to ensure that study models and assumptions are non-discriminatory, realistic, appropriate for generation or regional characteristics, and accountable.420

    419 AWEA 2017 Comments at 37; Generation Developers 2017 Comments at 28; NEPOOL 2017 Comments at 10; NextEra 2017 Comments at 22; TDU Systems 2017 Comments at 18; Xcel 2017 Comments at 13.

    420 AWEA 2017 Comments at 37; see also Generation Developers 2017 Comments at 31.

    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.421

    421 Generation Developers 2017 Comments at 28.

    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; 422 and (2) providing information about lower voltage facilities (e.g., those below 100 kV) and higher voltage facilities.423

    422 NextEra 2017 Comments at 23.

    423Id.

    ii. Commission Determination

    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.424 We find that the current record does not support such a finding. With respect to Generation Developers', NextEra's, and TDU Systems' suggestions that transmission providers should have to post more information on OASIS, we clarify that the final action does not mandate an exhaustive list of minimum model assumptions. We find that the record before us does not support mandating that each region post the same set of information in the analysis of interconnection requests.

    424Ark. Elec. Coop. Corp. v. ALLETE, Inc., 156 FERC ¶ 61,061, at P 18 (2016).

    3. Congestion and Curtailment Information a. NOPR Proposal

    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.425 The Commission proposed to require that transmission providers post specific congestion and curtailment information that is disaggregated, or more granular (e.g., hourly and locational data) than the information that some transmission providers currently provide.426 To effectuate this requirement, the Commission proposed to add a new paragraph (l) to 18 CFR 37.6, which stated that the Transmission Provider must post on OASIS information as to congestion data representing (i) total hours of curtailment on all interfaces, (ii) total hours of Transmission Provider-ordered generation curtailment and transmission service curtailment due to congestion on that facility or interface, (iii) the cause of the congestion (e.g., a contingency or an outage), and (iv) total megawatt hours of curtailment due to lack of transmission for that month. This data shall be posted on a monthly basis by the 15th day of the following month and shall be posted in one location on the OASIS. The Transmission Provider should maintain this data for a minimum of three years.

    425 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 128.

    426Id. P 130.

    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 (e.g., at the scoping meeting).427

    427Id. P 128.

    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.428 The Commission sought further comment on the value of requiring transmission providers to post flow duration curves on the major transmission interfaces based on hourly flow data on OASIS.429 Finally, the Commission sought comment on changes to section 3.3.4 of the pro forma LGIP requiring transmission providers or transmission owners to provide curtailment and congestion information at the scoping meeting.430

    428Id. P 131.

    429Id.

    430Id. P 133.

    b. Comments

    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.431 AFPA asserts that the proposal will allow interconnection customers to better use existing transmission infrastructure.432 Public Interest Organizations and IECA contend that the proposal will help interconnection customers better understand investment risks, which could result in more efficient markets and lower costs.433 IECA, SEIA, and Joint Renewable Parties indicate that the added transparency will improve access to information, increase efficiency, and reduce discrimination.434

    431 AFPA 2017 Comments at 11; Public Interest Organizations 2017 Comments at 5-8; IECA 2017 Comments at 2; SEIA 2017 Comments at 19; Joint Renewable Parties 2017 Comments at 11; Alevo 2017 Comments at 6; NEPOOL 2017 Comments at 11; Alliant 2017 Comments at 12.

    432 AFPA 2017 Comments at 11.

    433 Public Interest Organizations 2017 Comments at 5-8; IECA 2017 Comments at 2.

    434Id.; SEIA 2017 Comments at 19; Joint Renewable Parties 2017 Comments at 11.

    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.435 AWEA asserts that it is crucial for interconnection customers to have access to historical local congestion information, noting that study results do not provide this information and that transmission providers frequently do not make it available. AWEA also states that there is a lack of uniformity in the type and location of information that transmission providers post.436 AWEA states that non-disclosure agreements can prevent disclosure of commercially sensitive information to the general public.437

    435Id.; Alliant 2017 Comments at 12; Generation Developers 2017 Comments at 31-32; ITC 2017 Comments at 17; see also AWEA 2017 Comments at 40.

    436Id. at 39.

    437Id. at 41.

    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.438 AWEA contends that the burden on transmission providers to post this type of information is minimal, as the information is readily available and does not require significant additional studies.439 TDU Systems also supports the proposal and urges the Commission to clarify that transmission providers should report on congestion that is avoided by dispatching generation out of merit order.440

    438 Alevo 2017 Comments at 6; NEPOOL 2017 Comments at 11.

    439 AWEA 2017 Comments at 42.

    440 TDU Systems 2017 Comments at 19-20.

    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.441 TVA argues that the information that NERC stores via Transmission Loading Relief (TLR) logs provides enough information to allow the interconnection customer to evaluate its selected location.442 TVA also contends that the time and expense of analyzing potential interconnection locations should be the interconnection customer's responsibility.443 Xcel argues that, to the extent stakeholder needs are not met by posting the proposed information, RTO/ISO stakeholder processes should address these issues.444 Non-Profit Utility Trade Associations ask the Commission to convene a technical conference to determine what congestion and constraint information utilities should maintain, the format of that information, and what information would benefit interconnection customers.445

    441 EEI 2017 Comments at 45; TVA 2017 Comments at 10-11; Xcel 2017 Comments at 15-16.

    442 TVA 2017 Comments at 10.

    443Id. at 10-11.

    444 Xcel 2017 Comments at 15-16.

    445 Non-Profit Utility Trade Associations 2017 Comments at 17.

    254. CAISO and PG&E note that the requested information is largely already available on CAISO's website.446 CAISO explains that transmission providers publish dispatch reports, congestion data, and locational marginal price (LMP) data so that potential interconnection customers can understand where there is available capacity.447 CAISO also states that it already provides interconnection customers with as much information as can be predicted, bearing in mind that economic curtailment protects the grid from events that are difficult or impossible to predict, such as outages, overloads due to oversupply, and contingency events.448

    446 CAISO 2017 Comments at 20; PG&E 2017 Comments at 6 (citing http://www.caiso.com/market/Pages/OutageManagement/Curtailed-OperationalGeneratorReportGlossary.aspx).

    447 CAISO 2017 Comments at 19.

    448Id.

    255. MISO argues that the sort of granular information the Commission has proposed to be posted will not significantly resolve issues with queue processing.449 MISO TOs state that MISO posts market reports that contain LMP data and the marginal congestion component for every commercial pricing node, which can be used to develop information on congestion. MISO TOs state that it would be redundant (and burdensome) to require MISO to publish this information on OASIS as well as on its website, where it currently resides.450

    449 MISO 2017 Comments at 28.

    450 MISO TOs 2017 Comments at 30.

    256. NextEra notes that operational snapshots of the transmission provider's system are more useful than statistics of total hours or MW of curtailment.451 NextEra notes that MISO and SPP already provide state estimator snapshots from the prior two weeks, which include generator dispatch, system congestion, and power flow information, among other things. NextEra recommends that all RTOs/ISOs adopt this practice and provide snapshots of their systems from different times of the day to show system conditions.452

    451 NextEra 2017 Comments at 25.

    452Id.

    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.453 PJM states that, along with LMP pricing information, these data are adequate to allow an interconnection customer to make informed business decisions relative to their interconnection project.454

    453 PJM 2017 Comments at 16.

    454Id.

    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.455 PJM states that posting information regarding unit-specific and constraint-specific generator curtailment information would allow other market participants to replicate market-sensitive data, such as unit offers, and would require significant effort.456 PJM contends that publicly posting the cause of congestion would improperly disclose commercially sensitive information and require difficult and time-consuming power flow analysis and market re-runs. PJM notes that it does not have the software capability to determine causes of congestion.457 PJM states that posting the total monthly MWh of curtailment due to lack of transmission could result in misleading information, as curtailment may be caused by multiple factors.458

    455Id.

    456Id.

    457Id. at 17.

    458Id.

    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.459 Duke states that historic congestion and curtailment information might only be useful if the generating facility's location and the area of congestion coincided.460 Duke and MISO TOs further state that system changes including interconnection and transmission upgrades, large generators going on- or off-line, or a transmission system topology change could render historical congestion information meaningless.461 Xcel states that future generation impacts future congestion, and that knowledge of where other generation will locate is likely of more value to the interconnecting generators.462

    459 EEI 2017 Comments at 45; Six Cities 2017 Comments at 3-4; MISO TOs 2017 Comments at 29; CAISO 2017 Comments at 19; Xcel 2017 Comments at 14-15.

    460 Duke 2017 Comments at 12.

    461Id. at 13; MISO TOs 2017 Comments at 29.

    462 Xcel 2017 Comments at 14-15.

    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.463 ISO-NE argues that regional flexibility is warranted to allow RTOs/ISOs to identify the relevant congestion and curtailment information in their region and the information that is already available to interconnection customers that meets the NOPR's objective.464 ISO-NE states that the congestion and curtailment information identified in the NOPR is not relevant in New England because this information relates to availability of pro forma transmission service and internal flow gates, neither of which is applicable in New England.465

    463Id.

    464 ISO-NE 2017 Comments at 27-28.

    465Id. n.65.

    261. NYISO states that it has historically published significant system information on its public website, including congestion and curtailment information.466 NYISO argues that additional operational data posted to NYISO's public website would not provide the information the NOPR anticipates would be useful to interconnection customers.467 NYISO further states that the curtailment data requested by AWEA and proposed in the NOPR would not be useful data to NYISO interconnection customers and explains that it may not even have the capability to provide certain data proposed by the NOPR.468 NYISO contends that it need not maintain and post the same OASIS-related information as RTOs/ISOs with a physical reservation transmission system.469

    466 NYISO 2017 Comments at 24.

    467Id. at 28.

    468Id. at 26 (citing, e.g., N.Y. Indep. Sys. Operator, Inc., 123 FERC ¶ 61,134, at PP 8-13 (2008); N.Y. Indep. Sys. Operator, Inc., Docket No. OA08-13-003 (Nov. 12, 2008) (delegated letter order)).

    469Id. (citing, e.g., N.Y. Indep. Sys. Operator, Inc., Docket Nos. ER11-2048-003 & ER11-2048-004 (June 6, 2011) (delegated letter order); N.Y. Indep. Sys. Operator, Inc., 133 FERC ¶ 61,208, at PP 12-13 (2010)).

    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.470

    470 MISO 2017 Comments at 28.

    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.471 PG&E expresses concern about making much of this information public, including but not limited to CEII, since CAISO has a process that provides much of this information to interconnection customers that have executed non-disclosure agreements.472 MISO TOs state that RTOs/ISOs should develop a method to ensure privileged and/or confidential information is shared only with interconnection customers and is not available to market participants or others without authorization to receive CEII information, in order to prevent market manipulation and potential harm.473

    471 PG&E 2017 Comments at 6.

    472Id.

    473 MISO TOs 2017 Comments at 30.

    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.474 Duke states that the transmission system outside RTOs/ISOs is planned, designed, and operated so that generating resources with firm bilateral contracts to serve load are not constrained.475 Xcel notes that, in non-market areas, firm transmission service mitigates congestion and curtailment risk. Xcel and Southern contend that congestion and curtailment information is more relevant for RTOs/ISOs that have locational marginal pricing, and because regional markets usually dispatch generation according to price, curtailment is generally based on price and not a lack of transmission capacity.476 Southern points out that it provides congestion/curtailment screens specific to each interconnection request in each interconnection study report.477

    474 Duke 2017 Comments at 13; NorthWestern 2017 Comments at 6; Southern 2017 Comments at 21-22; Xcel 2017 Comments at 15; Non-Profit Utility Trade Associations 2017 Comments at 15-16.

    475 Duke 2017 Comments at 13.

    476 Xcel 2017 Comments at 15; Southern 2017 Comments at 21.

    477Id. at 21-22.

    265. NorthWestern and Non-Profit Utility Trade Associations state that the definition of “congestion” is unclear in non-RTOs/ISOs.478 NorthWestern argues that posting congestion could be duplicative because, in contract-path balancing authority areas that operate outside of organized markets, “congestion” is synonymous with “available transfer capability,” which is already posted on OASIS in real time.479

    478 NorthWestern 2017 Comments at 6; Non-Profit Utility Trade Associations 2017 Comments at 15-16.

    479 NorthWestern 2017 Comments at 6.

    266. Duke, EEI, and OATI assert that the Commission should consult with NAESB regarding standards for making congestion and curtailment information accessible on OASIS.480 OATI states that it is critical that access to all of these postings require secure and controlled access through a registered OASIS user account per existing OASIS standards.481 Duke states that NAESB is already working on this issue, as evidenced by its 2017 Wholesale Electric Quadrant Annual Plan item 2.a.ii.1, and should consider designing queries for interconnection customers to use to obtain congestion and curtailment information specific to their interconnection requests.482 TVA suggests that adding these data to data that NERC already tracks appears a more appropriate regulatory implementation path.483

    480 Duke 2017 Comments at 13; EEI 2017 Comments at 47-48; OATI 2017 Comments at 2.

    481Id.

    482 Duke 2017 Comments at 13.

    483 TVA 2017 Comments at 10-11.

    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 pro forma SGIP.484 NYISO urges the Commission to consider such an approach as an alternative to requiring cumbersome posting requirements that are not applicable in all regions and that can only provide historical data—data that are of little use to an interconnection customer and indeed may be misleading compared to data that could be provided through an interconnection study or in response to a pre-application report request.485

    484 NYISO 2017 Comments at 29.

    485Id. at 29-30.

    c. Commission Determination

    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.486

    486 PJM 2017 Comments at 16-17; NYISO 2017 Comments at 29-30.

    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.487 Further, the NERC Transmission Loading Relief (TLR) Logs make publicly available information on the duration, direction, and MW total of curtailments in the Eastern Interconnection.488 We also note that some commenters question the usefulness of some of the data contemplated by the NOPR proposal to prospective interconnection customers and that others argue that some of this data is not available outside of RTOs/ISOs.

    487See e.g., CAISO 2017 Comments at 20; NYISO 2017 Comments at 24; PJM 2017 Comments at 16.

    488 NERC TLR Logs, http://nerc.com/pa/rrm/TLR/Pages/TLR-Logs.aspx.

    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.

    4. Definition of Generating Facility in the Pro Forma LGIP and Pro Forma LGIA a. NOPR Proposal

    273. The Commission proposed to revise the definition of “Generating Facility” in the pro forma LGIP and the pro forma LGIA to include electric storage resources, similar to how it revised the definition of a “Small Generating Facility” in the pro forma SGIP and the pro forma SGIA in Order No. 792.489 Specifically, the Commission proposed to amend the definition of a Generating Facility in the pro forma LGIP and the pro forma LGIA as follows (with proposed additions in italics): “Generating Facility shall mean Interconnection Customer's device for the production and/or storage for later injection of electricity identified in the Interconnection Request, but shall not include the interconnection customer's Interconnection Facilities.” 490

    489 NOPR, FERC Stats. & Regs. ¶ 32,719 at PP 134, 136 (citing Order No. 792, 145 FERC ¶ 61,159 at P 228 (emphasis in original)).

    490Id. PP 138-139.

    b. General i. Comments

    274. A majority of responsive commenters, including utilities, RTOs/ISOs, and renewable interests, support the proposal.491 MISO and NYISO state that they already account for electric storage resources in their definitions.492 CAISO states that it has clarified that electric storage resources can participate as generators to “provide supply” and ancillary services. CAISO further states that it studies the reliability impacts of an electric storage resource's charging, but not as firm load.493 To the extent that an electric storage resource requires firm load treatment, CAISO states that it can apply to the local distribution company.494

    491 AFPA 2017 Comments at 12; AWEA 2017 Comments at 55; Bonneville 2017 Comments at 5; CAISO 2017 Comments at 20; California Energy Storage Alliance 2017 Comments at 4; Duke 2017 Comments at 15; EDP 2017 Comments at 6; ESA 2017 Comments at 6; IECA 2017 Comments at 3; ISO-NE 2017 Comments at 32-33; Joint Renewable Parties 2017 Comments at 10-11; MISO 2017 Comments at 29; MISO TOs 2017 Comments at 32; Modesto 2017 Comments at 22; NEPOOL 2017 Comments at 12-13; NextEra 2017 Comments at 26; Non-Profit Utility Trade Associations 2017 Comments at 17; PG&E 2017 Comments at 6; PJM 2017 Comments at 19-20; Public Interest Organizations 2017 Comments at 7-8; TDU Systems 2017 Comments at 20; TVA 2017 Comments at 11.

    492 MISO 2017 Comments at 29; NYISO 2017 Comments at 30.

    493 CAISO 2017 Comments at 20.

    494 CAISO 2017 Comments at 20.

    ii. Commission Determination

    275. In this final action, we adopt the NOPR proposal to modify the definition of “Generating Facility” in the pro forma LGIP and pro forma LGIA to include “and/or storage for later injection.” We find that this definitional change will reduce a potential barrier to large electric storage resources with a generating facility capacity above 20 MW that wish to interconnect pursuant to the terms in the pro forma LGIP and pro forma LGIA. Additionally, this finding and definitional change are consistent with provisions already implemented in the pro forma SGIP and the pro forma SGIA.495

    495Pro forma SGIP at Attachment 1 (Glossary of Terms); Pro forma SGIA at Attachment 1 (Glossary of Terms).

    c. Electric Storage Resources as Transmission Assets i. Comments

    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.496 ESA recommends that the Commission state that neither a SGIA nor an LGIA is necessary for electric storage resources to be employed as transmission assets and that electric storage resources providing transmission services should not be excluded from seeking an LGIA or SGIA to provide wholesale generator services.497 Public Interest Organization generally supports the proposal but opposes requiring all electric storage resources, including those intended to serve as transmission assets, to go through the formal large generator interconnection process.498

    496 ESA 2017 Comments at 6; California Energy Storage Alliance 2017 Comments at 4.

    497 ESA 2017 Comments at 7 (citing Utilization of Electric Storage Resources for Multiple Services When Receiving Cost-Based Rate Recovery, 158 FERC ¶ 61,051 (2017)).

    498 Public Interest Organizations 2017 Comments at 7-8.

    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.499

    499 AES 2017 Comments at 9-11; Alevo 2017 Comments at 2-4.

    ii. Commission Determination

    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,500 or both.501

    500See, e.g., Western Grid Dev., LLC, 130 FERC ¶ 61,056 (Western Grid), reh'g denied, 133 FERC ¶ 61,029 (2010).

    501See Utilization of Electric Storage Resources for Multiple Services When Receiving Cost-Based Rate Recovery, 158 FERC ¶ 61,051.

    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 pro forma LGIP and pro forma LGIA. These final action revisions are meant to clarify that new technologies may avail themselves of the existing pro forma interconnection process, so long as they meet the threshold requirements as stated in those documents.

    d. Characteristics of Electric Storage Resources i. Comments

    280. ESA asserts that the proposal does not address the differences between electric storage resources and traditional generators.502 ESA recommends that the Commission require RTOs/ISOs to develop Electric Storage Interconnection Agreements and Processes that account for the unique characteristics of electric storage resources.503 In addition, ESA recommends that the Commission revise tariffs and modify the pro forma LGIP and the pro forma LGIA into a pro forma Large Facility Interconnection Agreement and Process, in which facilities are defined to consist of only a generating unit, only an electric storage unit, or a combination of generating units and electric storage units.504

    502 ESA 2017 Comments at 6.

    503Id. at 7 (citing, e.g., ISO New England, Inc., 151 FERC ¶ 61,024 (2015)).

    504Id. at 8.

    281. Alevo and AES state that the proposal does not account for the full capability of electric storage resources.505 Alevo states that a new definition should be made separately for electric storage resources, while AES suggests that the development of a new interconnection agreement specific to electric storage resources.506

    505 AES 2017 Comments at 9-11; Alevo 2017 Comments at 2-4.

    506 AES 2017 Comments at 10-11; Alevo 2017 Comments at 2-4.

    282. EEI and Portland request that the Commission hold a technical conference on this proposal.507 EEI states that it is unclear how existing interconnection agreements and processes would account for the generation and load characteristics of electric storage resources.508 Portland states that further discussions are necessary to address the unique characteristics of electric storage resources and that a new definition for storage facilities may be appropriate.509

    507 EEI 2017 Comments at 48; Portland 2017 Comments at 3-4.

    508 EEI 2017 Comments at 48.

    509 Portland 2017 Comments at 4.

    283. Southern argues that redefining Generating Facility to include electric storage resources would complicate the pro forma LGIP and pro forma LGIA.510 Southern states that electric storage resources could be considered generation or load, and this could cause problems when discussing reactive power in article 9.6 of the pro forma LGIA, which references the generating facility capacity rather than the load.511

    510 Southern 2017 Comments at 22.

    511Id.

    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.512 Indicated NYTOs, who support the proposal, agree with NYISO on the addition of the term “withdrawal” to the definition.513 MidAmerican states that the Commission should clarify that the proposal does not permit transmission providers to impose restrictions on withdrawals by storage resources in excess of restrictions imposed on any other load.514

    512 NYISO 2017 Comments at 30.

    513 Indicated NYTOs 2017 Comments at 14.

    514 MidAmerican 2017 Comments at 21.

    ii. Commission Determination

    285. We disagree with EEI's and Southern's arguments that the pro forma LGIP and pro forma LGIA may be unable to accommodate the load characteristics of an electric storage resource. We note that studies under the pro forma LGIP already provide transmission providers with the flexibility to address the load characteristics of electric storage resources, and that electric storage resources have already successfully interconnected pursuant to a Commission-jurisdictional LGIP and LGIA.515 EEI and Southern provide no evidence that the requirements of the LGIP and LGIA cannot accommodate the load characteristics of electric storage resources. We note that, if a transmission provider finds a particular resource to be outside the scope of its existing LGIA, the LGIP permits a transmission provider to enter into non-conforming LGIAs when necessary.

    515See, e.g., AES New Creek, Docket No. ER12-1100-000 (Apr. 10, 2012) (delegated letter order) (accepting a non-conforming interconnection agreement between PJM, Virginia Electric Power, and a combined solar and electric storage resource).

    286. We find that ESA's suggestion that we remove the term “generator” from the pro forma LGIA and the pro forma LGIP in favor of interconnection agreements based on a facility's technical and operational characteristics is beyond the scope of this proposal. We find that AES's and Alevo's assertions are beyond the scope of this rulemaking because, as previously noted, the final action revisions are meant to clarify that new technologies with a capacity of more than 20 MW may avail themselves of the existing pro forma generator interconnection process and interconnection agreement rather than defining an electric storage resource. In response to NYISO's suggestion to add “withdrawal” to the definition, we do not believe it is necessary to accept this suggestion. While the meaning of NYISO's comment is unclear, to the extent that it refers to an electric storage resource's ability to charge, our adopted definition already accounts for this ability through the inclusion of the word “storage.” Anything beyond this interpretation is beyond the scope of this proceeding.

    e. Other i. Comments

    287. EEI seeks clarification on whether the proposed change will affect tax treatment of generators.516 In addition, EEI states that the Commission should clarify the applicability of wholesale distribution charges to electric storage resources using distribution facilities and that the inclusion of electric storage resources in the definition does not affect the jurisdiction of interconnection studies.517

    516 EEI 2017 Comments at 49.

    517Id.

    ii. Commission Determination

    288. In response to EEI's concern that the proposed change to the pro forma LGIP and pro forma LGIA definition of generating facility might affect tax treatment of generators, we note that the purpose of this proposal is only to allow electric storage resource's with a capacity above 20 MW to interconnect pursuant to the pro forma LGIP and pro forma LGIA. It should not affect tax treatment of electric storage resources.

    289. We find that this definitional change will not affect the jurisdictional issues EEI raises. The pro forma LGIP is the process provided for Commission-jurisdictional interconnections by resources above 20 MW, and this definition change ensures that electric storage resources above 20 MW that seek a Commission-jurisdictional interconnection can access that interconnection process. All relevant jurisdictional delineations and precedent remain unchanged. This definition change also does not affect the Commission's precedent on wholesale distribution charges when distributed resources use the distribution system to reach the wholesale market.

    5. Interconnection Study Deadlines a. NOPR Proposal

    290. The pro forma LGIP requires that transmission providers use “reasonable efforts” 518 to complete feasibility studies in 45 days, system impact studies in 90 days, and facilities studies within 90 or 180 days.519 The Commission proposed to require that transmission providers post on their OASIS on a quarterly basis summary statistics indicating the number of interconnection requests withdrawn and interconnection studies completed and delayed, the proportion of studies completed within tariff timeframes, and the average time to complete a study. Additionally, the Commission proposed to require that a transmission provider that exceeds study deadlines for more than 25 percent of any study type for two consecutive quarters must file informational reports at the Commission for the four calendar quarters (Filed Report Requirement). If during this period, the transmission provider exceeds more than 25 percent of study deadlines for any study type for two consecutive quarters, the reporting requirement would be retriggered for another four consecutive quarters from the date of the last consecutive quarter to exceed the 25 percent threshold.520

    518 The pro forma LGIP states that reasonable efforts “shall mean, with respect to an action required to be attempted or taken by a Party under the Standard Large Generator Interconnection Agreement, efforts that are timely and consistent with Good Utility Practice and are otherwise substantially equivalent to those a Party would use to protect its own interests.” Pro forma LGIP Section 1 (Definitions).

    519Pro forma LGIP Sections 6.3, 7.4, and 8.3.

    520 In this final action, we are modifying the calculation for determining whether a transmission provider has triggered the Filed Report Requirement so that it reads more simply. For example, for the calculation in 35.2.2(E), the new calculation will be the sum of 35.2.2(B) plus 35.2.2(C) divided by the sum of 35.2.2(A) plus 35.2.2(C). For ease of readership, we abbreviate here as (B + C) / (A + C). This calculation would represent the quarterly total of late studies, i.e., completed late studies plus uncompleted late studies, divided by the number of studies that should have been completed, i.e., completed studies plus uncompleted late studies. Although this is a simpler calculation, we note that it is mathematically equivalent to the calculation proposed in the NOPR, which we abbreviate here as 1−(A−B) / (A + C).

    291. To implement this proposal, the Commission proposed to modify section 3.4 of the pro forma LGIP 521 to institute quarterly reporting requirements for transmission providers to report interconnection study performance on their OASIS. The Commission also proposed reporting requirements and justifications that would be triggered if a transmission provider exceeds study deadlines for more than 25 percent of any study type for two consecutive calendar quarters.

    521 In the “Utilization of Surplus Interconnection Service” section, the Commission proposed revisions to the pro forma LGIP that result in renumbering of several existing sections. One section that the Commission proposed to be renumbered is section 3.4. For this reason, the proposed revisions to the “OASIS Posting” section (current section 3.4) will begin at section 3.5.1.

    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.

    b. Interconnection Study Metrics Reporting i. Comments

    293. Numerous commenters support a requirement for transmission providers to report on their interconnection study performance.522 AWEA states that many transmission providers consistently experience interconnection study delays due to factors completely within their control.523 NEPOOL states that reporting requirements will provide greater transmission provider accountability, thereby tending to improve transmission provider performance and facilitating market entry.524 NextEra notes that, while it would prefer to eliminate the reasonable efforts standard, the NOPR proposal will improve transparency into study delay causes and frequency, and this transparency could lead to appropriate solutions.525

    522 Alevo 2017 Comments at 7-8; Alliance for Clean Energy 2017 Comments at 1; AWEA 2017 Comments at 43; Competitive Suppliers 2017 Comments at 9; EDP 2017 Comments at 7; Joint Renewable Parties 2017 Comments at 11; NEPOOL 2017 Comments at 13; NextEra 2017 Comments at 27; PJM 2017 Comments at 20-21; Portland 2017 Comments at 5-6; SEIA 2017 Comments at 19; TDU Systems 2017 Comments at 21-22.

    523 AWEA 2017 Comments at 43-44.

    524 NEPOOL 2017 Comments at 13.

    525 NextEra 2017 Comments at 27.

    294. Some commenters support requiring transmission providers to provide additional or even more detailed statistics than the Commission proposed 526 or argue that the Commission should lower the hurdle for triggering the Filed Report Requirement (e.g., lowering the 25 percent hurdle to 10 percent).527

    526 Alliance for Clean Energy 2017 Comments at 1-2; AWEA 2017 Comments at 45; EDP 2017 Comments at 7; Generation Developers 2017 Comments at 34-36; NextEra 2017 Comments at 28.

    527 AWEA 2017 Comments at 44-45; Competitive Suppliers 2017 Comments at 10; Generation Developers 2017 Comments at 35-36.

    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.528 Portland also opposes the Filed Report Requirement, stating that this proposal could disproportionately affect utilities with small queues or those that jointly own, but do not operate, transmission facilities. Portland suggests that the Commission apply a minimum threshold of delayed interconnection studies for triggering justifications and that the Commission not impose these requirements if the reasons for missing deadlines are outside the transmission provider's control.529

    528 PJM 2017 Comments at 20.

    529 Portland 2017 Comments at 5-6.

    296. Alevo and Invenergy favor financial incentives or penalties over reporting requirements to encourage timely study completion.530 Relatedly, AWEA states that a final action should include remedies for interconnection customers affected by transmission providers' failures to complete studies accurately and in a timely fashion.531 AWEA suggests that the Commission require transmission providers to specify remedies in their study services agreements for failure to comply with timeline provisions.532 While it concedes that the NOPR proposal increases transparency, Invenergy likewise argues that concrete incentives and penalties would result in more timely interconnection study performance.533 Generation Developers assert that the proposal does not respond to the issue of consistently delinquent transmission providers. They argue that, as a consequence, such transmission providers will have no motivation to improve.534

    530 Alevo 2017 Comments at 7-8; Invenergy 2017 Comments at 8.

    531 AWEA 2017 Comments at 46.

    532Id.

    533 Invenergy 2017 Comments at 3, 7.

    534 Generation Developers 2017 Comments at 34.

    297. Some commenters express concerns regarding the potential administrative burden imposed by the proposal.535 Bonneville, PG&E, and Alevo argue that the proposal could divert transmission providers' planning resources from conducting studies to meeting administrative burdens with no improvement on the underlying causes of delays.536 EEI states that posting the aggregate number of employee hours and third party consultant hours expended toward interconnection studies is overly burdensome, is not helpful in evaluating performance, and raises customer costs.537 TVA notes that the process and tracking burden would need to be borne continually by transmission providers, without regard to whether a reporting trigger is met.538 In contrast, NextEra believes that the proposal would not impose a material burden on transmission providers because they already know the status of their studies.539

    535See, e.g., Xcel 2017 Comments at 16.

    536 Bonneville 2017 Comments at 6; PG&E 2017 Comments at 6; Alevo 2017 Comments at 7-8.

    537 EEI 2017 Comments at 51.

    538 TVA 2017 Comments at 12.

    539 NextEra 2017 Comments at 27.

    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.540 APS states that the addition of metrics would constrain the interconnection process while providing minimal benefits to the interconnection customer.541

    540 APS 2017 Comments at 4.

    541Id.

    299. A few commenters state that they do not object to the NOPR's proposed reporting requirement.542 MidAmerican nonetheless would prefer that transmission providers reform the queue process itself, rather than reporting on existing processes.543 MISO TOs also do not oppose the additional study reporting requirements, but they point out that they are already subject to extensive reporting requirements.544 For this reason, they ask the Commission to allow MISO to retain its existing reporting requirements, subject to modification as needed to include the types of information required by the final action.545

    542 MidAmerican 2017 Comments at 14; MISO TOs 2017 Comments at 34; Non-Profit Utility Trade Associations 2017 Comments at 17.

    543 MidAmerican 2017 Comments at 14.

    544 MISO TOs 2017 Comments at 33 (citing Midcontinent Indep. Sys. Operators, Inc., 158 FERC ¶ 61,003, at P 108 (2017)).

    545Id.

    300. Other commenters expressly oppose the proposal to require the posting of interconnection study statistics.546 Duke states that the primary reasons for delays are queue withdrawals and material modifications.547 EEI argues that the proposal fails to consider circumstances outside the transmission provider's control, and that without additional context, this information will not benefit interconnection customers.548 NYISO indicates that the 25 percent missed deadline requirements are unnecessarily punitive and would jeopardize NYISO's ability to be flexible as needed during the interconnection process.549 NYISO also argues that additional administrative requirements to track study statistics will not expedite the study process.550

    546 Duke 2017 Comments at 15-16; EEI 2017 Comments at 50; ISO-NE 2017 Comments at 33-35; NYISO 2017 Comments at 32-34; Xcel 2017 Comments at 16.

    547 Duke 2017 Comments at 16.

    548 EEI 2017 Comments at 50-51.

    549 NYISO 2017 Comments at 34.

    550Id. at 32.

    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.551 Xcel also argues that the NOPR proposal does not account for regions with fewer requests or delays caused by changes in study assumptions, negotiation of contractual language, or interpretation of technical study results. Xcel states that, if the Commission proceeds with this proposal, it should limit the LGIP requirements to providing a written description of the cause of the delay.552

    551 Xcel 2017 Comments at 16.

    552Id.

    302. Some commenters consider currently available information to be sufficient for interconnection customers.553 Duke asserts that the LGIP already requires transmission providers to inform interconnection customers about the causes of study delays and schedule revisions.554 Indicated NYTOs state that NYISO currently provides sufficient interconnection study information on its public website and to interconnection customers, and NYISO updates its Transmission Planning Advisory Committee on the status of all pending large generator facility interconnections.555 Indicated NYTOs also state that NYISO updates its OASIS with additional information as to where an interconnection request is situated in the study process and which studies have been completed.556 Additionally, Indicated NYTOs state that interconnection customers receive more detailed information directly throughout the study process.557 Xcel indicates interconnection customers currently have sufficient transparency regarding the causes of delays and that any delays are discussed directly with the customer. Xcel states that if the customer does not understand the cause of a delay, it can ask the transmission provider for clarification.558

    553See, e.g., EEI 2017 Comments at 51 (citing pro forma LGIP Sections 6.3, 7.4, and 8.3).

    554 Duke 2017 Comments at 16; see also Xcel 2017 Comments at 16.

    555 Indicated NYTOs 2017 Comments at 11; see also NYISO 2017 Comments at 30.

    556 Indicated NYTOs 2017 Comments at 11.

    557Id.

    558 Xcel 2017 Comments at 16.

    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.559 NYISO asserts that adding additional detail regarding the status of a particular study is not informative to the specific interconnection customer, which already knows its status. Moreover, NYISO argues that additional administrative requirements to track study statistics will not expedite the study process.560 NYISO contends that the best way to expedite interconnection studies is through targeted process improvements, such as those NYISO has proposed to its stakeholders; 561 NYISO states that it has a number of proposals that would improve study processing efficiency.562 Similarly, MISO recommends allowing existing stakeholder processes to accomplish the objectives of the proposed reporting requirements and notes that it is currently working to increase study timing visibility.563

    559 NYISO 2017 Comments at 30.

    560Id. at 32.

    561Id. at 30-32.

    562Id. at 32.

    563 MISO 2017 Comments at 30.

    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.564 NYISO contends that posting the requested information is only informative if a transmission provider reveals additional details that may require disclosure of confidential information. NYISO also argues that such detailed information regarding the status of a particular study is appropriately shared only with the interconnection customer, not all projects in the interconnection queue.565

    564 NYISO 2017 Comments at 32.

    565Id. at 33.

    ii. Commission Determination

    305. In this final action, we adopt the NOPR proposal modifying the pro forma LGIP section on OASIS Posting 566 to require transmission providers to post interconnection study metrics to increase the transparency of interconnection study completion timeframes. We note, however, that we are modifying the posting location requirement, as discussed further below in the subsection “Requirement to Post Interconnection Study Metrics on OASIS” of this final action. As proposed in the NOPR, transmission providers shall post this interconnection study metric information on a quarterly basis. We also adopt the Filed Report Requirement.567 The revisions to the pro forma LGIP adopted in this final action are provided in Appendix B to Order No. 845.

    566 This has been renumbered to pro forma LGIP section 3.5 through this final action.

    567 Any informational reports that transmission providers file at the Commission are for informational purposes and will not be formally noticed nor require additional action by the Commission. See Grid Assurance LLC, 154 FERC ¶ 61,244, at n.106, order on clarification, 156 FERC ¶ 61,027 (2016).

    306. The current requirement that transmission providers complete interconnection studies on a timely basis is based on a “reasonable efforts” 568 standard. This standard can be challenging to apply in the absence of information required in this final action, including information about how long it takes transmission providers to complete studies and the resources a transmission provider uses to complete interconnection studies. Information on interconnection study metrics should provide needed transparency to allow interconnection customers to assess whether a transmission provider is using “reasonable efforts.” This information should also allow interconnection customers to develop informed expectations about how long the interconnection study portion of the process actually takes.

    568 “Reasonable Efforts” in Pro forma LGIP Section 1 (Definitions).

    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 pro forma LGIP related to informing interconnection customers about the causes of study delays. While those provisions require transmission providers to provide the reasons for study delays to individual interconnection customers, these newly adopted provisions require the transmission provider to submit study delay information to the Commission.

    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 requests while maintaining a transmission provider's schedule flexibility to process complex and interdependent interconnection requests. As noted in the NOPR and supporting comments, the requirements should identify the geographical locations where interconnection study delays occur most often and will document the delays' causes. We recognize that often a delay will not be the result of the transmission provider having acted inappropriately; therefore, we do not propose implementing automatic penalties for delayed studies, in recognition of this possibility. Nonetheless, we believe that adopting pro forma LGIP provisions will improve transparency by highlighting where interconnection study delays are most common and the causes of delays in these regions. Such information could highlight systemic problems for individual transmission providers and interconnection customers. This information could also be useful to the Commission in determining if additional action is required to address interconnection study delays.

    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.

    c. Requirement To Post Interconnection Study Metrics on OASIS i. Comments

    312. CAISO objects to the requirement to post interconnection study information on OASIS.569 CAISO contends that using existing public websites, portals, and reports should satisfy any publication requirement and would save ratepayers from the expense of moving data onto OASIS.570 Additionally, CAISO argues that using existing public websites, portals, and reports would allow the critical assets to remain confidential.571 OATI states that the metrics proposed are in line with similar requirements for transmission request studies but asks the Commission to direct this posting requirement to NAESB to establish a uniform location for the posting of these metrics on OASIS.572

    569 CAISO 2017 Comments at 22.

    570Id.

    571Id.

    572 OATI 2017 Comments at 6.

    ii. Commission Determination

    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.

    d. Reasonable Efforts Standard and Firm Study Deadlines i. Comments

    315. Generation Developers and NextEra advocate elimination of the “reasonable efforts” standard as a way to improve study timeliness,573 the result of which would be to impose firm study deadlines Generation Developers state that, even with the new reporting requirement, transmission providers still have no obligation or incentives to meet the study deadline in their LGIPs.574

    573 Generation Developers 2017 Comments at 33-34; NextEra 2017 Comments at 27.

    574 Generation Developers 2017 Comments at 33-34.

    316. Several commenters prefer to retain the ability of transmission providers to use “reasonable efforts” to complete interconnection studies.575 According to Imperial, numerous factors affect timely study completion, and preserving the reasonable efforts standard, while imposing these new reporting requirements, will afford transmission providers the requisite flexibility to account for study delays beyond their control.576 NYISO states that, in its experience, interconnection customer non-responsiveness and inaccuracy interferes with its ability to perform timely interconnection studies. NYISO also notes that it must coordinate with all affected systems. NYISO states that, given these factors and other unique project complexities, the Commission should continue to evaluate interconnection study completion in accordance with the reasonable efforts standard.577

    575 Bonneville 2017 Comments at 6; Duke 2017 Comments at 15-16; Imperial 2017 Comments at 19; NYISO 2017 Comments at 33-34.

    576 Imperial 2017 Comments at 20.

    577 NYISO 2017 Comments at 33-34.

    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.578 PG&E and Indicated NYTOs oppose establishment of fixed study deadlines.579 Indicated NYTOs argue that imposing artificial deadlines can lead to prematurely completed studies that do not fully investigate all reliability issues, which could result in transmission owners having to pay for later-identified upgrades.580

    578 TVA 2017 Comments at 12.

    579 Indicated NYTOs 2017 Comments at 10-11; PG&E 2017 Comments at 6-7.

    580 Indicated NYTOs 2017 Comments at 11.

    318. TDU Systems urge the Commission to consider adding a tolling provision to relevant provisions of the pro forma OATT because hard deadlines can be a “two-edged sword” for interconnection customers. Thus, they urge the Commission to toll the deadlines during periods when the transmission provider is responding to questions from the interconnection customer concerning study methods or results. TDU Systems contend that this will ensure that the deadline does not serve as a reason for the transmission provider to refuse to respond to legitimate questions from the interconnection customer.581

    581 TDU Systems 2017 Comments at 21-22.

    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.582 APS suggests that the Commission could better address queue delays by empowering transmission providers to set a default timeframe for study completion that is tiered based on specific factors, such as size, location, presence of affected systems, or expected amount of upgrades.583 APS asserts that, if the Commission determines that an interconnection customer needs additional details about a request's study progress, the best solution is a requirement that the transmission provider coordinate more closely with the interconnection customer.584

    582 APS 2017 Comments at 5; Bonneville 2017 Comments at 6.

    583 APS 2017 Comments at 4.

    584 APS 2017 Comments at 4-5.

    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 pro forma LGIP.585 ISO-NE states that, alternatively, the Commission should allow regional flexibility for ISO-NE to evaluate and revise the timeframes to more realistically reflect the time that it takes to complete interconnection studies.586

    585 ISO-NE Comments at 35.

    586Id. at 36.

    321. CAISO opposes the interconnection study reporting requirement proposal as applied to CAISO and other transmission providers with firm study deadlines.587 CAISO states that its interconnection procedures and transmission planning process are coordinated such that one process informs the other and that this linkage necessitates timely interconnection study completion.588 As such, CAISO asserts, its transmission owners complete studies on a timely basis, and it already publishes detailed study process schedules for each queue cluster on its public website.589 CAISO requests that the Commission clarify that this proposal is limited to those transmission providers and owners whose tariffs do not have firm study deadlines.590

    587 CAISO 2017 Comments at 21.

    588Id. at 22.

    589Id. (citing https://www.caiso.com/planning/Pages/GeneratorInterconnection/Default.aspx).

    590Id.

    ii. Commission Determination

    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 591 is that each interconnection study conducted per an interconnection request have a specific amount of time determined as appropriate for completion under the reasonable efforts standard, we note that ISO-NE has tariff-prescribed timeframes that are designed to apply to most interconnection requests.

    591 ISO-NE 2017 Comments at 35.

    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.

    e. Challenges in Calculating Reported Metrics i. Comments

    327. Southern states that there are too many potential clock resets and restudies to result in any meaningful metrics.592 It does not see the value of using withdrawal metrics and considers average study cost to be a more meaningful metric than aggregating the total number of employee and third-party consultant hours.593 TVA asserts that, for the proposed metrics to be useful, there would need to be consistent definitions of start and stop times for each study phase and ways to adjust for customer‐caused delays.594

    592 Southern 2017 Comments at 23.

    593Id.

    594 TVA 2017 Comments at 12-13.

    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.595

    595 ISO-NE 2017 Comments at 36 (citing Preventing Undue Discrimination and Preference in Transmission Service, Order No. 890, FERC Stats. & Regs. ¶ 31,241, at P 747, order on reh'g, Order No. 890-A, FERC Stats. & Regs. ¶ 31,261 (2007), order on reh'g, Order No. 890-B, 123 FERC ¶ 61,299 (2008), order on reh'g, Order No. 890-C, 126 FERC ¶ 61,228, order on clarification, Order No. 890-D, 129 FERC ¶ 61,126 (2009) (clarifying that the 60-day due diligence period starts on the date the transmission study agreement is executed, unless the transmission provider and the customer agree on an alternative day for the transmission provider to begin the study, and explaining that, while the transmission provider and customer may not alter the length of the study period, they can mutually agree as to the day on which the study begins)).

    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.596

    596Id. at 39.

    330. PG&E requests clarification as to the application of the Commission's proposed metrics.597 PG&E states that it is unclear whether they would apply to material modification applications, to cluster studies only, or also to Fast Track, repowering, and in-service date studies.598

    597 PG&E 2017 Comments at 7.

    598Id.

    ii. Commission Determination

    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 pro forma tariff. These date ranges are clearly defined, and the period between the executed study agreement and the study completion date reflects the amount of time to complete a study after the study's terms are formally agreed upon. Some regions may experience significant delays in beginning a study after study agreements are signed; in these instances, metrics based on a transmission provider's performance once a study is begun—which could be long after executing the study agreement—would not be as informative and useful as the Commission's adopted metrics.

    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.

    6. Improving Coordination With Affected Systems a. NOPR Request for Comments

    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 pro forma LGIP requires the transmission provider to coordinate the conduct of any studies required to determine the impact of an interconnection request on affected systems with the affected system operators. The transmission provider should also, if possible, include those results in the applicable interconnection study. Because the affected system operator is not bound by the terms of the interconnection transmission provider's LGIP, its process and schedule may differ from the transmission provider's processing of the interconnection request. In Order No. 2003, the Commission explained that:

    [a]lthough the owner or operator of an Affected System is not bound by the provisions of the . . . LGIP or LGIA, the Transmission Provider must allow any Affected System to participate in the process when conducting the Interconnection Studies, and incorporate the legitimate safety and reliability needs of the Affected System.599

    599 Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 121.

    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.600 Often, however, transmission providers will not proceed without receiving reliability-related analysis from any affected systems. AWEA raised the issue of affected system impacts in its petition,601 and the Commission discussed the issue at the 2016 Technical Conference.

    600Id. On rehearing, the Commission clarified that delays by an affected system in performing interconnection studies or providing information for such studies is not an acceptable reason to deviate from the timetables established in Order No. 2003 unless the interconnection itself (as distinct from any future delivery service) will endanger reliability. See Order No. 2003-A, FERC Stats. & Regs. ¶ 31,160 at P 114.

    601 Petition at 31.

    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.602 The Commission reiterated, however, that a transmission provider must allow any affected system to participate in the interconnection study process and must incorporate the affected system's legitimate safety and reliability needs.603

    602 Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 121.

    603Id. PP 120-121.

    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.604 The Commission further posited that clear procedures and timelines regarding the affected system's study of a proposed interconnection memorialized in a Commission-approved affected systems analysis agreement could ameliorate delays caused by the affected systems coordination process.

    604 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 158.

    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 (e.g., conducting a technical conference or workshop focused on improving issues that arise when affected systems are impacted).

    b. Comments

    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.

    c. Commission Determination

    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.

    C. Enhancing Interconnection Processes

    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.

    1. Requesting Interconnection Service Below Generating Facility Capacity a. NOPR Proposal

    343. The Commission proposed to modify the pro forma LGIP to allow interconnection customers to request interconnection service that is lower than full generating facility capacity,605 recognizing the need for proper control technologies and penalties to ensure that the generation facility does not inject energy above the requested level of service.606 The Commission also requested comment on whether, instead of such pro forma LGIP revisions, such interconnection requests should be processed on an ad hoc basis.607

    605 The term generating facility capacity means “the net capacity of the Generating Facility and the aggregate net capacity of the Generating Facility where it includes multiple energy production devices.” Pro forma LGIA Art. 1.

    606 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 167-68.

    607Id. P 173.

    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.608

    608Id. P 168.

    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.609 Finally, the Commission proposed changes to the definitions of “Large Generating Facility” and “Small Generating Facility” in the pro forma LGIP and pro forma LGIA so that they are based on the level of interconnection service for the generating facility rather than the generating facility capacity.610

    609Id. P 169.

    610Id. P 172.

    347. Consistent with the proposals above, the NOPR proposed to add the following new paragraph at the end of section 3.1 of the pro forma LGIP (with proposed new text in italics):

    The Transmission Provider shall have a process in place to consider requests for Interconnection Service below the Generating Facility Capacity. These requests for Interconnection Service shall be studied at the level of Interconnection Service requested for purposes of Interconnection Facilities, Network Upgrades, and associated costs, but may be subject to other studies at the full Generating Facility Capacity to ensure safety and reliability of the system, with the study costs borne by the Interconnection Customer. Any Interconnection Facility and/or Network Upgrade costs required for safety and reliability also would be borne by the Interconnection Customer. Interconnection Customers may be subject to additional control technologies as well as testing and validation of those technologies consistent with article 6 of the LGIA. The necessary control technologies and protection systems as well as any potential penalties for exceeding the level of Interconnection Service established in the executed, or requested to be filed unexecuted, LGIA shall be established in Appendix C of that executed, or requested to be filed unexecuted, LGIA. 611

    611Id. P 174. In this final action, the adopted language differs slightly from the NOPR language because we remove the word “the” before “Transmission Provider.”

    348. The NOPR proposed to add the following language to the end of section 6.3 of the pro forma LGIP (with proposed new text in italics):

    Transmission Provider shall study the interconnection request at the level of service requested by the interconnection customer, unless otherwise required to study the full Generating Facility Capacity due to safety or reliability concerns. 612

    612Id. P 175.

    349. The NOPR proposed to insert the following language in section 7.3 of the pro forma LGIP in line 8 of the second paragraph (with proposed new text in italics):

    For purposes of determining necessary interconnection facilities and network upgrades, the System Impact Study shall consider the level of interconnection service requested by the Interconnection Customer, unless otherwise required to study the full Generating Facility Capacity due to safety or reliability concerns. 613

    613Id. P 176.

    350. The NOPR proposed to add the following language to the end of section 8.2 of the pro forma LGIP (with proposed new text in italics):

    The Facilities Study will also identify any potential control equipment for requests for Interconnection Service that are lower than the Generating Facility Capacity. 614

    614Id. P 177.

    351. The NOPR proposed to add the following language to Appendix 1, Item 5, of the pro forma LGIP, as sub-item h (with proposed new text in italics):

    Requested capacity (in MW) of Interconnection Service (if lower than the Generating Facility Capacity). 615

    615Id. P 178.

    352. Lastly, the NOPR proposed to change the definition of “Large Generating Facility” and “Small Generating Facility” in section 1 of the pro forma LGIP and article 1 of the pro forma LGIA as follows (proposed to delete the bracketed text and add the italicized text):

    Large Generating Facility shall mean a Generating Facility for which an Interconnection Customer has [having a Generating Facility Capacity] requested Interconnection Service of more than 20 MW.

    Small Generating Facility shall mean a Generating Facility for which an Interconnection Customer has requested Interconnection Service [that has a Generating Capacity] of no more than 20 MW.616

    616Id. P 179.

    b. General i. Comments

    353. Most responsive commenters support the proposal.617 Alevo states that electric storage facilities may not plan to use the maximum power rating of their facilities; therefore, they should have the ability to request interconnection service at the power rating of their choice.618 NextEra also argues that rejecting requests for interconnection below full generating facility capacity can result in paying for unneeded interconnection facilities and network upgrades.619

    617 Alevo 2017 Comments at 8; AFPA 2017 Comments at 3; AWEA 2017 Comments at 52; Bonneville 2017 Comments at 7; CAISO 2017 Comments at 27; California Energy Storage Alliance 2017 Comments at 6; Joint Renewable Parties 2017 Comments at 12; ELCON 2017 Comments at 7; ESA 2017 Comments at 8.

    618 Alevo 2017 Comments at 8.

    619 NextEra 2017 Comments at 34-35 (citing NOPR, FERC Stats. & Regs. ¶ 32,719 at P 167).

    354. A number of commenters see benefits to the proposal. Several commenters see the potential for lower costs.620 AFPA and the Public Interest Organizations assert that allowing for interconnection service below capacity will improve the efficiency and fairness of the interconnection process and enhance reliability.621 ESA agrees, adding that the proposal will allow interconnection customers to request service that reflects a given resource's intended operation.622 ESA and AFPA contend that the proposal will remove undue discrimination toward highly controllable or unique resources, such as electric storage resources or combined heat and power, in interconnection processes.623 ESA further argues that the proposal will facilitate market entry of electric storage resources by eliminating excessive costs and will allow electric storage resources to use spare interconnection service to repower existing conventional generators or firm the deliveries of variable generators.624

    620 AFPA 2017 Comments at 14; Public Interest Organizations 2017 Comments at 5-8; ELCON 2017 Comments at 7; ESA 2017 Comments at 8; IECA 2017 Comments at 3.

    621 AFPA 2017 Comments at 14; Public Interest Organizations 2017 Comments at 5-8; MidAmerican 2017 Comments at 17.

    622 ESA 2017 Comments at 8.

    623Id.; AFPA 2017 Comments at 14.

    624 ESA 2017 Comments at 10.

    355. AWEA states that developers of new technologies have an interest in requesting interconnection service at levels below generating facility capacity.625 It notes that wind turbine manufacturers often make minor upgrades to equipment or software to increase capacity, and these upgrades sometimes occur during the pendency of an interconnection request. As a result, the final generating facility capacity may be greater than what was originally specified in the interconnection request. AWEA argues that in such cases, the interconnection customer may prefer to avoid seeking an increase in interconnection service because increasing the generating facility capacity may constitute a material modification that triggers the need for a restudy.626 AWEA further argues that allowing an interconnection customer to increase its capacity without increasing its requested level of interconnection service and without it being considered a material modification would promote more efficient operation of wind plants.627 AWEA states that allowing interconnection service at levels below generating facility capacity would benefit wind facilities due to the collector system losses that occur, as the output of the multiple turbines at a wind farm are aggregated before injection to the grid. According to AWEA, these losses result in the maximum real power output at the point of interconnection being measurably lower than the combined generating facility capacity of the individual units.628

    625 AWEA 2017 Comments at 52.

    626Id. at 52-53.

    627Id. at 52-53.

    628Id. at 53-54.

    356. ESA and NextEra also point out that, in Order No. 792, the Commission revised the pro forma SGIP to allow small generating facilities to attain interconnection service below installed capacity, if the interconnection customer installs acceptable control technologies to avoid violating injection limits; thus, it would be inconsistent to not allow the same for large generating facilities.629

    629 ESA 2017 Comments at 11 (citing Order No. 792, 145 FERC ¶ 61,159 at P 230); NextEra 2017 Comments at 37.

    357. ELCON, ESA, and NextEra also note that the proposal will reduce the overbuilding of interconnection facilities and network upgrades.630 According to Industrial Energy Consumers of America, this reform should also increase existing asset utilization and improve the accuracy and reliability of interconnection studies.631 MidAmerican argues that the proposal may reduce late-stage withdrawals from the queue by allowing interconnection customers to operate at reduced output levels rather than requiring network upgrades that would otherwise render them non-viable.632 NEPOOL suggests that the proposal provides options and flexibility for market participants and could facilitate market entry of new resources.633

    630 ESA 2017 Comments at 8; ELCON 2017 Comments at 7; NextEra 2017 Comments at 35.

    631 IECA 2017 Comments at 3.

    632 MidAmerican 2017 Comments at 17.

    633 NEPOOL 2017 Comments at 14-15.

    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.634 It further argues that the transmission operator is unaffected so long as the interconnection request studies the correct capacity and the generating facility never exceeds that capacity.635 ELCON also notes that the proposal would provide benefits for industrial co-generators or other behind-the-meter industrial generation.636

    634 CAISO 2017 Comments at 27.

    635Id.

    636 ELCON 2017 Comments at 7.

    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.637 ESA and NextEra offer examples of where interconnection service lower than installed capacity is already occurring without reliability problems.638 ESA provides examples in CAISO, MISO, and PJM, where it believes projects have been sized to allow greater generation deliveries over time, but where the facilities (including one that combines solar and storage) never deliver at maximum output.639

    637 CAISO 2017 Comments at 27; MISO 2017 Comments at 33; PJM 2017 Comments at 23-24; NEPOOL 2017 Comments at 14-15.

    638 ESA 2017 Comments at 10-11; NextEra 2017 Comments at 36.

    639 ESA 2017 Comments at 10-11.

    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.640 PG&E notes that various projects have made such requests, particularly solar resources.641

    640 CAISO 2017 Comments at 27; PG&E 2017 Comments at 7 (citing CAISO Business Practice Manual for Generator Management, Section 6.5.4.1).

    641 PG&E 2017 Comments at 7.

    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.642

    642Id.

    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.643 MISO notes that the additional limiting language gives the transmission owner and MISO the right to enforce the limit.644 Similarly, NextEra explains that MISO has allowed it to amend an existing interconnection agreement to reflect an increase in the rating of a wind generation project without an increase in the level of interconnection service provided.645

    643 MISO 2017 Comments at 33.

    644Id.

    645 NextEra 2017 Comments at 36-37.

    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.646 PJM explains that these studies allow PJM to specify the system protections necessary in the event of system contingencies.647 NextEra states that PJM has allowed a wind generator to install capacity in excess of the level of interconnection service in the agreement.648

    646 PJM 2017 Comments at 24.

    647Id.

    648 NextEra 2017 Comments at 36-37.

    364. ISO-NE states that it supports the proposal and has already implemented a similar process under its existing interconnection procedures.649 Similarly, NEPOOL states that interconnection customers in ISO-NE can already request an amount of interconnection service less than generating facility capacity at the time of the interconnection request or before beginning the system impact study.650 NEPOOL notes that if a generating facility consists of multiple generating units, ISO-NE would need to study a number of possible output combinations, which could increase study costs and timelines but could also potentially reduce upgrade requirements.651 NEPOOL states that ISO-NE studies such requests at the requested below-generating facility capacity amount, and the interconnection customer must explain how it will limit output of its facility to that level.652

    649 ISO-NE 2017 Comments at 40.

    650 NEPOOL 2017 Comments at 15.

    651 NEPOOL 2017 Comments at 15.

    652Id.

    365. Non-Profit Utility Trade Associations, NYISO, and SEIA do not object to the proposal.653 Portland generally supports this proposal, but states that there are potential queue and reliability impacts.654 TVA argues that the proposal imposes an undesirable monitoring and mitigation burden on transmission system operators, and that the necessary protective systems introduce undesirable reliability challenges.655 Southern expresses concern that interconnection customers could take advantage of this proposal to avoid costly network upgrades.656 EEI requests that the Commission ensure that any revisions to the pro forma LGIA or LGIP provide clear requirements for interconnection customers.657 Non-Profit Utility Trade Associations recommend establishing NERC reliability standards for interconnection customers operating at levels below their rated capacity, which would constrain them to the rating at which their generation was studied.658

    653 Non-Profit Utility Trade Associations 2017 Comments at 4, 21-22; NYISO 2017 Comments at 36; SEIA 2017 Comments at 21.

    654 Portland 2017 Comments at 6.

    655 TVA 2017 Comments at 14-16.

    656 Southern 2017 Comments at 25.

    657 EEI 2017 Comments at 54; NYISO 2017 Comments at 36.

    658 Non-Profit Utility Trade Associations 2017 Comments at 24.

    366. In response to the Commission's question in the NOPR regarding whether, instead of revising the pro forma LGIP, such interconnection requests should be processed on an ad hoc basis,659 ESA states that an ad hoc basis for considering interconnection requests below cumulative installed capacity does not provide sufficient certainty to interconnection customers seeking interconnection service below a resource's installed capacity.660 NextEra agrees, arguing that an ad hoc approach could lead to arbitrary and potentially unduly discriminatory results.661

    659 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 173.

    660 ESA 2017 Comments at 11.

    661 NextEra 2017 Comments at 37-38.

    ii. Commission Determination

    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 pro forma LGIP to allow interconnection customers to request interconnection service that is lower than full generating facility capacity, recognizing the need for proper control technologies and penalties to ensure that the generating facility does not inject energy above the requested level of service.662 We also withdraw the proposal to revise the definitions of “Large Generating Facility” and “Small Generating Facility” in the pro forma LGIA so that they are based on the level of interconnection service for the generating facility rather than the generating facility capacity, and make certain clarifications, as discussed further below.

    662 We are therefore not pursuing the alternative, ad hoc approach to interconnections below generating facility capacity, about which the NOPR sought comment.

    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 pro forma LGIA, provide the desired flexibility for interconnection customers while allowing transmission providers to ensure reliability.

    370. The reforms adopted here are consistent with existing provisions of the pro forma LGIA. Article 6 of the pro forma LGIA provides transmission providers with broad ability to test and inspect or require the testing and inspection of interconnection facilities and network upgrades. Articles 7 and 8 of the pro forma LGIA provide a similarly broad ability to transmission providers with respect to metering and communications requirements relevant to interconnection. All of these existing provisions would apply to interconnection requests that are below generating facility capacity, just as they do to other interconnection requests, and they would thus help ensure that the necessary control technologies for limiting injection adhere to transmission provider requirements.

    371. Most importantly, article 9 of the pro forma LGIA describes both the transmission provider's and the interconnection customer's obligations with respect to operations of the interconnection facilities and network upgrades and, in particular, defines system protection facilities to include “the equipment, including necessary protection signal communications equipment, required to protect the transmission provider's transmission system from faults or other electrical disturbances occurring at the generating facility.” 663 Article 9.7.4.1 of the pro forma LGIA requires the interconnection customer to pay for the installation, operation, and maintenance of system protection facilities associated with its interconnecting generating facility. We find that the necessary control technologies for limiting injection discussed in the NOPR are a subset of the system protection facilities that transmission providers are empowered to require and all interconnection customers are required to pay for under article 9.7.4.1 of the pro forma LGIA.

    663 LGIA Art. 1 (Definitions) (emphasis added).

    372. We note that nothing in article 9.7.4.1 of the pro forma LGIA prevents interconnection customers from proposing system protection facilities to limit their injection rights to meet the transmission provider's requirements. Therefore, this aspect of the final action makes those interconnection customer rights explicit, while still preserving the transmission provider's ability to ensure system protection under the existing pro forma LGIA provisions. Commenters have not argued that these broad, existing authorities are insufficient in the context of interconnection requests operating below full generating facility capacity.

    373. Furthermore, article 5.9 of the pro forma LGIA permits an interconnection customer to request the study and, if appropriate, subsequent use of, a lower level of interconnection service, termed “limited operation,” in cases where the transmission provider's interconnection facilities or network upgrades are not reasonably expected to be completed prior to the commercial operation date of the generating facility. While this existing LGIA provision is intended to permit temporary operation at below generating facility capacity, the fact that entities have successfully made use of this provision demonstrates that there should not be anything inherently unworkable about the concept of interconnection below generating facility capacity. Therefore, we find that this final action does not adversely impact transmission providers' ability to ensure reliable interconnection consistent with good utility practice.

    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 pro forma LGIA, which apply to all interconnection customers, adequately ensure that below-generating facility capacity interconnection customers do not exceed the limits for which they are studied.

    c. Study Assumptions and Modeling i. Comments

    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.664

    664 AWEA 2017 Comments at 54; ESA 2017 Comments at 12; NextEra 2017 Comments at 40-41.

    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.665 NextEra argues that requiring studies at full generating facility capacity would “undermine the very goal of the Commission's proposed reforms.” 666

    665 ESA 2017 Comments at 12.

    666 NextEra 2017 Comments at 39.

    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.667 NYISO asserts that these evaluations are necessary to ensure that the mechanism does not impact the resource's ability to reliably interconnect to the New York state transmission system or distribution system and that, in the event that the mechanism fails, there are no adverse short circuit impacts.668

    667 NYISO 2017 Comments at 36.

    668Id.

    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.669 However, if a transmission provider decides to perform thermal studies at the full generating facility capacity rating, then NextEra suggests tariff language stating that those study costs should be borne by the transmission provider and be outside the normal queue timeframe.670 NextEra adds that a transmission provider should be able to refuse to grant the requested lower level of interconnection service just as it could refuse to proceed with an interconnection request, subject to dispute resolution, if a customer objects to a system protection facility proposed by the transmission provider.671

    669 ESA 2017 Comments at 12-13; NextEra 2017 Comments at 40.

    670Id. at 41.

    671Id. at 41.

    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.672 Duke goes further, stating that system impact studies and facilities studies should use full generating facility capacity for reliability reasons.673

    672 Bonneville 2017 Comments at 7; Non-Profit Utility Trade Associations 2017 Comments at 4, 21-22.

    673 Duke 2017 Comments at 19.

    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.674 EEI is not aware of any protection system that would eliminate the need to study the full generating facility capacity and therefore doubts that the proposal would reduce costs.675

    674 TDU Systems 2017 Comments at 27-28.

    675 EEI 2017 Comments at 55.

    381. ITC and Six Cities support the NOPR proposal that the costs of all additional studies should be borne by the interconnection customer.676

    676 ITC 2017 Comments at 18, Six Cities 2017 Comments at 5.

    382. SoCal Edison takes a middle view, stating that the necessary studies would depend on the specifics of each interconnecting project.677 It states that, based on its experience, the cost to study a generating facility at less than its full capacity is either the same as or higher than a regular process.678 SoCal Edison suggests that dual technologies (e.g., solar coupled with energy storage) will require more study time than normal,679 and would actually have higher study costs, despite the fact that the output is limited, as two or three different scenarios would need to be evaluated for stability and post-transient voltage performance.680

    677 SoCal Edison 2017 Comments at 7.

    678Id.

    679Id.

    680Id.

    ii. Commission Determination

    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 (e.g., steady-state, short circuit/fault duty, and dynamic stability analysis) will be performed at which generating facility capacity level.

    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.

    d. Limits on Energy Injection/Monitoring/Control i. Comments

    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.681 Most agree that such tools are available, though there is wide variation in suggested implementation. For example, Portland agrees that sufficient mechanical and electronic tools exist that can restrain an interconnection customer from operating above its allowed service level, and also that transmission providers should establish such arrangements.682

    681 AFPA 2017 Comments at 14; ESA 2017 Comments at 12; AWEA 2017 Comment at 54; California Energy Storage Alliance 2017 Comments at 5-6; PJM 2017 Comments at 24; Duke 2017 Comments at 18-19; EEI 2017 Comments 2017 at 54; TDU Systems 2017 Comments at 27-28.

    682 Portland 2017 Comments at 7.

    388. AWEA notes that programmable meters and other technologies that allow plant operators to self-curtail are widely available,683 and ESA and NextEra state that wind and solar projects already use software control systems and inverters to modulate their output, and that equipment failure is rare.684

    683 AWEA 2017 Comments at 54.

    684 ESA 2017 Comments at 12, NextEra 2017 Comments at 39.

    389. CAISO states that exceeding studied interconnection capacity can result in serious safety and reliability risks to the grid and the generator itself.685 It argues that it is more critical to have tested and well-maintained protection schemes that enforce these limits and operate circuit breakers to disconnect the generator from the transmission system than an interconnection customer's contractual commitment to do so.686 CAISO supports strict enforcement of interconnection capacity limits, including opening breakers as enforcement and, if needed, terminating LGIAs.687 NYISO also states that it and the connecting transmission owner should be able to take action as necessary to maintain reliability—e.g., the ability to curtail the resource.688 Non-Profit Utility Trade Associations note that control equipment ensuring appropriate power flows is a critical reliability feature.689

    685 CAISO 2017 Comments at 27.

    686Id.

    687Id.

    688 NYISO 2017 Comments at 36-37.

    689 Non-Profit Utility Trade Associations 2017 Comments at 22.

    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.690 ISO-NE argues that any control equipment proposed to restrict the generating facility's output to the requested interconnection service levels must be identified in the project description at the beginning of the study process.691

    690 PJM 2017 Comments at 24-25.

    691 ISO-NE 2017 Comments at 41-42.

    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.692

    692 SoCal Edison 2017 Comments at 6.

    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.693 MISO TOs, Duke and TDU Systems state that the interconnection customer should be obliged to install or pay for the necessary control technologies.694

    693 Non-Profit Utility Trade Associations 2017 Comments at 4, 21-22.

    694 MISO TOs 2017 Comments at 36; Duke 2017 Comments at 18-19; TDU Systems 2017 Comments at 27-28.

    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.695 NextEra also argues that, if a malfunction were to occur, protective relay controls could be installed that manually trip breakers when output levels exceed specified levels at the point of interconnection, establishing a secondary and redundant control mechanism.696

    695 NextEra 2017 Comments at 40.

    696Id. n.26.

    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.697 MidAmerican sees no clear reason why resources having interconnection service at levels below their full output should be singled out for special hardware or software requirements. Further, it argues that the Commission's proposal for “provisional” service appears functionally equivalent to operating a generating facility for a period of time below its rated generating facility capacity, yet the proposal for provisional service makes no mention of special hardware or software schemes.698

    697 MidAmerican 2017 Comments at 18.

    698Id.

    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.699 Similarly, for inverter-based resources, California Energy Storage Alliance asks the Commission not to impose a requirement for burdensome and expensive protection equipment that may duplicate similar utility equipment.700

    699 Xcel 2017 Comments at 17.

    700 California Energy Storage Alliance 2017 Comments at 5-6.

    ii. Commission Determination

    396. As discussed above, we find that the revisions and clarifications in this rulemaking coupled with existing provisions of the pro forma LGIA adequately address the Commission's proposal to require that any interconnection customer that seeks interconnection service below its generating facility capacity install appropriate monitoring and control technologies at its generating facility. We agree with ISO-NE's argument that any control technologies proposed by the interconnection customer to restrict the generating facility's output to the requested interconnection service levels must be identified in the project description at the beginning of the study process. We clarify that we see no reason to preclude a customer from relying on the transmission provider to identify protection and control technologies in the first instance. Indeed, as discussed earlier, the existing system protection facilities provisions in the pro forma LGIA already allow the transmission provider to identify and require the installation of appropriate system protection facilities.701

    701 As discussed earlier, any protection and control technologies necessary to restrict the generating facility's output to the requested interconnection service levels would be components of the system protection facilities associated with that generating facility's interconnection.

    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 pro forma LGIP and pro forma LGIA require transmission providers to make such engineering judgments consistent with good utility practice.

    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 pro forma LGIA article 9.7.4.1, which already directly assigns these costs to the interconnection customer.

    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.702 We appreciate these points, and note further that many generators of various types interconnected under ERIS may have the technical capability to generate beyond the level to which they are limited by the terms of their LGIAs providing for ERIS. However, we note that article 9.7.4.1 of the pro forma LGIA already generally allows a transmission provider to require appropriate control technologies for limiting injection from interconnection customers. The revisions to sections 3.1 and 8.2 of the pro forma LGIP that we adopt here with regard to control technologies serve to make such provisions explicit in the pro forma LGIP in the case where interconnection service is requested below generating facility capacity, in recognition of the fact that, in such instances, the generating facility may be coordinating output from multiple generating facilities, and may therefore have unique control characteristics and challenges.

    702 NextEra 2017 Comments at 45.

    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, and that it should make such determinations in a manner that is not unduly discriminatory or preferential.

    e. Process for Changing an Interconnection Request i. Comments

    401. As discussed further below, in the pro forma LGIP, interconnection customers are allowed to reduce the level of their generating facility capacity at two points: prior to the system impact study and prior to the facilities study. Commenters suggest that the Commission should consider provisions to allow customers to also request reduced interconnection service at varying points through the interconnection process, though they do not necessarily agree on the details. For example, AWEA and EEI argue that, if an interconnection customer wishes to change service levels at a later time, the interconnection customer should be required to submit an additional interconnection request for the new level of service unless the new level of service was previously studied.703

    703 AWEA 2017 Comments at 54-55; EEI 2017 Comments at 54.

    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.704 Southern further states that an interconnection customer's request to modify the interconnection service amount to less than the generating facility capacity should constitute a material modification to its interconnection request.705 In a related vein, NEPOOL states that some of its participants want flexibility for the interconnection customer. They request that the customer be able to base necessary upgrades on either a smaller generating facility that has been approved as non-material or based on an agreement to limit the generating facility output below the originally requested service. They argue that the customer should be able to do this once studies have started or after studies are completed and the transmission provider has provided estimates regarding upgrade costs, all without losing queue position.706 NEPOOL contends that some developers might consider particularly high upgrade costs unacceptable, which could result in more queue withdrawals if interconnection customers cannot reduce their requested generating facility capacity without losing their queue position.707 NEPOOL states that, in some cases even a small reduction in the requested amount of interconnection service can significantly reduce interconnection upgrade costs and make projects viable.708 NEPOOL requests that the final action clarify when interconnection customers can reduce their requested level of interconnection service and provide guidance on the appropriateness of affording any flexibility to reduce capacity for purposes of determining upgrades after interconnection studies have started or are complete.709

    704 Idaho Power 2017 Comments at 5; Portland 2017 Comments at 6; Southern 2017 Comments at 25.

    705Id. at 25-26.

    706 NEPOOL 2017 Comments at 15.

    707Id.

    708Id. at 15-16.

    709Id. at 16.

    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 (i.e., by delaying operation to the higher capacity until network upgrades have been funded by these projects).710 ITC goes further, arguing that, where a generator has already executed an LGIA, a request for reduced generating facility capacity could undermine the study assumptions for lower-queued projects, and therefore, the Commission should permit transmission providers to deny requests for reduced service where granting such a request would cause cascading adverse impacts.711

    710 Idaho Power 2017 Comments at 5.

    711 ITC 2017 Comments at 18-19.

    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.712 They state that there could be instances where a generation-limited entity may wish to increase its output as a result of subsequent interconnection customers that fund network upgrades that increase system capabilities. They indicate that, in such instances, the upgrade users, including the generation-limited entity, should share the costs to guard against gaming by entities that would attempt to “foist upgrade costs upon subsequent interconnecting entities.” 713

    712 Non-Profit Utility Trade Associations 2017 Comments at 4, 21-22.

    713Id. at 23.

    ii. Commission Determination

    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 pro forma LGIP to allow an interconnection customer to either request interconnection service below generating facility capacity at the outset or reduce its level of requested interconnection service at the same two points in the interconnection process, as set forth below. An interconnection customer may choose to do so if doing so is, in its business judgment, advantageous and if it is willing to abide by the limitations of interconnection service below generating facility capacity. Accordingly, as described further below, the Commission revises pro forma LGIP sections 4.4.1 and 4.4.2 to permit interconnection customers to reduce their requested level of interconnection service at the same points in the interconnection process as they are currently able to reduce their generating facility capacity. Specifically, this final action requires that interconnection customers can submit a request for interconnection service below generating facility capacity as its initial interconnection request, or may submit a request to reduce interconnection service below generating facility capacity at two points after the interconnection process has begun: (1) As a revision of its interconnection request prior to when the interconnection customer returns an executed system impact study agreement to the transmission provider; and (2) as a revision of its interconnection request prior to when the interconnection customer returns an executed facility study agreement to the transmission provider. These decision points are based on existing sections 4.4.1 and 4.4.2 of the pro forma LGIP.

    406. Section 4.4.1 of the pro forma LGIP allows interconnection customers to decrease the electrical output of the proposed project by up to 60 percent before the interconnection customer returns an executed system impact study agreement to the transmission provider.714 Additionally, section 4.4.2 of the pro forma LGIP allows customers to decrease the plant size by an additional 15 percent prior to the return of an executed facility study agreement.715 As originally written, these sections allow interconnection customers to reduce the generating facility capacity from that proposed in the original interconnection request (i.e., interconnection customers may request to build a smaller plant). In other words, as originally written, these sections do not allow for reductions in interconnection service (i.e., for interconnection customers to lower interconnection service levels without altering the size of the generating facility). However, with the appropriate transmission provider-approved control technologies in place, we see no reason why interconnection customers should not also have the option of reducing the level of interconnection service at these two stages of the interconnection process. Therefore, we revise pro forma LGIP sections 4.4.1 and 4.4.2 as follows (with new text in italics):

    714Pro forma LGIP Section 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; (b) modifying the technical parameters associated with the Large Generating Facility technology or the Large Generating Facility step-up transformer impedance characteristics; and (c) modifying the interconnection configuration. For plant increases, the incremental increase in plant output will go to the end of the queue for the purposes of cost allocation and study analysis.

    715Pro forma LGIP Section 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.

    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, through either (1) a decrease in plant size or (2) a decrease in interconnection service level (consistent with the process described in Section 3.1) accomplished by applying transmission provider-approved injection-limiting equipment; (b) modifying the technical parameters associated with the Large Generating Facility technology or the Large Generating Facility step-up transformer impedance characteristics; and (c) modifying the interconnection configuration. For plant increases, the incremental increase in plant output will go to the end of the queue for the purposes of cost allocation and study analysis.

    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 of electrical output of the proposed project through either (1) a decrease in plant size (MW) or (2) a decrease in interconnection service level (consistent with the process described in Section 3.1) accomplished by applying transmission provider-approved injection-limiting equipment, 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.

    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 pro forma LGIP already permits reductions in generating facility capacity at certain points in the interconnection process without triggering material modification provisions, the Commission finds that requests to reduce the interconnection service amount at those same points within the interconnection process should also not trigger material modification provisions. We also note that the phrase “additional 15 percent” is meant to allow a total of up to a 75 percent reduction (60 percent plus 15 percent) from the original interconnection request.

    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 pro forma LGIP already permits.

    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.

    f. Penalties i. Comments

    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 pro forma LGIA are sufficient.716 NextEra explains that in CAISO, their combined solar/battery storage project relies solely on the remedies provided for in the existing LGIA. According to NextEra, one other LGIA for a project in CAISO includes additional language about the ability to curtail, but it does not provide for penalties. NextEra notes that MISO has also taken a similar approach. NextEra states that PJM has added significant language to its interconnection agreements below full generating capacity but notes that this language repeats the pro forma indemnification responsibilities. NextEra and ESA also argue that any other financial penalties would be punitive and inconsistent with existing and reasonable practices in CAISO, MISO and PJM.717

    716 NextEra 2017 Comments at 43; NYISO 2017 Comments at 36-37; ESA 2017 Comments at 13; MidAmerican 2017 Comments at 18.

    717 NextEra 2017 Comments at 43; ESA 2017 Comments at 13.

    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.718 NextEra argues that, if the Commission creates any additional penalties, it would need to do so equally to all generation under all circumstances to avoid undue discrimination.719

    718 NextEra 2017 Comments at 45.

    719Id.

    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.720

    720 Xcel 2017 Comments at 17-18.

    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.721 MISO TOs support imposition of penalties for exceeding authorized levels of service but defer to RTOs/ISOs to develop the specifics of such penalties.722

    721 Bonneville 2017 Comments at 7; ITC 2017 Comments at 18; Duke 2017 Comments at 18; TDU Systems 2017 Comments at 27-28; Six Cities 2017 Comments at 5; SoCal Edison 2017 Comments at 6; Xcel 2017 Comment at 17; Portland 2017 Comments at 6.

    722 MISO TOs 2017 Comments at 36.

    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.723

    723 Six Cities 2017 Comments at 5.

    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.724 SoCal Edison suggests that penalties should range from temporary disruption of service to permanent termination of service.725

    724 SoCal Edison 2017 Comments at 6.

    725Id. at 6.

    ii. Commission Determination

    416. With respect to penalties, based on the record here, we find that current provisions in the pro forma LGIA, which allow a transmission provider to curtail service or terminate an LGIA, are sufficient to ensure proper behavior by interconnection customers. As noted by NextEra, thermal generation may be able to produce higher levels of output than the interconnection service level under certain conditions, such as lower than benchmark ambient air temperature, and does not face any additional penalty requirements beyond curtailment of service or termination of its LGIA for breach if a party defaults and fails to cure that default.726 The Commission agrees that this is an analogous situation to interconnection below generating facility capacity, and therefore the same treatment with respect to penalties should apply. Furthermore, as NextEra also notes, there are no special penalty requirements beyond these for the operation of system protection facilities. As discussed earlier, this final action finds that the control technologies at issue are system protection facilities. Based on these facts, we decline to generically adopt into the pro forma LGIP any additional financial penalties for exceeding the limitations for interconnection service established in the interconnection agreements. However, if a transmission provider can justify a need for additional penalties, it may propose such penalties in a section 205 filing.

    726 NextEra 2017 Comments at 45.

    417. As mentioned above, article 17 of the pro forma LGIA provides a process for termination of an LGIA if a party defaults 727 on its obligations and fails to cure such defaults. Given the potential reliability and operational ramifications, failure to adhere to the injection limits included in a below-generating facility capacity LGIA could rise to the level of default, and termination of the LGIA would be a serious consequence for an interconnection customer, as the resulting disconnection and idling of the generating facility could cause significant economic losses. Furthermore, existing article 9.7.2 of the LGIA allows the transmission provider to reduce deliveries from (i.e., curtail) an interconnection customer if required by good utility practice. Because of these existing provisions, and the fact that no other consequences currently apply in the analogous situations described above, we see no need to devise new penalties at this time.

    727 The pro forma LGIA defines default as “the failure of a Breaching Party to cure its Breach in accordance with Article 17.” Pro forma LGIA Art. 1 (Definitions). A breach is “the failure of a Party to perform or observe any material condition” of the pro forma LGIA. Id.

    g. Changes to the Definitions of Large and Small Generating Facilities i. Comments

    418. TDU Systems conditionally support the Commission's proposal to change the definitions of Large Generating Facility and Small Generating Facility in the pro forma LGIP and pro forma LGIA to base them on the level of interconnection service actually provided, rather than on the generating facility's capacity, subject to the transmission provider being able to study the full generating facility capacity if it believes there is a need to do so at the cost of the interconnection customer.728 However, TDU Systems urge the Commission to ensure that the interconnection customer (or potential interconnection customer) knows what upgrade costs it may incur if seeks to use the generating facility's full capacity.729

    728 TDU Systems 2017 Comments at 27.

    729Id.

    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.730 IECA indicates that a generator's size classification should be based on the maximum amount of power that could be exported to the grid under normal manufacturing operations at the combined heat and power and waste heat recovery facility location, rather than being based on net generation.731

    730 IECA 2017 Comments at 3.

    731Id. at 3-4.

    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.732 TVA thinks that the Commission should define generating facility capacity more specifically, particularly with regard to certain parameters such as what power factor is measured and whether it is gross or net of station service load.733 It also notes that many transmission owners and providers have MW thresholds that trigger more robust interconnection facility requirements, and states that interconnection for less than the full generator output should not be allowed to circumvent these thresholds.734

    732 Portland 2017 Comments at 7.

    733 TVA 2017 Comments at 15.

    734Id. at 15-16.

    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.” 735 Six Cities seeks clarity as to whether the current NERC compliance registration criteria for generating facilities will continue to be based on nameplate ratings irrespective of the requested level of interconnection service, or if the Commission intends for the registration criteria to be revised based upon the level of interconnection service that is requested and implemented.736

    735 Six City 2017 Comments at 7 (citing NOPR, FERC Stats. & Regs. ¶ 32,719 at P 180).

    736Id.

    ii. Commission Determination

    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.737 Our particular concern is the possibility of unintended and unforeseen consequences with respect to the interconnection study process and NERC compliance registration process.

    737 As a result of the withdrawal of this proposal, the determination of whether a generator is large or small, including for purposes of whether it qualifies for the LGIP or SGIP, will continue to be based on 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.

    2. Provisional Interconnection Service a. NOPR Proposal

    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.738

    738 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 186.

    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.739

    739Id. P 187.

    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.740

    740Id. P 188.

    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.741

    741Id.

    428. The Commission proposed to add the following new definitions to Section 1 of the pro forma LGIP, and to article 1 of the pro forma LGIA (with proposed additions in italics):

    Provisional Interconnection Service shall mean interconnection service provided by the Transmission Provider associated with interconnecting the Interconnection Customer's Generating Facility to the Transmission Provider's Transmission System and enabling that Transmission System to receive electric energy and capacity from the Generating Facility at the Point of Interconnection, pursuant to the terms of the Provisional Large Generator Interconnection Agreement and, if applicable, the Tariff.742

    742 In this final action, the adopted language differs slightly from the NOPR language because we remove the word “the” before “Transmission Provider.”

    Provisional Large Generator Interconnection Agreement shall mean the interconnection agreement for Provisional Interconnection Service established between the Transmission Provider and/or the Transmission Owner and the Interconnection Customer. This agreement shall take the form of the Large Generator Interconnection Agreement, modified for provisional purposes. 743

    743Id. P 189. In this final action, the adopted language differs slightly from the NOPR language because we remove the word “the” before “Transmission Provider.”

    429. Additionally, the Commission proposed a new article 5.10 for the pro forma LGIA that defines the requirements for transmission providers to provide provisional interconnection service and the responsibilities of the interconnection customer. The Commission did not propose a pro forma Provisional Large Generator Interconnection Agreement, reasoning that parties could develop such agreements on an ad hoc basis or transmission providers could establish their own pro forma agreements. Nonetheless, the Commission sought comment on the need to establish a pro forma Provisional Large Generator Interconnection Agreement as well as any details related to interconnection service. The proposed new article 5.10 to the pro forma LGIA reads as follows (with proposed text in italics):

    5.10 Provisional Interconnection Service.

    Upon the request of Interconnection Customer, and prior to completion of requisite Network Upgrades, the Transmission Provider may execute a Provisional Large Generator Interconnection Agreement or Interconnection Customer may request the filing of an unexecuted Provisional Large Generator Interconnection Agreement with the Interconnection Customer for limited interconnection service at the discretion of Transmission Provider based upon an evaluation that will consider the results of available studies. Transmission Provider shall determine, through available studies or additional studies as necessary, whether stability, short circuit, thermal, and/or voltage issues would arise if Interconnection Customer interconnects without modifications to the Generating Facility or Transmission Provider's system. Transmission Provider shall determine whether any Network Upgrades, Interconnection Facilities, Distribution Upgrades, or System Protection Facilities that are necessary to meet the requirements of NERC, or any applicable Regional Entity for the interconnection of a new, modified and/or expanded Generating Facility are in place prior to the commencement of interconnection service from the Generating Facility. Where available studies indicate that such Network Upgrades, Interconnection Facilities, Distribution Upgrades, and/or System Protection Facilities that are required for the interconnection of a new, modified and/or expanded Generating Facility are not currently in place, Transmission Provider will perform a study, at the Interconnection Customer's expense, to confirm the facilities that are required for provisional interconnection service. The maximum permissible output of the Generating Facility in the Provisional Large Generator Interconnection Agreement shall be studied and updated on a quarterly basis. Interconnection Customer assumes all risk and liabilities with respect to changes between the Provisional Large Generator Interconnection Agreement and the Large Generator Interconnection Agreement, including changes in output limits and Network Upgrades, Interconnection Facilities, Distribution Upgrades, and/or System Protection Facilities cost responsibilities. 744

    744Id. P 190.

    b. General i. Comments

    430. Most responsive commenters either support the proposal 745 or do not oppose it.746 ISO-NE, Tri-State, and TVA oppose the proposal.747 NEPOOL takes no position, but states that it would oppose the proposal if it raises system reliability concerns, introduces interconnection study delays, or degrades ISO-NE's interconnection/forward capacity market processes.748

    745 AES 2017 Comments at 11; Alevo 2017 Comments at 9; AFPA 2017 Comments at 15; AWEA 2017 Comments at 56; Bonneville 2017 Comments at 8; California Energy Storage Alliance 2017 Comments at 13; Duke 2017 Comments at 20; Forecasting Coalition 2017 Comments at 4; EDP 2017 Comments at 8; ELCON 2017 Comments at 7; ESA 2017 Comments at 15; Idaho Power 2017 Comments at 6; IECA 2017 Comments at 3; ITC 2017 Comments at 19; Joint Renewable Parties 2017 Comments at 12; MidAmerican 2017 Comments at 18-19; NextEra 2017 Comments at 46; Public Interest Organizations 2017 Comments at 6; TDU Systems 2017 Comments at 28-29; Xcel 2017 Comments at 18.

    746 Non-Profit Utility Trade Associations 2017 Comments at 24; NYISO 2017 Comments at 37; PJM 2017 Comments at 25.

    747 ISO-NE 2017 Comments at 43-44; Tri-State 2017 Comments at 9; TVA 2017 Comments at 16.

    748 NEPOOL 2017 Comments at 16-17.

    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.749 Alevo asks for clarification on whether a provisional interconnection can become permanent at the provisional MW level.750

    749 Alevo 2017 Comments at 9; ITC 2017 Comments at 19; MISO TOs 2017 Comments at 37-38; NextEra 2017 Comments at 46; PJM 2017 Comments at 25-26; and Six Cities 2017 Comments at 6.

    750 Alevo 2017 Comments at 9.

    432. As noted in the NOPR, certain regions already include some form of provisional interconnection service.751 Bonneville states that it already allows limited facility operation using existing interconnection capacity prior to the completion of upgrades needed for the full interconnection request.752 MISO states that its GIP includes a process for obtaining a provisional GIA that is subject to study and the maximum permissible output of the facility is updated on a quarterly basis. MISO notes that the provisional GIA is replaced by a “permanent” GIA upon the completion of the interconnection customer's assigned network upgrades.753 NYISO states that it already provides provisional interconnection service under the limited operation provision of NYISO's LGIA.754 However, Indicated NYTOs state that the Commission must ensure that any final action to accommodate provisional interconnection service does not diminish the superior interconnection standards in regions like NYISO.755

    751 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 183.

    752 Bonneville 2017 Comments at 8.

    753 MISO 2017 Comments at 34-35.

    754 NYISO 2017 Comments at 37.

    755 Indicated NYTOs 2017 Comments at 9.

    433. CAISO provides different avenues for “provisional” interconnection service.756 However, CAISO requests clarification regarding the NOPR statement that “in some cases, there is a certain amount of interconnection capacity that has already been studied.” 757 It argues that the only interconnection capacity that it has studied is already in use or planned to be in use soon. CAISO supports the proposal to the extent that the NOPR is consistent with this understanding.758 PG&E states that interconnection customers are able to obtain limited interconnection service prior to the completion of the full interconnection process in some circumstances, and CAISO conducts a limited operation study six months ahead of a project's in-service date and allows phased projects and energy-only projects to interconnect before certain upgrades or studies are completed.759

    756 CAISO 2017 Comments at 28.

    757Id. (citing NOPR, FERC Stats. & Regs. ¶ 32,719 at P 181).

    758Id.

    759 PG&E 2017 Comments at 8.

    434. SoCal Edison supports the existing CAISO process but argues that the NOPR proposal may unintentionally degrade safety and reliability.760 SoCal Edison states that, while interconnection capacity may be temporarily available due to construction delay, there is no assurance that short-circuit duty levels will be within allowable limits or that overall system performance would meet all NERC reliability criteria.761

    760 SoCal Edison 2017 Comments at 8.

    761Id.

    435. Eversource states that transmission providers should have discretion to determine whether there is capacity available to accommodate provisional interconnection service.762 It also states that any provisional process should be tailored, adapted to, and consistent with each region's existing interconnection and market rules.763

    762 Eversource 2017 Comments at 16.

    763Id.

    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.764 Southern agrees that all provisional service should be limited to the amount of service that can be provided until all required network upgrades identified by interconnection studies are in service.765

    764 EEI 2017 Comments at 57.

    765 Southern 2017 Comments at 26.

    437. ISO-NE opposes the establishment of provisional interconnection service, arguing that it would unnecessarily increase uncertainty and create difficult obligations for system operators.766 ISO-NE further argues that the proposal would allow an interconnection customer requesting provisional interconnection service to jump ahead of a higher-queued interconnection request and would require the transmission provider to conduct studies for the provisional interconnection request before completing a higher-queued project's studies.767 It states that, if the proposal is adopted, the Commission should provide regional flexibility for ISO-NE to deviate from the final action.768

    766 ISO-NE 2017 Comments at 43-44.

    767Id. at 45-46.

    768Id. at 47.

    ii. Commission Determination

    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 pro forma LGIP and article 1 of the pro forma LGIA; and add article 5.9.2 769 to the pro forma LGIA, as modified below. We require transmission providers to make the changes to their LGIPs and LGIAs so that all interconnection customers may request provisional interconnection service, but we modify the proposed pro forma LGIA provisions to allow transmission providers to determine the frequency for updating provisional interconnection studies, and to clarify the cost responsibilities of the interconnection customer.

    769 To avoid extensive renumbering of the article 5 of the pro forma LGIA, the Commission is re-titling article 5.9 “Other Interconnection Options.” Existing article 5.9 Limited Operation will now be article “5.9.1 Limited Operation,” and the newly adopted Provisional Interconnection Service provision will be article 5.9.2 instead of 5.10.

    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” 770 refers to situations where, for example, available studies or additional studies as necessary indicate that there is a certain amount of interconnection service available without the need for additional network upgrades and the transmission provider can reliably accommodate the interconnection service. In such cases, an interconnection customer may use the identified interconnection service while it awaits the completion of the full interconnection process.

    770 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 181.

    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.

    c. Pro Forma Provisional Interconnection Agreement i. Comments

    443. Duke, Xcel, and Southern see no need for the Commission to develop a pro forma provisional interconnection service agreement at this time.771 MISO agrees because its GIP includes a process for obtaining a provisional GIA and because MISO already conducts quarterly provisional interconnection service studies.772 NYISO states that a separate provisional interconnection agreement would unnecessarily complicate and prolong the interconnection agreement negotiations.773 PJM opposes the creation of a separate provisional interconnection agreement because PJM's current interconnection agreement already provides for the service.774

    771 Duke 2017 Comments at 21; Xcel 2017 Comment at 18; Southern 2017 Comments at 26.

    772 MISO 2017 Comments at 34-35.

    773 NYISO 2017 Comments at 38.

    774 PJM 2017 Comments at 26.

    ii. Commission Determination

    444. In this final action, we agree with commenters and decline to adopt a separate pro forma Provisional Large Generator Interconnection Agreement.

    d. Additional Studies i. Comments

    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.775 Southern agrees and also argues that transmission providers should have discretion over granting provisional interconnection service based on standard interconnection studies or any other applicable and valid studies.776

    775 EEI 2017 Comments at 58.

    776 Southern 2017 Comments at 26.

    446. Duke and NYISO oppose the requirement to conduct quarterly restudies.777 Instead, NYISO proposes to define a timeframe for which provisional service will be provided, and study the proposed project to determine the permissible output level of the project over the entire defined provisional timeframe. NYISO further proposes to retain the discretion to update its analysis as necessary based on system changes.778

    777 Duke 2017 Comments at 21; NYISO 2017 Comments at 38.

    778Id.

    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.779 Six Cities also has concerns that additional studies may prolong the interconnection process.780 Tri-State and TVA argue that the proposal burdens transmission providers because it requires regularly-updated or additional studies,781 or imposes distracting monitoring and/or mitigation burdens.782

    779 Eversource 2017 Comments at 17.

    780 Six Cities 2017 Comments at 6.

    781 Tri-State 2017 Comments at 9.

    782 TVA 2017 Comments at 16.

    ii. Commission Determination

    448. In this final action, we modify the NOPR proposal and article 5.9.2 of the pro forma LGIA, Provisional Interconnection Service, to allow transmission providers to determine the frequency for updating provisional interconnection studies. This flexibility will allow transmission providers to determine a study frequency that best suits their individual needs. However, the determined frequency should be consistent across all interconnection customers seeking provisional interconnection service. In addition, we modify the NOPR proposal, and add article 5.9.2 of the pro forma LGIA, to clarify that any study performed by the transmission provider to update the available maximum provisional interconnection service will be at the expense of the interconnection customer. To effectuate this change, we renumber existing article 5.9 as follows (deleting bracketed text and adding the italicized text):

    5.9 [Limited Operation] Other Interconnection Options

    5.9.1 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):

    5.9.[1]2[0] Provisional Interconnection Service.

    Upon the request of Interconnection Customer, and prior to completion of requisite Interconnection Facilities, Network Upgrades, Distribution Upgrades, or System Protection Facilities [the ]Transmission Provider may execute a Provisional Large Generator Interconnection Agreement or Interconnection Customer may request the filing of an unexecuted Provisional Large Generator Interconnection Agreement with the Interconnection Customer for limited interconnection service at the discretion of Transmission Provider based upon an evaluation that will consider the results of available studies. Transmission Provider shall determine, through available studies or additional studies as necessary, whether stability, short circuit, thermal, and/or voltage issues would arise if Interconnection Customer interconnects without modifications to the Generating Facility or Transmission Provider's system. Transmission Provider shall determine whether any [Network Upgrades,] Interconnection Facilities, Network Upgrades, Distribution Upgrades, or System Protection Facilities that are necessary to meet the requirements of NERC, or any applicable Regional Entity for the interconnection of a new, modified and/or expanded Generating Facility are in place prior to the commencement of interconnection service from the Generating Facility. Where available studies indicate that such [Network Upgrades,] Interconnection Facilities, Network Upgrades, Distribution Upgrades, and/or System Protection Facilities that are required for the interconnection of a new, modified and/or expanded Generating Facility are not currently in place, Transmission Provider will perform a study, at the Interconnection Customer's expense, to confirm the facilities that are required for Provisional Interconnection Service. The maximum permissible output of the Generating Facility in the Provisional Large Generator Interconnection Agreement shall be studied and updated [on a frequency determined by Transmission Provider and at the Interconnection Customer's expense.] [on a quarterly basis]. Interconnection Customer assumes all risk and liabilities with respect to changes between the Provisional Large Generator Interconnection Agreement and the Large Generator Interconnection Agreement, including changes in output limits and [Network Upgrades,] Interconnection Facilities, Network Upgrades, Distribution Upgrades, and/or System Protection Facilities cost responsibilities.783

    783 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 190.

    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.

    e. Other i. Comments

    451. Imperial and Modesto ask the Commission to clarify how the provisional service would be subject to section 3.5 of the pro forma LGIP, which provides for coordination of any study required to determine the interconnection request's impact on affected systems, and how the transmission provider would conduct the studies for provisional interconnection service in conjunction with affected systems.784

    784 Imperial 2017 Comments at 13; Modesto 2017 Comments at 18.

    ii. Commission Determination

    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.

    3. Utilization of Surplus Interconnection Service a. NOPR Proposal

    453. In the NOPR, the Commission proposed to add a new definition for Surplus Interconnection Service to section 1 of the pro forma LGIP and to article 1 of the pro forma LGIA, and a requirement that transmission providers provide an expedited process for interconnection customers to utilize or transfer surplus interconnection service at existing generating facilities.785 The intent of this proposal was to allow another interconnecting resource owned by an existing generating facility owner or an affiliated owner the ability to use any surplus interconnection service associated with the existing generating facility. The Commission also proposed that transmission providers establish open and transparent processes for generating facilities that wish to transfer that surplus interconnection service to others if the generating facility owner and its affiliates elect not to use it.786

    785 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 201.

    786Id.

    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.” 787 In its order accepting MISO's proposal for Net Zero Interconnection Service, the Commission directed MISO to submit a compliance filing to ensure that MISO offered Net Zero Interconnection Service “on a fair, transparent, and non-discriminatory basis.” 788

    787Id. P 193 (citing MISO FERC Electric Tariff, Attachment X, Section 1 (Definitions) (47.0.0) (“Net Zero Interconnection Service shall mean a form of Energy Resource Interconnection Service that allows an interconnection customer to alter the characteristics of an existing generating facility, with the consent of the existing generating facility, at the same [point of interconnection] such that the Interconnection Service limit remains the same”)).

    788Midwest Indep. Transmission Sys. Operator, Inc., 138 FERC ¶ 61,233, at P 302 (2012).

    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.789 The Commission also proposed that, if the transmission provider does not study surplus interconnection service under off-peak conditions, it would perform off-peak steady state analyses to the level necessary to demonstrate reliability.790 The Commission further proposed that, if the original system impact study is not available while the surplus interconnection service is going through the study process, both off-peak and peak analyses may be necessary for the existing generating facility associated with the request for surplus interconnection service.791 Additionally, the Commission proposed that a process for the use or transfer of surplus interconnection service be available for any quantity of surplus interconnection service that currently exists.792

    789 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 202.

    790Id.

    791Id.

    792Id.

    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.793 In addition to the new interconnection agreement for surplus interconnection service, the Commission recognized that other contractual arrangements may be necessary.794

    793Id. P 203.

    794Id.

    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 pro forma LGIP and pro forma LGIA.795 The Commission also sought comment on whether the interconnection agreement for surplus interconnection service should terminate upon the retirement of the existing generating facility, or whether there are circumstances under which the surplus interconnection service customer may operate its generating facility under the terms of the surplus interconnection service agreement after the retirement of the existing generating facility.796

    795Id. P 204.

    796Id.

    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.797 However, if an existing generating facility owner that has surplus interconnection service wished to transfer it but did not wish to use the surplus interconnection service itself or to transfer it to one of its affiliates, the existing generator would conduct an open and transparent solicitation process for that surplus interconnection service.798 While the Commission proposed that priority be given to the existing generating facility owner of the surplus interconnection service or its affiliates, the Commission sought comment on the need for further limitations on the entities with priority use of that surplus interconnection service.799

    797Id. P 206.

    798Id.

    799Id.

    459. With regard to specific requirements, the Commission proposed to add the following new definition to section 1 of the pro forma LGIP and to article 1 of the pro forma LGIA (with proposed text in italics):

    Surplus Interconnection Service shall mean any unused portion of Interconnection Service established in a Large Generator Interconnection Agreement, such that if Surplus Interconnection Service is utilized the Interconnection Service limit at the Point of Interconnection would remain the same. 800

    800Id. P 208. With respect to these new additions to the pro forma LGIP and pro forma LGIA, we make minor clarifying edits to the pro forma tariff language originally proposed in the NOPR, as shown in Appendices B and C to Order No. 845. Specifically, the term “unused” is replaced with the term “unneeded,” and the term “Interconnection Service limit” is replaced with “total amount of Interconnection Service.”

    460. The Commission proposed to add a new section 3.3 to the pro forma LGIP that requires the transmission provider to establish a process for the use of surplus interconnection service as follows (with proposed text in italics):

    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. The original Interconnection Customer or one of its affiliates shall have priority to utilize Surplus Interconnection Service. If the existing Interconnection Customer or one of its affiliates does not exercise its priority, then that service may be made available to other potential interconnection customers through an open and transparent solicitation process. 801

    801Id. P 209. With respect to these new additions to the pro forma LGIP, we make minor clarifying edits to the pro forma tariff language originally proposed in the NOPR, as shown in Appendix B to Order No 845. Specifically, in the first sentence, the words “Generating Facility” are replaced with the words “Point of Interconnection” and in the last sentence, the words “through an open and transparent solicitation process” are struck.

    461. The Commission proposed to add a new section 3.3.1 to the pro forma LGIP that describes the process for using surplus interconnection service (with proposed text in italics):

    Surplus Interconnection Service Requests. Surplus Interconnection Service requests may be made by the existing Generating Facility or one of its affiliates. Surplus Interconnection Service requests also may be made by another Interconnection Customer selected through an open and transparent solicitation process. The Transmission Provider shall provide a process for evaluating interconnection requests for Surplus Interconnection Service. Studies for Surplus Interconnection Service shall consist of reactive power, short circuit/fault duty, stability analyses, and any other appropriate studies. Steady-state (thermal/voltage) analyses may be performed as necessary to ensure that all required reliability conditions are studied. If the Surplus Interconnection Service was not studied under off-peak conditions, off-peak steady state analyses shall be performed to the required level necessary to demonstrate reliable operation of the Surplus Interconnection Service. If the original System Impact Study is not available for the Surplus Interconnection Service, both off-peak and peak analysis may need to be performed for the existing Generating Facility associated with the request for Surplus Interconnection Service. The reactive power, short circuit/fault duty, stability, and steady-state analyses for Surplus Interconnection Service will identify any additional Interconnection Facilities and/or Network Upgrades necessary. 802

    802Id. P 210. With respect to these new additions to the pro forma LGIP, we make minor clarifying edits to the pro forma tariff language originally proposed in the NOPR, as shown in Appendix B to Order No. 845. Specifically, the first sentence is modified as follows (with additions made in italics): “Surplus Interconnection Service requests may be made by the existing Interconnection Customer whose Generating Facility is already interconnected or one of its affiliates.” Additionally, the second sentence is modified by striking the words “selected through an open and transparent solicitation process.” We also remove the word “the” before “Transmission Provider.”

    462. Finally, the Commission proposed to add a new section 3.3.2 to the pro forma LGIP that establishes the open and transparent solicitation process for surplus interconnection service (with proposed text in italics):

    Solicitation Process for Surplus Interconnection Service. If the existing Generating Facility owner elects to transfer rights for Surplus Interconnection Service to an unaffiliated Interconnection Customer, it must do so through an open and transparent solicitation process. The existing Generating Facility owner must first request that the Transmission Provider post on its website that it is willing to accept requests for Surplus Interconnection Service at the existing Point of Interconnection. Such posting will include the name of the existing Generating Facility, the exact electrical location of the physical termination point of the Surplus Interconnection Service, including proposed breaker position(s) within its substation, the state and county of the existing Generating Facility, and a valid email address and phone number to contact the representative of the existing Generating Facility. The existing Generating Facility owner must provide the Transmission Provider with the System Impact Study performed for the existing Generating Facility with its request for posting Surplus Interconnection Service or indicate that such study is not available.

    After the existing Generating Facility owner requests that the Transmission Provider post the availability of Surplus Interconnection Service, the Transmission Provider will also post on its website a description of the selection process for transferring rights to the Surplus Interconnection Service that will include a timeline and the selection criteria developed by the existing Generating Facility owner. The selection process may vary among existing Generating Facility owners but the existing Generating Facility owner will choose the winning request after all necessary studies have been performed by the Transmission Provider. The existing Generating Facility owner will submit to the Transmission Provider, for posting on the Transmission Provider's website, the results of the selection process and will include a description of whose proposal for the Surplus Interconnection Service was selected and why. After an Interconnection Customer has been chosen, the new Interconnection Customer will execute, or request the filing of an unexecuted, interconnection agreement with the Transmission Provider and Transmission Owner (as applicable) upon completion of all necessary studies for its new Generating Facility. 803

    803Id. P 211.

    b. General i. Comments

    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.804 AWEA states that better use of interconnection capacity would reduce system costs and improve competition. AWEA argues that an interconnection customer would benefit from being able to split its GIA into multiple GIAs when it is a party to a Power Purchase Agreement that does not account for all of the capacity under the customer's interconnection agreement.805 Xcel supports a “net-zero-like” interconnection service and argues that existing interconnection customers or affiliates should have priority to use any available surplus interconnection service.806 Duke supports the proposal if it is like MISO's net-zero program and suggests that MISO's interconnection agreement is a good model for such transactions.807 FTC states that transferred interconnection capacity rights can play a significant role in providing transmission capacity for use by generation entrants quickly and at low cost.808 TDU Systems argue that the transmission provider must give comparable service to non-affiliates as they do to their own affiliates.809 MISO generally supports the Commission's proposal, as do Alliant, ITC, MidAmerican, MISO TOs, and TDU Systems.810

    804 ESA 2017 Comments at 13-14.

    805 AWEA 2017 Comments at 58.

    806 Xcel 2017 Comments at 19.

    807 Duke 2017 Comments at 22.

    808 FTC 2017 Comments at 10.

    809 TDU Systems 2017 Comments at 19-20.

    810 MISO 2017 Comments at 5; Alliant 2017 Comments at 8; ITC 2017 Comments at 121; MidAmerican 2017 Comments at 19; MISO TOs 2017 Comments at 40; TDU Systems 2017 Comments at 19-20.

    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.811 NYISO opposes simple transfer of capacity from an interconnection customer to another party because more than just MW capacity is needed for safe and reliable interconnection (for example, evaluation of short circuit issues). If the new interconnection customer is under 20 MW, NYISO suggests that it might be easier to use the SGIP and SGIA where it is easier to waive certain studies.812 PJM does not support the proposed open solicitation for transfer of any surplus interconnection service. PJM contends that there are no surplus capacity rights on its system because capacity is based on tested output. PJM asserts that it would have to create some form of energy rights that could be transferred. PJM prefers to continue using the transfer process contained in its tariffs and manuals.813

    811 EEI 2017 Comments at 59.

    812 NYISO 2017 Comments at 39.

    813 PJM 2017 Comments at 27-28.

    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.814 CAISO appeals to the Commission to “not sacrifice reliability studies on the altar of convenience.” 815 CAISO questions the need for this proposal, stating that interconnection customers can already retire/replace, repower, or assign available capacity through bilateral transactions, which according to CAISO work better than the administrative process in the NOPR.816 SoCal Edison supports the Commission's goal but does not support the NOPR due to the expedited process and concerns that the expedited NOPR process: (1) May be inferior to current processes like CAISO's Material Modification Assessment; (2) may encourage interconnection customers to request more interconnection service than they intend to use; and (3) should not enable a surplus interconnection customer to avoid the installation of necessary facilities to enable a safe and reliable interconnection.817 SEIA does not support the creation of a process to reassign surplus interconnection capacity.818 NYISO asserts that the NOPR may conflict with the principle of open access and might allow for undue discrimination by establishing a process that favors affiliates of an existing interconnection customer over other interconnection customers.819 AES states that this proposal could reduce flexibility to the transmission provider or reliability coordinator, and they would prefer that RTOs/ISOs determine for themselves how to address the topic of transferring surplus capacity.820

    814 ISO-NE 2017 Comments at 48.

    815 CAISO 2017 Comments at 32.

    816Id. at 34.

    817 SoCal Edison 2017 Comments at 9-13.

    818 SEIA 2017 Comments at 21.

    819 NYISO 2017 Comments at 39-40 (citing Midwest Indep. Transmission Sys. Operator, Inc., 140 FERC ¶ 61,237, at PP 50-51 (2012), and Midwest Indep. Transmission Sys. Operator, Inc., 155 FERC ¶ 61,274, at P 19 (2016)).

    820 AES 2017 Comments at 11-12.

    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.821 Similarly, PJM states that it does not permit excess capacity to be obtained through the initial request. PJM rates interconnection capacity at the tested output of the generator after installation.822 Southern questions whether capacity being “surplus” should refer to its lack of use in operation, in the interconnection study, or in the interconnection request.823 NYISO's LGIA requires interconnection customers to inform NYISO if the built generating facility is smaller than what had been proposed, which initiates a process to consider amending the interconnection agreement, or requires a new interconnection request if the interconnection customer proposes to expand its facility.824 NYISO allows interconnection customers to pay for larger network upgrades than required for the initial project, as long as they are reasonably related to the interconnection of the proposed project.825 According to NYISO, another later interconnection customer can also use these network upgrades, so long as it reimburses the earlier interconnection customer that paid for them.826

    821 CAISO 2017 Comments at 31-32.

    822 PJM 2017 Comments at 27.

    823 Southern 2017 Comments at 28.

    824 NYISO 2017 Comments at 40.

    825Id. at 42.

    826Id.

    ii. Commission Determination

    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 pro forma LGIP and to article 1 of the pro forma LGIA; (2) add a new section 3.3 to the pro forma LGIP that requires the transmission provider to establish a process for the use of surplus interconnection service; and (3) add a new section 3.3.1 to the pro forma LGIP that describes the process for using surplus interconnection service.827 As described in more detail below, we will withdraw the NOPR proposal to add a new section 3.3.2 to the pro forma LGIP that establishes an open and transparent solicitation process for surplus interconnection service. We affirm that requiring transmission providers to establish an expedited process, separate from the interconnection queue, for the use of surplus interconnection service could reduce costs for interconnection customers by increasing the utilization of existing interconnection facilities and network upgrades rather than requiring new ones, improve wholesale market competition by enabling more entities to compete through the more efficient use of surplus existing interconnection capacity, and remove economic barriers to the development of complementary technologies such as electric storage resources that may be able to easily tailor their use of interconnection service to adhere to the limitations of the surplus interconnection service that may exist. Further, we find that facilitating the use of surplus interconnection service could improve capabilities at existing generating facilities, prevent stranded costs, and improve access to the transmission system.

    827 With respect to these new additions to the pro forma LGIP and pro forma LGIA, we make minor clarifying edits to the pro forma tariff language originally proposed in the NOPR, as shown in Appendix B and C to Order No. 845.

    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 Order No. 2003, transmission providers assume that each interconnection customer is fully utilizing its interconnection service when studying other requests for new interconnections. Thus, currently, even if a generating facility only operates a few days a year, or routinely operates at a level below its maximum capacity, the remaining, unused interconnection service is assumed to be unavailable to other prospective interconnection customers.

    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),828 a “basic or minimum interconnection service,” 829 and Network Resource Interconnection Service (NRIS),830 a “more flexible and comprehensive service.” 831 In Order No. 2003, the Commission stated that, for a generating facility with ERIS, “[t]he Interconnection Studies to be performed . . . would identify the Interconnection Facilities required as well as the Network Upgrades needed to allow the proposed Generating Facility to operate at full output” and “the maximum allowed output of the Generating Facility without Network Upgrades.” 832

    828 Energy Resource Interconnection Service:

    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.

    Pro forma LGIP Section 1 (Definitions).

    829 Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 752.

    830 Network Resource Interconnection 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.

    Pro forma LGIP Section 1 (Definitions).

    831 Order No. 2003, FERC Stats. & Regs. ¶ 31,146 at P 752.

    832Id. P 753 (emphasis added).

    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.” 833 To allow for this, “[t]he Transmission Provider would study the Transmission System at peak load, under a variety of severely stressed conditions, to determine whether, with the Generating Facility at full output, the aggregate of generation in the local area can be delivered to the aggregate of load, consistent with the Transmission Provider's reliability criteria and procedures” and “would assume that some portion of the capacity of existing Network Resources is displaced by the output of the new Generating Facility.” 834

    833Id.

    834Id. P 755 (emphasis added).

    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 pro forma LGIP may be in excess of the actual interconnection service required by the generating facility, at least during some periods. For these reasons, we find that, where proper precautions are taken to ensure system reliability, it would be unjust and unreasonable to deny an original interconnection customer the ability either to transfer or use for another resource surplus interconnection service.

    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 (i.e., a certain number of MW of surplus interconnection service always available for use by a co-located generating facility), or on a scheduled, periodic basis (i.e., a specified number of MW available intermittently).835 In contrast, an interconnection customer making a new interconnection request can request any level of interconnection service at or below its resource's generating facility capacity, and ERIS, NRIS, or provisional interconnection service.

    835 This would include situations where existing generating facilities operate infrequently, such as peaker units, or operate often below their full generating facility capacity, such as variable generation.

    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.” 836

    836Pro forma LGIP Secction 1 (Definitions); pro forma LGIA Art. 1 (Definitions).

    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 interconnection customer's generating facility would eliminate any potential surplus interconnection service that might otherwise have been available.

    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,837 we find that, in light of the substantial potential benefits of and inherent practical limitations on the use of surplus interconnection service, open access requirements such as those the Commission previously imposed upon MISO's Net Zero Interconnection Service are not currently necessary to achieve the Commission's open access goals. This finding is consistent with the perspective that the Commission adopted in Order No. 807, where the Commission amended:

    837See Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888, FERC Stats. & Regs. ¶ 31,036 (1996), order on reh'g, Order No. 888-A, FERC Stats. & Regs. ¶ 31,048, order on reh'g, Order No. 888-B, 81 FERC ¶ 61,248 (1997), order on reh'g, Order No. 888-C, 82 FERC ¶ 61,046 (1998), aff'd in relevant part sub nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 (2002).

    its regulations to waive the Open Access Transmission Tariff (OATT) requirements of 18 CFR 35.28, the Open Access Same-Time Information System (OASIS) requirements of 18 CFR 37, and the Standards of Conduct requirements 18 CFR 358, under certain conditions, for the ownership, control, or operation of Interconnection Customer's Interconnection Facilities (ICIF).838

    838Open Access and Priority Rights on Interconnection Customer's Interconnection Facilities, Order No. 807, FERC Stats. & Regs. ¶ 31,367, at P 1 (Order No. 807), order on reh'g, Order No. 807-A, 153 FERC ¶ 61,047 (2015).

    In Order No. 807, the Commission concluded that the waived requirements were not “necessary to achieve the Commission's open access goals.” 839 In coming to this conclusion, the Commission stated, among other things, that given the limited nature of the ICIF and practical benefits provided by Order No. 807, the waived requirements were not necessary to achieve open access. 840

    839Id. P 18.

    840Id. PP 38, 55.

    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 wishes to transfer this surplus interconnection service to a non-affiliated third party. Consequently, we will revise proposed pro forma section 3.3 as follows (deleting the bracketed text from, and adding the italicized text to, proposed language):

    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] Point of Interconnection. The original Interconnection Customer or one of its affiliates shall have priority to utilize Surplus Interconnection Service. If the existing Interconnection Customer or one of its affiliates does not exercise its priority, then that service may be made available to other potential interconnection customers [through an open and transparent solicitation process].841

    841 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 209.

    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.842 Because of the history of that service (namely the fact that only one party has sought MISO's Net Zero Interconnection Service), and in light of the record and discussion above, we find it appropriate to revisit and modify our position on the topic of surplus interconnection service.

    842See, e.g., Midwest Indep. Transmission Sys. Operator, 138 FERC ¶ 61,233 at P 302.

    c. Expedited Process i. Comments

    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.843 Xcel and AWEA argue for a new process outside the LGIP that would handle all transfers of interconnection capacity.844 On the other hand, some transmission providers oppose any expedited process that departs from the interconnection queue order. SoCal Edison states that, in order to properly identify required upgrades and define proper cost assignment, technical studies need to follow a rational order that must be predicated on relative queue position.845 Southern opposes an expedited process that allows a new interconnection customer to “jump up” in the queue, as this would be unfair to others in the queue.846

    843 California Energy Storage Alliance 2017 Comments at 7.

    844 Xcel 2017 Comments at 19; AWEA 2017 Comments at 59.

    845 SoCal Edison 2017 Comments at 2.

    846 Southern 2017 Comments at 31.

    ii. Commission Determination

    486. As described earlier, we adopt the NOPR proposal to add a new definition for “Surplus Interconnection Service” to section 1 of the pro forma LGIP and to article 1 of the pro forma LGIA that requires transmission providers to provide an expedited process for interconnection customers to utilize or transfer surplus interconnection service at a particular point of interconnection. This process would be expedited in the sense that it would take place outside of the interconnection queue. Some commenters argue that this would result in inappropriate queue jumping.

    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.847 We also clarify that original interconnection customers are not required to make surplus interconnection service available to potential customers. If they do make it available, transmission providers are not required to execute an interconnection agreement for surplus interconnection service if arrangements do not meet the definition set forth in their tariff or if the customer does not agree to the terms of such service, including any requirements that may be identified by the transmission provider in the studies for surplus interconnection service. If the surplus interconnection service customer disputes an issue in the interconnection agreement for surplus interconnection service, the transmission provider must file the unexecuted surplus interconnection service agreement with the Commission if requested to do so by the surplus interconnection service customer.

    847See, e.g., MISO, FERC Electric Tariff, Attachment X (76.0.0), Section 11.5.

    d. Interconnection Capacity Hoarding or Squatting i. Comments

    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.848 Southern agrees and adds that this could create costs for later-queued customers that they otherwise would not have to pay.849 Xcel expresses concerns that such practices could lead to capacity “squatting (i.e., hoarding).” 850 However, Competitive Suppliers oppose these positions and state that reductions in interconnection service to eliminate surplus by transmission providers amounts to confiscation of the rights of the interconnection customers.851

    848 SoCal Edison 2017 Comments at 10.

    849 Southern 2017 Comments at 29-30.

    850 Xcel 2017 Comments at 21.

    851 Competitive Suppliers 2017 Comments at 8.

    ii. Commission Determination

    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 of interconnection service, that service will be limited to the original interconnection customer's generating facility capacity (which is based on the size of the generating facility it constructs and continues to operate). If the original interconnection customer does not construct the facility it has represented to the transmission provider, or retires that facility, the transmission provider may terminate the customer's LGIA in accordance with applicable provisions in its tariff. Accordingly, we see no significant concern with hoarding interconnection service.

    e. Property Rights i. Comments

    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.852 NYISO asserts that the NOPR would expand what is currently a contractual right, namely the right to a particular point of interconnection, into a property right by allowing a generator to transfer interconnection service to a third party.853 SoCal Edison states that the NOPR assumes that interconnection capacity is a property right, but that in many cases the interconnection customer did not pay for the “surplus.” 854

    852 CAISO 2017 Comments at 32 (citing CalWind Resources Inc. v. California Independent System Operator Corp., 146 FERC ¶ 61,121, at PP 33 et seq. (2014)).

    853 NYISO 2017 Comments at 41.

    854 SoCal Edison 2017 Comments at 9.

    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.855 Cogeneration Association argues that transfer of capacity cannot be done without the consent of the existing interconnection customer, and that the existing interconnection customer should be able to negotiate the terms and compensation for the transfer of capacity.856

    855 Generation Developers 2017 Comments at 41.

    856 Cogeneration Association 2017 Comments at 3.

    ii. Commission Determination

    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.

    f. Original Interconnection Customer's Priority i. Comments

    494. Some commenters argue that the proposed priority for original interconnection customers and their affiliates should have a limited term. MidAmerican 857 and CAISO 858 support a limit of three years from when the original generation facility last produced energy. EDP proposes a minimum of five years. EDP cites compatibility with the five-year safe harbor granted to interconnection customer interconnection facilities in Order No. 807 as support for a five year priority here.859 MISO TOs,860 PJM,861 and TDU Systems 862 support a time limit, either after the original commercial operations date if the interconnection customer has failed to achieve commercial operations, or for some period after it has ceased commercial operations, but do not specify a duration, preferring to leave each RTO or ISO with discretion to determine appropriate duration.

    857 MidAmerican 2017 Comments at 20.

    858 CAISO 2017 Comments at 33.

    859 EDP 2017 Comments at 8.

    860 MISO TOs 2017 Comments at 40.

    861 PJM 2017 Comments at 26.

    862 TDU Systems 2017 Comments at 29-30.

    ii. Commission Determination

    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.

    g. Contractual Arrangements i. Comments

    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.863 Specifically, Cogeneration Association states that collateral agreements between the interconnection customers are necessary, as dealing with rights and obligations between the original interconnection customer and new interconnection customer may not be included in the LGIA.864 Similarly, AWEA supports the idea of the original and new interconnection customers each having a separate LGIA.865

    863 Cogeneration Association 2017 Comments at 5; ITC 2017 Comments at 20; Generation Developers 2017 Comments at 41; Duke 2017 Comments at 22.

    864 Cogeneration Association 2017 Comments at 5.

    865 AWEA 2017 Comments at 59.

    497. ITC argues that the Commission should specify in the pro forma LGIA that the original interconnection customer will serve as the single point of contact for operational directives and outage coordination by the transmission provider and/or transmission owner. According to ITC, transmission providers/owners should not be required to coordinate these operational issues with multiple, potentially-unaffiliated parties. Rather, ITC argues, it is appropriate that the original interconnection customer that elects to make surplus capacity available assume the obligation of coordinating with surplus customers.866

    866 ITC 2017 Comments at 20.

    498. Generation Developers argue that the Commission should require a transmission provider to have a pro forma surplus interconnection agreement.867 Duke agrees with the NOPR proposal that a new interconnection agreement for surplus interconnection service must be executed, or filed unexecuted, by the transmission provider, transmission owner (as applicable), and the surplus interconnection service customer and suggests that the MISO LGIA template provides a framework for such agreements between the interconnection customers and transmission providers.868

    867 Generation Developers 2017 Comments at 41.

    868 Duke 2017 Comments at 22.

    ii. Commission Determination

    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 (i.e., common or singular operation) and to establish the roles and responsibilities of the parties for maintaining the operation of the facility within the parameters of the surplus interconnection service agreement. Therefore, we require that the original interconnection customer, the surplus interconnection service customer, and the transmission provider enter into such agreements for surplus interconnection service and that they be filed by the transmission provider with the Commission, because any surplus interconnection service agreement will be an agreement under the transmission provider's OATT.

    500. However, we decline to establish these agreements as part of the pro forma LGIA or prescribe their terms and conditions. This will give transmission providers flexibility to establish agreements appropriate for their region (e.g., they may be different for RTO/ISO and non-RTO/ISO regions) and the unique conditions of each agreement for surplus interconnection service. It will also alleviate some potential burden by allowing transmission providers to either file pro forma versions of these agreements with the Commission, as was done in MISO, or execute them as needed and file them with the Commission on an ad hoc basis.

    h. Retirement, Repowering and Continuation of Surplus Interconnection Service After the Original Interconnection Customer's Generating Facility Retires i. Comments

    501. Some commenters discuss the NOPR as it might relate to retirement of generators and replacement or repowering.869 Xcel argues that the retention of rights by the interconnection customer or its affiliates may be helpful at the current time when many utilities are going through retirement and replacement or repowering.870 Xcel argues that using this approach for repowering leads to efficiency because re-using brownfield sites is the most cost-effective approach to repowering, and suggests that the Commission should encourage this practice.871 CAISO states that it allows repowering, and notes that, in some cases, this process has led to the replacement of conventional generation by electric storage.872 PG&E supports the CAISO repowering process for allowing new generation on the grid while potentially minimizing interconnection and network upgrade costs.873 ISO-NE states that its forward capacity market can accommodate repowering by maintaining the interconnection service while the interconnection customer builds a new generating facility that can take the place of a retiring unit.874

    869 For purposes of this final action, we adopt CAISO's definition of “repowering,” which defines repowering as a modification of existing generating units that does not: (i) Increase the total capability of the plant; or (ii) substantially change its electrical characteristics such that original reliability studies would be affected. See Section 25.1.2 of the CAISO tariff; Section 12 of the business practice manuals for Generator Management, https://bpmcm.caiso.com/Pages/BPMDetails.aspx?BPM=Generator%20Management.

    870 Xcel 2017 Comments at 19.

    871Id. at 20.

    872 CAISO 2017 Comments at 33.

    873 PG&E 2017 Comments at 9.

    874 ISO-NE 2017 Comments at 50.

    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.875 Generation Developers argue for the survivorship of the surplus interconnection service when the original interconnection customer's generating facility retires, on the basis that the surplus interconnection customer would have paid the original interconnection customer for the interconnection rights.876 Xcel supports survivorship because of greater commercial attractiveness and helping the new interconnection customers to get financing.877

    875 Cogeneration Association 2017 Comments at 5-6.

    876 Generation Developers 2017 Comments at 42.

    877 Xcel 2017 Comments at 21.

    ii. Commission Determination

    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 (e.g., through the existing processes discussed by some commenters).

    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 retiring) must have agreed in writing that the surplus interconnection service customer may continue to operate at either its limited share of the original interconnection customer's generating facility capacity in the original interconnection customer's LGIA, as reflected in its surplus interconnection service agreement, or at any level below such limit upon the retirement and permanent cessation of commercial operation of the original interconnection customer's generating facility.

    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.

    i. Relationship to MISO Net Zero Interconnection Service i. Comments

    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.878

    878 MISO 2017 Comments at 36.

    ii. Commission Determination

    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.

    4. Material Modification and Incorporation of Advanced Technologies a. NOPR Proposal

    510. Under the pro forma LGIP, an interconnection customer can modify its interconnection request and still retain its queue position if the modifications are either explicitly allowed under the pro forma LGIP or if the transmission provider determines that the modifications are not material. The pro forma LGIA defines material modifications as “those modifications that have a material impact on the cost or timing of any Interconnection Request with a later queue priority date.” 879 Under the pro forma LGIP, an interconnection customer must submit to the transmission provider, in writing, modifications to any information provided in the interconnection request.880 The pro forma LGIP directs transmission providers to commence any necessary additional studies related to the interconnection customer's modification request no later than 30 calendar days after receiving notice of the request.881 If the transmission provider determines that the proposed modification is material, the interconnection customer can choose to abandon the proposed modification or proceed and lose its queue position.

    879Pro forma LGIA Art. 1.

    880See pro forma LGIP Section 4.4.

    881See pro forma LGIP Section 4.4.4.

    511. In the NOPR, the Commission explained that the pro forma LGIP does not contain guidance regarding analysis and modeling for the incorporation of technological advancements into an existing interconnection request. The Commission preliminarily found that the discretion resulting from this lack of guidance can lead to unjust and unreasonable rates, terms, and conditions, and unduly discriminatory or preferential practices, especially for technological advancements.882 The Commission thus proposed to require transmission providers to establish a technological change procedure in their LGIPs to assess and, if necessary, study whether they can accommodate a technological advancement without the change being considered material.883 The Commission stated that such a procedure would allow an interconnection customer to provide an analysis of how its proposed technological advancement would result in electrical performance that is equal to or better than the electrical performance expected prior to the change.884 Using such a procedure, a transmission provider would determine whether a technological advancement is a material modification. If it was not a material modification, the interconnection customer could incorporate the technological advancement without losing its queue position.

    882 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 216.

    883Id. P 217.

    884Id. PP 217-18.

    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.885 Thus, pursuant to this proposal, a permissible technological advancement is a technological advancement that, by definition, does not constitute a material modification. Further, the Commission proposed that this definition should contemplate advancements that provide cost efficiency and/or electrical performance benefits.886 The Commission proposed that in the scenario where a transmission provider requires a study for a proposed technological advancement to not be considered a material modification, the interconnection customer should tender an appropriate study deposit and provide the necessary modeling data that sufficiently models the behavior of the new equipment and any other required data about the technological advancement to the transmission provider.887

    885Id. P 217.

    886Id. P 212.

    887Id. P 219.

    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 achieve cost and grid performance efficiencies.888 Finally, the Commission proposed to permit interconnection customers to submit technological advancement requests for incorporation any time before the execution of the facilities study agreement.889

    888Id. P 222.

    889Id. P 223.

    514. Accordingly, the Commission proposed to revise section 4.4.2 of the pro forma LGIP as follows (with proposed deletions in brackets and with proposed additions in italics):

    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; and (c) a technological advancement for the Large Generating Facility after the submission of the interconnection request. Section 4.4.4 specifies a separate Technological Change Procedure including the requisite information and process that will be followed to assess whether the Interconnection Customer's proposed technological advancement under Section 4.4.2(c) is a Material Modification. Section 1 contains a definition of Technological Advancement. 890

    890 With respect to this new provisions to the pro forma LGIP, we make minor clarifying edits to the pro forma tariff language originally proposed in the NOPR, as shown in Appendix B to Order No. 845. Specifically, the comma after section 4.4.2(a)(2) will be replaced with a semicolon, and pro forma section 4.4.2 will no longer capitalize “Technological Change Procedure.” Additionally, in the last sentence of pro forma section 4.4.2, “technological advancement” will now say “Permissible Technological Advancement.” Also, section 1 of the pro forma LGIP will contain a placeholder for the definition of “Permissible Technological Advancement, and there is now a placeholder for each transmission provider's technological change procedure in pro forma LGIP section 4.4.4.

    b. Technological Change Procedure i. Comments

    515. The majority of commenters support 891 or do not object 892 to the proposal. AFPA and ELCON cite the proposal's potential to lower interconnection costs and avoid costly delays in commercial operation.893 AWEA comments that the proposal will provide transparency and certainty to both the transmission provider and the interconnection customer, and will remove a barrier to the use of the most modern, cost effective technology.894 NextEra states that transmission providers are inconsistent in considering potential changes to the equipment being installed under an interconnection agreement.895 Alliant asserts that the current definition of material modification is unclear and that more guidance is needed from the Commission in terms of what would trigger a material modification study.896 Idaho Power agrees with the proposal provided that an interconnection customer will be responsible for any necessary network upgrades that are identified and for which the transmission provider committed expenses before the technological advancement request.897 TDU Systems supports the flexibility built into the proposal and adds that, if technological advancements include changes to the equipment's electrical characteristics, then the models require modification, the simulations must be re-run, and the results require reevaluation.898

    891 Alliant 2017 Comments at 13; AFPA 2017 Comments at 16; AWEA 2017 Comments at 60; CAISO 2017 Comments at 35; Joint Renewable Parties 2017 Comments at 12; ELCON 2017 Comments at 7; Idaho Power 2017 Comments at 6; IECA Comments at 3; ISO-NE 2017 Comments at 51; MISO 2017 Comments at 5; NEPOOL 2017 Comments at 18; NextEra 2017 Comments at 52; TDU Systems 2017 Comments at 30-31; PJM 2017 Comments at 30.

    892 APPA/LPPC 2017 Comments at 26; NYISO 2017 Comments at 43; SEIA 2017 Comments at 21.

    893 AFPA 2017 Comments at 4; ELCON 2017 Comments at 7.

    894 AWEA 2017 Comments at 60.

    895 NextEra 2017 Comments at 52.

    896 Alliant 2017 Comments at 13.

    897 Idaho Power 2017 Comments at 6.

    898 TDU Systems 2017 Comments at 30-31.

    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.899 MISO also supports the proposal, and comments that interconnection customers should not forfeit interconnection rights simply because the technology of their generating facility has become outdated.900 ISO-NE and NEPOOL state that ISO-NE's 2016 revisions to its interconnection procedures already establish clear rules to consistently and expeditiously determine whether a proposed modification is material.901 ISO-NE states that it developed its rules to respond to continuous requests for technical changes, which were one contributing factor to the Maine queue backlog.902 ISO-NE states that its recent tariff changes have addressed these issues. NYISO asserts that it does not oppose the NOPR proposal if it is limited to assessing the materiality and consideration of whether the transmission provider can accommodate a modification to the specific technology type initially proposed (as opposed to changing from gas to wind, for example).903 PJM states that it is not opposed to accounting for technological changes during the study process.904 However, PJM cites to its current practice of incorporating technological changes and states that a separate “technological change procedure” is not necessary to determine whether such a modification is material.905

    899 CAISO 2017 Comments at 35.

    900 MISO 2017 Comments at 5.

    901 ISO-NE 2017 Comments at 52; NEPOOL 2017 Comments at 18.

    902 ISO-NE 2017 Comments at 52-53. ISO-NE noted that the revisions were developed with stakeholders to address interconnection challenges that have led to a backlog of interconnection requests for 4,000 MW of primarily wind generation in Maine. See ISO New England Inc. and Participating Transmission Owners Admin. Comm., 155 FERC ¶ 61,031, at P 2 (2016).

    903 NYISO 2017 Comments at 43.

    904 PJM 2017 Comments at 30.

    905 PJM 2017 Comments at 30.

    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.906 EEI asserts that the Commission has not clearly explained the difference between a technological advancement and a material modification and that the proposal unreasonably limits a transmission provider's ability to evaluate reliability impacts.907 EEI states that, if the Commission decides to establish more granular procedures for technological advancements, it should not duplicate the material modification requirements. Instead, EEI suggests that the Commission could require transmission providers to explain whenever a change that is not explicitly listed in the pro forma LGIP constitutes a material modification.908 EEI also states that it is reasonable to leave significant discretion to sound engineering judgment in order to balance the need to implement technological advancements, improve performance and efficiencies, and to maintain safe, reliable service.909 Southern adds that the concern should not be about developing types of advanced technologies, but how that technology impacts already queued requests.910 TVA suggests that, rather than identifying specific pre-qualified technical advancements, interconnection customers should update their model data before starting the system impact study.911 Xcel notes that the types and impacts of changes evolve as technology advances, and while it does not consider a pro forma LGIP change necessary, it encourages customers to provide studies and evidence that any change is immaterial.912 Xcel also recommends that the Commission hold a technical conference or workshop to discuss material modification issues, which it anticipates will show the variation and difficulty involved in evaluating such modifications.913

    906 AES 2017 Comments at 8-9; Duke 2017 Comments at 24; EEI 2017 Comments at 67; PG&E 2017 Comments at 9 (citing CAISO Business Practice Manual for Generator Management Section 6); Southern 2017 Comments at 32; TVA 2017 Comments at 18; Xcel 2017 Comment at 22.

    907 EEI 2017 Comments at 5, 67, 68-69.

    908Id. at 69, 73.

    909Id. at 73.

    910 Southern 2017 Comments at 32.

    911 TVA 2017 Comments at 18.

    912 Xcel 2017 Comment at 22.

    913Id.

    ii. Commission Determination

    518. We adopt the NOPR proposal subject to certain clarifications. We require transmission providers to include in their pro forma LGIP a technological change procedure. They must also assess, and if necessary, study whether proposed technological advancements can be incorporated into interconnection requests without triggering the material modification provisions of the pro forma LGIP. Furthermore, transmission providers must, consistent with the guidance provided in this final action, develop a definition of permissible technological advancement. Such permissible technological advancements would, by definition, not constitute material modifications.

    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 (i.e., materially impact the transmission system with regard to short circuit capability limits, steady-state thermal and voltage limits, or dynamic system stability and response).914

    914 In the next section, we respond to EEI's comment as to what was meant by “performance that is equal or better than the electrical performance expected prior to the technology change.”

    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 pro forma LGIP, the transmission provider shall provide an explanation to the interconnection customer regarding why the technological advancement is a material modification.

    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.915 We find that, contrary to the assertions that the existing material modification procedures are adequate, the proposed reforms are necessary to improve certainty and transparency.

    915See AFPA 2017 Comments at 16; AWEA 2017 Comments at 60-61; ELCON 2017 Comments at 7; NextEra 2017 Comments at 52.

    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.916 EEI further asserts that the Commission has not clearly explained the difference between a technological advancement and a material modification and that the proposal unreasonably limits a transmission provider's ability to evaluate reliability impacts.917 In response to these concerns, we note that the purpose of the technological change procedure is to allow for equipment changes resulting in electrical performance that is equal to or better than an interconnection request's previously projected electrical performance and not cause any reliability concerns.918 We have designed the technological change procedure to allow transmission providers to evaluate whether equipment changes in an interconnection request should trigger the material modification provisions. This new requirement increases transparency in the interconnection process and allows transmission providers to evaluate the impact of a proposed technological advancement to determine whether it qualifies as a material modification, and, thus will result in the interconnection customer losing its queue position.

    916 EEI 2017 Comments at 69-70.

    917Id. at 5, 67, 68-69.

    918 For example, an interconnection customer may elect to incorporate a smart inverter that is capable of sensing and autonomously reacting to changes on the grid.

    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.

    c. Definition of Permissible Technological Advancements i. Comments

    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.919 Alliant and AWEA support an inclusive definition of technological advancement that accounts for changes that already exist.920 Alliant states that while a “loose” definition of material modification creates uncertainty and additional risk associated with replacing equipment or completing normal unit maintenance, an overly rigid definition could burden generator owners with unnecessary costs and the system operator with a longer backlog or strained resources.921 Other commenters assert that the rate of technological advancement makes it difficult to speculate which technologies to include.922 MISO TOs request clearer Commission direction to develop clear material modification guidelines.923 They also state that RTO/ISO guidelines should specify 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.924

    919 AWEA 2017 Comments at 62; Alliant 2017 Comments at 13-14; Duke 2017 Comments at 25; EEI 2017 Comments at 6.

    920 Alliant 2017 Comments at 13-14; AWEA 2017 Comments at 62.

    921 Alliant 201 Comments at 13-14.

    922 Duke 2017 Comments at 25; EEI 2017 Comments at 69.

    923 MISO TOs 2017 Comments at 41.

    924 MISO TOs 2017 Comments at 42.

    528. EDP argues that changes between wind and solar technologies should be treated as non-material modifications.925 Other commenters disagree and request that the Commission make clear that permissible technological advancements exclude changes in generation technology type.926 NextEra argues that an incremental change within the same technology class, e.g., substituting a newer model of solar panel than originally planned, is not material.927 NYISO states that it opposes any tariff changes that would consider changes “to the technology type that would essentially constitute a new facility as non-material modifications—e.g., the addition of a battery element to a wind project or the addition of a solar element to a wind project.” 928 NextEra submits that transmission providers should be able to define a category of permissible technological advancements that will not need extensive studies.929 EEI supports leaving the definition to the transmission provider's discretion.930

    925 EDP 2017 Comments at 9.

    926 EEI 2017 Comments at 71; NYISO Comments at 43.

    927 NextEra 2017 Comments at 52.

    928 NYISO 2017 Comments at 43.

    929 NextEra 2017 Comments at 52.

    930 EEI 2017 Comments at 70.

    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.” 931 EEI also states that some material considerations such as electrical characteristics (e.g., reactive power), capacity factor, and time of use should be studied holistically.932

    931Id.

    932Id.

    ii. Commission Determination

    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 pro forma LGIP. We are providing transmission providers with the flexibility to propose a unique definition for permissible technological advancements in their compliance filings. Some commenters caution against an overly prescriptive definition to account for the unpredictability of technology evolution.933 We agree that transmission providers should have the flexibility to account for the rapid pace of innovation when developing the definition. The definition must make clear what category of technological advancements can be accommodated that do not require extensive or additional studies to determine whether a proposed technological advancement is a material modification.934 As noted in the NOPR, such permissible changes may include, for example, advancements to turbines, inverters, plant supervisory controls, or other technological advancements that may affect a generating facility's ability to provide ancillary services.935 We clarify that the assessment of whether a technological advancement is permissible is limited to assessing the materiality of the change and consideration of whether the transmission provider can accommodate a modification to the specific technology type initially proposed in the interconnection request. Although some commenters argue that changes between wind and solar technologies should be treated as non-material modifications,936 we disagree since such changes involve a change in the electrical characteristics of an interconnection request, and the transmission provider would likely need to evaluate the impacts of such changes. We also agree that the definition of permissible technological advancements must not include changes in generation technology or fuel type 937 (e.g., from gas to wind) because they involve a change in the electrical characteristics of an interconnection request.

    933 AWEA 2017 Comments at 62; Alliant 2017 Comments at 13-14; Duke 2017 Comments at 25; EEI 2017 Comments at 6.

    934See e.g., NextEra 2017 Comments at 52.

    935 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 212.

    936See e.g., EDP 2017 Comments at 9.

    937 EEI 2017 Comments at 71; NYISO Comments at 43.

    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.938 Responding to comments questioning whether certain technological advancements can be accommodated without materially affecting other interconnection customers in the queue as well as EEI's comment as to what was meant by “performance that is equal or better than the electrical performance expected prior to the technology change,” we find that a technological advancement that does not increase the interconnection customer's requested interconnection service or cause any reliability concerns (i.e., materially impact the transmission system with regard to short circuit capability limits, steady-state thermal and voltage limits, or dynamic system stability and response), is generally not a material modification. Further, we clarify that technological advancements that do not degrade the electrical characteristics of the generating equipment (e.g., the ratings, impedances, efficiencies, capabilities, and performance of the equipment under steady state and dynamic conditions) qualify as performance that is “equal to or better than the performance expected prior to the change.” 939

    938 MISO TOs 2017 Comments at 42.

    939 We note that TDU Systems argue for a similar interpretation of permissible technological advancement. TDU Systems 2017 Comments at 30-31.

    d. Timing and Deposits i. Comments

    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.940 NYISO supports only allowing modifications early in the interconnection study process.941 EEI requests clarification on when an interconnection customer should be able to request the incorporation of advanced technology; it is unsure if the Commission proposes to allow different technological advancements to trigger the procedure at different points or a single set of technological advancements prior to the facilities study agreement's execution.942 It further argues that technology changes without a change of queue position could result in additional studies and delays, particularly if the change is material or if the process to study the technological advancement negatively impacts the overall interconnection study process.943 EEI states that any final action should provide the flexibility for a transmission provider to evaluate the impact of a proposed technological advancement, relative to allowing it in the current study or requiring the generator to reenter the queue.944

    940 EEI 2017 Comments at 72-73.

    941 NYISO 2017 Comments at 44.

    942 EEI 2017 Comments at 71.

    943Id. at 71-72.

    944Id. at 72.

    533. AWEA supports allowing technological advancements at any point including after an interconnection agreement is executed and a generating unit is online.945 Generation Developers argue that transmission providers should have to respond to technological advancement analyses within 15 days.946 Conversely, Bonneville opposes a specific study completion timeframe, and suggests that a transmission provider would meet its obligation if it uses reasonable efforts.947

    945 AWEA 2017 Comments at 62.

    946 Generation Developers 2017 Comments at 44.

    947 Bonneville 2017 Comments at 11.

    ii. Commission Determination

    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.948

    948See EEI 2017 Comments at 72-73.

    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.949 After consideration of comments and the record in this proceeding, we believe that it is appropriate to establish a 30-day study result deadline. Accordingly, transmission providers must perform and complete any necessary additional studies as soon as practicable, but no later than 30 days after the interconnection customer submits a formal technological advancement request to the transmission provider. Although Bonneville opposes a specific study completion timeframe, and suggests that a transmission provider would meets its obligation if it uses reasonable efforts,950 we find that, given that the pro forma LGIP currently contains no requirement for such studies to be completed within a specified timeframe, a 30-day requirement to determine whether the proposed technological advancement is a material modification adds certainty to the interconnection process.

    949See, e.g., id.

    950 Bonneville 2017 Comments at 11.

    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,951 we disagree. We believe that we are establishing a reasonable cut-off point for allowing technological advancements that will not be considered material modifications given that changes requested during the facilities study could delay the transmission provider's ability to tender an interconnection service agreement and, consequently, delay other projects.952 In addition, in response to EEI's concerns regarding whether the Commission envisions allowing different technological advancements to trigger the procedure at different points in the interconnection process, or if the Commission is proposing to allow one single set of technological advancements prior to the execution of the interconnection facilities study agreement, we clarify that interconnection customers must submit a technological advancement request for any type of technological advancement in the interconnection process up until execution of the interconnection facilities study agreement. However, to the extent that a transmission provider believes that it is appropriate to establish rules that permit technological advancements only at a single point in its interconnection process (prior to the execution of the interconnection facilities study agreement), we permit transmission providers to propose such a practice in their compliance filings.

    951See, e.g., AWEA 2017 Comments at 62 (stating that “the technological change procedure should be allowed at any point in the interconnection process”).

    952 PJM 2017 Comments at 30.

    5. Modeling of Electric Storage Resources for Interconnection Studies a. NOPR Proposal

    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.

    b. Comments

    538. Several commenters support the proposal to require transmission providers to evaluate their methods for modeling electric storage resources for interconnection studies.953 MISO TOs state that MISO lacks clear standards for modeling electric storage, and ask that the Commission convene a workshop or technical conference to allow the industry to determine best practices.954 NEPOOL argues that the NOPR proposal would improve modeling of storage and facilitate entry of storage resources into the markets.955 Non-Profit Utility Trade Associations and PJM state that they do not object to the proposal.956

    953 AFPA 2017 Comments at 17; California Energy Storage Alliance 2017 Comments at 9-11; Joint Renewable Parties 2017 Comments at 12-13; MISO TOs 2017 Comments at 43; NEPOOL 2017 Comments at 18; NextEra 2017 Comments at 53; Public Interest Organizations 2017 Comments at 8-9; Indicated NYTOs 2017 Comments at 15.

    954 MISO TOs 2017 Comments at 43.

    955 NEPOOL 2017 Comments at 18.

    956 Non-Profit Utility Trade Associations 2017 Comments at 26; PJM 2017 Comments at 30.

    539. Other commenters support the proposal but ask the Commission to give transmission providers flexibility to address any necessary changes.957 For example, Indicated NYTOs state that the evaluation of storage-related interconnection must be conducted in the context of each regional stakeholder process.958 Duke and NYISO take a similar view. They oppose a unified model for studying electric storage resources because it could remove a transmission provider's flexibility to study the various use cases for storage.959

    957 Indicated NYTOs 2017 Comments at 15; ITC 2017 Comments at 20-21; Bonneville 2017 Comments at 11-12.

    958 Indicated NYTOs 2017 Comments at 15.

    959 Duke 2017 Comments at 25; NYISO 2017 Comments at 45.

    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.960 Similarly, Schulte Associates suggests that an energy storage resource should be able to interconnect as a generator under the LGIP and LGIA and the electric storage resource should be able to also act as a transmission asset, if applicable.961

    960 Public Interest Organizations 2017 Comments at 8-9.

    961 Schulte Associates 2017 Comments at 4.

    541. Other commenters, primarily the RTOs/ISOs, believe current modeling practices are adequate for the interconnection of electric storage resources.962 ISO-NE and PJM state that their modeling practices are able to study storage resources when they are either charging or discharging energy.963 NYISO adds that modeling electric storage resources can be challenging because it depends on the services the resource wants to provide, but that current modeling approaches are sufficient as long as the interconnection customer provides accurate modeling data and validation of such data.964 CAISO states that its stakeholders support CAISO's modeling of electric storage resources' charging function as “negative generation” in lieu of conducting traditional firm load studies, which some participants and commenters identified as a best practice during the Commission's 2016 Technical Conference and in post-technical conference comments.965 Idaho Power asks the Commission to elaborate on the size and capacity of electric storage resources to be evaluated.966

    962 CAISO 2017 Comments at 36-37; ISO-NE 2017 Comments at 55; MISO 2017 Comments at 39; NYISO 2017 Comments at 45; PJM 2017 Comments at 31; AVANGRID 2017 Comments at 25.

    963 ISO-NE 2017 Comments at 55; PJM 2017 Comments at 31.

    964 NYISO 2017 Comments at 45.

    965 CAISO 2017 Comments at 37.

    966 Idaho Power 2017 Comments at 7.

    542. Schulte Associates suggests that electric storage resources should be able to propose consideration as a transmission asset under the pro forma LGIP and the pro forma LGIA and that this would require the RTOs/ISOs to consider the potential benefits and costs to the transmission system as part of its modeling methods going forward.967 ESA, NextEra, TVA, and Xcel support modeling an electric storage resource based on its intended use,968 and MISO and Duke provide examples of specific information interconnection customers should provide.969

    967 Schulte Associates 2017 Comments at 4.

    968 ESA 2017 Comments at 17-18; NextEra 2017 Comments at 54; TVA 2017 Comments at 18-19; Xcel 2017 Comment at 23.

    969 Duke 2017 Comments at 26-27; MISO 2017 Comments at 39.

    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.970 Several commenters support the “negative generation” approach employed in CAISO.971

    970 MISO 2017 Comments at 39; ESA 2017 Comments at 16-17.

    971Id. at 17; NextEra 2017 Comments at 53; PG&E 2017 Comments at 9.

    c. Commission Determination

    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 storage resources in ways that are most appropriate in their respective regions. Additionally, in response to Schulte Associates, we are not requiring Transmission Providers to model electric storage resources serving as transmission assets under the pro forma LGIP and the pro forma LGIA at this time. Given the flexibility that we are providing, we find that gathering additional information on potential approaches for modeling electric storage resources is not necessary at this time, but we encourage transmission providers to continue to consider approaches to modeling electric storage resources that will save costs and improve the efficiency of the interconnection process.

    D. Other Issues 1. Whether Proposed Reforms Should Be Applied to Small Generation a. Comments

    545. In response to the Commission's question in the NOPR,972 several commenters suggest that new proposals accepted for the LGIP and LGIA should also apply to the SGIP and SGIA.973 Joint Renewable Parties also contend that improved transparency would assist small generators in locating their facilities and moving through the interconnection process efficiently and cost-effectively.974 ESA supports extending the proposals regarding interconnection service below facility capacity, surplus interconnection service, provisional interconnection service, and electric storage modeling to apply to the pro forma SGIA and SGIP.975 California Energy Storage Alliance also suggests that the Commission consider simplified procedures for interconnecting distributed electric storage resources that desire to participate in wholesale markets, either as a standalone resources or as part of an aggregation.976 TVA states that the small generator interconnection process could benefit from the proposed reforms and discussions involving affected system studies and any guidelines for modeling and evaluating electric storage resources.977

    972 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 11.

    973 California Energy Storage Alliance 2017 Comments at 11; Joint Renewable Parties 2017 Comments at 3; ISO-NE 2017 Comments at 56.

    974 Joint Renewable Parties 2017 Comments at 11.

    975 ESA 2017 Comments at 18.

    976 California Energy Storage Alliance 2017 Comments at 11-13.

    977 TVA 2017 Comments at 19.

    546. Others argue that the proposed reforms should not apply to small generating facilities.978 Duke, for instance, argues that the SGIP and SGIA processes are designed to be streamlined and that states use the processes as the bases for state small generator interconnection processes.979 Modesto asserts that, if the Commission believes it should make comparable revisions to the SGIP and SGIA, such revisions should be subject to appropriate notice and comment rulemaking procedures.980 Xcel states that if the Commission wishes to pursue this possibility, it should initiate a notice of inquiry.981

    978 Duke 2017 Comments at 3-4; Modesto 2017 Comments at 22; SoCal Edison 2017 Comments at 2; Xcel 2017 Comments at 5; see also Imperial 2017 Comments 20-21.

    979 Duke 2017 Comments at 3-4.

    980 Modesto April 2017 Comments at 22; Xcel 2017 Comments at 5.

    981Id.

    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.982 PG&E states that the administrative burden and costs of doing so outweighs the benefits.983 PG&E states that, as explained in section 2.13 of the wholesale distribution access tariff, such interconnection facilities are considered distribution facilities for purposes of the wholesale distribution access tariff.984

    982 PG&E 2017 Comments at 2; SoCal Edison 2017 Comments at 1-2.

    983 PG&E 2017 Comments at 2.

    984Id. (citing Pac. Gas & Elec. Co., 77 FERC ¶ 61,077 (1996); see also SoCal Edison 2017 Comments at 1-2.

    b. Commission Determination

    548. We decline to make the new requirements from this final action applicable to the pro forma SGIP and the pro forma SGIA. Although the Commission sought comment on whether any of the proposed reforms should be applied to small generating facilities and implemented in the pro forma SGIP and pro forma SGIA, the Commission did not make any specific proposals as to the pro forma SGIP or pro forma SGIA. We also note that the majority of responsive commenters oppose such a change.985

    985 Duke 2017 Comments at 3-4; Modesto 2017 Comments at 22; SoCal Edison 2017 Comments at 2; Xcel 2017 Comments at 5; see also Imperial 2017 Comments 20-21.

    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.

    2. Issues Not Raised in the NOPR a. Comments

    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.986 Additionally, IECA urges the Commission to alter the QF minimum export threshold to be based on “total energy” exported to the grid and not on net system capacity because the current system discriminates against combined heat and power and waste heat recovery facilities in favor of other types of facilities.987

    986 Joint Renewable Parties 2017 Comments at 13-15.

    987 IECA 2017 Comments at 3.

    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.988 First Solar states that there is also significant misalignment in CAISO's deliverability allocation procedures where upgrade cost caps deprive generators of the ability to deliver a plant's full output, which can prevent interconnection customers from competing in solicitations or force them to withdraw from the queue.989 Invenergy argues that the Commission should update pro forma LGIA article 5.17 to incorporate recent changes in the Internal Revenue Service safe harbor rules.990 CAISO, Xcel, and Southern express views that the Commission move away from a first-come, first-served standard to a first-ready, first-served standard.991

    988 Forecasting Coalition 2017 Comments at 1.

    989 First Solar 2017 Comments at 1.

    990 Invenergy 2017 comments at 16.

    991 CAISO 2017 Comments at 38-39; Xcel 2017 Comments at 6-7; Southern 2017 Comments at 6.

    b. Commission Determination

    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 here given the inadequacy of the record on such proposals.

    3. Process Considerations a. Comments

    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.992 OATI states that if the final action requires new informational postings by transmission providers, the Commission should direct the nature and standards for those postings to NAESB.993 OATI states that access to any additional postings made on a transmission provider's OASIS site requires secure and controlled access. OATI asks the Commission to assess the impact of new information on OASIS to decide if OASIS is the appropriate location for additional information and, if so, determine how currently available information on OASIS is accessed, and what would be necessary to post additional information.994

    992 Duke 2017 Comments at 28.

    993 OATI 2017 Comments at 1-2.

    994Id. at 7.

    b. Commission Determination

    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.

    4. Compliance and Implementation a. Comments

    554. EEI, Duke, ITC, MISO TOs, and Xcel request that the Commission allow 180 days for compliance with any final action.995 Duke and ITC also request a date of one year after the final action for implementation of the revised OATTs included in the compliance filings.996

    995 EEI 2017 Comments at 77; Duke 2017 Comments at 28; ITC 2017 Comments at 21; MISO TOs 2017 Comments at 44; Xcel 2017 Comments at 23.

    996 Duke 2017 Comments at 28; ITC 2017 Comments at 21.

    b. Commission Determination

    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 pro forma LGIP and pro forma LGIA “required by Commission rulemaking proceedings promulgating and amending” such agreements. Despite the comments described above, we see no reason to delay the effective date or extend the compliance deadline of this final action. Therefore, the Commission is requiring all public utility transmission providers to submit compliance filings to adopt the requirements of this final action as revisions to the LGIP and LGIA in their OATTs no later than 90 days after the issuance of this final action in the Federal Register.997

    997 NOPR, FERC Stats. & Regs. ¶ 32,719 at P 231.

    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 pro forma LGIP or pro forma LGIA or permissible under the independent entity variation standard or regional reliability standard.998 Where these provisions are modified by this final action, public utility transmission providers must either comply with this final action or demonstrate that these previously-approved variations continue to be consistent with or superior to the pro forma LGIP and pro forma LGIA as modified by this final action or continue to be permissible under the independent entity variation standard or regional reliability standard.999 We also find that transmission providers that are not public utilities must adopt the requirements of this final action as a condition of maintaining the status of their safe harbor tariff or otherwise satisfying the reciprocity requirement of Order No. 888.1000

    998See Order No. 792, 145 FERC ¶ 61,159 at P 270.

    999See 18 CFR 35.28(f)(1)(i) (2017).

    1000 Order No. 888, FERC Stats. & Regs. ¶ 31,036 at 31,760-63.

    V. Information Collection Statement

    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 1995.1001 OMB's regulations,1002 in turn, require approval of certain information collection requirements imposed by agency rules. Upon approval of a collection(s) of information, OMB will assign an OMB control number and an expiration date. Respondents subject to the filing requirements of a rule will not be penalized for failing to respond to the collection of information unless the collection of information displays a valid OMB control number.

    1001See 44 U.S.C. 3507(d) (2012).

    1002 5 CFR part 1320 (2017).

    558. The reforms adopted in this final action revise the Commission's pro forma LGIP and pro forma LGIA. This final action requires each public utility transmission provider to amend its LGIP and LGIA to: (1) Remove the limitation that interconnection customers may only exercise the option to build transmission provider's interconnection facilities and stand alone network upgrades in instances when the transmission owner cannot meet the dates proposed by the interconnection customer; (2) require that transmission providers establish interconnection dispute resolution procedures that would allow a disputing party to unilaterally seek non-binding dispute resolution; (3) require transmission providers to outline and make public a method for determining contingent facilities; (4) require transmission providers to list the specific study processes and assumptions for forming the network models used for interconnection studies; (5) revise the definition of “Generating Facility” to explicitly include electric storage resources; (6) establish reporting requirements for aggregate interconnection study performance; (7) allow interconnection customers to request a level of interconnection service that is lower than their generating facility capacity; (8) require transmission providers to allow for provisional interconnection agreements that provide for limited operation prior to completion of the full interconnection process; (9) require transmission providers to create a process for interconnection customers to use surplus interconnection service at existing points of interconnection; and (10) require 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. The reforms adopted in this final action require revised filings of LGIPs and LGIAs with the Commission. The Commission anticipates the revisions required by this final action, once implemented, will not significantly change currently existing burdens on an ongoing basis. With regard to those public utility transmission providers that believe they already comply with the revisions adopted in this final action, they can demonstrate their compliance in the filing required 90 days after the issuance of this final action in the Federal Register. The Commission will submit the proposed reporting requirements to OMB for its review and approval under section 3507(d) of the Paperwork Reduction Act.1003

    1003 44 U.S.C. 3507(d) (2012).

    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.

    Burden Estimate and Information Collection Costs: The Commission believes that the burden estimates below are representative of the average burden on respondents. The estimated burden and cost 1004 for the requirements contained in this final action follow.

    1004 The estimated hourly cost (salary plus benefits) provided in this section is based on the salary figures for May 2016 posted by the Bureau of Labor Statistics for the Utilities sector (available at http://www.bls.gov/oes/current/naics2_22.htm#13-0000) and scaled to reflect benefits using the relative importance of employer costs in employee compensation from June 2016 (available at https://www.bls.gov/oes/current/naics2_22.htm). The hourly estimates for salary plus benefits are:

    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.

    FERC 516F Number of
  • applicable
  • registered
  • entities
  • Annual number of
  • responses per respondent
  • Total number of
  • responses
  • Average burden
  • (hours) & costs per
  • response
  • Total annual burden hours
  • & total annual cost
  • (1) (2) (1) * (2) = (3) (4) (3) * (4) = (5) Issue A1—Scheduled periodic restudies 1005 126
  • 6
  • N/A
  • N/A
  • N/A
  • N/A
  • N/A
  • N/A
  • N/A.
  • N/A.
  • Issue A2—Interconnection customer's option to build (Non-RTO/ISO) 126 1 (Year 1); 0 (Ongoing) 1006 126 (Year 1); 0 (Ongoing) 4 hrs. (Year 1); $308
  • 0 hrs. (Ongoing); $0
  • 504 hrs. (Year 1); $38,808.
  • 0 hrs. (Ongoing); $0.
  • Issue A2—Interconnection customer's option to build (RTO/ISO) 6 1 (Year 1); 0 (Ongoing) 6 (Year 1); 0 (Ongoing) 4 hrs. (Year 1); $308
  • 0 hrs. (Ongoing); $0
  • 24 hrs. (Year 1); $1,848.
  • 0 (Ongoing); $0
  • Issue A3—Self-funding by the transmission owner 1007 (Non-RTO/ISO) 126 N/A N/A N/A N/A. Issue A3—Self-funding by the transmission owner (RTO/ISO) 6 N/A N/A N/A N/A. Issue A4—RTO/ISO dispute resolution (Non-RTO/ISO) 126 1 (Year 1); 0 (Ongoing) 126 (Year 1); 0 (Ongoing) 4 hrs. (Year 1); $308
  • 0 hrs. (Ongoing)
  • 504 hrs. (Year 1); $38,808.
  • 0 hrs. (Ongoing); $0.
  • Issue A4—RTO/ISO dispute resolution (RTO/ISO) 6 1 (Year 1); 0 (Ongoing) 6 (Year 1); 0 (Ongoing) 4 hrs. (Year 1); $308
  • 0 hrs. (Ongoing)
  • 24 hrs. (Year 1); $1,848.
  • 0 (Ongoing) $0.
  • Issue A5—Capping costs for network upgrades 1008 (Non-RTO/ISO) 126 N/A N/A N/A N/A. Issue A5—Capping costs for network upgrades (RTO/ISO) 6 N/A N/A N/A N/A. Issue B1—Identification and definition of contingent facilities (Non-RTO/ISO) 126 1 (Year 1); 0 (Ongoing) 126 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 10,080 hrs. (Year 1); $776,160.
  • 0 hrs. (Ongoing); $0.
  • Issue B1—Identification and definition of contingent facilities (RTO/ISO) 6 1 (Year 1); 0 (Ongoing) 6 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 480 hrs. (Year 1);
  • $36,960.
  • 0 hrs. (Ongoing); $0.
  • Issue B2—Transparency in the interconnection process (Non-RTO/ISO) 126 1 (Year 1); 0 (Ongoing) 126 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 10,080 hrs. (Year 1); $776,160.
  • 0 hrs. (Ongoing); $0.
  • Issue B2—Transparency in the interconnection process (RTO/ISO) 6 1 (Year 1) 0 (Ongoing) 6 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 480 hrs. (Year 1);
  • $36,960.
  • 0 hrs. (Ongoing); $0.
  • Issue B3—Curtailment concerns (Non-RTO/ISO) 126 N/A N/A N/A N/A. Issue B3—Curtailment concerns (RTO/ISO) 6 N/A N/A N/A N/A. Issue B4—Definition of generating facility (non-RTO/ISO) 126 1 (Year 1); 0 (Ongoing) 126 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 10,080 hrs. (Year 1); $776,160.
  • 0 hrs. (Ongoing); $0.
  • Issue B4—Definition of generating facility (RTO/ISO) 6 1 (Year 1) 0 (Ongoing) 6 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 480 hrs. (Year 1);
  • $36,960.
  • 0 hrs. (Ongoing); $0.
  • Issue B5—Interconnection study deadlines (non-RTO/ISO) 126 1 (Year 1); 4 (Ongoing) 126 (Year 1); 504 (Ongoing) 4 hrs. (Year 1); $308
  • 4 hrs. (Ongoing) $308
  • 504 hrs. (Year 1); $38,808.
  • 2,016 hrs. (Ongoing); $155,232.
  • Issue B5—Interconnection study deadlines (RTO/ISO) 6 1 (Year 1) 4 (Ongoing) 6 (Year 1); 24 (Ongoing) 4 hrs. (Year 1); $308
  • 4 hrs. (Ongoing); $308
  • 24 hrs. (Year 1); $1,848.
  • 96 hrs. (Ongoing); 7,392.
  • Issue B6—Improving Coordination of Affected Systems 1009 (non-RTO/ISO) 126 N/A N/A N/A N/A. Issue B6—Improving Coordination of Affected Systems (RTO/ISO) 6 N/A N/A N/A N/A. Issue C1—Requesting interconnection service below generating facility capacity (Non-RTO/ISO) 126 1 (Year 1) 0 (Ongoing) 126 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 10,080 hrs. (Year 1); $776,160.
  • 0 hrs. (Ongoing); $0.
  • Issue C1—Requesting interconnection service below generating facility capacity (RTO/ISO) 6 1 (Year 1) 0 (Ongoing) 6 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 480 hrs. (Year 1);
  • $36,960.
  • 0 hrs. (Ongoing); $0.
  • Issue C2—Provisional agreements (non-RTO/ISO) 126 1 (Year 1) 0 (Ongoing) 126 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 10,080 hrs. (Year 1); $776,160.
  • 0 hrs. (Ongoing); $0.
  • Issue C2—Provisional agreements (RTO/ISO) 6 1 (Year 1) 0 (Ongoing) 6 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 480 hrs. (Year 1);
  • $36,960.
  • 0 hrs. (Ongoing); $0.
  • Issue C3—Utilization of surplus interconnection service (non-RTO/ISO) 126 1 (Year 1) 0 (Ongoing) 126 (Year 1); 0 (Ongoing) 4 hrs. (Year 1); $308
  • 0 hrs. (Ongoing) $0
  • 504 hrs. (Year 1); $38,808.
  • 0 hrs. (Ongoing); $0.
  • Issue C3—Utilization of surplus interconnection service (RTO/ISO) 6 1 (Year 1) 0 (Ongoing) 6 (Year 1); 0 (Ongoing) 4 hrs. (Year 1); $308
  • 0 hrs. (Ongoing) $0
  • 24 hrs. (Year 1); $1,848.
  • 0 (Ongoing) $0.
  • Issue C4—Material modification and incorporation of advanced technologies (non-RTO/ISO) 126 1 (Year 1) 0 (Ongoing) 126 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 10,080 hrs. (Year 1); $776,160.
  • 0 hrs. (Ongoing); $0.
  • Issue C4—Material modification and incorporation of advanced technologies (RTO/ISO) 6 1 (Year 1) 0 (Ongoing) 6 (Year 1); 0 (Ongoing) 80 hrs. (Year 1); $6,160
  • 0 hrs.; (Ongoing); $0
  • 480 hrs. (Year 1);
  • $36,960.
  • 0 hrs. (Ongoing); $0.
  • Issue C5—Modeling of electric storage resources 1010 (non-RTO/ISO) 126 N/A N/A N/A N/A. Issue C5—Modeling of electric storage resources (RTO/ISO) 6 N/A N/A N/A N/A. Total Non-RTO/ISO, Year 1 1,260 62,244 hrs.; $4,792,788 Non-RTO/ISO, Ongoing 504 2,016 hrs.; $155,232 RTO/ISO, Year 1 60 2,976 hrs.; $229,152 RTO/ISO, Ongoing 24 96 hrs.; $7,392

    Cost to Comply: The Commission has projected the cost of compliance as follows:

    1005 There are no estimates for this section, because the Commission has withdrawn the NOPR proposal.

    1006 Ongoing refers to Year 2 and ongoing.

    1007 There are no estimates for this section, because the Commission has withdrawn the NOPR proposal.

    1008 There are no estimates for this issue, because the NOPR did not propose, and the final action did adopt, any requirements for this issue.

    1009 There are no estimates for this issue, because the NOPR did not propose, and the final action did adopt, any requirements for this issue.

    1010 There are no estimates for this section, because the Commission has withdrawn the NOPR proposal.

    • Year 1: $5,021,940 • Ongoing: $162,624

    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.

    Title: FERC-516F, Electric Rate Schedules and Tariff Filings.

    Action: Proposed information collection.

    OMB Control No.: TBD.

    Respondents for Proposal: Businesses or other for profit and/or not-for-profit institutions.

    Frequency of Information: One-time during Year 1. Multiple times during subsequent years.

    Necessity of Information: The Commission issues this final action to address interconnection practices that may be resulting in unjust and unreasonable or unduly discriminatory or preferential rates, terms, and conditions. The reforms are designed to improve certainty in the interconnection process, to promote more informed interconnection decisions by interconnection customers, and to enhance interconnection processes.

    Internal Review: The Commission has reviewed the proposed changes and has determined that such changes are necessary. These requirements conform to the Commission's need for efficient information collection, communication, and management within the energy industry. The Commission has specific, objective support for the burden estimates associated with the information collection requirements.

    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: [email protected], phone: (202) 502-8663, fax: (202) 273-0873.

    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: [email protected]. Comments submitted to OMB should refer to FERC-516F and OMB Control No. to be determined.

    VI. Environmental Analysis

    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.1011 The Commission concludes that neither an Environmental Assessment nor an Environmental Impact Statement is required for this final action under § 380.4(a)(15) of the Commission's regulations, which provides a categorical exemption for approval of actions under sections 205 and 206 of the FPA relating to the filing of schedules containing all rates and charges for the transmission or sale of electric energy subject to the Commission's jurisdiction, plus the classification, practices, contracts, and regulations that affect rates, charges, classification, and services.1012

    1011Regulation Implementing National Environmental Policy Act of 1969, Order No. 486, FERC Stats. & Regs. ¶ 30,783 (1987).

    1012 18 CFR 380.4(a)(15) (2017).

    VII. Regulatory Flexibility Act

    564. The Regulatory Flexibility Act of 1980 (RFA) 1013 generally requires a description and analysis of rules that will have significant economic impact on a substantial number of small entities. The RFA mandates consideration of regulatory alternatives that accomplish the stated objectives of a rule and that minimize any significant economic impact on a substantial number of small entities. The Small Business Administration's (SBA) Office of Size Standards develops the numerical definition of a small business.1014 The small business size standards are provided in 13 CFR 121.201.

    1013 5 U.S.C. 601-12 (2012).

    1014 13 CFR 121.101 (2017) Sector 22 (Utilities), NAICS code 22121 (Electric Power Transmission and Control).

    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 1,1015 and 16 hours or $1,232 in subsequent years.1016 According to SBA guidance, the determination of significance of impact “should be seen as relative to the size of the business, the size of the competitor's business, and the impact the regulation has on larger competitors.” 1017 The Commission does not consider the estimated burden to be a significant economic impact. As a result, the Commission certifies that the revisions adopted in this final action will not have a significant economic impact on a substantial number of small entities.

    1015 65,220 hours ÷ 132 = 494 hours/respondent; $5,021,940 ÷ 132 = $38,045/respondent.

    1016 2,112 hours ÷ 132 = 16 hours/respondent; $162,624 ÷ 132 = $1,232/respondent.

    1017 U.S. Small Business Administration, A Guide for Government Agencies: How to Comply with the Regulatory Flexibility Act, at 18 (August 2017), https://www.sba.gov/sites/default/files/advocacy/How-to-Comply-with-the-RFA-WEB.pdf.

    VIII. Document Availability

    566. In addition to publishing the full text of this document in the Federal Register, the Commission provides all interested persons an opportunity to view and/or print the contents of this document via the internet through the Commission's Home Page (http://www.ferc.gov) and in the Commission's Public Reference Room during normal business hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street NE, Room 2A, Washington, DC 20426.

    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 [email protected], or the Public Reference Room at (202) 502-8371, TTY (202) 502-8659. Email the Public Reference Room at [email protected].

    IX. Effective Date and Congressional Notification

    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.

    List of Subjects in 18 CFR Part 37

    Conflicts of interest, Electric power plants, Electric utilities, Reporting and recordkeeping requirements.

    By the Commission.

    Issued: April 19, 2018. Nathaniel J. Davis, Sr., Deputy Secretary.
    [FR Doc. 2018-08659 Filed 5-8-18; 8:45 am] BILLING CODE 6717-01-P
    83 90 Wednesday, May 9, 2018 Proposed Rules Part III Securities and Exchange Commission 17 CFR Parts 240, 249, 275, et al. Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the Use of Certain Names or Titles; Proposed Rule SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240, 249, 275 and 279 [Release No. 34-83063; IA-4888; File No. S7-08-18] RIN 3235-AL27 Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the Use of Certain Names or Titles AGENCY:

    Securities and Exchange Commission.

    ACTION:

    Proposed rule.

    SUMMARY:

    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.

    DATES:

    Comments should be received on or before August 7, 2018.

    ADDRESSES:

    Comments may be submitted by any of the following methods:

    Electronic Comments

    • Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or

    • Send an email to [email protected]. Please include File Number S7-08-18 on the subject line.

    Paper Comments

    • Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

    All submissions should refer to File Number S7-08-18. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. 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.

    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 www.sec.gov to receive notifications by email.

    FOR FURTHER INFORMATION CONTACT:

    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 [email protected], and Benjamin Kalish, Elizabeth Miller, Parisa Haghshenas (Branch Chief), and Holly Hunter-Ceci (Assistant Director), Chief Counsel's Office at (202) 551-6825 or [email protected], Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

    SUPPLEMENTARY INFORMATION:

    The Commission is proposing new rule 204-5 under the Investment Advisers Act of 1940 [15 U.S.C. 80b],1 and is proposing to amend Form ADV to add a new Part 3: Form CRS [17 CFR 279.1] under the Advisers Act. The Commission is also proposing to amend rules 203-1 [17 CFR 275.203-1], 204-1 [17 CFR 275.204-1], and 204-2 [17 CFR 275.204-2] under the Advisers Act. The Commission is proposing new rule 17a-14 under the Securities Exchange Act of 1934 [17 CFR 240.17a-14],2 and new Form CRS [17 CFR 249.640] under the Exchange Act. The Commission is also proposing to amend rules 17a-3 [17 CFR 240.17a-3] and 17a-4 [17 CFR 240.17a-4] under the Exchange Act. The Commission is further proposing new rule 15l-2 under the Exchange Act [17 CFR 240.15l-2], new rule 15l-3 under the Exchange Act [17 CFR 240.15l-3], and new rule 211h-1 under the Advisers Act [17 CFR 275.211h-1].

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

    2 15 U.S.C. 78a. Unless otherwise noted, when we refer to the Exchange Act, or any paragraph of the Exchange Act, we are referring to 15 U.S.C. 78a, at which the Exchange Act is codified, and when we refer to rules under the Exchange Act, or any paragraph of these rules, we are referring to Title 17, Part 240 of the Code of Federal Regulations [17 CFR 240], in which these rules are published.

    I. Background II. Form CRS Relationship Summary A. Presentation and Format B. Items 1. Introduction 2. Relationships and Services 3. Obligations to the Retail Investor—Standard of Conduct 4. Summary of Fees and Costs 5. Comparisons 6. Conflicts of Interest 7. Additional Information 8. Key Questions C. Delivery, Updating, and Filing Requirements 1. Filing Requirements 2. Delivery Requirements 3. Updating Requirements D. Transition Provisions E. Recordkeeping Amendments III. Restrictions on the Use of Certain Names and Titles and Required Disclosures A. Investor Confusion B. Restrictions on Certain Uses of “Adviser” and “Advisor” 1. Firms Solely Registered as Broker-Dealers and Associated Natural Persons 2. Dually Registered Firms and Dual Hatted Financial Professionals C. Alternative Approaches D. Disclosures About a Firm's Regulatory Status and a Financial Professional's Association IV. Economic Analysis A. Baseline 1. Providers of Financial Services 2. Investor Account Statistics 3. Investor Perceptions About Broker-Dealers and Investment Advisers B. Form CRS Relationship Summary 1. Broad Economic Considerations 2. Economic Effects of the Relationship Summary 3. Impact on Efficiency, Competition, and Capital Formation 4. Alternatives to the Proposed Relationship Summary 5. Request for Comments C. Restrictions on the Use of Certain Names and Titles and Required Disclosures 1. Broad Economic Considerations 2. Economic Effects of the Proposed Restrictions on the Use of Certain Titles and Required Disclosures 3. Impact on Efficiency, Competition, and Capital Formation 4. Alternatives to the Proposed Rules 5. Request for Comments D. Combined Economic Effects of Form CRS Relationship Summary and Restrictions on the Use of Certain Titles and Required Disclosures About a Firm's Regulatory Status V. Paperwork Reduction Act Analysis A. Form ADV 1. Respondents: Investment Advisers and Exempt Reporting Advisers 2. Changes in Burden Estimates and New Burden Estimates 3. Total Revised Burden Estimates for Form ADV B. Rule 204-2 Under the Advisers Act 1. Changes in Burden Estimates and New Burden Estimates 2. Revised Annual Burden Estimates C. Rule 204-5 Under the Advisers Act 1. Respondents: Investment Advisers 2. Initial and Annual Burdens D. Form CRS and Rule 17a-14 Under the Exchange Act 1. Respondents: Broker-Dealers 2. Initial and Annual Burdens E. Recordkeeping Obligations Under Rule 17a-3 of the Exchange Act F. Record Retention Obligations Under Rule 17a-4 of the Exchange Act 1. Changes in Burden Estimates and New Burden Estimates 2. Revised Annual Burden Estimates G. Rule 151-3 Under the Exchange Act 1. Respondents: Broker-Dealers and Associated Natural Persons 2. Initial and Annual Burdens H. Rule 211h-1 Under the Advisers Act 1. Respondents: Investment Advisers and Supervised Persons 2. Initial and Annual Burdens I. Request for Comment VI. Initial Regulatory Flexibility Analysis A. Reason for and Objectives of the Proposed Action 1. Proposed Form CRS Relationship Summary 2. Proposed Rules Relating to Restrictions on the Use of Certain Terms and Required Disclosure of Regulatory Status and a Financial Professional's Firm Association B. Legal Basis C. Small Entities Subject to the Rule and Rule Amendments 1. Investment Advisers 2. Broker-Dealers D. Projected Reporting, Recordkeeping and Other Compliance Requirements 1. Initial Preparation of Form CRS Relationship Summary 2. Rule 15l-2 Relating to Restrictions on the Use of Certain Terms in Names and Titles 3. Rules 15l-3 and 211h-1 Relating to Disclosure of Commission Registration Status and Financial Professional Association E. Duplicative, Overlapping, or Conflicting Federal Rules F. Significant Alternatives 1. Form CRS Relationship Summary 2. Rule 15l-2 Relating to Restrictions on the Use of Certain Terms in Names and Titles 3. Rule 15l-3 Relating to Disclosure of Commission Registration Status and Financial Professional Association G. Solicitation of Comments VII. Consideration of the Impact on the Economy VIII. Statutory Authority IX. Text of Rule and Form Appendices Appendix A: Form ADV: General Instructions Appendix B: [Form ADV, Part 3:] Instructions to Form CRS Appendix C: Dual Registrant Mock-Up Appendix D: Broker-Dealer Mock-Up Appendix E: Investment Adviser Mock-Up Appendix F: Feedback on the Relationship Summary I. Background

    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.3 A number of firms are dually registered with the Commission as broker-dealers and investment advisers, and offer both types of services.4 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.5 These differences include the scope and nature of the services they provide, the fees and costs associated with those services, conflicts of interest, and the applicable legal standards and duties to investors.

    3See Staff of the U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers as Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Jan. 2011), at 10-11, available at www.sec.gov/news/studies/2011/913studyfinal.pdf (“913 Study”). As discussed below, we have considered the findings, conclusions and recommendations of the 913 Study in developing this proposal.

    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.

    4 Investment advisers also may be registered with one or more states if, among other things, they have less than a certain amount of assets under management. See section 203A of the Advisers Act. References in this release to investment advisers generally refer only to SEC-registered investment advisers.

    5See, e.g., 913 Study, supra note 3. See also Letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America, et al., (Sept. 15, 2010) (“CFA Survey”) (submitting the results of a national opinion survey regarding U.S. investors and the fiduciary standard conducted by ORC/Infogroup for the Consumer Federation of America, AARP, the North American Securities Administrators Association, the Certified Financial Planner Board of Standards, Inc., the Investment Adviser Association, the Financial Planning Association and the National Association of Personal Financial Advisors); Siegel & Gale, LLC/Gelb Consulting Group, Inc., Results of Investor Focus Group Interviews About Proposed Brokerage Account Disclosures (Mar. 5, 2005), available at http://www.sec.gov/rules/proposed/s72599/focusgrp031005.pdf (“Siegel & Gale Study”); Angela A. Hung, et al., RAND Institute for Civil Justice, Investor and Industry Perspectives on Investment Advisers and Broker-Dealers (2008), available at https://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf (“RAND Study”).

    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 2013.6 A number of approaches with a range of formats have been considered to address this issue, such as a statement by broker-dealers that an account is a brokerage account and not an advisory account, and encouraging investors to ask questions.7 Through these initiatives, we have heard and considered the views of a wide range of commenters—financial firms, investors, consumer advocates, academics, and others. Improving retail investors' understanding of their different options for investment-related services through better disclosure is one key area on which commenters have focused. Commenters have suggested a range of presentations. Some commenters recommended a short disclosure document that explains the firm's services, fees, certain conflicts of interest, and the scope and nature of its services to the retail investor.8 Others recommended a longer, more comprehensive narrative document such as the Form ADV Part 2 brochure that investment advisers are required to deliver to their clients.9

    6See RAND Study, supra note 5; 913 Study, supra note 3; Duties of Brokers, Dealers, and Investment Advisers, Exchange Act Release No. 69013 (Mar. 1, 2013) [78 FR 14848 (Mar. 7, 2013)] (“2013 Request for Data”).

    7See, e.g., Certain Broker-Dealers Deemed Not to Be Investment Advisers, Exchange Act Release No. 51523 (Apr. 12, 2005) [70 FR 20424, 20435 (Apr. 19, 2005)], at n.124 and accompanying text (“2005 Broker Dealer Release”).

    8See, e.g., Comment letters of Sammons Retirement Solutions (Jun. 4, 2013) and Insured Retirement Institute (Jul. 3, 2013) (recommending a short summary disclosure document together with a longer disclosure document similar to Form ADV, to be offered by both broker-dealers and investment advisers); Comment letter of AARP (Jul. 25, 2013); Comment letter of American Council of Life Insurers (Jul. 5, 2013) (incorporating by reference its comment letter, dated Aug. 30, 2010); Comment letter of Financial Services Institute (Jul. 5, 2013).

    9See, e.g., Comment letter of Committee of Annuity Insurers (Jul. 5, 2013); Comment letter of Edward D. Jones and Co., L.P. (Jul. 12, 2013); Comment letter of North American Securities Administrators Association, Inc. (Jul. 5, 2013); Comment letter of PFS Investments, Inc. (Jul. 5, 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.10 Disclosure has also been a feature of other regulatory efforts that address investment advice, including those of the U.S. Department of Labor (“DOL”) applicable to services provided by broker-dealers and investment advisers,11 and rules applicable to broker-dealers issued by the Financial Industry Regulatory Authority (“FINRA”).12

    10See 913 Study, supra note 3, at 114-117. The 913 Study contemplated that the general relationship guide would be akin to Part 2A of Form ADV, which is generally referred to as an investment adviser's “brochure” and is the form investment advisers use to register with the Commission and states, which is provided to advisory clients. The 913 Study identified a number of potential disclosures that the Commission should consider including in such relationship guide. See also Recommendation of the Investor Advisory Committee: Broker-Dealer Fiduciary Duty, available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation-2013.pdf (“Broker-Dealer Fiduciary Duty Recommendations”). The recommendation of the Investor Advisory Committee suggested that the disclosure be provided at the start of the engagement and periodically thereafter, and that it cover basic information about the nature of the services offered, fees and compensation, conflicts of interest, and disciplinary record.

    11 For example, DOL regulations relating to “reasonable plan service arrangements” require firms providing advisory and other services to workplace retirement plans covered by the Employee Retirement Income Security Act of 1974 (“ERISA”) and the prohibited transaction provisions under section 4975 of the Internal Revenue Code (“Code”) to disclose in writing (among other things) a description of services and applicable fees. See 29 CFR 2550.408b-2. See also 29 CFR 2550.408g-1 (regulation requires fiduciary advisers to plans and individual retirement accounts (“IRAs”) seeking to rely on the statutory exemption for participant investment advice to provide certain disclosures, among other conditions). See also infra Section IV.A.1.c, which further describes disclosure obligations under DOL regulations and exemptions, including the DOL's “Best Interest Contract Exemption” (the “BIC Exemption”).

    12 Disclosure of Services, Conflicts and Duties, FINRA Notice 10-54 (Oct. 2010), available at http://www.finra.org/sites/default/files/NoticeDocument/p122361.pdf (“FINRA Notice 10-54”).

    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.13 Many commenters recommended enhanced disclosures in addition to regulations that would raise the standard of conduct for broker-dealers providing advice.14 Some recommended that both broker-dealers and investment advisers should provide a uniform disclosure document to retail investors,15 while others suggested new disclosure requirements only for broker-dealers.16 Commenters also noted that investor confusion based on financial professionals' titles persists, and made a range of suggestions.17 Specifically, some commenters believed that particular titles cause investors to either form misimpressions about whether the services received are those of an investment adviser and subject to a fiduciary duty, or these investors are misled by financial professionals to form such beliefs.18

    13 Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers, Chairman Jay Clayton (Jun. 1, 2017), available at https://www.sec.gov/news/public-statement/statement-chairman-clayton-2017-05-31 (“Chairman Clayton's Request for Comment”).

    14See, e.g., Comment letter of T. Rowe Price (Oct. 12, 2017) (“T. Rowe 2017 Letter”); Comment letter of Vanguard (Sept. 29, 2017) (“Vanguard 2017 Letter”); Comment letter of Teachers Insurance and Annuity Association of America (Sept. 26, 2017) (“TIAA 2017 Letter”); Comment letter of the Investment Adviser Association (Aug. 31, 2017) (“IAA 2017 Letter”); Comment letter of Stifel, Nicolaus & Co. (Jul. 25, 2017) (“Stifel 2017 Letter”); Comment letter of Bernardi Securities, Inc. (Sept. 11, 2017) (“Bernardi Securities 2017 Letter”); Comment letter of UBS Financial Services Inc. (Jul. 21, 2017) (“UBS 2017 Letter”); Comment letter of SIFMA (Jul 21, 2017) (“SIFMA 2017 Letter”); Comment letter of the Equity Dealers of America (Sept. 11, 2017) (“Equity Dealers of America 2017 Letter”); Comment letter of AARP (Sept. 6, 2017) (“AARP 2017 Letter”); Comment letter of Financial Services Institute (Oct. 30, 2017); Comment letter of Financial Services Roundtable (Oct. 17, 2017) (“FSR 2017 Letter”); Comment letter of Consumer Federation of America (Sept. 14, 2017) (“CFA 2017 Letter”).

    15See, e.g., Stifel 2017 Letter; Equity Dealers of America 2017 Letter; Comment letter of Michael Kiley (Jul. 6, 2017) (“Kiley 2017 Letter”); Comment letter of the American Council of Life Insurers (Oct. 3, 2017) (“ACLI 2017 Letter”); Comment letter of Allianz Life Insurance Company of North America (Oct. 13, 2017) (“Allianz 2017 Letter”); AARP 2017 Letter; Comment letter of Robert Shaw (Jun. 5, 2017) (“Shaw 2017 Letter”); Comment letter of Alan Syzdek (Jul. 2 2017); Comment letter of Americans for Financial Reform (Sept. 22, 2017) (“AFR 2017 Letter”).

    16See, e.g., SIFMA 2017 Letter; Comment letter of the Investment Company Institute (Feb. 5, 2018); IAA 2017 Letter; Comment letter of Fidelity Investments (Aug. 11, 2017) (“Fidelity 2017 Letter”); Vanguard 2017 Letter; T. Rowe 2017 Letter; FSR 2017 Letter; UBS 2017 Letter; TIAA 2017 Letter; Comment letter of Wells Fargo & Company (Sept. 20, 2017) (“Wells Fargo 2017 Letter”); Bernardi Securities 2017 Letter; Comment letter of State Farm Mutual Automobile Insurance Company (Aug. 21, 2017) (“State Farm 2017 Letter”); Comment letter of PFS Investments Inc. (Dec. 10, 2017); Comment letter of Davis & Harman LLP (Jan. 18, 2018); Comment letter of LPL Financial LLC (Feb. 22, 2018).

    17See, e.g., CFA 2017 Letter; Comment letter of the Public Investors Arbitration Bar Association (Aug. 11, 2017) (“PIABA 2017 Letter”); IAA 2017 Letter; Comment letter of Pefin (Sept. 13, 2017) (“Pefin 2017 Letter”); Comment letter of Jackson National Life Insurance Company (Nov. 1, 2017) (“Jackson 2017 Letter”); Comment letter of CFA Institute (Jan. 10, 2018); Comment letter of First Ascent Asset Management (Jan. 10, 2018) (“First Ascent 2018 Letter”).

    18See e.g., CFA 2017 Letter; IAA 2017 Letter; Comment letter of the National Employment Law Project (Oct. 20, 2017) (“National Employment Law Project 2017 Letter”).

    Many commenters recommended a short disclosure document addressing the nature and scope of services, fees and material conflicts of interest.19 These suggestions are consistent with our staff's financial literacy study, 20 which found that retail investors favor a summary document and find these categories of disclosures, plus a financial intermediary's disciplinary history, to be important in choosing financial intermediaries.21 Regarding investor confusion based on titles, commenters also recommended, for example, prohibiting the use of certain terms in titles, and prohibiting a firm not registered as an investment adviser from holding itself out in a manner that implies it is an investment adviser.22

    19See, e.g., SIFMA 2017 Letter; UBS 2017 Letter; Stifel 2017 Letter; AARP 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter; Allianz 2017 Letter.

    20See, e.g., Staff of the Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors as required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Aug. 2012), at iv, v, xiv, 37, 73, 121-23 and 131-32, available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf (“917 Financial Literacy Study”).

    21See, e.g., 917 Financial Literacy Study, supra note 20, at iv, x-xiii, xxi, 37, 66-67, 73, 119.

    22See, e.g. Comment letter of Mark D. Moss (Jun. 2, 2017); Comment letter of Gimme Credit (Aug. 8, 2017); PIABA 2017 Letter; AFL-CIO 2017 Letter; IAA 2017 Letter; Pefin 2017 Letter; Jackson 2017 Letter; AFR 2017 Letter; National Employment Law Project 2017 Letter; First Ascent 2018 Letter.

    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.23 Second, we are proposing rules that would (i) restrict the use of the terms “adviser” and “advisor” by broker-dealers and their associated financial professionals, and (ii) require broker-dealers and investment advisers to disclose in retail investor communications the firm's registration status while also requiring their associated financial professionals to disclose their association with such firm.

    23 For investment advisers, Form CRS would be required by Form ADV Part 3. For broker-dealers, Form CRS would be required by proposed new rule 17a-14 under the Exchange Act. When we refer to Form CRS in this release, we are referring to Form CRS for both broker-dealers and investment advisers.

    Together, these requirements would complement a separate release that the Commission is proposing concurrently to enhance existing broker-dealer conduct obligations (“Regulation Best Interest”).24 Regulation Best Interest would establish a standard of conduct for broker-dealers and associated natural persons of broker-dealers to act in the best interest of a retail customer when making a recommendation of a securities transaction or investment strategy involving securities. While Regulation Best Interest would enhance the standard of conduct owed by broker-dealers to retail customers, it would not make that standard of conduct identical to that of investment advisers, given important differences between investment advisers and broker-dealers. The requirements we are proposing in this release would help an investor better understand these differences, and distinguish among different firms in the marketplace, which in turn should assist the investor in making an informed choice for the services that best suit her particular needs and circumstances.

    24 Regulation Best Interest, Exchange Act Release No. 34-83062 (Apr. 18, 2018) (“Regulation Best Interest Proposal”).

    II. Form CRS Relationship Summary

    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.25

    25 For purposes of the relationship summary, we propose to define dual registrant as a firm that is dually registered as a broker-dealer and an investment adviser and offers services to retail investors as both a broker-dealer and investment adviser. Proposed General Instruction 9.(b) to Form CRS. Accordingly, a firm that is registered with the Commission as a broker-dealer and with one or more states as an investment adviser would be a dual registrant.

    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.26

    26 We propose to amend Form ADV, which investment advisers must file to register with the Commission and with state securities regulators, to include a new Part 3: Form CRS that describes the requirements for the relationship summary, and we propose conforming technical amendments to the General Instructions of Form ADV. See proposed amendments to Advisers Act rule 203-1; proposed amendments to General Instructions to Form ADV. We also propose a rule 17a-14 to require a Form CRS for broker-dealers registered with the Commission. See Exchange Act proposed rule 17a-14. Advisers use Form ADV to apply for registration with us (Part 1A) or with state securities authorities (Part 1B), and must keep it current by filing periodic amendments as long as they are registered. See Advisers Act rules 203-1 and 204-1. Form ADV has two parts. Part 1(A and B) of Form ADV provides regulators with information to process registrations and to manage their regulatory and examination programs. Part 2 is a uniform form used by investment advisers registered with both the Commission and the state securities authorities. See Instruction 2 of General Instructions to Form ADV. This release discusses the Commission's proposal of Form ADV Part 3: Form CRS and related rules applicable to advisers registered with the Commission. To the extent that state securities authorities could consider making similar changes that affect advisers registered with the states, we can forward comments to the North American Securities Administrators Association (“NASAA”) for consideration by the state securities authorities.

    We are proposing to define “relationship summary” as a written disclosure statement that firms must provide to retail investors.27 A “retail investor” would be defined as a prospective or existing client or customer who is a natural person (an individual).28 All natural persons would be included in the definition, regardless of the individual's net worth (thus including, e.g., accredited investors, qualified clients or qualified purchasers).29 The definition would include a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust.30 We believe that this definition is appropriate because section 913 of the Dodd-Frank Act defines “retail customer” to include natural persons and legal representatives of natural persons without distinction based on net worth, and because financial literacy studies report deficiencies in financial literacy among the general population.31 While studies also report variability in financial literacy among certain sub-sections of the general population,32 we believe that all individual investors would benefit from clear and succinct disclosure regarding key aspects of their advisory and brokerage relationships.

    27 Proposed General Instruction 9.(d) to Form CRS.

    28 Proposed General Instruction 9.(e) to Form CRS.

    29 Advisers Act proposed rule 204-5(d)(2) and Exchange Act proposed rule 17a-14(e)(2); proposed General Instruction 9.(e) to Form CRS. We recognize that the definition of “retail investor” would differ from that of “retail customer,” as used in Regulation Best Interest. “Retail customer” for broker-dealers under Regulation Best Interest would be defined 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.” Regulation Best Interest Proposal, supra note 24, section II.C.4. We believe it is beneficial to require firms to provide a relationship summary to all natural persons to facilitate their understanding of account choices, regardless of whether they will receive investment advice primarily for personal, family, or household purposes. The relationship summary is intended for an earlier stage in the relationship between an investor and a financial professional, potentially before discussing the investment purposes of the investor. In contrast, Regulation Best Interest focuses on recommendations to “retail customers” who have chosen to engage the services of a broker-dealer after receiving the relationship summary.

    30 Advisers Act proposed rule 204-5(d)(2) and Exchange Act proposed rule 17a-14(e)(2); proposed General Instruction 9.(e) to Form CRS.

    31See Federal Research Division, Library of Congress, Financial Literacy Among Retail Investors in the United States (Dec. 30, 2011), available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part2.pdf (“Library of Congress Report”). The Library of Congress Report is incorporated by reference into the 917 Financial Literacy Study, supra note 20, at Appendix 1.

    32See, e.g., 917 Financial Literacy Study, supra note 20, at viii (“In addition, surveys demonstrate that certain subgroups, including women, African-Americans, Hispanics, the oldest segment of the elderly population, and those who are poorly educated, have an even greater lack of investment knowledge than the average general population.”); Library of Congress Report, supra note 31, at 1.

    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.33 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 are promoting these goals through specifying much of the content and presentation of Form CRS in the form's instructions (“Instructions”); while firms will be required to include firm-specific information in Form CRS, they will have limited discretion in the scope and presentation of that information. We are proposing that firms electronically file the relationship summary and any updates with the Commission, and therefore such filings would be subject to section 207 of the Advisers Act 34 and section 18 of the Exchange Act.35 Investment advisers would file on the Investment Adviser Registration Depository (“IARD”), broker-dealers would file on the Commission's Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”), and dual registrants would file on both IARD and EDGAR.

    33See infra Section II.C.

    34 15 U.S.C. 80b-7.

    35 15 U.S.C. 78r.

    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 (e.g., switching or adding account types), as further discussed below, is appropriate and in the public interest and will improve investor protection, and will deter potentially misleading sales practices by helping retail investors to make a more informed choice among the types of firms and services available to them.36

    36See Exchange Act section 15(l)(2) and Advisers Act section 211(h)(2) (providing that the Commission shall examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, among other things, for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors).

    A. Presentation and Format

    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.37 We encourage firms to use innovative technology to create a relationship summary that is user-friendly, concise, easy-to-read, and more interactive than paper, and request comment below on ways to do so. The relationship summary would be provided to retail investors in addition to, and not in lieu of, any other required disclosures.38

    37 In a previous study, Commission staff found that most of the retail investors agreed that it was important to read a summary prospectus prior to investing in a mutual fund, and a majority of the retail investors surveyed on the mutual fund summary prospectus panel agreed that the actual summary prospectus they reviewed highlighted important information, was well-organized, written using words that they understood, clear and concise, and user friendly, and agreed that summary prospectuses contain the `right amount' of information. 917 Financial Literacy Study, supra note 20, at xvii and xix.

    38See Proposed General Instruction 3 to Form CRS. Broker-dealers and investment advisers have disclosure and reporting obligations under state and federal law, and broker-dealers are also subject to disclosure obligations under the rules of self-regulatory organizations. Delivery of the relationship summary would not necessarily satisfy a firm's other disclosure obligations.

    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.39 First, as several commenters have recommended, we propose requiring that firms use “plain language” principles for the organization, wording, and design of the entire relationship summary, taking into consideration retail investors' level of financial sophistication.40 Specifically, firms would be required to be concise and direct and to use short sentences, active voice, and definite, concrete, everyday words.41 Firms would not be permitted to use legal jargon, highly technical business terms or multiple negatives.42 Firms should write the relationship summary as if addressing the retail investor, using “you,” “us,” or “our firm.” 43

    39 Proposed General Instruction 2 to Form CRS.

    40 Proposed General Instruction 2 to Form CRS. See, e.g., PIABA 2017 Letter; State Farm 2017 Letter; Fidelity 2017 Letter; Comment letter of BlackRock (Aug. 7, 2017); Comment letter of the Investor Advisory Committee (Aug. 24, 2017); CFA 2017 Letter; AFR 2017 Letter; ACLI 2017 Letter; FSR 2017 Letter.

    41 Proposed General Instruction 2 to Form CRS.

    42 Proposed General Instruction 2 to Form CRS.

    43 Proposed General Instruction 2 to Form CRS.

    Second, we are proposing to require that, whether in electronic or paper format, the relationship summary should be no more than four 81/2 x 11 inch pages if converted to Portable Document Format (“PDF”), using at least an 11 point font size, and margins of at least 0.75 inches on all sides.44 For example, if delivered directly in the text of an email or in a mobile viewing format on the firm's website, the content of the relationship summary should not exceed this four-page PDF-equivalent length. This approach is consistent with our experience and commenters' suggestion that brief disclosure is more effective than a long-form narrative to focus retail investors on relevant information, and with suggestions from commenters who advocated for a clear, concise disclosure.45 If delivered in paper, the paper size, font, and margin requirements would also encourage a clear presentation for retail investors, for example, by presenting important disclosures in a readable font-size and eliminating fine print.46 Recognizing, however, that many firms deliver disclosures in electronic format and employ a variety of technologies to interact with prospective and existing retail investors, the Commission is requesting comment on formatting and other features of the relationship summary in electronic form.

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

    45See, e.g., Shaw 2017 Letter; SIFMA 2017 Letter; AFL-CIO 2017 Letter; AARP 2017 Letter; CFA 2017 Letter; AFR 2017 Letter; TIAA 2017 Letter; Vanguard 2017 Letter; ACLI 2017 Letter; FSR 2017 Letter; Allianz 2017 Letter.

    46See, e.g., 917 Financial Literacy Study, supra note 20, at xiii and 32.

    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.47 The proposed relationship summary is intended to serve different purposes than the summary prospectus, including to provide a general overview of firms that could prompt a more detailed, individualized, and open conversation between the retail investor and his or her financial professional. The Commission preliminarily believes that the utility and effectiveness of the relationship summary lie in its brevity and conciseness; accordingly, we believe a page limit (or equivalent limit if in electronic format) is appropriate.

    47See Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 2009)], at 24 (“Enhanced Mutual Fund Disclosure Adopting Release”).

    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.48 The proposed relationship summary also would encourage retail investors to seek additional information in other ways, including through suggested questions for retail investors to ask their financial professional, as discussed further below.49 These requirements are intended to create a concise summary that points out relevant areas for retail investors to focus on as they consider financial services, and the cross references and suggested questions facilitate investors' ability to choose to seek additional information. In addition, providing retail investors with a relationship summary containing specified information about the firm in a standardized format should aid retail investors' ability to compare firms at a higher level. The suggested questions and cross references to more information would enable them to more easily find and compare these details about the firms.

    48 Firms would be required to include cross-references to where investors could find additional information, such as in the Form ADV Part 2 brochure and brochure supplement for investment advisers or on the firm's website or in the account opening agreement for broker-dealers. For electronic versions of the relationship summary, we would require firms to use hyperlinks to the cross-referenced document if it is available online. See proposed Items 7.E.1. and 7.E.2. of Form CRS; proposed General Instruction 1.(g) to Form CRS.

    49See proposed Item 8 of Form CRS.

    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.50 We also encourage the use of methods, such as embedded hyperlinks, to direct retail investors to additional disclosures.

    50See, e.g., 917 Financial Literacy Study, supra note 20, at 23-24 (citing CFA 2012 Letter, at 4-5).

    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); 51 (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.52 In order to promote comparison across firms, we would require firms to present this information under prescribed headings in the same order.53 Firms also would be prohibited from including any information other than what the Instructions and the applicable item require or permit.54 We believe that allowing only the required and specified permitted information would promote consistency of information presented to investors, allow retail investors to focus on information that we believe would be particularly helpful in deciding among firms, and help retail investors to decide what further information is needed. It would also encourage impartial information by preventing firms from adding information commonly used in marketing materials, such as performance.55

    51 For purposes of the relationship summary, we propose to define a standalone investment adviser as a registered investment adviser that offers services to retail investors and (i) is not dually registered as a broker-dealer or (ii) is dually registered as a broker-dealer but does not offer services to retail investors as a broker-dealer. We propose to define a standalone broker-dealer as a registered broker-dealer that offers services to retail investors and (i) is not dually registered as an investment adviser or (ii) is dually registered as an investment adviser but does not offer services to retail investors as an investment adviser. Proposed General Instruction 9.(f) to Form CRS. We are including certain dual registrants in these proposed definitions because we understand that dual registrants do not always offer both brokerage and advisory accounts to retail investors. For example, some dual registrants offer advisory accounts to retail investors, but offer brokerage broker-dealer services only to institutions (e.g., for their underwriting services).

    52See proposed Items 1-8 of Form CRS.

    53 Proposed General Instruction 1.(b) and (e) to Form CRS. See also e.g., proposed Items 2.A., 3.A., 4.A., 5.A. and 5.B., 6.A., 7.A., and 8 of Form CRS.

    54 Proposed General Instruction 1.(d) to Form CRS.

    55 Although performance disclosure is a subject on which the Commission focuses, including to promote accuracy, consistency, and comparability, such disclosure is not the subject of this initiative.

    For certain items, firms will have some flexibility in how they include the required information.56 For others, we are requiring firms to use prescribed wording, as discussed in the following sections. Firms may not include disclosure in the relationship summary other than disclosure that is required or permitted by the Instructions. We believe that this approach 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. The information in the relationship summary must accurately reflect the characteristics of the particular firm and the services that it offers. Accordingly, all information in the relationship summary must be true and may not omit any material facts necessary to make the required disclosures not misleading.57 If a statement is inapplicable to a firm's business or would be misleading to a reasonable retail investor, the firm may omit or modify that statement.58

    56See, e.g., proposed General Instruction 1.(f) to Form CRS (“You may use charts, graphs, tables, and other graphics or text features to explain the required information, so long as the information (i) is responsive to and meets the requirements in these instructions (including space limitations); (ii) is not inaccurate or misleading; and (iii) does not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. When using interactive graphics or tools, you may include instructions on their use and interpretation.”); proposed Items 2.B., 2.C., and 6.B. of Form CRS.

    57 Firms should keep in mind the applicability of the antifraud provisions of the federal securities laws, including section 206 of the Advisers Act, section 17(a) of the Securities Act, and section 10(b) of the Exchange Act and rule 10b-5 thereunder, in preparing the relationship summary.

    58See proposed General Instruction 3 to Form CRS. Firms may omit or modify prescribed wording or other statements required to be part of the relationship summary if such statements are inapplicable to a firm's business or would be misleading to a reasonable retail investor.

    Based on studies that indicate the effectiveness of graphical presentation for retail investors,59 we are prescribing the use of graphical formats in specified circumstances. For example, dual registrants would be required to present all of the information required by Items 2 through 4 and Item 6 in a tabular format,60 comparing advisory services and brokerage services side-by-side, with prescribed headings.61 Similarly, standalone broker-dealers and investment advisers would be required to provide general information about fee types in tabular format, in a separate comparison section.62 All firms would be permitted to use charts, graphs, tables, and other graphics or text features to explain the information, so long as the information is responsive to and meets the requirements in the Instructions (including the space limitations).63 The use of a graphical presentation would be prohibited if it is inaccurate or misleading or, because of its nature, quantity, or manner of presentation, obscures or impedes understanding of the information that is required to be included. Firms that choose to use interactive graphics or tools may include Instructions on their use and interpretation.64 We believe that standardizing 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 will provide comparative information in a user-friendly manner that helps retail investors with informed decision-making.65

    59See 917 Financial Literacy Study, supra note 20, at iv, xx, 21-22; see also Benbasat & Dexter, infra note 592.

    60 Empirical evidence suggests that visualization improves individual perception of information (see Hattie, infra note 591) and that tabular reports may lead to better decision making (see Benbasat & Dexter, infra note 592).

    61 Dual registrants must present the information in Items 2 through 4 and Item 6 in a tabular format, comparing advisory services and brokerage services side-by-side. In the column discussing brokerage services, firms must include the heading “Broker-Dealer Services” and the sub-heading “Brokerage Accounts.” In the column discussing investment advisory services, firms must include the heading “Investment Adviser Services” and the sub-heading “Advisory Accounts.” See proposed General Instruction 1.(e) to Form CRS.

    62 Standalone broker-dealers and investment advisers would be required to include the sub-heading “You can receive advice in either type of account, but you may prefer paying:” and present prescribed information comparing a transaction-based fee and an asset-based fee in side-by-side columns, in a tabular format. See proposed Items 5.A.4. and 5.B.6. of Form CRS.

    63 Proposed General Instruction 1.(f) to Form CRS.

    64Id.

    65 Empirical evidence suggests that users are better able to make coherent, rational decisions when they have comparative, standardized disclosure that allows them to assess relevant trade-offs. See infra note 593 and accompanying text.

    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,66 qualified clients,67 or qualified purchasers? 68 If we did exclude certain categories of natural persons based on their net worth, what threshold should we use for measuring net worth? Should we exclude certain categories of natural persons for other reasons?

    66 Accredited investors include natural persons who (i) have a net worth over $1 million, either individually or together with a spouse (excluding the value of the primary residence); (ii) had an individual income greater than $200,000 (or $300,000 together with a spouse) in each of the two most recent years, and has a reasonable expectation of reaching the same income level in the current year; or (iii) for purposes of a securities offering of a particular issuer, are directors, executive officers, or general partners of that issuer. Accredited investors also include non-natural persons, such as, banks, broker-dealers, insurance companies, investment companies registered under the Investment Company Act of 1940, and certain partnerships, corporations, nonprofit entities, retirement plans, and trusts. 17 CFR 230.501.

    67 A qualified client is a client that meets one or more of the following criteria: (i) Is a natural person or company that has at least $1 million in assets under management with the adviser immediately after entering into an investment advisory contract with the adviser; (ii) the adviser reasonably believes the natural person has a net worth (together with assets held jointly with a spouse) of more than $2.1 million immediately prior to entering into an advisory contract (excluding the value of the primary residence); (iii) the adviser reasonably believes the natural person or company is a “qualified purchaser” as defined in section 2(a)(51)(A) of the Investment Company Act at the time an advisory contract is entered into; (iv) is an executive officer, director, trustee, general partner, or person serving in a similar capacity, of the adviser; or (v) is an employee of the adviser who participates in the investment activities of the adviser, and has performed investment activities for at least twelve months. The dollar thresholds under the definition of qualified client are subject to inflation adjustments every five years. 17 CFR 275.205-3(d)(1); Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the Investment Advisers Act of 1940, Investment Advisers Act Release No. 4421 (Jun. 14, 2016) [81 FR 39985 (Jun. 20, 2016)].

    68 The term “qualified purchaser” has been defined for purposes of the Investment Company Act and for the Securities Act. Under the Investment Company Act, the term “qualified purchaser” includes any natural persons who or certain family-owned companies that own not less than $5 million in investments; certain trusts; and any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25 million in investments. 15 U.S.C. 80a-2(a)(51)(A).

    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 (i.e., a “deep link”) or a more general landing page? How would delivery obligations be formulated to ensure that retail investors receive sufficient but still user-friendly information?

    • In the alternative, should we permit or require firms to prepare one relationship summary for the entire affiliated group or firm complex, i.e., to summarize the services offered to retail investors of all affiliated companies together in a single relationship summary? What factors should dictate whether affiliates should be permitted or required to prepare a single relationship summary? For example, should we base any permissive instruction or requirement on whether the affiliates typically market services of multiple investment advisers and broker-dealer entities together? What about investment advisers and broker-dealers that are not affiliates but have partnership agreements, are part of one wrap fee program,69 or other arrangements? Should they be required or permitted to cross-reference to other firms?

    69 A wrap fee program would be defined as an advisory program under which a specified fee or fees not based directly upon transactions in a retail investor's account is charged for investment advisory services and the execution of retail investor transactions. Proposed General Instruction 9.(g) to Form CRS. See infra note 173.

    • 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 (e.g., 11 point font, and have margins of at least 0.75 inches on all sides)? Would they be helpful in encouraging relationship summaries that address retail investors' preferences for concise and user-friendly information? If not, what requirements would improve the document's utility and accessibility for retail investors? In particular, are there any areas where requiring the use of a specific check-the-box approach, bullet points, tables, charts, graphs or other graphics or text features would be helpful in presenting any of the information or making it more engaging to retail investors? Should we include different requirements for font size, margins and paper size? Should we restrict certain types or sizes of font, color choices or the use of footnotes?

    • 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 their disclosures more interactive and understandable? For instance, should we permit or require a firm to use pop-ups or hovers to provide retail investors with additional information required or permitted by the relationship summary, without retail investors having to scroll to find the information in another section of the relationship summary? Would this tool be useful for firms to use, for example, in the Introduction section of the relationship summary, so that a retail investor could access upfront additional information about the terms used (advisory and brokerage accounts) that is presented in other sections of the relationship summary? Instead of requiring and permitting hyperlinks in certain circumstances (e.g., to link to an adviser's Form ADV or a fee schedule), are there other technological tools that would better help an investor find information that is cross-referenced in the relationship summary? Should we permit or require other technologies (such as QR codes 70 ) in addition to or in lieu of hyperlinks to connect to such information?

    70 A QR code is a two-dimensional barcode capable of encoding information such as a website address, text information, or contact information. These codes are becoming increasingly popular in print materials and can be read using the camera on a smartphone.

    • 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?

    B. Items 1. Introduction

    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.71 A firm also would be required to include its name, whether it is registered with the Commission as a broker-dealer, investment adviser, or both, and date of the relationship summary prominently on the first page or beginning of the electronic disclosure (this information could be included in the header or footer).72

    71 Proposed Items 1.B., 1.C. and 1.D. of Form CRS.

    72 Proposed Item 1.A. of Form CRS. The disclosure of Commission registration would make the relationship summary consistent with proposed rules 15l-3 of the Exchange Act and 211h-1 of the Advisers Act, which would require that a broker-dealer and a registered investment adviser prominently disclose that it is registered with the Commission as a broker-dealer or investment adviser, respectively, in print or electronic retail investor communications.

    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.” 73 Likewise, a standalone investment adviser would be required to state in bold font: “We are an investment adviser and provide advisory accounts and services rather than brokerage accounts and services.” 74 Dual registrants would include a similar statement in bold font that discusses both types of services, specifically: “Depending on your needs and investment objectives, we can provide you with services in a brokerage account, investment advisory account, or both at the same time.” 75 Finally, all firms would be required to include: “This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page [ ].” 76

    73 Proposed Item 1.B. of Form CRS.

    74 Proposed Item 1.C. of Form CRS.

    75 Proposed Item 1.D. of Form CRS.

    76 Proposed Items 1.B.—1.D. of Form CRS.

    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?

    2. Relationships and Services

    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.77 The section would begin with the heading “Relationships and Services” for a standalone broker-dealer or investment adviser.78 A dual registrant would use the heading “Types of Relationships and Services,” followed by this statement: “Our accounts and services fall into two categories.” 79 Each firm 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 account.

    77 Proposed Item 2 of Form CRS.

    78 Proposed Item 2.A. of Form CRS.

    79Id.

    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.80 We have designed these requirements to provide retail investors with consistent, concise, and meaningful information about the services they would receive from a firm and help them to ask relevant questions, compare firms' services against each other, and make more informed choices about the services they choose.

    80See supra note 58 and accompanying text.

    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.

    Brokerage Account Services. We propose requiring broker-dealers to summarize the principal brokerage services that they provide to retail investors.81 First, broker-dealers would include the following wording to explain the transaction-based nature of their fees (emphasis required): “If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment.” 82 Even though a separate section of the relationship summary would discuss a firm's fees, we believe it is important for broker-dealers to explain transaction-based fees at the beginning of the disclosure because these types of fees are typically a critical distinction between brokerage and investment advisory accounts.83

    81 Proposed Item 2.B. of Form CRS.

    82 Proposed Item 2.B.1. of Form CRS.

    83See infra note 126 (discussing our use of the term “transaction-based fees” in the relationship summary).

    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.84 Broker-dealers that offer accounts in which they do not offer recommendations to retail investors (e.g., execution-only brokerage services) would state that the retail investor will select the investments and make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments.85 Starting with a clear description of the services provided in a brokerage account by a broker-dealer—including the retail investor's choice of receiving recommendations or self-directing his or her investments, and the fact that the retail investor will make the ultimate investment decision—would help address confusion about the services that broker-dealers offer to retail investors.86 This language also highlights differences from the services that investment advisers would describe, discussed below.

    84 Proposed Item 2.B.2. of Form CRS.

    85Id.

    86 We believe that retail investors have the ultimate investment decision for their investment strategy and the purchase or sale of investments, even if the broker-dealer has temporary or limited discretion over retail investors' accounts. See Regulation Best Interest Proposal, supra note 24, at section II.F.

    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 (e.g., the broker-dealer discusses the retail investor's investment goals or designs with the retail investor a strategy to achieve the retail investor's investment goals); or (b) monitoring the performance of the retail investor's account.87 They would also state that a retail investor might pay more for these additional services, if applicable.88 Broker-dealers that offer performance monitoring as part of the standard brokerage account services would indicate how frequently they monitor the performance.89 While broker-dealers do not undertake to provide investment strategy and performance monitoring services when they give recommendations, we recognize that many broker-dealers offer these services to retail investors as part of their account agreement. We believe that retail investors would benefit from disclosure that such services exist, and that broker-dealers might charge higher fees for these services. Broker-dealers would also be required to briefly describe any regular communications they have with retail investors, such as providing account statements, giving an overview of transactions during a period, or evaluating the account's performance.90 Firms would include the frequency (e.g., at least quarterly) and the method (e.g., by email, phone or in person) of the communications.91

    87 Proposed Item 2.B.3. of Form CRS.

    88Id.

    89Id. Broker-dealers that monitor the performance of the retail investor's account, as market and customer conditions demand (rather than on a specific time schedule), could state so.

    90Id.

    91Id. We are proposing the same requirement for investment advisers, described below. See infra note 102 and accompanying text.

    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.” 92 A broker-dealer would significantly limit the types of investments if, for example, the firm only offers one type of asset (e.g., mutual funds, exchange-traded funds, or variable annuities), the firm only offers mutual funds or other investments sponsored or managed by the firm or its affiliate (i.e., proprietary products), or the firm only offers a small choice of investments.93 In addition, if the limitations only apply to some of the accounts the firm offers, such as, for example, limiting the types of investments for retail investors within different asset tiers, then the firm would have to identify those accounts.94

    92 Proposed Item 2.B.4. of Form CRS.

    93Id.

    94Id.

    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.

    Advisory Account Services. We propose requiring investment advisers that offer investment advisory accounts to retail investors to summarize the principal investment advisory services provided to retail investors.95 First, investment advisers would be required to state the type(s) of fee they receive as compensation if a retail investor opens an investment advisory account.96 For example, an investment adviser would state if it charges an on-going asset-based fee based on the value of the cash and investments in the advisory account, a fixed fee, or some other fee arrangement. A standalone adviser would also state how frequently it assesses the fee.97 Similar to the requirement for broker-dealers,98 we are proposing to require a statement about how investment advisers charge fees up-front because of the importance that investors understand how they will pay for services and to highlight this critical distinction between brokerage and advisory accounts. We are proposing to require that firms describe additional fees associated with these services in the discussion of fees and costs. Because the fees charged by each investment adviser may differ, we are not prescribing specific wording and instead are allowing firms flexibility in choosing the exact wording to use for this disclosure. Advisers would, however, emphasize the type of fee in bold and italicized font.99

    95 Proposed Item 2.C. of Form CRS.

    96 Proposed Item 2.C.1. of Form CRS. The relationship summary would refer to “account advisory services” and “opening an account” to simplify the explanations for retail investors. When an investment adviser provides investment advisory services, the client may have a custodial account with another firm, such as a broker-dealer or bank. A dual registrant may maintain custody for an advisory client's assets as broker-dealer. We are not proposing to require that firms include these nuances in the discussion of relationships and services.

    97Id.

    98See supra note 82 and accompanying text.

    99 Proposed Item 2.C.1 of Form CRS.

    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.100 They would also state the services they offer to retail investors including, for example, (a) assistance with developing the retail investor's investment strategy (e.g., the investment adviser discusses the retail investor's investment goals or designs with the retail investor a strategy to achieve the retail investor's investment goals), or (b) how frequently they monitor the retail investor's accounts.101 Similar to broker-dealers, advisers would include the frequency (e.g., at least quarterly) and the method (e.g., by email, phone or in person) of the communications.102 We believe that the regularity of advice and other services that investment advisers commonly provide, including, as applicable—discussions with the retail investor, designing a strategy to achieve investment goals, monitoring, and reporting on performance—are key aspects of services that advisers commonly provide.103 As discussed above with respect to broker-dealers, these services can distinguish advisory accounts from brokerage accounts and therefore the disclosure will help retail investors determine which type of account best suits their needs.

    100 Proposed Item 2.C.2. of Form CRS.

    101Id.

    102Id.

    103 An agreement for advisory services typically defines the scope and specific types of services provided.

    Additionally, investment advisers would state if they offer advisory accounts for which they exercise investment discretion (i.e., discretionary accounts), accounts for which they do not exercise investment discretion (i.e., non-discretionary accounts), or both.104 For purposes of this Item in the relationship summary, investment advisers generally should use the same definition of “discretionary authority” as in Form ADV, which is the authority to decide which securities to purchase and sell for the client, or the authority to decide which investment advisers to retain on behalf of the client.105 If an investment adviser offers a discretionary account, the relationship summary would state that a discretionary advisory account allows the firm to buy and sell investments in the retail investor's account, without asking the retail investor in advance. For a non-discretionary advisory account, the relationship summary would state that the firm gives advice and the retail investor decides what investments to buy and sell.106

    104 Proposed Item 2.C.3. of Form CRS. Investment advisers would be required to emphasize the type of account (discretionary and non-discretionary) in bold and italicized font.

    105 Term 12 of Glossary of Terms to Form ADV.

    106 Proposed Item 2.C.3. of Form CRS.

    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,107 so explaining discretion would benefit a retail investor in choosing between brokerage and investment advisory services, as well as between different types of advisory accounts.

    107 In 1992, only approximately three percent of SEC-registered advisers had discretionary authority over client assets; as of March 31, 2018, according to data collected on Form ADV, 91 percent of SEC-registered advisers have that authority.

    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.108

    108 Proposed Item 2.C.4. of Form CRS. The required statement would be “Our investment advice will cover a limited selection of investments. Other firms could provide advice on a wider range of choices, some of which might have lower costs.” Also consistent with the requirements for broker-dealers, such limitations could include, for example, only offering a selection of mutual funds, equities, or proprietary products.

    Affiliate Services. We recognize that many investment advisers and broker-dealers that are not dual registrants nonetheless have affiliates that are broker-dealers or investment advisers, respectively. Often, these standalone firms offer their affiliates' services to retail investors. For example, an affiliated sub-adviser also may manage a portion of a retail investor's portfolio or an investment adviser may effect trades for client accounts through an affiliated broker-dealer. We would allow these firms to state that they offer retail investors their affiliates' brokerage or advisory services, as applicable.109 We believe that the inclusion of this disclosure could make clear the choice investors have within affiliated firms and give financial professionals an opportunity to discuss these services.

    109 Proposed Item 2.D. of Form CRS. This disclosure only applies in the context of an affiliate of the firm. This is not intended to describe disclosure of a financial professional's outside business activities, such as an outside investment advisory business of a broker-dealer registered representative.

    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 section, or should fees only be discussed in the fee section?

    • 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 clients and customers. Are the Instructions pertaining to relationships and services sufficient and appropriate to capture the business models of robo-advisers and online broker-dealers? For example, would it be appropriate to require or permit descriptions regarding the degree of human involvement in the oversight and management of individual client accounts, how computer algorithms are used in generating investment advice, and the availability of financial professionals to answer retail investors' questions? Do the requirements with respect to the content and delivery of the relationship summary, as further discussed below, allow retail investors to make informed decisions about entering into a relationship with a robo-adviser, other type of investment adviser, or broker-dealer?

    3. Obligations to the Retail Investor—Standard of Conduct

    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.110 The section would begin with the heading “Our Obligations to You” and the following language: “We must abide by certain laws and regulations in our interactions with you.” Firms would then use prescribed wording describing the standard of conduct applicable to investment advisers and/or broker-dealers.111 As with certain other sections of the relationship summary, dual registrants would provide this information in tabular format to facilitate comparison.

    110 Proposed Item 3.A. of Form CRS.

    111 Proposed General Instruction 1.(e) to Form CRS.

    We understand that the standard of conduct that applies to firms and financial professionals has been a source of investor confusion.112 For example, the 913 Study noted that retail investors were not clear about the specific legal duties of broker-dealers and investment advisers.113 We believe that providing a brief overview of the standards of conduct to which broker-dealers and investment advisers must adhere, including the differences between the standards of care of broker-dealers and investment advisers, could help alleviate this confusion. We further believe that providing this overview, in combination with the key question about the financial professional's legal obligations discussed below, would encourage a conversation between the retail investor and the financial professional about applicable legal obligations.114 We also believe that prescribing language is appropriate to promote consistency in communicating these standards to retail investors.115

    112See, e.g., Siegel & Gale Study, supra note 5; and RAND Study, supra note 5. See also CFA Survey, supra note 5.

    113See 913 Study, supra note 3, at v. See also Rand Study, supra note 5.

    114See infra at Section II.B.8. Similarly, certain DOL regulations already obligate firms and financial professionals to acknowledge fiduciary status when they provide certain advisory type services to workplace retirement plans subject to ERISA and to IRAs. See, e.g., 29 CFR 2550.408g-1(b)(7)(i)(G) (regulation under statutory exemption for participant advice requires fiduciary advisers to plans and IRAs seeking exemptive relief to provide advice and receive compensation to acknowledge fiduciary status); 29 CFR 2550.408b-2(c)(1)(iv)(B) (regulation under statutory exemption for reasonable service arrangements requires certain ERISA-covered plan service providers to state, if applicable, that the service provider will provide or reasonably expects to provide services as a “fiduciary” as defined by ERISA). Similarly, the DOL's BIC Exemption, see infra note 504, would require an investment advice fiduciary that seeks to rely on that exemption to receive compensation in connection with investment recommendations to state in writing that it is acting as a fiduciary under ERISA or the Code.

    115 As noted above, if a prescribed statement is inapplicable to a firm's business or would be misleading to a reasonable retail investor, the firm may omit or modify that statement, as further discussed below. Proposed General Instruction 3 to Form CRS. See supra note 58.

    Broker-Dealers. We are proposing a required description of the standard of conduct for broker-dealers based on the proposed standards in Regulation Best Interest, as well as existing obligations of broker-dealers when they provide services to customers. First, a broker-dealer that provides recommendations subject to Regulation Best Interest 116 would include the following wording: “We must act in your best interest and not place our interests ahead of yours when we recommend an investment or an investment strategy involving securities.” 117 Execution-only broker-dealers and other broker-dealers that do not provide such recommendations would not be required to include this sentence. We believe retail investors receiving recommendations that are subject to Regulation Best Interest would benefit from understanding the new obligation.

    116 Regulation Best Interest Proposal, supra note 24.

    117 Proposed Item 3.B.1. of Form CRS. This wording assumes Commission adoption of Regulation Best Interest. As noted above (see supra note 29 and accompanying text), the proposed definition of “retail customer,” to whom Regulation Best Interest would apply, differs from the proposed definition of “retail investor” under Form CRS. The relationship summary is intended for a broader range of investors than the intended focus of Regulation Best Interest. Accordingly, the proposed Regulation Best Interest standard may not apply to the recommendations of all retail investors receiving the relationship summary from broker-dealers. The Instructions for proposed Item 3.B.1 recognizes this possibility and seeks to ensure that broker-dealers provide accurate disclosure to their retail investors, even if the broker-dealer is not providing a recommendation subject to Regulation Best Interest.

    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.118

    118See Report of the Special Study of Securities Markets of the Securities and Exchange Commission, H.R. Doc. No. 88-95, at 238 (1st Sess. 1963); In the Matters of Richard N. Cea, et al., Exchange Act Release No. 8662 (Aug. 6, 1969), at 18 (“Release 8662”) (involving excessive trading and recommendations of speculative securities without a reasonable basis); In the Matter of Mac Robbins & Co. Inc., Exchange Act Release No. 6846 (Jul. 11, 1962). See also FINRA Rule 2111.01 (Suitability) (“Implicit in all member and associated person relationships with customers and others is the fundamental responsibility for fair dealing. Sales efforts must therefore be undertaken only on a basis that can be judged as being within the ethical standards of [FINRA's] Rules, with particular emphasis on the requirement to deal fairly with the public. The suitability rule is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct”); see also FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) (requiring a member, in the conduct of its business, to observe high standards of commercial honor and just and equitable principles of trade).

    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,119 while making clear that broker-dealers could agree to provide monitoring as an additional service. We are proposing this wording because we believe that the episodic, rather than ongoing, nature of broker-dealers' standard of conduct in Regulation Best Interest is a distinction from investment advisers' obligations to clients that retail investors should be aware of from the outset of a relationship.

    119 References to “monitoring” relate to monitoring the performance of a portfolio or investments, and are not intended to alter or diminish broker-dealers' current supervisory obligations under the Exchange Act and detailed self-regulatory organization 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 self-regulatory rules. See section 15(b)(4)(E) of the Exchange Act; FINRA Rule 3110.

    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.” 120 These statements reflect proposed requirements in Regulation Best Interest that broker-dealer would need to establish, maintain, and enforce reasonably designed policies and procedures relating to material conflicts of interest, including those arising from financial incentives, associated with recommendations to retail customers. While we are not using the exact words of the proposed standard, we believe that this information, in combination with the conflicts section below, can make the retail investor aware that conflicts exist and that the broker-dealer has obligations regarding disclosure, mitigation, or elimination of conflicts when the broker-dealer is subject to Regulation Best Interest. We believe this could help prompt a conversation between retail investors and their financial professionals about both the conflicts the firm and financial professional have and what steps the firm takes to reduce the conflicts.121

    120 Proposed Item 3.B.2. of Form CRS. This wording assumes Commission adoption of the Regulation Best Interest.

    121See discussion of the proposed conflicts of interest disclosure in the relationship summary, infra Section II.B.6.

    Investment Advisers. We propose to require that investment advisers state the standard of conduct that applies to them as an investment adviser by including the following wording: “We are held to a fiduciary standard that covers our entire investment advisory relationship with you.” In addition, unless the investment adviser does not provide ongoing advice (for example, provides only a one-time financial plan), the investment adviser would also state, “For example, we are required to monitor your portfolio, investment strategy and investments on an ongoing basis.” 122 While we are not proposing to include a specific definition of fiduciary, we believe that the proposed wording that the relationship covers the “entire investment advisory relationship” and wording regarding the ongoing duty to monitor would provide retail investors with information about aspects of the fiduciary duty that can help the retail investor understand the standard.123 Additionally, as with the proposed standard of conduct disclosure for broker-dealers, we believe that the ongoing, as opposed to episodic, nature of investment advisers' standard of conduct is a distinction from broker-dealers' typical obligations when providing recommendations that retail investors should be aware of from the outset of a relationship.

    122 Proposed Item 3.C.1. of Form CRS.

    123 We are concurrently publishing for comment a proposed interpretation of the standard of conduct for investment advisers under the Advisers Act. See Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, Investment Advisers Act Release No. IA-4889 (Apr. 18, 2018) (“Fiduciary Duty Interpretive Release”).

    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.124 We believe this could help prompt a conversation between retail investors and their financial professionals about both the conflicts the firm and financial professional have and what steps the firm takes to reduce the conflicts.

    124See, e.g., General Instruction 3 to Form ADV, Part 2.

    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,125 also may require broker-dealers and advisers to affirmatively acknowledge fiduciary status. Should we provide firms flexibility to include language in a relationship summary consistent with or to satisfy these other regulatory requirements? Would such flexibility enhance or potentially reduce the effectiveness of the relationship summary?

    125See. e.g., supra note 114.

    4. Summary of Fees and Costs

    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.126 Investment advisers that provide advice to retail investors about investing in “wrap fee programs” would include an overview of the fees associated with those wrap fee programs.127 Both broker-dealers and investment advisers would state that some investments impose fees that will reduce the value of a retail investor's investment over time, and would provide examples relevant to the firm's business.128 In addition, each firm would include the incentives it and its financial professionals have to put their own interests ahead of their retail investors' interests based on the account fee structure,129 and would state that depending on an investor's investment strategy, retail investors may prefer paying a different type of fee in certain specified circumstances.130 Having a clear, simple explanation of the fees a retail investor would pay firms for advisory accounts versus brokerage accounts, and the incentives that such fees create, would help the retail investor to understand the types of fees that they will pay and make a more informed choice about which account is right for them. As with other sections of the relationship summary, dual registrants would provide this information in tabular format to facilitate comparison.131

    126 Proposed Item 4 of Form CRS. A broker-dealer would describe transaction-based fees as its principal type of fee, using prescribed wording. See proposed Item 4.B.1 of Form CRS. We use the term “transaction-based fees” in the relationship summary for plain language purposes to refer generally to broker-dealer compensation such as commissions, mark-ups, mark-downs, sales loads or similar fees, including 12b-1 fees, tied to specific transactions. An investment adviser would summarize the principal fees and costs that align with the type of fee(s) the adviser reports in response to Item 5.E. of Form ADV Part 1A that are applicable to retail investors. See proposed Item 4.C. of Form CRS. Investment advisers and associated persons that receive compensation in connection with the purchase or sale of securities should carefully consider the applicability of the broker-dealer registration requirements of the Exchange Act.

    127 Proposed Items 4.C.3., 4.C.7., 4.C.9. and 4.C.10. of Form CRS.

    128 Proposed Items 4.B.2.b. and 4.C.4. of Form CRS.

    129 Proposed Items 4.B.5. and 4.C.8. of Form CRS.

    130 Proposed Items 4.B.6. and 4.C.10. of Form CRS. Dual registrants would make these disclosures under the heading “Fees and Costs,” whereas standalone investment advisers and broker-dealers would make certain of these disclosures under the heading “Fees and Costs,” and certain of these disclosures under the heading, as applicable “Compare with Brokerage Accounts” or “Compare with Advisory Accounts,” as described below. Proposed Items 5.A.4. and 5.B.6. of Form CRS.

    131 Proposed General Instruction 1.(e) to Form CRS.

    Fees and costs are important to retail investors,132 but many retail investors are uncertain about the fees they will pay.133 Many commenters have stressed the importance of clear fee disclosure to retail investors, including disclosure about differences between advisory and brokerage fees.134 Accordingly, the proposed relationship summary is intended to provide investors greater clarity concerning certain categories of fees they should expect to pay, how the types of fees affect the incentives of the firm and their financial professionals, and certain other fees and expenses that will reduce the value of the retail investor's investment. The proposed relationship summary would focus on certain general types of fees, rather than describe all fees or provide a comprehensive schedule of fees. Specifically, the proposal would highlight certain differences in how broker-dealers and investment advisers charge for their services.

    132See 917 Financial Literacy Study, supra note 20, at iv (“With respect to financial intermediaries, investors consider information about fees, disciplinary history, investment strategy, conflicts of interest to be absolutely essential.”).

    133See Rand Study, supra note 5, at xix (“In fact, focus-group participants with investments acknowledged uncertainty about the fees they pay for their investments, and survey responses also indicate confusion about the fees.”). In addition, we have brought enforcement actions against advisers providing inaccurate disclosure of all of the fees and costs that retail investors pay. See, e.g., In the Matter of Robert W. Baird & Co. Inc., Investment Advisers Act Release No. 4526 (Sept. 8, 2016) (settled action) (“In re Robert W. Baird”); In the Matter of Raymond James & Associates, Inc., Investment Advisers Act Release No. 4525 (Sept. 8, 2016) (settled action) (“In re Raymond James”); In the Matter of Barclays Capital Inc., Investment Advisers Act Release No. 3929 (Sep. 23, 2014) (settled action) (“Release 3929”).

    134See, e.g., Kiley 2017 Letter (recommending that investors receive disclosures about the differences in advisory and brokerage fees, and brokers' specific fee and commission structure); Stifel 2017 Letter (recommending that firms explain the differences between brokerage and advisory accounts with the goal of improving understanding of a firm's different service models, compensation arrangements, and conflicts of interests); Equity Dealers of America 2017 Letter (recommending disclosure of aspects of advisory and brokerage accounts, including the type of fees charged, to facilitate investors' selection of an account type); Wells Fargo 2017 Letter; ACLI 2017 Letter; FSR 2017 Letter; SIFMA 2017 Letter; UBS 2017 Letter; Comment letter of the Investment Company Institute (Aug. 7, 2017) (“ICI 2017 Letter”); State Farm 2017 Letter; IAA 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter; Vanguard 2017 Letter.

    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.135 A personalized fee disclosure could be expensive and complex for firms to provide in a standardized presentation across all of their accounts and in a way that captures all fees, including embedded fees in various investments (which will vary for each investor depending on their portfolio). Many firms likely would seek to implement systems to automate the disclosure for each of their existing and prospective retail investors, and if such systems were expensive, some firms could choose to reduce the products and services that they offer as a result of the additional costs. Our proposal would encourage retail investors to ask financial professionals about their fees and request personalized information about the specific fees and expenses associated with their current or prospective accounts. As further discussed in Section II.B.8 below, one of the proposed questions for a retail investor to ask a financial professional is to “do the math for me,” and specifically encourages retail investors to ask about the amount that they would pay per year for the account, what would make the fees more or less, and the services included in those fees.136 Additionally, the beginning of the Fees and Costs section of the relationship summary would state: “Please ask your financial professional to give you personalized information on fees and costs that you will pay.” 137 We believe that financial professionals are well positioned to provide individualized fee information to their retail investors upon request. During the account opening process, for example, generally the relevant financial professional would have access to personalized information about the retail investor's account and can put together personalized fee information estimates during the process.

    135See, e.g., Comment letter of Mark J. Flannery, BankAmerica Professor of Finance, University of Florida (Jul. 27, 2017) (“Flannery 2017 Letter”); Pefin 2017 Letter (recommending that clients should receive information on a quarterly basis on fees charged to their account, the calculation used to determine fees, and a breakdown of the charges by category).

    136See infra Section II.B.8.; infra notes 299-303 and accompanying text; proposed Item 8 of Form CRS.

    137 Proposed Item 4.A. of Form CRS.

    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.138 As discussed below, investment advisers 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.139 An adviser's Form ADV Part 2 contains more detailed information about the firm's fees. Broker-dealers would likewise be required to direct retail investors to additional information at BrokerCheck, the firm's website, and the retail investor's account agreement.140 Up-to-date fee disclosures may appear on broker-dealers' websites or in the retail investors' account agreements, if applicable, where we understand broker-dealers typically provide information about fees, including, in some cases, comprehensive fee schedules.141

    138 Proposed Item 7 of Form CRS.

    139 Proposed Item 7.E.2. of Form CRS. Investment advisers that do not have a public firm website or do not maintain their current Form ADV brochure on its public website would be required to include a link to adviserinfo.sec.gov. Advisers that do not have a public firm website would also be required to include a toll-free telephone number where retail investors can request up-to-date information.

    140 Proposed Item 7.E.1. of Form CRS. Broker-dealers that do not have a public firm website would be required to include a toll-free telephone number where retail investors can request up-to-date information.

    141 Under Regulation Best Interest, broker-dealers would also be required to disclose the material facts relating to the scope and terms of the relationship, which would include disclosure of fees and charges that apply to a customer's transactions, holdings and accounts. Regulation Best Interest Proposal, supra note 24, at section II.D.1.a.

    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.142 While we continue to believe that examples of the effect of fees on returns could be helpful to retail investors, they could also fail to capture the effect of a firm's fees on a particular retail investor's account. Transactional fees, in particular, can vary widely based on a number of circumstances, and it could be potentially misleading to present a typical example showing how sample transaction fees apply to a sample account over time. We believe requiring firms to provide an example for each type of account that would show the effect of fees on a sample account could overwhelm investors due to the number and variability of assumptions that would need to incorporated, explained, and understood in order for the example to be meaningful, and would not necessarily promote comparability. If the assumptions were standardized, such examples might not be useful, or might even be potentially misleading, to the retail investor, whose circumstances may be different from the assumptions used.

    142See Item 3 of Mutual Fund Summary Prospectus; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47, at section III.A.3.b (“The fee table and example are designed to help investors understand the costs of investing in a fund and compare those costs with the costs of other 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.143 A few commenters suggested requiring disclosure of how much the firm and its financial professionals receive in fees, including commissions and fees from third parties.144 We agree with commenters that it is important to make investors aware of such fees and compensation because they create conflicts of interest for firms and financial professionals making investment recommendations for retail investors. We are proposing to require that firms disclose commissions and certain third-party fees related to mutual funds in this section, and certain compensation-related conflicts (e.g., conflicts related to revenue sharing) in the conflicts section of the relationship summary, as discussed in Section II.B.6 below.

    143See, e.g., SIFMA 2017 Letter; UBS 2017 Letter; ICI 2017 Letter; State Farm 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter.

    144See, e.g., Flannery 2017 Letter; Pefin 2017 Letter.

    Heading. To emphasize the importance of fees, all firms would be required to include the following statement at the beginning of this section under the heading “Fees and Costs”: “Fees and costs affect the value of your account over time. Please ask your financial professional to give you personalized information on the fees and costs that you will pay.” 145 We are proposing this precise wording because we believe it is applicable to retail investors regardless of any differences among the accounts and their fees. Understanding that fees and costs affect investment value over time would help retail investors to understand why they should review and understand this information. This introductory language also would highlight that retail investors could get more personalized information from the firm's financial professionals.

    145 Proposed Item 4.A. of Form CRS.

    Brokerage Account Fees and Costs. Broker-dealers would be required to summarize the principal fees and costs that retail investors will incur.146 First, we are proposing prescribed language that describes the transactional nature of many brokerage fees.147 We are proposing different wording for dual registrants than for standalone broker-dealers to facilitate the side-by-side comparison with the description of the advisory fee in the dual registrant's relationship summary. Specifically, dual registrants that offer retail investors both investment advisory accounts and brokerage accounts would include the following wording to assist with the side-by-side comparison with investment advisers: “Transaction-based fees. You will pay us a fee every time you buy or sell an investment. This fee, commonly referred to as a commission, is based on the specific transaction and not the value of your account.” 148 A standalone broker-dealer would include the following: “The fee you pay is based on the specific transaction and not the value of your account.” 149

    146 Proposed Item 4.B. of Form CRS.

    147 As discussed above, we use the term “transaction-based fees” to refer to broker-dealer compensation such as commissions, mark-ups, mark-downs, sales loads or similar fees, including 12b-1 fees, tied to specific transactions. See supra note 126.

    148 Proposed Item 4.B.1. of Form CRS. As discussed further below, dual registrants would include a parallel statement regarding their investment advisory account fees. Proposed Item 4.C.1. of Form CRS.

    149 Proposed Item 4.B.1. of Form CRS. As discussed above, standalone broker-dealers would be required to include wording that a transaction-based fee is generally referred to as a commission in the Relationships and Services section of the relationship summary. See proposed Item 2.B.1. of Form CRS.

    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 “mark-up” or “mark down”). With mutual funds, this fee (typically called a “load”) reduces the value of your investment.” 150 Because of the importance of these transaction-based fees to brokerage services, as well as the variety of forms that such fees can take, we believe it will benefit investors to have specific examples to illustrate transaction-based fees with standardized, concise wording. We are proposing to require the example of mutual fund loads because they are common indirect fees associated with investments that compensate the broker-dealer.

    150 Proposed Item 4.B.2.a. of Form CRS.

    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.151 Mutual funds, variable annuities and exchange-traded funds are common examples, as well as any other investment that incurs fund management, 12b-1, custodial or transfer agent fees, or any other fees and expenses that reduce the value of the investment over time.152 Broker-dealers also would be required to state that a retail investor could be required to pay fees when certain investments are sold, for example, surrender charges for selling variable annuities.153 We believe that it is important to highlight for investors the costs associated with particular investments in addition to describing the transaction-based fee for brokerage services. Retail investors may not appreciate that they will bear costs for some investments in addition to the transaction-based brokerage fee they pay to their financial professional or firm.154 In addition, the investment fees and expenses we are proposing to require that firms disclose are ones that we believe are among the most common and can have a substantial impact on an investor's return from a particular investment.

    151 Proposed Item 4.B.2.b. of Form CRS. Investment advisers would also be required to make this disclosure. See proposed Item 4.C.4. of Form CRS.

    152 We acknowledge that some fees, such as 12b-1 fees, could be a broker-dealer's principal fee for their brokerage services and are also fees that reduce the return on an investment. In such a case, the broker-dealer would describe transaction-based fees as its principal fees and costs pursuant to proposed Item 4.B.1, and would also describe these fees as additional fees that will reduce the return on an investor's investments pursuant to proposed Item 4.B.2.b. of Form CRS.

    153 Proposed Item 4.B.2.b. of Form CRS. Investment advisers would also be required to make this disclosure. See proposed Item 4.C.4. of Form CRS.

    154See, e.g., Enhanced Disclosure and New Prospectus Delivery Option For Registered Open-End Management Investment Companies, Investment Company Act Release No. 28064 (Nov. 21, 2007) [72 FR 67790 (Nov. 30, 2007)], at n.49 and accompanying text (“In recent years, we have taken significant steps to address concerns that investors do not understand that they pay ongoing costs every year when they invest in mutual funds, including requiring disclosure of ongoing costs in shareholder reports.”).

    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.155 We are not proposing a requirement that firms disclose the amount or range of mutual fund fees or other third-party fees that retail investors may pay related to their underlying investments, as a few commenters recommended.156 These expenses vary so greatly that attempts to quantify them or describe their range likely would not be useful to retail investors or would provide limited benefit to retail investors given that the relationship summary is designed to be short disclosure provided in addition to, and not in lieu of, other disclosures.157 Instead, we intend that our proposed summary disclosure would effectively highlight these costs in a simple, understandable way.

    155See, e.g., State Farm 2017 Letter; Bernardi Securities 2017 Letter; Pefin 2017 Letter; Flannery 2017 Letter; Comment letter of Dan Keppel (Jun. 5, 2017); Comment letter of Edward H. Weyler (Jun. 8, 2017).

    156See Flannery 2017 Letter; Pefin 2017 Letter.

    157See Amendments to Form ADV, Investment Advisers Act Release No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 2010)] (“Brochure Adopting Release”); Amendments to Form ADV, Investment Advisers Act Release No. 2711 (Mar. 3, 2008) [73 FR 13958 (Mar. 14, 2008)] (“2008 Brochure Proposing Release”).

    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.158 Such factors could include, for example, how much the retail investor buys or sells, what type of investment the retail investor buys or sells, and what kind of account the retail investor has with the broker-dealer. We believe investors would benefit from knowing at account opening whether they have the ability to negotiate the fees they pay.

    158 Proposed Item 4.B.3. of Form CRS.

    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.159 We believe that it is important to highlight for investors the fees associated with an account that they will pay in addition to the principal type of fee that the firm charges retail investors for their brokerage account because these fees are common and they can have an impact on a retail investor's return.

    159 Proposed Item 4.B.4. of Form CRS.

    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. 160 They would be required to include the following: “The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions.” 161 We believe this information would help retail investors understand how the fee structures for brokerage accounts could affect their investments and the incentives that firms and financial professionals have to place their interests ahead of retail investors' interests by encouraging retail investors to engage in transactions to increase their fees.162 We are proposing to prescribe wording because we believe these particular incentives and considerations generally apply to most brokers that offer retail investors brokerage accounts, and using uniform wording would promote consistency. We believe that retail investors would benefit from understanding these incentives when they are considering broker-dealers. Additionally, we believe this disclosure would reinforce a key theme of the relationship summary, which is choice across account types and services.

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

    161Id.

    162 Pursuant to the federal securities laws, broker-dealers can violate the federal antifraud provisions by engaging in excessive trading that amounts to churning, switching, or unsuitable recommendations. Churning occurs when a broker-dealer, exercising control over the volume and frequency of trading in a customer account, abuses the customer's confidence for personal gain by initiating transactions that are excessive in view of the character of the account and the customer's investment objectives. Excessive trading is an excessive level of trading unjustified in light of the customer's investment objectives. See Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 821 (9th Cir. 1980); Carras v. Burns, 516 F.2d 251, 258 (4th Cir. 1975). See also Regulation Best Interest Proposal, supra note 24, at section II.D.2.c.

    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.” 163 We believe that these factors—cost, trading frequency, and the desire to “buy and hold”—are important for retail investors to consider when determining whether to use brokerage services or advisory services.164 We are proposing to prescribe the wording because we believe these factors reflect common circumstances in which a brokerage account could be more cost-effective for a retail investor than an advisory account, and using uniform wording would promote consistency. We believe this disclosure, in conjunction with the corresponding disclosure regarding advisory accounts that would appear next to it, would help retail investors to compare the two services and make an informed choice about the account type that is the right fit for them based on their goals and preferences.

    163 Proposed Item 4.B.6. of Form CRS.

    164See e.g., Comment letter of The Capital Group Companies, Inc. (Mar. 12, 2018) (discussing considerations for buy and hold investors choosing among commission-based and fee-based arrangements). Standalone broker-dealers and standalone investment advisers would also be required to include similar wording under the headings “Compare with Typical Advisory Accounts” and “Compare with Typical Brokerage Accounts,” as applicable. See proposed Items 5.B.5 and 5.A.4 of Form CRS. Dual-registrants, standalone broker-dealers, and standalone investment advisers would also be required to include a statement that retail investors may prefer an asset-based fee in certain circumstances, and that an asset-based fee may cost more than a transaction-based fee. See proposed Items 4.C.10, 5.B.5 and 5.A.4 of Form CRS.

    Investment Advisory Account Fees and Costs. Investment advisers that offer advisory accounts to retail investors would be required to summarize the principal fees and costs that retail investors will incur.165 Dual registrants that charge ongoing asset-based fees for their advisory services would state the following: “Asset-based fees. You will pay an on-going fee [at the end of each quarter] based on the value of the cash and investments in your advisory account.” 166 replacing, as needed, the bracketed wording with how often they assess the fee. If the dual registrant charges another type of fee for advisory services, it would briefly describe that fee and how often it is assessed.167 Standalone investment advisers would state the following: “The amount paid to our firm and your financial professional generally does not vary based on the type of investments we select on your behalf.” 168 Standalone investment advisers that charge an ongoing asset-based fee would also state “The asset-based fee reduces the value of your account and will be deducted from your account.” 169 Standalone investment advisers that charge another type of fee would succinctly describe how the fee is assessed and the impact it has on the value of the retail investor's account.170

    165 Proposed Item 4.C. of Form CRS. An investment adviser would summarize the principal fees and costs that align with the type of fee(s) the adviser reports in response to Item 5.E. of Form ADV Part 1A that are applicable to retail investors.

    166 Proposed Item 4.C.1. of Form CRS.

    167Id. Some investment advisers report on Form ADV Item 5.E that they receive “commissions.” These “commissions” may include deferred sales loads, including fees for marketing and service, as well as commissions as understood in the broker-dealer context. As a form of deferred sales load, all payments of ongoing sales charges to intermediaries would constitute transaction-based compensation. Intermediaries receiving those payments should consider whether they need to register as broker-dealers under section 15 of the Exchange Act.

    168 Proposed Item 4.C.2. of Form CRS. We recognize that, in some cases, the amount paid to the advisory firm and the financial professional can vary based on the type of investment selected (e.g., advisory firms and financial professionals may recommend certain mutual funds that pay the adviser or the financial professional 12b-1 fees out of fund assets).

    169Id.

    170 Proposed Item 4.C.2. of Form CRS. Investment advisers that offer retail investors advisory accounts sometimes charge fees that are not ongoing, asset based fees. A financial planner, for example, sometimes charges a one-time fixed fee to prepare a plan.

    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.171 We are not proposing to require that investment advisers provide the range of fees, as ranges an investment adviser charges can vary based on a number of factors individual to the retail investor and the services they choose. Additionally, although we do not believe that ranges for investment advisers' asset based fees vary as much as broker-dealers' transaction-based fees, we recognize that requiring firms to provide a fee range for advisory accounts and not brokerage accounts could cause confusion among retail investors and be of limited benefit when comparing advisory and brokerage services. However, we recognize that providing such a range could promote comparability between different advisers, and we request comment below on whether we should require disclosure of the adviser's range of principal fees charged.

    171 As discussed above, when completing Form CRS, investment advisers should generally consider achieving consistency with the type(s) of fee(s) that the investment adviser reports on Item 5.E. of Form ADV Part 1A. See supra note 126.

    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.172 A “wrap fee program” would be defined as an advisory program that charges a specified fee not based directly upon transactions in the account for investment advisory services and the execution of transactions.173 The advisory services may include portfolio management or advice concerning selection of other advisers.174 An investment adviser that provides advice to retail investors about investing in a wrap fee program and does not also offer another type of advisory account would be required to include the following (emphasis required): “We offer advisory account programs called wrap fee programs. In a wrap fee program, the asset-based fee will include most transaction costs and fees to a broker-dealer or bank that will hold your assets (known as “custody”), and as a result wrap fees are typically higher than non-wrap advisory fees.” 175 An investment adviser that provides advice about investing in a wrap fee program and offers another type of advisory account would be required to include similar prescribed wording, modified as applicable to reflect that the adviser also offers other types of advisory accounts.176

    172 Proposed Items 4.C.3., 4.C.6., 4.C.9. and 4.C.10. of Form CRS. We also refer to these types of investment advisers as “client-facing firms.”

    173 Proposed General Instruction 9.(g) to Form CRS. This proposed definition is identical to the definition already used in Form ADV.

    174 Proposed General Instruction 9.(g) to Form CRS.

    175 Proposed Item 4.C.3. of Form CRS. The asset-based fee in a wrap program does not always include all transaction costs. For example, in some cases retail investors pay mark-ups, mark-downs, or spreads, and mutual fund fees and expenses in addition to the wrap fee program's asset-based fee. In addition, as discussed below, an investment adviser may select a broker-dealer outside of the wrap fee program to execute certain trades in a retail investor's account—a practice sometimes referred to as “trading away”—that results in the retail investor's account incurring separate brokerage fees. See infra note 187 and accompanying text.

    176 Such investment advisers would be required to include the following (emphasis required): “For some advisory accounts, known as wrap fee programs, the asset-based fee will include most transaction costs and custody services, and as a result wrap fees are typically higher than non-wrap advisory fees.” Proposed Item 4.C.3. of Form CRS.

    Many retail investors participate in wrap fee programs.177 We believe that retail investors would benefit from receiving information about certain characteristics of wrap fee programs, particularly with respect to their fees. Requiring investment advisers to describe the asset-based fee, what it includes, and that it is typically higher than non-wrap advisory fees would help a retail investor to distinguish wrap fee programs from other types of advisory accounts that charge or incur separate transaction fees.

    177 Based on IARD data as of December 31, 2017, of the 12,667 SEC-registered investment advisers, 1,035 (8.17%) sponsor a wrap fee program, and 1,597 (12.61%) act as a portfolio manager for one or more 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.178 Investment advisers also would state that a retail investor could be required to pay fees when certain investments are sold, for example, surrender charges for selling variable annuities.179 These proposed requirements are identical to the disclosure that broker-dealers would provide.180

    178 Proposed Item 4.C.4 of Form CRS. See supra notes 151-155 and accompanying text for a discussion of this requirement applicable to both investment advisers and broker-dealers.

    179 Proposed Item 4.C.4. of Form CRS.

    180See proposed Item 4.B.2.b. of Form CRS.

    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.181 They would be required to describe 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.182 Such factors could include, for example, the services the retail investor receives and the amount of assets in the account. As discussed above with regard to broker-dealers, we believe investors would benefit from knowing at account opening whether they have the ability to negotiate the fees they pay.

    181 Proposed Item 4.C.5. of Form CRS.

    182Id.

    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 (e.g., commissions paid to broker-dealers for buying or selling investments) in addition to the firm's principal fee it charges retail investors for the firm's advisory accounts.183 Investment advisers would also be required to state, if applicable, that a retail investor will pay fees to a broker-dealer or bank that will hold the retail investor's assets and that this is called “custody,” and would be required to list other fees the retail investor will pay.184 Examples could include fees for account maintenance services. These other fees we are proposing to require firms to disclose are ones that we believe are among the most common or can have an impact on a retail investor's return.185 As discussed above, we believe that investors would benefit from being aware of the fees associated with an account that they will pay in addition to the principal fee that the firm charges retail investors for their brokerage or advisory account.

    183 Proposed Item 4.C.6. of Form CRS.

    184Id.

    185See, e.g., Advisers Act rule 204-3; Item 5 of Form ADV Part 2A (requiring each adviser to describe the types of other costs, such as brokerage, custody fees and fund expenses that clients may pay in connection with the advisory services provided to them by the adviser).

    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).” 186 The Commission is aware that wrap fee program portfolio managers employ, to varying degrees, “trading away” practices, in which they use a broker other than the sponsoring broker to execute trades for which a commission or other transaction-based fee is charged, in addition to the wrap fee, to the retail investor.187 The Commission has identified instances in which firms participating in wrap fee programs had poor disclosure about the overall cost of selecting a wrap fee program, including the effect of their trade away practices.188 We believe that investors would benefit from the relationship summary highlighting that, even in a wrap fee program, they sometimes will pay an additional transaction fee.

    186 Proposed Item 4.C.7. of Form CRS.

    187 A wrap fee program portfolio manager may trade away because, for example, it believes that doing so will allow it to seek best execution of clients' transactions, as investment advisers have an obligation to seek best execution of clients' securities transactions where they have the responsibility to select broker-dealers to execute client trades (typically in the case of discretionary accounts). See Advisers Act rule 206(3)-2(c) (referring to adviser's duty of best execution of client transactions). See also Commission Guidance Regarding Client Commission Practices Under Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Release No. 54165 (Jul. 18, 2006) (stating that investment advisers have “best execution obligations”) (“Release 54165”). See also Brochure Adopting Release at 9.

    188 The Commission has brought enforcement actions in these circumstances. See, e.g., In re Robert W. Baird, supra note 133; In re Raymond James, supra note 133; In the Matter of Riverfront Investment Group, LLC, Investment Advisers Act Release No. 4453 (Jul. 14, 2016) (settled action); In the Matter of Stifel, Nicolaus & Company, Inc., Investment Advisers Act Release No. 4665 (Mar. 13, 2017) (settled action).

    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.189 These advisers would be required to include the following statement: “The more assets you have in the advisory account, including cash, the more you will pay us. We therefore have an incentive to increase the assets in your account in order to increase our fees. You pay our fee [insert frequency of fee (e.g., quarterly)] even if you do not buy or sell,” replacing the brackets with the frequency of their fee.190 Investment advisers that provide advice to retail investors about participating in a wrap fee program would, in addition, be required to include the following: “Paying for a wrap fee program could cost more than separately paying for advice and for transactions if there are infrequent trades in your account.” 191 We are proposing to require prescribed wording to promote consistency and because we believe these particular incentives and considerations generally apply to all advisers that charge retail investors ongoing asset-based fees or provide advice about participating in a wrap fee program. While we are not proposing any prescribed language for other fee types, such as fixed fees, we request comment, below, on whether advisers that charge other types of fees for their advisory services have incentives to act in their own interest based on the type of fee charged, and whether we should require disclosure of such incentives.

    189 Proposed Item 4.C.8. of Form CRS.

    190 Proposed Item 4.C.8. of Form CRS.

    191 Proposed Item 4.C.9. of Form CRS.

    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.192 As with some of the proposed requirements described above, we are proposing to prescribe wording because we believe these particular considerations generally apply to any investment in a wrap fee program and would promote consistency. Also, as discussed above, we believe this disclosure would reinforce a key theme of the relationship summary, which is choice across account types and services.

    192See Item 4.B. of Form ADV Part 2A; Appendix 1 of Form ADV: Wrap Fee Program Brochure.

    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.” 193 Dual registrants that provide advice to retail investors about investing in wrap fee programs would also be required to include the following with respect to wrap fee program accounts: “You may prefer a wrap fee program if you prefer the certainty of a [insert frequency of the wrap fee (e.g., quarterly)] fee regardless of the number of transactions you have.” 194 We believe that these features—ongoing advice, discretion, standards of conduct, and, for wrap fee programs, certainty in pricing—distinguish advisory accounts and wrap fee programs from brokerage accounts. We also believe it is important to highlight how costs relate to the services included.195 We are proposing to prescribe wording because we believe these particular considerations generally apply to all advisory accounts and wrap fee programs, and using uniform wording would promote consistency. We believe these disclosures, in conjunction with the corresponding disclosure regarding broker-dealer accounts that would appear next to it for dual registrants, would help retail investors to compare the two types of services and combinations of those services and make an informed choice about the account type that is the right fit for them based on their goals and preferences.

    193 Proposed Item 4.C.10. of Form CRS. Standalone investment advisers and standalone broker-dealers would also be required to include similar wording under the headings “Compare with Typical Brokerage Based Accounts,” and “Compare with Typical Advisory Accounts,” as applicable. Proposed Items 5.A.4 and 5.B.5. of Form CRS.

    194 Proposed Item 4.C.10. of Form CRS.

    195 We also propose to require dual registrants to include the following with respect to broker-dealer 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.” See proposed Items 4.B.6. See also Items 5.A.4. and 5.B.5 of Form CRS (including similar disclosures to be made by standalone investment advisers and broker-dealers).

    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 deducts fees directly from clients' accounts; and an explanation of how an adviser calculates and refunds prepaid fees when a client contract terminates (for an adviser charging fees in advance). Should we require some or all of such disclosures, or other disclosures about fees?

    • 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? 196 Advisers are required to disclose their receipt of performance-based fees on Form ADV, and they provide an incentive for the adviser to take additional investment risks with the account.

    196See Advisers Act rule 205-3.

    • 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 (e.g., for broker-dealers, such factors could include the: means of placing an order, such as online, by telephone or in person; type of account, such as full-service or discount brokerage, and; type of product)? Do commenters have suggestions for how best to convey one or more ranges in a space-limited disclosure in light of the different fee structures? Are there other ways to give retail investors a better sense of the amount of fees they will pay without providing account-specific disclosures?

    • 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 (e.g., the size of the transaction, the type of investment purchased, and the type of account and services he or she receives)?

    • 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 investor.gov?

    • 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 (e.g., mandated graphical presentation)? Should we require firms to present more than one hypothetical example showing a range of fees instead (e.g., based on representative holdings or recommendations)? Should specific assumptions be included in calculating the hypothetical example? What disclosures would need to accompany the example? Should the example(s) track the effect of the fees over time, and if so, over what time period (e.g., over one, five and 10 years)? Or should firms describe the impact of different amounts or types of fees over a longer period of time, such as 20 years?

    • 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 we, as proposed, permit firms to select their own example that they offer to retail investors? Are there other considerations related to fees for funds and other investments that we should require firms to highlight for retail investors? Would our proposed requirement that firms disclose the existence of such fees, along with examples of investments that impose such fees, adequately inform retail investors of these costs? Should we require an example showing how investment fees and expenses and other account fees and expenses may affect a retail investor's investment over time? Should we require a reference to such an example if available elsewhere (e.g., in mutual fund, ETF or variable annuity prospectuses)?

    • 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,” i.e., product distribution by broker-dealers)? Or, should we require firms to state in the fees and costs section of the relationship summary that they and their financial professionals receive such compensation? If so, what types of additional compensation should we require firms to disclose in the summary of fees and costs? Should we require firms to disclose how the amount of fees received from retail investors relates to the amount of fees received from others in connection with recommendations or other services to those investors? Would such disclosure be confusing to retail investors? Should we require firms only to disclose which source of fees is greater or to provide a reasonable estimate of the relative magnitude of the categories of such fees (e.g., that on average for retail customers that the amount the firm receives from third parties is twice as much as the firm charges investors)?

    • 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 (e.g., rule 12b-1 fees, sub-transfer agent or other similar service fees)?

    • 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 firms that provide advice about investing in both a wrap fee and a non-wrap fee program to prepare a separate relationship summary for the wrap fee program? Should we instead require firms to prepare an appendix with information about the wrap fee program, in addition to the relationship summary, as we do for the Form ADV brochure? If so, what types of information should we require firms to include about wrap fee programs in a separate relationship summary or appendix, and why should we require such disclosure?

    • 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 (e.g., that the firm or financial professional will only be compensated if the retail investor makes money on the investment)?

    5. Comparisons

    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).197 Specifically, standalone broker-dealers would include the following information about a generalized retail investment adviser: (i) The principal type of fee for investment advisory services; (ii) services investment advisers generally provide, (iii) advisers' standard of conduct; and (iv) certain incentives advisers have based on the investment adviser's asset-based fee structure.198 For investment advisers, this section would include parallel categories of information regarding broker-dealers.199

    197 Proposed Items 5.A. and 5.B. of Form CRS. As discussed above, for purposes of the relationship summary, we propose to define a standalone investment adviser as a registered investment adviser that offers services to retail investors and (i) is not dually registered as a broker-dealer or (ii) is dually registered as a broker-dealer but does not offer services to retail investors as a broker-dealer. We propose to define a standalone broker-dealer as a registered broker-dealer that offers services to retail investors and (i) is not dually registered as an investment adviser or (ii) is dually registered as an investment adviser but does not offer services to retail investors as an investment adviser. Proposed General Instruction 9.(f) to Form CRS. See supra note 51. A dually registered firm that offers retail investors only advisory or brokerage services (but not both) may in the future decide to offer retail investors both services. We would expect a firm to update its relationship summary within 30 days whenever any information in the relationship summary becomes materially inaccurate. See proposed General Instruction 6.(a). to Form CRS and infra note 350 and accompanying text. In addition, the firm would communicate the information in its 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. See proposed General Instruction 6.(b) to Form CRS and infra note 354 and accompanying text.

    198 Proposed Item 5.B. of Form CRS.

    199 Proposed Item 5.A. of Form CRS.

    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 broker-dealer, where you will pay a transaction-based fee, generally referred to as a commission, when the broker-dealer buys or sells an investment for you.” 200 They would be required to include prescribed statements in bullet point format (except as otherwise specified) under the lead-in “Features of a typical brokerage account include:” 201 First, there would be a general description of brokerage accounts: “With a broker-dealer, you may select investments or the broker-dealer may recommend investments for your account, but the ultimate decision as to your investment strategy and the purchase and sale of investments will be yours.” 202 This statement would highlight for the retail investor two aspects of a typical broker-dealer's services that differ from that of an investment adviser—specifically, that an investor may select investments without advice or he or she may receive recommendations from the broker-dealer, and that the investor will make the ultimate investment decision.

    200Id.

    201Id.

    202 Proposed Item 5.A.1. of Form CRS.

    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 required to monitor your portfolio or investments on an ongoing basis.” 203 As discussed above in Section II.B.3, above, the applicable standard of conduct for financial professionals has been a source of confusion among retail investors. This statement would provide information to retail investors about the obligations of broker-dealers, including some differences from investment advisers' obligations so that they can consider this factor when determining whether brokerage services might better suit their needs.

    203 Proposed Item 5.A.2. of Form CRS.

    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.” 204 This disclosure is substantially similar to the disclosure we propose a broker-dealer would be required to include in the “Fees and Costs” section of its relationship summary.205 As discussed above, we believe this information would help retail investors understand how the fee structures for brokerage accounts could affect their investments, which they could compare with the incentives advisers have based on their fee structure.206

    204 Proposed Item 5.A.3. of Form CRS.

    205See supra Section II.B.4.

    206Id.

    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:” 207 One column would include the following (emphasis required): “a transaction-based fee from a cost perspective, if you do not trade often or if you plan to buy and hold investments for longer periods of time.” 208 The other column would include the following (emphasis required): “an asset-based fee if you want continuing advice or want someone to make investment decisions for you, even though it may cost more than a transaction-based fee.” 209 This disclosure is substantially similar to the disclosure we propose that each dual registrant would include in the “Fees and Costs” section of its relationship summary.210 For the reasons discussed above, we are proposing this requirement to encourage choice across account types and services.211 We are also proposing that advisers include this information in the specified side-by-side manner in order to promote comparisons between the relevant considerations for both types of relationships.

    207 Proposed Item 5.A.4. of Form CRS.

    208Id.

    209Id.

    210See supra Section II.B.4.

    211Id.

    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 investment adviser, where you will pay an ongoing asset-based fee that is based on the value of the cash and investments in your advisory account.” 212 Standalone broker-dealers would list prescribed statements describing certain differences from investment advisers in bullet point format (except as otherwise specified) under the lead-in “Features of a typical advisory account include:”.213 First, there would be a general description of investment advisory accounts as follows: “Advisers provide advice on a regular basis. They discuss your investment goals, design with you a strategy to achieve your investment goals, and regularly monitor your account.” 214 The next bullet would highlight that investment advisers offer discretionary accounts and non-discretionary accounts by including the following (emphasis included): “You can choose an account that allows the adviser to buy and sell investments in your account without asking you in advance (a “discretionary account”) or the adviser may give you advice and you decide what investments to buy and sell (a “non-discretionary account”).” 215 Together, these statements would highlight for the retail investor two aspects of a typical investment adviser's services that differ from the typical services of a broker-dealer—specifically, ongoing advice and monitoring and discretionary accounts.

    212 Proposed Item 5.B. of Form CRS. We recognize that some investment advisers charge other types of fees for their advisory services, including fixed fees for one-time services such as financial planning. However, because asset-based fees are a common type of fee for advisory services, we think it would be useful for firms to describe asset-based fees in this section of the relationship summary for comparison with broker-dealers' transaction-based fees.

    213 Proposed Item 5.B. of Form CRS.

    214 Proposed Item 5.B.1. of Form CRS.

    215 Proposed Item 5.B.2. of Form CRS.

    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.” 216 As discussed above, the applicable standard of conduct for financial professionals has been a source of confusion among retail investors. This statement would provide information to retail investors about the obligations of investment advisers so that they can consider this factor when determining whether investment advisory services might better suit their needs.

    216 Proposed Item 5.B.3. of Form CRS.

    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.” 217 They would also be required to include the following prescribed disclosure about hourly fees and one-time flat fees, which are common among investment advisers that offer financial planning services and other advisory services to retail investors: “You may also choose to work with an investment adviser who provides investment advice for an hourly fee, or provides a financial plan for a one-time fee.” 218

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

    218Id.

    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.” 219 This statement is substantially similar to the disclosure an investment adviser would be required to include in the “Fees and Costs” section of its relationship summary.220 For the reasons discussed above, we believe this information would help retail investors understand how the principal fee structures for typical advisory accounts could affect their investments and the incentives financial professionals may have based on charging ongoing asset-based fees for investment advisory services. This proposed disclosure would encourage retail investors to compare these incentives with certain incentives broker-dealers have based on their fee structure, which broker-dealers would describe under “Fees and Costs.” 221

    219 Proposed Item 5.B.5. of Form CRS.

    220See supra Section II.B.4.

    221Id.

    Finally, standalone broker-dealers would be required to include the same tabular chart that standalone investment advisers would include.222 As discussed above, requiring this information side-by-side would promote comparisons of typical advisory and brokerage relationships.

    222 Proposed Item 5.B.6. of Form CRS.

    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? 223 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?

    223See supra Section II.B.4.

    • 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?

    6. Conflicts of Interest

    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 (i.e., principal trading).224

    224 Proposed Item 6 of Form CRS. Studies have shown, for example, that for broker-dealers, the most frequently identified disclosures concerned issues of compensation—e.g., how clients compensate the firm, how other firms compensate it, and how employees are compensated. See, e.g., Rand Study, supra note 5, at xviii. We sometimes refer interchangeably to payments, compensation and benefits that firms and financial professionals receive. These terms are all meant to capture the various ways through which firms and financial professionals have financial incentives to favor a product, service, account type, investor, or provider over another.

    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, or reject them.225 For broker-dealers, the federal securities laws and rules and self-regulatory organization rules address broker-dealer conflicts in one (or more) of the following ways: Express prohibitions,226 mitigation,227 or disclosure.228 Under Regulation Best Interest, broker-dealers would be required to establish, maintain and enforce written policies and procedures reasonably designed to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with such recommendation,229 as well as to disclose, in writing, all material conflicts of interest that are associated with the recommendation.230

    225See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (An adviser must deal fairly with clients and prospective clients, seek to avoid conflicts with its clients and, at a minimum, make full disclosure of any material conflict or potential conflict.); see also Instruction 3 of General Instructions to Part 2 of Form ADV. See Fiduciary Duty Interpretive Release, supra note 123.

    226 For example, FINRA rules establish restrictions on the use of non-cash compensation in connection with the sale and distribution of mutual funds, variable annuities, direct participation program securities, public offerings of debt and equity securities, and real estate investment trust programs. These rules generally limit the manner in which members can pay for or accept non-cash compensation and detail the types of non-cash compensation that are permissible. See FINRA Rules 2310, 2320, 2341, and 5110.

    227See, e.g., FINRA Rule 3110(c)(3) (firm must have procedures to prevent the effectiveness of an internal inspection from being compromised due to conflicts of interest); FINRA Rule 3110(b)(6)(C) (supervisory personnel generally cannot supervise their own activities); FINRA Rule 3110(b)(6)(D) (firm must have procedures reasonably designed to prevent the required supervisory system from being compromised due to conflicts of interest).

    228 For example, 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 mark-ups, without disclosing the fact to the customer. See, e.g., Grandon v. Merrill Lynch & Co., 147 F.3d 184, 189-90 (2d. Cir. 1998). See also Exchange Act rule 10b-10 (requiring a broker-dealer effecting transactions in securities to provide written notice to the customer of certain information specific to the transaction at or before completion of the transaction, including the capacity in which the broker-dealer is acting (i.e., agent or principal) and any third party remuneration it has received or will receive.

    229 Broker-dealers would also be required 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 such recommendation. See Regulation Best Interest Proposal, supra note 24, section II.D.3.

    230See Regulation Best Interest Proposal, supra note 24, section II.D.1.

    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.231 For example, a firm could have a financial incentive to recommend proprietary products because the firm (or its affiliate) would receive additional revenue or an affiliate could pay a firm for recommending affiliate products. A broker-dealer making a platform available for self-directed transactions may select investments available for purchase on the platform based on financial incentives the broker-dealer receives. Similarly, a financial professional could be paid for recommending affiliated products or could get a bonus or greater promotion potential for recommending certain investments.232 These conflicts create an incentive for firms and their financial professionals to make available for sale or base investment recommendations on the compensation or profit that firms will receive, rather than on the client's best interests.233 The Commission's enforcement actions underscore how these types of compensation arrangements and activities may produce conflicts of interest that can lead firms and their financial professionals to act in their own interests, rather than the interests of their retail investors.234

    231See, e.g., Rand Study, supra note 5, at 13 (“Examples of such conflicts include various practices in which an adviser may have pecuniary interest (through, e.g., fees or profits generated in another commercial relationship, finder's fees, outside commissions or bonuses) in recommending a transaction to a client.”) and 15 (noting that the formation of the Committee on Compensation Practices was, in part, motivated by concerns that commission-based compensation may encourage registered representatives to churn accounts or make unsuitable recommendations).

    232 Jason Zweig & Anne Tergesen, Advisers at Leading Discount Brokers Win Bonuses to Push Higher-Priced Products, Wall Street Journal (Jan. 10, 2018), available at https://www.wsj.com/articles/advisers-at-leading-discount-brokers-win-bonuses-to-push-higher-priced-products-1515604130.

    233See, e.g., Brochure Adopting Release, supra note 157, at n.62 and accompanying text and n.132; Report of the Committee on Compensation Practices (Apr. 10, 1995), at 3, available at https://www.sec.gov/news/studies/bkrcomp.txt (“The prevailing commission-based compensation system inevitably leads to conflicts of interest among the parties involved.”). See also FINRA Report on Conflicts of Interest (Oct. 2013), available at https://www.finra.org/sites/default/files/Industry/p359971.pdf (discussing conflicts of interest in the broker-dealer industry and highlighting effective conflicts management practices); SEC v. Capital Gains Research Bureau Inc., 375 U.S. at 191, 196-97 (“The Investment Advisers Act of 1940 thus reflects a congressional recognition of the delicate fiduciary nature of an investment advisory relationship. . . . An investor seeking the advice of a registered investment adviser must, if the legislative purpose is to be served, be permitted to evaluate such overlapping motivations, through appropriate disclosure, in deciding whether the adviser is serving two masters or only one, especially if one happens to be economic self-interest.”); In the Matter of Feeley & Willcox Asset Management Corp., Investment Advisers Act Release No. 2143 (Jul. 10, 2003) (Commission opinion) (“It is the client, not the adviser, who is entitled to make the determination whether to waive the adviser's conflict. Of course, if the adviser does not disclose the conflict, the client has no opportunity to evaluate, much less waive, the conflict.”).

    234See infra notes 243, 255, 256, 260 and 267, citing examples of where we have brought enforcement actions regarding conflicts of interest arising from one or more of the following categories of compensation practices and activities: the compensation of the firm's financial professionals; payments from others; incentives for selling the firm's own products, and 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,235 charging performance-based fees to some accounts but not others,236 personal trading by an adviser's personnel,237 receipt of soft dollar products and services provided by brokers in connection with client transactions,238 and voting client securities.239 Likewise, a broker-dealer may have several conflicts of interest with its retail investors that we are not proposing to include in the relationship summary. These include, for example, a broker-dealer's incentive to favor its institutional customers over its retail customers when making available proprietary research or certain investment opportunities, such as widely anticipated initial public offerings, acting as a market maker for a recommended security, using certain service providers, or voting client securities.240 In addition, broker-dealers are subject to Exchange Act rules that require them to disclose in writing to the customer if they have any control, affiliation, or interest in a security they are offering or the issuer of such security.241

    235 Item 10.C. of Form ADV Part 2A. Item 10 requires an investment adviser to describe in its brochure material relationships or arrangements the adviser (or any of its management persons) has with related financial industry participants, any material conflicts of interest that these relationships or arrangements create, and how the adviser addresses the conflicts. The disclosure that Item 10 requires highlights for clients their adviser's other financial industry activities and affiliations that can create conflicts of interest and may impair the objectivity of the adviser's investment advice. See Brochure Adopting Release, supra note 157, at 29.

    236 Item 6 of Form ADV Part 2A. An adviser faces a variety of conflicts of interest that it is required to address in its Form ADV brochure, including that the adviser can potentially receive greater fees from its accounts having a performance-based compensation structure than from those accounts it charges a fee unrelated to performance (e.g., an asset-based fee). See Brochure Adopting Release, supra note 157, at n.64 and accompanying text; 2008 Brochure Proposing Release, supra note 157, at n.51 and accompanying text.

    237 Items 11.C. and 11.D. of Form ADV Part 2A. For example, because of the information they have, advisers and broker-dealers and their personnel are in a position to abuse clients' positions by, for example, placing their own trades before or after client trades are executed in order to benefit from any price movements due to the clients' trades. An investment adviser is required to address this conflict in its Form ADV brochure. See Brochure Adopting Release, supra note 157, at n.83 and accompanying text.

    238 Item 12 of Form ADV Part 2A. Use of client commissions to pay for research and brokerage services presents money managers with significant conflicts of interest, and may give incentives for managers to disregard their best execution obligations when directing orders to obtain client commission services as well as to trade client securities inappropriately in order to earn credits for client commission services. See Brochure Adopting Release, supra note 157, at n.128 (citing Release 54165, supra note 187).

    239 Item 17 of Form ADV Part 2A. Each adviser must describe how the adviser addresses conflicts of interest when it votes securities pursuant to its proxy voting authority, as applicable. See Brochure Adopting Release, supra note 157, at n.172 and accompanying text.

    240See 913 Study, supra note 3, at nn.251 and 254 and accompanying text (discussing that courts have found that broker-dealers should have disclosed these conflicts).

    241See Exchange Act rules 15c1-1, 15c1-5, and 15c1-6. Similarly, rule 15c1-6 requires written disclosure of the broker-dealer's interest in a security it is offering at or before the completion of the transaction. Self-regulatory organizations require similar disclosures. See, e.g., FINRA Rules 2262 and 2269; and MSRB Rule G-22.

    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.242 While we are not proposing to require such detailed disclosures for broker-dealers in the relationship summary, Regulation Best Interest would require broker-dealers to disclose, in writing, all material conflicts of interest that are associated with a recommendation to a retail customer.243

    242 For investment advisers, the Form ADV Part 2 brochure and the brochure supplement address many of the conflicts an adviser may have. Items in Part 2 of Form ADV may not address all conflicts an adviser may have, and may not identify all material disclosure that an adviser may be required to provide clients. As a result, delivering a brochure prepared under Form ADV's requirements may not fully satisfy an adviser's disclosure obligations under the Advisers Act. See Brochure Adopting Release, supra note 157, at n.7. Broker-dealers also must make a variety of disclosures, but the extent, form and timing of the disclosures are different. See 913 Study, supra note 3, at 55—58. In accordance with the Instructions to Form CRS, if a relationship summary is posted on a firm's website or otherwise provided electronically, the firm must use hyperlinks for any document that is cross-referenced in the relationship summary if the document is available online. See proposed General Instruction 1.(g) to Form CRS.

    243See supra notes 229- 230 and accompanying text. When recommending a security, broker-dealers generally are liable under the antifraud provisions if they do not give “honest and complete information” or disclose any material adverse facts or material conflicts of interest, including any economic self-interest. See, e.g., De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 1293, 1302 (2d Cir. 2002); Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1970); In the Matter of Richmark Capital Corp., Exchange Act Release No. 48758 (Nov. 7, 2003) (Commission opinion) (“Release 48758”) (“When a securities dealer recommends stock to a customer, it is not only obligated to avoid affirmative misstatements, but also must disclose material adverse facts of which it is aware. That includes disclosure of “adverse interests” such as “economic self interest” that could have influenced its recommendation.”) (citations omitted).

    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.244 In addition, a number of commenters responding to Chairman Clayton's Request for Comment suggested disclosure that would focus on incentives associated with the products and services offered and how associated persons are compensated.245

    244See 917 Financial Literacy Study, supra note 20, at xxi. (“The most useful and relevant information that the online survey respondents indicated that they favored to make informed financial decisions before engaging a financial intermediary includes information about . . . [s]ources and amount of compensation that a financial intermediary may receive from third parties in connection with and [sic] investment transaction . . .”).

    245See, e.g., SIFMA 2017 Letter; UBS 2017 Letter; ICI 2017 Letter; State Farm 2017 Letter; IAA 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter.

    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.246 As we explain further below, we believe that investors should be aware of and understand this conflict at or before the start of the relationship.

    246See, e.g., SIFMA 2017 Letter (recommending that a best interest standard of conduct for broker-dealers would not prohibit principal trading, provided that such transactions be accompanied by written disclosure and corresponding client consent); Wells Fargo 2017 Letter. See also ICI 2017 Letter (recommending that a broker-dealer would be able to engage in principal trading, subject to appropriate limitations, disclosure, and customer consent); Bernardi Securities 2017 Letter (recommending that any revised standard of conduct for broker-dealers permit principal transactions, and suggesting that firms could implement disclosures and policies and procedures to protect investors from the related potential conflicts).

    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.247 To emphasize the importance of conflicts, broker-dealers would be required to state the following language after the heading: “We benefit from our recommendations to you.” 248 Similarly, investment advisers would be required to state: “We benefit from the advisory services we provide you.” 249 Dual registrants would be required to state: “We benefit from the services we provide you.” 250 If all or a portion of a conflict is not applicable to the firm's business, the firm should omit that conflict or portion thereof.251 If a conflict only applies to a dual registrant's brokerage accounts or investment advisory accounts, the firm would include that conflict in the applicable column.252

    247 Proposed Items 6.A. and 6.B. of Form CRS.

    248 Proposed Item 6.A. of Form CRS..

    249Id.

    250Id.

    251 Proposed Item 6.B. of Form CRS.

    252Id.

    First, we propose that a firm be required to state, as applicable, that it has a financial incentive to offer or recommend to the retail investor certain investments because: (a) They are issued, sponsored or managed by the firm or the firm's affiliates, (b) third parties compensate the firm when it recommends or sells the investments, or (c) both.253 The firm also would provide examples of such types of investments, and state if its financial professionals receive additional compensation if the retail investor buys these investments.254

    253 Proposed Item 6.B.1. of Form CRS. We are not prescribing the specific language that firms must use to discuss each of these conflicts, which would give firms some flexibility to structure their disclosure, particularly if they offer proprietary products and receive compensation from third parties.

    254 Proposed Items 6.B.1. of Form CRS.

    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.255 These financial incentives can range from cash and non-cash compensation that a firm or financial professional receives for selling those investments as well as less direct financial incentives. In particular, investors might not be aware that the firm or its affiliate offers proprietary products that provide a financial incentive to the firm to recommend those products, that a third party provides incentives for a firm to recommend investments, or that the firm's financial professional will receive additional compensation if the retail investor buys certain investments. We believe that requiring this disclosure is consistent with indications that retail investors find information about sources and amount of compensation that firms receive from third parties useful to make informed financial decisions.256 Additionally, we believe that it is important for firms to separately and explicitly disclose if the financial professionals benefit from these payments because these individuals are making the recommendations to the retail investors and their compensation is an incentive that could affect their advice.

    255 The Commission has brought enforcement actions against firms that the Commission alleged to have failed to disclose fees, such as referral fees, that financial professionals receive as a result of recommending certain investments to retail investors. See, e.g., In the Matter of Financial Design Associates, Inc. and Albert Coles Jr., Investment Advisers Act Release No. 2654 (Sept. 25, 2007) (settled action) (respondents failed to disclose to investment advisory clients payments received from a company in which clients were advised to invest); In the Matter of Energy Equities, Inc. and David G. Snow, Investment Advisers Act Release No. 1811 (Aug. 2, 1999) (settled action) (respondents received finder's fees or other compensation from issuers, the securities of which were recommended to clients or prospective clients); Vernazza v. SEC, 327 F.3d 851 (9th Cir. 2003).

    256See 917 Financial Literacy Study, supra note 20, at xxi. The Commission's enforcement actions also have underscored how these types of compensation and benefits from third parties for recommending certain investments may produce conflicts of interest that lead firms and their financial professionals to favor those investments over others. See, e.g., In the Matter of the Robare Group, LTD., Investment Advisers Act Release No. 3907 (Sep. 2, 2014) (Commission opinion) (investment adviser failed to disclose compensation it received through agreements with a registered broker-dealer and conflicts arising from that compensation).

    We are also proposing to require examples of the types of investments associated with each of these conflicts (e.g., mutual funds and variable annuities) because we believe it would be helpful for investors to be aware of the types of products for which firms and financial professionals have these incentives.257 We considered whether to require a complete list of investments; however, we believe that a long list of the names of each of the affected products would not necessarily benefit investors or be helpful to them in their review of the firm's conflicts and could detract from the other information in the relationship summary.

    257See proposed Items 6.B.1. of Form CRS.

    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.258 The firm also would provide examples of such types of investments.259 This disclosure would highlight another type of compensation firms receive that affects their incentives to offer or recommend certain investments to the retail investor, and like the disclosures regarding proprietary products and third party payments, would provide retail investors with information about sources of compensation the firm receives from third parties.260 This requirement is intended to capture arrangements pursuant to which a firm receives payments or other benefits from third parties for recommending certain investments, including, for example, conflicts related to payment for distribution support or ongoing services from distributors or advisers of mutual funds, annuity products or other products. We are proposing that firms would be required to describe these and other conflicts of interest even if the compensation the firm receives is not shared with the firm's financial professionals, as the compensation can create incentives for the firm to promote certain investments over others. These types of distribution-related arrangements may give broker-dealers heightened incentives to market the shares of particular mutual funds, or particular classes of fund shares. Those incentives may be reflected in a broker-dealer's use of “preferred lists” that explicitly favor the distribution of certain funds, or they may be reflected in other ways, including incentives or instructions that the broker-dealer provides to its managers or its salespersons.261

    258 Proposed Item 6.B.2. of Form CRS.

    259Id.

    260 The Commission has pursued enforcement actions against firms that the Commission alleged to have failed to disclose revenue sharing arrangements. See, e.g., In re Edward D. Jones & Co, Securities Act Release No. 8520 (Dec. 22, 2004) (broker-dealer violated antifraud provisions of Securities Act and Exchange Act by failing to disclose conflicts of interest arising from receipt of revenue sharing, directed brokerage payments and other payments from “preferred” fund families that were exclusively promoted by broker-dealer); In re Morgan Stanley DW Inc., Securities Act Release No. 8339 (Nov. 17, 2003) (“Release 8339”) (broker-dealer violated antifraud provisions of Securities Act by failing to disclose special promotion of funds from fund families that paid revenue sharing and portfolio brokerage); In the Matter of KMS Financial Services, Inc., Investment Advisers Act Release No. 4730 (Jul. 19, 2017) (dually-registered investment adviser and broker-dealer that failed, in its capacity as an investment adviser, to disclose to its advisory clients compensation it received from a third party broker-dealer for certain investments it selected for its advisory clients); In the Matter of Voya Financial Advisors, Inc., Investment Advisers Act Release No. 4661 (Mar. 8, 2017) (registered investment adviser failed to disclose to its clients compensation it received through an arrangement with a third party broker-dealer and conflicts arising from that compensation).

    261See, e.g., Release 8339, supra note 260.

    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”).262 Firms must state that they can earn a profit on those trades, and disclose that the firm has an incentive to encourage the retail investor to trade with it.263 If this activity is part of the firm's investment advisory business, it must state that the retail investor's specific approval is required on each transaction.264

    262 Proposed Item 6.B.3. of Form CRS.

    263Id.

    264 Section 206(3) of the Advisers Act. Proposed Item 6.B.3. of Form CRS.

    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 interest.265 Principal trading raises concerns because of the risks of price manipulation or the placing of unwanted securities into client accounts (i.e., “dumping”).266 Under the Advisers Act, an adviser may not engage in a principal trade with an advisory client unless it discloses to the client in writing, before completion of the transaction, the capacity in which the adviser is acting, and obtains the consent of the client to the transaction.267 Broker-dealers also are subject to a number of requirements when they engage in principal transactions with customers, including disclosure of such capacity on the trade confirmation.268 There is no specific requirement for broker-dealers, however, to provide written disclosure prior to the trade or obtain consent for each principal transaction.269 Our proposal to require firms to disclose, if applicable, that they engage in principal transactions, and to summarize the conflict of interest raised by principal transactions, would not replace the disclosure and consent requirements under the Advisers Act or any other requirement, such as under the Exchange Act. Rather, our disclosure requirement would supplement such disclosures by alerting retail investors to this practice and the related conflicts of interest at the start of the relationship.

    265See 913 Study, supra note 3, at 120.

    266See id., at 118.

    267 Section 206(3) of the Advisers Act. See also Opinion of Director of Trading and Exchange Division interpreting the reference to “the transaction” to require separate disclosure and consent for each transaction. Investment Advisers Act Release No. 40 (Feb. 5, 1945) (“[T]he requirements of written disclosure and of consent contained in this clause must be satisfied before the completion of each separate transaction. A blanket disclosure and consent in a general agreement between investment adviser and client would not suffice.”); 913 Study, supra note 3, at n.534 and accompanying text. An investment adviser must provide written disclosure to a client and obtain the client's consent at or prior to the completion of each transaction. 913 Study, supra note 3, at n.535 and accompanying text. See also, e.g., Release 3929, supra note 133; In the Matter of JSK Associates, et al., Investment Advisers Act Release No. 3175 (Mar. 14, 2011) (settled action).

    268 As an example of one such requirement, broker-dealers must disclose their capacity in the transactions (typically on the confirmation statement). See Exchange Act rule 10b-10.

    269See 913 Study, supra note 3, at n.540 and accompanying text.

    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 (i.e., short summaries of certain types of conflicts of interest with information later in the relationship summary on where retail investors can find more information) is to highlight these conflicts and encourage retail investors to ask questions and seek more information about the firm's and its financial professionals' conflicts of interest. Do our proposed requirements achieve this goal? In light of our objective of keeping the relationship summary short, should we instead prescribe general language concerning the importance of understanding conflicts, while simply requiring cross-references to the relevant sections of Form ADV Part 2 brochure or brochure supplement (for investment advisers) and relevant disclosures typically included in account opening documents or websites (for broker-dealers)? Should we provide wording to encourage retail investors to ask questions about conflicts, including advising customers to go through all of the firm's and financial professional's conflicts with the financial professional? Are there other modifications or alternatives we should consider?

    • 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-dealers to execute their clients' transactions that provide the adviser or financial professionals with compensation or other benefits, including in the form of client referrals. Should we highlight that compensation can be in the form of advisory client referrals?

    • 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?

    7. Additional Information

    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.270 This section would be titled “Additional Information” and firms would include the following after the title: “We encourage you to seek out additional information.” First, firms would be required to state 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. We are including information about a firm's and its financial professionals' disciplinary information because this information may assist retail investors in evaluating the integrity of a firm and its financial professionals.271 For example, a prior disciplinary event could reflect upon the firm's integrity, affect the degree of trust and confidence a client would place in the firm, or impose limitations on the firm's activities.272 Knowledge of a firm's and financial professional's disciplinary history is among the most important items for retail investors when deciding whether to receive financial services from a particular firm, according to one study.273 Approximately 67.5% of the online survey respondents considered information about an adviser's disciplinary history to be absolutely essential, and about 20.0% deemed it important, but not essential.274 But despite its importance, many investors do not review this information prior to engaging a firm.275 A study also found that many retail investors would check the Investment Adviser Public Disclosure site (“IAPD”) for comparative information on investment advisers, including disciplinary history, if they were made aware of its existence.276 We believe that requiring firms to state the existence of disciplinary events, provide specific questions for retail investors to ask, and provide information on where retail investors can find more information, would cause more retail investors to seek out this information and would make them better informed when they choose a firm and a financial professional.277

    270See supra notes 37, 48-50 and 139-141 and accompanying text (regarding the use of layered disclosure and alternative approaches to presentation).

    271See Brochure Adopting Release, supra note 157, at n.81 and accompanying text. See also Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Investment Advisers Act Release No. 1862 (Apr. 5, 2000) [65 FR 20524 (Apr. 17, 2000)], at nn.148-149 and accompanying text (“2000 Brochure Proposing Release”) (“When assessing whether an adviser will fulfill its obligations to clients, an investor would likely give great weight to whether the adviser has met its fiduciary and other legal obligations in the past.”); Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change to Amend FINRA Rule 8312 (FINRA BrokerCheck Disclosure) to Expand the Categories of Civil Judicial Disclosures Permanently Included in BrokerCheck, Release No. 34-71196 (Dec. 27, 2013) [79 FR 417 (Jan. 3, 2014)] (“By making certain of this information publicly available, BrokerCheck, among other things, helps investors make informed choices about the individuals and firms with which they conduct business.”).

    272See Brochure Adopting Release, supra note 157, at n.85.

    273See 917 Financial Literacy Study, supra note 20, at nn.308 and 498 and accompanying text (“When asked how important certain factors would be to them if they were to search for comparative information on investment advisers, the majority of online survey respondents identified the fees charged and the adviser's disciplinary history as the most important factors.”).

    274Id.

    275 917 Financial Literacy Study, supra note 20, at n.770 (citing Applied Research Consulting LLC for FINRA Investor Education Foundation, Financial Capability in the United States: Initial Report of Research Findings from the 2009 National Survey (Dec. 1, 2009), available at http://www.usfinancialcapability.org/downloads/NFCS_2009_Natl_Full_Report.pdf (“2009 National Survey Initial Report”), which revealed that only 15% of respondents claimed that they had checked a financial professional's background or credentials with a state or federal regulator, although the Commission notes that the study encompasses a wide group of advisors, such as debt counselors and tax professionals.). In addition, the FINRA 2015 Investor Survey found that only 24% of investors were aware of Investor.gov; only 16% were aware of BrokerCheck; only 14% were aware of the IAPD website, and only 7% had used BrokerCheck. FINRA, Investors in the United States 2016 (Dec. 2016), available at http://www.usfinancialcapability.org/downloads/NFCS_2015_Inv_Survey_Full_Report.pdf).

    276See 917 Financial Literacy Study, supra note 20, at nn.317-319 and accompanying text ([A]bout 76.5% of the online survey respondents reported that, in selecting their current adviser, they did not use an SEC-sponsored website to find information about the adviser. 73% of respondents stated that they would check IAPD if they were made aware of its existence. Of that subset—those who reported not using an SEC-sponsored website—approximately 85.2% indicated that they did not know that such a website was available for that purpose. Of that majority (i.e., a further subset)—those who were unaware of such a website—approximately 73.5% reported that they would review information about their adviser on an SEC-sponsored website if they knew it were available).

    277 In addition, this would address an issue that was highlighted by the Commission's Investor Advisory Committee, which, among other things, encouraged the Commission to develop an enhanced approach to the disclosure of disciplinary events. Broker-Dealer Fiduciary Duty Recommendations, supra note 10 (recommending a summary disclosure document that includes, among other disclosures, basic information about a firm's disciplinary record).

    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,278 or (ii) legal or disciplinary events per Items 11A-K of Form BD (“Uniform Application for Broker-Dealer Registration”) 279 except to the extent such information is not released through BrokerCheck pursuant to FINRA Rule 8312 or in IAPD.280 Regarding their financial professionals, firms would determine whether they need to include the statement based on legal and disciplinary information on Form U4,281 Form U5 282 and Form U6.283 In particular, firms would be required to state, “We have legal and disciplinary events” if they have financial professionals for whom disciplinary events are reported per Items 14 A-M on Form U4, Items 7(a) and 7(c)-(f) on Form U5,284 and Form U6 except to the extent such information is not released through BrokerCheck pursuant to FINRA Rule 8312 or in IAPD.285

    278 Proposed Item 7.B. of Form CRS. Generally, investment advisers are required to disclose on Form ADV Part 2A any legal or disciplinary event, including pending or resolved criminal, civil and regulatory actions, if it occurred in the previous 10 years, that is material to a client's (or prospective client's) evaluation of the integrity of the adviser or its management personnel, and include events of the firm and its personnel. See Brochure Adopting Release, supra note 157, at 22-27. Items 9.A., 9.B., and 9.C. provide a list of disciplinary events that are presumptively material if they occurred in the previous 10 years. However, Item 9 requires that disciplinary events more than 10 years old be disclosed if the event is so serious that it remains material to a client's or prospective client's evaluation of the adviser and the integrity of its management.

    279 Item 11 of Form BD requires disclosure on the relevant Disclosure Reporting Page (“DRP”) with respect to: (A) felony convictions, guilty pleas, “no contest” pleas or charges in the past ten years; (B) investment-related misdemeanor convictions, guilty pleas, “no contest” pleas or charges in the past ten years; (C) certain SEC or the Commodity Futures Trading Commission (CFTC) findings, orders or other regulatory actions (D) other federal regulatory agency, state regulatory agency, or foreign financial regulatory authority findings, orders or other regulatory actions; (E) self-regulatory organization or commodity exchange findings or disciplinary actions; (F) revocation or suspension of certain authorizations; (G) current regulatory proceedings that could result in “yes” answers to items (C), (D) and (E) above; (H) domestic or foreign court investment-related injunctions, findings, settlements or related civil proceedings; (I) bankruptcy petitions or SIPC trustee appointment; (J) denial, pay out or revocation of a bond; and (K) unsatisfied judgments or liens. Some of these disclosures are only required if the relevant action occurred within the past ten years, while others must be disclosed if they occurred at any time.

    280 FINRA Rule 8312 governs the information FINRA releases to the public via BrokerCheck. FINRA established BrokerCheck in 1988 (then known as the Public Disclosure Program) to provide the public with information on the professional background, business practices, and conduct of FINRA member firms and their associated natural persons. The information that FINRA releases to the public through BrokerCheck is derived from the CRD system, the securities industry online registration and licensing database. Firms, their associated natural persons and regulators report information to the CRD system via the uniform registration forms (Form U4 (Uniform Application for Securities Industry Registration or Transfer), Form U5 (Uniform Termination Notice for Securities Industry Registration), Form U6 (Uniform Disciplinary Action Reporting Form), Form BD (Uniform Application for Broker-Dealer Registration), Form BDW (Uniform Request for Broker-Dealer Withdrawal), and Form BR (“Uniform Branch Office Registration Form”)). Under FINRA Rule 8312, FINRA limits the information that is released to BrokerCheck in certain respects. For example, pursuant to FINRA Rule 8312(d)(2), FINRA shall not release “information reported on Registration Forms relating to regulatory investigations or proceedings if the reported regulatory investigation or proceeding was vacated or withdrawn by the instituting authority.” We believe it is appropriate to limit disclosure in the relationship summary to disciplinary information or history that would be released to BrokerCheck.

    281 Form U4 (Uniform Application for Securities Industry Registration or Transfer) requires disclosure of registered representatives' criminal, regulatory, and civil actions similar to those reported on Form BD as well as certain customer-initiated complaints, arbitration, and civil litigation cases. See generally Form U4.

    282 Form U5 (Uniform Termination Notice for Securities Industry Registration) requires information about representatives' termination from their employers. See Form U5.

    283 Form U6 (Uniform Disciplinary Action Reporting Form) is used by SROs, regulators, and jurisdictions to report disciplinary actions against broker-dealers and associated persons. This form is also used by FINRA to report final arbitration awards against broker-dealers and associated persons. See Form U6.

    284 The disclosure would be triggered by reportable information on Items 7(a) and 7(c) through (f). Item 7(b) (Internal Review Disclosure) is not released to BrokerCheck by FINRA, pursuant to FINRA Rule 8312(d)(3). As noted above (see supra note 280), we believe it is appropriate to limit disclosure in the relationship summary to disciplinary information or history that would be released to BrokerCheck.

    285 Proposed Item 7.B.3. of Form CRS.

    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.286 Furthermore, as discussed below, the statement encouraging retail investors to visit Investor.gov for more information would help retail investors to more easily learn additional details from the firms themselves and from their existing disclosures.287

    286 Proposed Item 7.D. of Form CRS.

    287Id.

    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 firm and our financial professionals.” 288

    288 Proposed Item 7.C. of Form CRS.

    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].289

    289 Proposed Item 7.D. of Form CRS.

    Broker-dealers and dual registrants also would include the bracketed language regarding how to report a problem to FINRA. Firms would be required to review and update (if needed) the current telephone numbers for the SEC and FINRA at least annually.290

    290Id.

    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 (https://brokercheck.finra.org), their firm websites (including a link to the portion of the website that provides up-to-date information for retail investors), and the retail investor's account agreement.291 Broker-dealers that do not have public websites would be required to state where retail investors can find up-to-date information.292

    291 Proposed Item 7.E.1. of Form CRS.

    292Id.

    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.293 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.294 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 (https://adviserinfo.sec.gov).295

    293 Proposed Item 7.E.2. of Form CRS.

    294Id.

    295Id. SEC- and state-registered investment advisers are required to file their brochures and brochure amendments through the IARD system. See rules 203-1 and 204-1 of the Advisers Act and similar state rules. Members of the public can view an adviser's most recent Form ADV online at the IAPD website: www.adviserinfo.sec.gov.

    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.296 However, under Regulation Best Interest, broker-dealers would be required to disclose, 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.297 We understand that, under current practice, broker-dealers typically provide information about some or all of the categories of disclosure included in this relationship summary on their firm websites and in their account opening agreements. We recognize that the different disclosure requirements for investment advisers and broker-dealers may result in retail investors having access to more information about investment advisers on a particular topic as compared to information about broker-dealers and vice versa. We request comment on whether we should take additional steps to ensure that retail investors have access to a similar amount of additional information about each of the topics covered by the relationship summary, such as by requiring firms to include appendices or hyperlinks with specific information.

    296 Broker-dealers are required under certain circumstances, such as when effecting certain types of transactions, to disclose certain conflicts of interest to their customers in writing, in some cases at or before the time of the completion of the transaction. See, e.g., supra notes 228 and 241 and accompanying text. See also 913 Study, supra note 3, at nn.256-259 and accompanying text; supra notes 230 and 243-243 and accompanying text (describing broker-dealer obligations under proposed Regulation Best Interest).

    297See Regulation Best Interest Proposal, supra note 24, at section II.D.1.

    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 disciplinary events, for example by stating “Our firm has legal and disciplinary events” or “We have financial professionals who have legal and disciplinary events”?

    • 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 (e.g., customer complaints and arbitrations). Should we include disclosures made to FINRA pursuant to FINRA Rule 4530 as reportable events? If so, should we require disclosure of similar events by investment advisers? Why or why not?

    • 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? 298

    298 Robo-advisers should also keep in mind the considerations set forth in the robo-adviser guidance update specifically as it relates to the substance and presentation of disclosures. See Robo-Advisers, IM Guidance Update No. 2017-02 (Feb. 23, 2017), available at https://www.sec.gov/investment/im-guidance-2017-02.pdf.

    • 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 (e.g., its current brochure or other current information), are there other places to which firms should direct retail investors to look for up-to-date information? Should we require firms that do not already maintain a public website to establish one for purposes of making the relationship summary publicly available?

    8. Key Questions

    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).299 Firms would be required to include ten questions, as applicable to their particular business, under the heading “Key Questions to Ask” after stating the following: “Ask our financial professionals these key questions about our investment services and accounts.” The required questions would be:

    299 Proposed Item 8 of Form CRS.

    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? 300

    300 Proposed Item 8 of Form CRS.

    We are proposing to allow firms to modify or omit portions of these questions, as applicable to their business.301 We are also proposing to require a standalone broker-dealer and a standalone investment adviser, to modify the questions to reflect the type of account they offer to retail investors (e.g., advisory or brokerage account).302 In addition, we are proposing that firms could include any other frequently asked questions they receive following these questions. Firms would not, however, be permitted to exceed fourteen questions in total in order to limit the length of the relationship summary.303

    301Id.

    302Id.

    303Id.

    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.304 If the firm provides automated advice, but makes a financial professional available to discuss the existing account with a retail investor, that firm generally should also make the financial professional available to discuss these questions with the retail investor.

    304Id.

    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.305 Questions about how the financial professional and the firm make money and about conflicts of interest would assist investors in understanding the extent to which compensation creates incentives for a financial professional to take his or her own interests into account in providing services. Similarly, the last question in the list of questions, which asks about a retail investor's primary contact at the firm and that financial professional's legal obligations, is intended to elicit a conversation about the different legal obligations of firms and financial professionals acting in an investment advisory capacity and in a brokerage capacity. Other items allow the investor to learn more specific information about the firms and financial professional, such as additional conflicts the firms or its financial professionals might have or disciplinary history.

    305See supra Section II.B.4, “Summary of Fees and Costs.”

    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.306 However, if we required firms to disclose the educational and professional certifications of each financial professional, firms would have to attach a separate disclosure for each particular financial professional (similar to the Form ADV brochure supplement or the information about financial professionals provided on BrokerCheck and IAPD) or would have to include lengthy disclosure with information about all of their financial professionals. We believe this would be more burdensome than prompting retail investors to ask their financial professionals these questions to encourage a conversation about these topics, if such a conversation is important to that investor. We understand that including “Key Questions to Ask” would result in some firms creating policies and procedures, including supervision and compliance reviews, relating to how their financial professionals respond to the questions.

    306See 917 Financial Literacy Study, supra note 20, at 24 (“Some examples of information that commenters indicated should be included in a summary disclosure document for an investment product or service include descriptions of. . . any eligibility requirements.”); Brochure Adopting Release, supra note 157, at nn.213-216 and accompanying text (discussing commenters that supported the brochure supplement, which contains information about the educational background, business experience, and disciplinary history (if any) of the supervised persons who provide advisory services to the client).

    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 information related to the relationship and certain externalized fees, but also information about fees that are implicit to a given product?

    • 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?

    C. Delivery, Updating, and Filing Requirements

    Our proposal would require registered investment advisers, registered broker-dealers that serve retail customers and dual registrants to deliver a relationship summary.307 Delivery of the relationship summary would not necessarily relieve the firm of any other disclosure obligations it has to its retail investors or prospective retail investors under any federal or state laws or regulations.

    307See Advisers Act proposed rule 204-5 and Exchange Act proposed rule 17a-14.

    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.308 Broker-dealers are liable under the antifraud provisions of the federal securities laws for failure to disclose material information to their customers when they have a duty to make such disclosure.309 When recommending a security, broker-dealers may be liable under the antifraud provisions if they do not give “honest and complete information” or disclose any material adverse facts or material conflicts of interest, including any economic self-interest.310 Among other specific disclosure obligations, broker-dealers are required to disclose certain potential conflicts to their customers under certain circumstances, such as disclosing at or before the time of the completion of the transaction whether the broker-dealer is acting as agent or principal, and its compensation and any third-party remuneration it has received or will receive.311 Broker-dealers typically provide information about their services, fees, and conflicts on their websites and in their account opening agreements. Disciplinary history on broker-dealers, details on the background, qualifications, and disciplinary history of financial professionals associated with broker-dealers, and customer complaints and arbitrations against them, are available on FINRA's BrokerCheck website.312

    308 For example, the relationship summary would not necessarily satisfy the disclosure requirements under proposed Regulation Best Interest. Regulation Best Interest would require broker-dealers to disclose in writing, before or at the time of a recommendation, the material facts related to the scope and terms of the relationship with the retail customer, including all material conflicts of interest that are associated with the recommendation. Regulation Best Interest Proposal, supra note 24, at section II.D.1 (noting that the relationship summary would reflect initial layers of disclosure, and the disclosure obligation of proposed Regulation Best Interest would reflect more specific and additional, detailed layers of disclosure).

    309See Basic v. Levinson, 485 U.S. 224, 239 n.17 (1988) (“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.”); Chiarella v. U.S., 445 U.S. 222, 228 (1980) (explaining that a failure to disclose material information is only fraudulent if there is a duty to make such disclosure arising out of “a fiduciary or other similar relation of trust and confidence”); SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999) (explaining that defendant is liable under section 10(b) and rule 10b-5 for material omissions “as to which he had a duty to speak”).

    310See, e.g., De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d at 1302; Chasins v. Smith, Barney & Co., 438 F.2d at 1172.

    311 17 CFR 240.10b-10(a)(2).

    312See https://brokercheck.finra.org.

    Investment advisers deliver to clients a “brochure” (and/or a “wrap fee program brochure,” as applicable) and “brochure supplement” required by Form ADV Part 2.313 The brochure is a plain language, narrative document that addresses, among other things, an investment adviser's advisory business, conflicts of interest with its clients, fees, and disciplinary history.314 The brochure supplement contains information about the advisory personnel providing clients with investment advice.315 The wrap fee program brochure provides prospective wrap fee program clients with important information regarding the cost of the programs and the services provided. The current Form ADV Parts 1 and 2A are filed by investment advisers, and details about the background qualifications, registrations and disciplinary history of financial professionals supervised by the investment adviser, are available on IAPD.316

    313See Advisers Act rule 204-3; Instructions 1 and 2 of Instructions for Part 2A of Form ADV; Instructions 2 and 3 of Instructions for Part 2B of Form ADV. An investment adviser that sponsors a wrap fee program is generally required to complete a wrap fee program brochure. See Appendix 1 to Form ADV Part 2A.

    314 Much of the disclosure in Part 2A addresses an investment adviser's conflicts of interest with its clients, and is disclosure that the adviser, as a fiduciary, must make to clients in some manner regardless of the form requirements. See Brochure Adopting Release, supra note 157, at 9.

    315 Form ADV Part 2B includes information about certain advisory personnel on whom clients may rely for investment advice, including their educational background, disciplinary history, and the adviser's supervision of the advisory activities of its personnel. Investment advisers are not required to file with the Commission the brochure supplements required by Form ADV Part 2B. Advisers Act rules 203-1(a), 204-1(b).

    316 IAPD is available at https://www.adviserinfo.sec.gov.

    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.

    1. Filing Requirements

    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.317 Broker-dealers would file their relationship summaries electronically in a text-searchable format with the Commission on EDGAR. Investment advisers would file their relationship summaries electronically in a text-searchable format through IARD in the same manner as they currently file Form ADV Parts 1A and 2A. Dual registrants would file on both EDGAR and IARD. All previously filed versions of relationship summaries filed via EDGAR will remain available to the public. Although previously filed versions of an adviser's relationship summary would remain stored as Commission records in IARD, only the most recent version of an adviser's relationship summary will be available through the Commission's public disclosure website.

    317See proposed amended Advisers Act rule 203-1 note to paragraph (a)(1); proposed Exchange Act rule 17a-14(a), (b). See infra Section II.C.2 for a discussion of the delivery requirements.

    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.318 Many broker-dealers submit documents to the Commission on EDGAR and all broker-dealers have an EDGAR CIK number.319 As mentioned above, a dual registrant would be required to file the relationship summary on EDGAR and IARD. The information for dual registrants would be accessible through IARD or EDGAR, which are both available through the Commission's website www.Investor.gov. Exact processes for firms to follow in filing under each system is specified on the IARD system website and in the EDGAR filer manual, respectively.

    318 Investment advisers may instead file a paper copy of the Form ADV with the Commission if they apply for a hardship exemption by filing Form ADV-H.

    319 During fiscal year 2017, approximately 1,100 broker-dealers submitted documents to the Commission using EDGAR. Broker-dealers can file their annual reports on EDGAR and broker-dealers that also conduct another business activity (e.g., broker-dealers that are also municipal advisers or large traders) use EDGAR for other required filings.

    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,320 requiring filing with the Commission will allow the public to access any firm's relationship summary. Lastly, by having firms file the relationship summaries with the Commission, the Commission can more easily monitor the filings for compliance with Form CRS.

    320 Proposed General Instruction 8.(a) to Form CRS.

    2. Delivery Requirements

    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.321 A dual registrant should 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.322 We encourage delivery of the relationship summary far enough in advance of a final decision to engage the firm to allow for meaningful discussion between the financial professional and retail investor, including by using the Key Questions, and for the retail investor to understand the information and weigh the available options. The delivery requirement applies to investment advisers even if the investment advisory agreement is oral, and to broker-dealers even if a transaction is executed outside of an account or without an account opening agreement, as further discussed below. In the case of paper delivery, if firms do not deliver the relationship summary as the sole document, firms should ensure that it is the first among any documents that are delivered at that time.323 A firm would be permitted to deliver the relationship summary (including updates) electronically, consistent with the Commission's guidance regarding electronic delivery.324 We are also proposing a requirement for firms that maintain a public website to post their relationship summaries on their websites in a way that is easy for retail investors to find.325 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.326

    321 Advisers Act proposed rule 204-5(b)(1) and Exchange Act proposed rule 17a-14(c)(1); proposed General Instruction 5.(b) to Form CRS.

    322 Advisers Act proposed rule 204-5(b)(1) (investment advisers or their supervised persons must deliver to each retail investor a current Form CRS before or at the time the investment adviser enters into an investment advisory contract with the retail investors) and Exchange Act proposed rule 17a-14(c)(1) (broker-dealers must deliver to each retail investor a current Form CRS before or at the time the retail investor first engages the broker-dealer's services). See also proposed General Instruction 5.(b) to Form CRS.

    323 Proposed General Instruction 8.(c) to Form CRS.

    324See Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples Under the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940, Exchange Act Release No. 37182 (May 9, 1996) [61 FR 24644 (May 15, 1996)] (“96 Guidance”). See also Use of Electronic Media, Exchange Act Release No. 42728 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)] (“2000 Guidance”); and Use of Electronic Media for Delivery Purposes, Exchange Act Release No. 36345 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)] (“95 Guidance”).

    325 Advisers Act proposed rule 204-5(b)(3) and Exchange Act proposed rule 17a-14(c)(3); proposed General Instruction 8.(a) to Form CRS.

    326 Proposed General Instruction 8.(a) to Form CRS.

    The timing of the initial delivery of the relationship summary for investment advisers generally tracks that of Form ADV Part 2A.327 The requirement for broker-dealers is intended to capture the earliest point in time at which a retail investor engages the services of a broker-dealer, including instances when a customer opens an account with the broker-dealer, or effects a transaction through the broker-dealer in the absence of an account, for example, by purchasing a mutual fund through the broker-dealer via “check and application.” 328 We believe that providing the retail investor the relationship summary at this first juncture would better assist the retail investor in making a determination whether to open an account with a broker-dealer. The rule does not require delivery to a retail investor to whom a broker-dealer makes a recommendation, if that retail investor does not open or have an account with the broker-dealer, or that recommendation does not lead to a transaction with that broker-dealer. If the recommendation leads to a transaction with the broker-dealer who made the recommendation, we would consider the retail investor to be “engaging the services” of that broker-dealer at the time the customer places the order or an account is opened, whichever occurs first.

    327See Instruction 1 of General Instructions for Part 2A of Form ADV.

    328 The obligation for a broker-dealer to deliver a relationship summary is broader than the proposed application of Regulation Best Interest, which would apply when a broker-dealer provides a recommendation. See supra note 29. Broker-dealers and investment advisers that offer online services would be required to provide the relationship summary to retail investors even if the only services provided to the customer or client is to offer a choice of investment options from an online menu of products, i.e., even if the broker-dealer does not provide a recommendation, provided that the retail investor engages its services. See also infra note 337 and accompanying text.

    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.329 Such changes would include a recommendation that the retail investor transfer from an investment advisory account to a brokerage account or from a brokerage account to an investment advisory account, or move assets from one type of account to another in a transaction that is not in the normal, customary, or already agreed course of dealing.330 A move of assets from one type of account to another in a transaction not in the normal, customary, or already agreed course of dealing could include, for example, asset transfers due to an IRA rollover; deposits or the investment of monies based on infrequent events or unusual size, such as an inheritance or receipt from a property sale; or a significant migration of funds from savings to an investment account. If a firm does not have any retail investors to whom it must deliver a relationship summary, it would not be required to prepare one.331 A firm would be required to deliver the relationship summary to a retail investor within 30 days upon request.332

    329 Advisers Act proposed rule 204-5(b)(2) and Exchange Act proposed rule 17a-14(c)(2); proposed General Instruction 7.(a) to Form CRS.

    330 Advisers Act proposed rule 204-5(b)(2) and Exchange Act proposed rule 17a-14(c)(2); proposed General Instruction 7.(a) to Form CRS.

    331 Proposed General Instruction 5.(a) to Form CRS.

    332 Advisers Act proposed rule 204-5(b)(5) and Exchange Act proposed rule 17a-14(c)(5); proposed General Instruction 7.(b) to Form CRS.

    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.333 In addition, the trigger for investment advisers is consistent with current requirements for investment advisers to deliver the Form ADV Part 2 brochure.334 A few commenters suggested that disclosures be delivered before a broker-dealer first executes a transaction based on a recommendation to a retail investor.335 Along these lines, we believe that retail investors should receive the relationship summary as part of the process of engaging the services of a financial professional or firm so the retail investor has the relevant information to make that decision.336 In particular, because broker-dealers are not required to enter into a formal agreement with a customer in order to provide services, there may be instances in which retail investors engage the services of a broker-dealer without (or before) formally opening a brokerage account (e.g., by entering an agreement with the broker-dealer). For example, some broker-dealers assist their customers in purchasing mutual funds or variable insurance products to be held with the mutual fund or variable insurance product issuer, by sending checks and applications directly to the fund or issuer (this is sometimes referred to as “check and application,” “application-way,” “subscription-way” or “direct application” business; we use the term “check and application” for simplicity).337 In light of these types of circumstances, we are proposing to require broker-dealers to deliver the relationship summary before or at the time the retail investor first engages the firm's services. As noted above, we would not interpret the term “engage the firm's services” to capture a recommendation by a broker-dealer 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.

    333 Many commenters suggested that the document be provided at the beginning of the relationship with a firm; such as before or at the time the retail investor enters into the agreement. See, e.g., Stifel 2017 Letter; Equity Dealers of America 2017 Letter; Fidelity 2017 Letter; AARP 2017 Letter; State Farm 2017 Letter; AFL-CIO 2017 Letter; CFA 2017 Letter; Wells Fargo 2017 Letter.

    334 An investment adviser is required to give a firm brochure to each client before or at the time the adviser enter into an advisory agreement with that client. See Advisers Act rule 204-3(b).

    335See, e.g., SIFMA 2017 Letter.

    336See, e.g., 917 Financial Literacy Study, supra note 20, at iv (“Generally, retail investors prefer to receive disclosures before making a decision on whether to engage a financial intermediary or purchase an investment product or service.”); Equity Dealers of America 2017 Letter, at 2 (“[W]e believe that [a relationship summary] should be a pillar to any new standard when establishing a new brokerage or advisory account relationship . . . Whether a client wants incidental advice, the ability to provide their own investment ideas or to direct their own transactions as associated with a brokerage account or whether a client wants ongoing advice, monitoring, and a level fee as associated with an advisory account will determine the type of account they choose.”); State Farm 2017 Letter; AARP 2017 Letter; AFL-CIO 2017 Letter, at 3 (“If [a proposed enhanced standard of conduct] were supplemented by pre-engagement disclosures that briefly and clearly describe the sales nature of the broker's services, . . . investors would be modestly better off than they are today.”); Fidelity 2017 Letter; Kiley 2017 Letter; CFA 2017 Letter.

    337 The broker-dealer is typically listed as the broker-dealer of record on the retail investor's account application, and generally receives fees or commissions resulting from the retail investor's transactions in the account. See, e.g., Transfers of Mutual Funds and Variable Annuities, FINRA Notice to Members 04-72 (Oct. 2004), available at http://www.finra.org/sites/default/files/NoticeDocument/p011634.pdf. See also supra note 328 and accompanying text.

    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.338 For example, firms would be required to provide a current version of the relationship summary before or at the time a recommendation is made that the retail investor transfers from an investment advisory account to a brokerage account, transfers from a brokerage account to an investment 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.339 In these instances, retail investors are again making decisions about whether to invest through an advisory account or a brokerage account and would benefit from information about the different services and fees that the firm offers to make an informed choice. Therefore, we are proposing that firms be required to deliver the relationship summary to existing retail investors before or at the time these changes occur. Whether a change would require delivery of the relationship summary would depend on the specific facts and circumstances.340 For example, transfers among accounts that occur in the ordinary course of business, such as a periodic rebalancing of assets among two accounts or quarterly investments in a retirement account, would not require the delivery of a relationship summary.341

    338 Advisers Act proposed rule 204-5(b)(2) and Exchange Act proposed rule 17a-14(c)(2); proposed General Instruction 7.(a) to Form CRS.

    339Id.

    340Id.

    341Id.

    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.342 The Commission's previously issued guidance applicable to electronic delivery of certain documents by investment advisers and broker-dealers consists of the following elements: (i) Notice to the investor that information is available electronically; (ii) access to information comparable to that which would have been provided in paper form and that is not so burdensome that the intended recipients cannot effectively access it; and (iii) evidence to show delivery, i.e., reason to believe that electronically delivered information will result in the satisfaction of the delivery requirements under the federal securities laws.343

    342 Proposed General Instruction 8.(b) to Form CRS. See 96 Guidance, supra note 324.

    343 96 Guidance, supra note 324.

    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.344 This method of initial delivery for the relationship summary would be consistent with the Commission guidance.345 With respect to existing clients or customers, firms should deliver the relationship summary in a manner consistent with the firm's existing arrangement with that client or customer and with the Commission guidance.

    344 For example, a retail investor without access to a computer or email would likely request information in person or by telephone, and the financial professional would deliver a hard copy of the relationship summary in person or by mail.

    345 Firms could meet the elements of the Commission's electronic delivery guidance in other ways as well when delivering the relationship summary to new or prospective clients or customers. See 2000 Guidance, supra note 324, at 65 FR 25845-46; 96 Guidance, supra note 324, at 61 FR at 24647; 95 Guidance, supra note 324, at 60 FR at 53461.

    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.346 The Commission noted that a global consent to e-delivery would not be an informed consent if the opening of a brokerage account were conditioned upon providing the consent; in such cases other evidence of delivery would be required.347 However, the 2000 Guidance made an exception for brokerage firms that require accounts to be opened online and all account transactions to be initiated and conducted online, stating, “In these instances only, the opening of a brokerage account may be conditioned upon providing global consent to electronic delivery.” 348 We understand that for some robo-advisers, the account opening process and subsequent investment decisions and transactions may involve similarly limited interaction with a financial professional. Therefore, it would be consistent with the Commission's prior guidance if firms that offer only online account openings and account transactions, including robo-advisers and online broker-dealers, made global consent to electronic delivery a condition of account opening, for purposes of delivering the relationship summary.

    346 2000 Guidance, supra note 324, at 65 FR 25846.

    347Id. Evidence of delivery could include, for example: Obtaining evidence that an investor actually received the information such as by electronic mail return receipt or confirmation of access, downloading, or printing; an investor's accessing a document with hyperlinking to a required document; or using other forms or material available only by accessing the information. See 1995 Guidance, supra note 324, at section II.C.

    348Id. at n.27.

    We request comment on whether the Commission should provide additional guidance with respect to electronic delivery of the relationship summary to new and prospective or existing clients and customers.

    3. Updating Requirements

    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.349 To the extent that this information changes in a material way, existing clients and customers should be made aware so that they can decide whether the choice of that particular firm or financial professional remains appropriate and consistent with their decision-making criteria. Therefore, we are proposing to require a firm to update its relationship summary within 30 days whenever the relationship summary becomes materially inaccurate.350 Firms also would be required to post the latest version on their websites (if they have one), and electronically file the relationship summary with the Commission.351 We believe this approach is consistent with the current requirements for investment advisers to update the Form ADV Part 2 brochure,352 and with broker-dealers' current obligations, including to update Form BD if its information is or becomes inaccurate for any reason, which information generally would be made available through EDGAR.353 We believe allowing 30 days for firms to make updates provides sufficient time for firms to make the necessary changes and gives the benefit of certainty of when the updates must be made.

    349See 917 Financial Literacy Study, supra notes 20-21 and accompanying text.

    350 Advisers Act proposed rule 204-1(a)(2) and Exchange Act proposed rule 17a-14(b)(3); proposed General Instruction 6.(a) to Form CRS.

    351 Advisers Act proposed rules 203-1(a)(1), 204-5(b)(3) and Exchange Act proposed rule 17a-14(b)(2), 17a-14(c)(3); proposed General Instructions 5.(a), 6.(c) and 8 to Form CRS.

    352See, e.g., Advisers Act proposed rule 204-5(b)(4) and Exchange Act proposed rule 17a-14(a)(3); proposed General Instruction 6 to Form CRS. Generally, an investment adviser registered with the SEC or a state securities authority is required to amend its Form ADV promptly if information it provided in its brochure becomes materially inaccurate. See Advisers Act rule 204-1(a)(2); Instruction 4 of General Instructions to Form ADV.

    353See, e.g., Exchange Act rule 15b3-1.

    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.354 Firms could communicate this information by delivering the amended relationship summary or by communicating the information another way to the retail investor.355 For example, if an investment adviser communicated a material change to information contained in its relationship summary to a retail investor by delivering an amended Form ADV brochure or Form ADV summary of material changes containing the updated information, this would support a reasonable belief that the information had been communicated to the retail investor, and the investment adviser would not be required to deliver an updated relationship summary to that retail investor. This requirement provides firms the ability to disclose changes without requiring them to duplicate disclosures and incur additional costs. A retail investor also would be able to find the latest version of the relationship summary on the firm's website, if it has one, and firms would be required to deliver it upon the retail investor's request.356

    354 Advisers Act proposed rule 204-5(b)(4) and Exchange Act proposed rule 17a-14(c)(4); proposed General Instruction 6.(b) to Form CRS.

    355Id.

    356 Advisers Act proposed rules 204-5(b)(3) and 204-5(b)(5) and Exchange Act proposed rules 17a-14(c)(3) and 17a-14(c)(5); proposed General Instructions 7 and 8 to Form CRS.

    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 357 and would enhance investor protections to retail investors engaging the financial services of broker-dealers.

    357 For example, broker-dealers may already have compliance infrastructure to identify customers pursuant to FINRA's suitability rule, which applies to dealings with a person (other than a broker or dealer) who opens a brokerage account at a broker-dealer or who purchases a security for which the broker-dealer receives or will receive, directly or indirectly, compensation even though the security is held at an issuer, the issuer's affiliate or custodial agent, or using another similar arrangement. See Guidance on FINRA's Suitability Rule, FINRA Regulatory Notice 12-55 (Dec. 2012), at Q6(a), available at http://finra.complinet.com/net_file_store/new_rulebooks/f/i/FINRANotice12_55.pdf.

    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.358

    358See Advisers Act proposed rule 204-2(a)(14)(i) and Exchange Act proposed rule 17a-3(a)(24).

    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? 359 Should investment advisers with sub-advisory relationships be allowed to receive the relationship summary, and any updated information in relationship summaries, from the sub-advisers, on behalf of the primary investment adviser's clients? Should such clients receive the relationship summary of the sub-adviser?

    359See, e.g., FINRA Rule 4311(c) (Carrying Agreements) (requiring each carrying agreement in which accounts are to be carried on a fully disclosed basis to specify the responsibilities of each party to the agreement), available at http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=10028.

    • 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? 360 Should broker-dealers instead be required to file Form CRS solely through IARD? What would be the costs or benefits associated with broker-dealers becoming familiar with and filing through IARD system rather than through EDGAR? Is there another method of electronic filing the Commission should consider for Form CRS and why? If broker-dealers should file using a system other than EDGAR, what would be the costs and benefits associated with creation of, and/or becoming familiar with and filing through, that system? Should investment advisers and broker-dealers be required to file on the same system?

    360See proposed General Instruction 5.(a) to Form CRS.

    • 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 (e.g., 48 hours or a 15 minute waiting period)? For broker-dealers, should we require delivery of the relationship summary at the earlier of a recommendation or engagement, as opposed to just engagement? We also propose that a broker-dealer would not need to deliver the relationship summary to a retail investor to whom a broker-dealer makes a recommendation, if that retail investor does not open or have an account with the broker-dealer, or that recommendation does not lead to a transaction with that broker-dealer. Should we instead require that broker-dealers deliver the relationship summary to prospective customers regardless of whether that leads to a transaction or account opening?

    • 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 disclosures or other types of supplemental information? Would this requirement give retail investors sufficient opportunity to process the information and ask questions before the changes are made? Should we specify how far in advance a firm should deliver the relationship summary before making such changes?

    • Should we require that firms deliver an updated relationship summary to retail investors periodically (e.g., quarterly, semi-annually or annually) or whenever there is a material change, as proposed, such as a change in fees or commission structure?

    • 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 any investor, not just retail investors and any trust or other similar entity that represents natural persons?

    • 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 (e.g., “before or at the time the retail investor first enters a relationship,” or “before or at the time the retail investor engages in a transaction or opens an account, whichever occurs first,” or “before or at the time the retail investor indicates an intent to open an account or engage in a transaction, whichever occurs first”)? Why or why not? Should the delivery requirements for investment advisers and broker-dealers be identical? Why or why not?

    • For investment advisers, our proposal generally tracks the initial delivery requirements for Form ADV Part 2.361 Should we instead follow a different disclosure delivery requirement? Should we adopt a different delivery requirement, recognizing that the purpose of the relationship summary is to provide information to retail investors to help them decide whether to engage a particular firm and open an investment advisory or brokerage account?

    361See Advisers Act rule 204-3.

    • 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?

    D. Transition Provisions

    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 investment advisers would not be required to file or deliver their relationship summaries until the date six months after the effective date of the proposed new rules and rule amendments.362 After that date, newly registered broker-dealers would be required to file their Form CRS with the Commission by the date on which their registration with the Commission becomes effective, and the Commission would not accept any initial application for registration as an investment adviser that does not include a relationship summary that satisfies the requirements of Form ADV, Part 3: Form CRS.363

    362See Advisers Act proposed rule 203-1(a)(2) and Exchange Act proposed rule 17a-14(f)(1).

    363See Advisers Act proposed rule 203-1(a)(2) and Exchange Act proposed rule 17a-14(f)(3).

    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.364 We also propose requiring an investment adviser or a dual registrant that is registered with us as of the effective date to comply with the new filing requirements as part of the firm's next annual updating amendment to Form ADV that is required after six months after the rule's effective date.365 Such an adviser or dual registrant would be required to include Form CRS as part of its next such annual updating amendment filing with the Commission.366

    364See Exchange Act proposed rule 17a-14(f)(1); proposed General Instruction 5.(c)(i) to Form CRS.

    365See Advisers Act proposed rule 204-1(b)(3); proposed General Instruction 5.(c)(i) to Form CRS.

    366See id.

    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.367 This proposed requirement would allow existing retail investor clients and customers to receive the important disclosures in the relationship summary that will be provided to new and prospective retail investor customers and clients. A firm would be required to give its relationship summary to its new and prospective clients and customers who are retail investors beginning on the date the firm is first required to electronically file its relationship summary with the Commission, and would be required to give the relationship summary to its existing clients and customers who are retail investors within 30 days, pursuant to the rule's requirements for initial delivery and updating.368

    367See Advisers Act proposed rule 204-5(e)(1) and Exchange Act proposed rule 17a-14(f)(2); proposed General Instruction 5.(c)(iii) to Form CRS.

    368See Advisers Act proposed rule 204-5(e) and Exchange Act proposed rule 17a-14(f)(1), (2); proposed General Instruction 5.(c)(ii), (iii) to Form CRS.

    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 (e.g., within six months from the effective date of Form CRS), even if investment advisers file Form CRS after that date? Or should we require firms to deliver to existing retail investor customers and clients initial relationship summaries at a later date? For example, firms could be required to deliver the relationship summary only 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 (including before or at the time the firm recommends that the retail investor transfers from an investment advisory account to a brokerage account or from a brokerage account to an investment 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).

    E. Recordkeeping Amendments

    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.369 Firms 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.370 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.

    369 Advisers Act proposed rule 204-2(a)(14)(i); Exchange Act proposed rules 17a-3(a)(24) and 17a-4(e)(10).

    370Id.

    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 maintained for a period of six years.371 The proposed required documentation, like other records, would be required to be provided to the staff “promptly” upon request.372

    371See Advisers Act rule 204-2(e)(1); Exchange Act rule 17a-4(e)(10). Pursuant to Advisers Act rule 204-2(e)(1), investment advisers will be required to maintain the relationship summary for a period of five years, while Exchange Act proposed rule 17a-4(e)(10) would require broker-dealers to maintain the relationship summary for a period of six years.

    372See Advisers Act rule 204-2(g)(2); Exchange Act rule 17a-4(j).

    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?

    III. Restrictions on the Use of Certain Names and Titles and Required Disclosures

    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.373 We therefore believe that it is vital that retail investors understand whether the firm is a registered investment adviser or registered broker-dealer, and whether the individual providing services is associated with one or the other (or both), so that retail investors can make an informed selection of their financial professional, and then appropriately monitor their financial professional's conduct.

    373See, e.g., 913 Study, supra note 3.

    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.374 Proposed Form CRS, as set out in Section II above, should help to ameliorate this confusion by helping retail investors understand the services that a particular firm offers, and how those services differ based on whether the firm is a registered broker-dealer, registered investment adviser, or both. We preliminarily believe, however, that Form CRS is not a complete remedy for investor confusion. The education and information that Form CRS provides to retail investors could potentially be overwhelmed by the way in which financial professionals present themselves to potential or current retail investors, including through advertising and other communications. This could particularly be the case where the presentation could be misleading in nature, or where advertising and communications precede the delivery of Form CRS and may have a disproportionate impact on shaping or influencing retail investor perceptions.

    374See, e.g., Siegel & Gale Study, supra note 5; RAND Study, supra note 5; 913 Study, supra note 3. Additionally, the RAND Study noted that participants “commented that the interchangeable titles and `we do it all' advertisements [by broker-dealers] made it difficult to discern broker-dealers from investment advisers.” Those participants also stated that these lines were further blurred by the marketing efforts which depicted an “ongoing relationship between the broker and the investor. . . .” See RAND Study, supra note 5, at xix, 19.

    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.375 Additionally, broker-dealers and investment advisers, and the financial professionals that are associated with them, currently engage in communications with prospective or existing retail investors without making clear whether they are a broker-dealer or an investment adviser, which can further confuse retail investors if this distinction is not clear from context (whether intentionally or not).

    375See supra notes 122 and 216 and accompanying texts.

    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.376

    376 Section 15(l)(2) of the Exchange Act and section 211(h)(2) of the Advisers Act.

    A. Investor Confusion

    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.377

    377See, e.g., Siegel & Gale Study, supra note 5; RAND Study, supra note 5; 913 Study, supra note 3.

    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 . . .” 378 The following year, the Commission retained RAND to conduct a study of broker-dealers and investment advisers for the purpose of examining, among other things, whether investors understood the duties and obligations owed by investment advisers and broker-dealers.379 The RAND Study noted that “thousands of firms” are structured in a variety of ways and provide various different combinations of services and products.380 The RAND Study concluded that “partly because of this diversity of business models and services, investors typically fail to distinguish broker-dealers and investment advisers along the lines defined by federal regulations.” 381

    378See Siegel & Gale Study, supra note 5, at 2. The study used focus groups in both Baltimore, MD and Memphis, TN to “explore investor opinions regarding the services, compensation and legal obligations of several types of financial services professionals.” Id., at 5.

    379See RAND Study, supra note 5, at xiv. In conducting the study, RAND used several methods to study current practices in the financial industry and analyze whether investors understand differences between types of financial service professionals. Among these methods, RAND sent out national household surveys through the internet which studied “household investment behavior and preferences, experience with financial service providers, and understanding of the different types of financial service providers.” Additionally, RAND conducted six focus groups with investors in Alexandria, Virginia, and Fort Wayne, Indiana to gain additional evidence on investor beliefs about and experience with financial service providers. RAND also conducted two sets of [in person] interviews: one set of interviews with interested parties and one set with financial service firms. See RAND Study, supra note 5, at 3-4.

    380See RAND Study, supra note 5, at 118.

    381Id.

    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.' ” 382 Additionally, participants in RAND's survey believed that financial professionals using the title “financial advisor” were “more similar to investment advisers than to brokers . . .” 383

    382See id., at 19.

    383See id., at xix.

    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.” 384 More specifically, focus group participants observed that “common job titles for investment advisers and broker-dealers are so similar that people can easily get confused over the type of professional with which they are working.” 385 The focus group results also showed that when “[c]omparing beliefs on services provided by investment advisers to services provided by brokers, participants were more likely to say that investment advisers provide advice about securities, recommend specific investments, and provide planning services.” 386 According to the RAND Study, focus-group participants were more likely to say that brokers rather than investment advisers execute stock transactions and earn commissions and believed “that investment advisers and brokers are required to act in the client's best interest” and “were more likely to say that brokers rather than investment advisers are required to disclose any conflicts of interest.” 387 In highlighting part of the confusion, the RAND Study noted that the responses from survey participants indicated the opposite conclusion from those of the focus-group participants, namely, that investment advisers are more likely to disclose conflicts of interest.388

    384See id., at xix. Interview participants also stated that these lines were further blurred by the marketing efforts which depicted an “ongoing relationship between the broker and the investor. . . .”. See id., at 19.

    385See id., at 111.

    386See id., at 109.

    387Id.

    388Id.

    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.389 For example, one commenter examined the websites of nine different brokerage firms and “found that the firms' advertising presents the image that the firms are acting in a fiduciary capacity” with many firm advertisements continuing to present the firm “as providing all-encompassing advice, with no differentiation between the firms' investment adviser services and brokerage services.” 390 This commenter also noted that “[w]ithout uniform standards, persons seeking financial advice are left to fend for themselves in deciding whether their financial advisor is serving two masters or only one, and whether one of those masters is the advisor's financial self-interest.” 391 In addition, a different commenter argued that the use of certain titles, such as “advisor,” should be standardized by the Commission because they are currently “catch all” terms for firms with “wildly different practices, standards, and responsibilities to their clients.” 392 Some of the commenters to Chairman Clayton's Request for Comment also noted that this confusion is the result of the misleading nature of these titles. Specifically, one commenter stated that “[t]he problem is that investors are being misled into relying on biased sales recommendations as if they were objective, best interest advice and are suffering significant financial harm as a result.” 393 The commenter noted that “these titles and marketing materials are misleading” [if] . . . broker-dealers truly are the “mere salespeople they've claimed to be in their legal challenge to the DOL fiduciary rule.” 394 A different commenter stated that “a financial professional should not be able to use a title that conveys a standard of conduct to which the professional is not in fact held under the law. . . .” 395 Additionally, another commenter noted that customer confusion is “also driven by misleading marketing and misleading titles.” 396 Finally, one commenter stated that “having SEC registered entities and their agent, claim such title gives false credence and implies a responsibility which the agent never claims to provide (numerous brokers go by the title `Financial Advisor', implying Fiduciary standard that is not being upheld).” 397

    389See, e.g., CFA 2017 Letter; PIABA 2017 Letter; IAA 2017 Letter; Pefin 2017 Letter; First Ascent 2018 Letter.

    390See PIABA 2017 Letter, at 7. See also IAA 2017 Letter, at 11 (“investor confusion persists where certain financial professionals are permitted to use terms such as “financial adviser” or “financial advisor” that imply a relationship of trust and confidence but, in effect, disclaim fiduciary responsibility for such a relationship”); Pefin 2017 Letter, at 3 (noting that “ `Investment Advisor' or `Financial Advisor' are not defined terms, and are currently a “catch all” for firms with wildly different practices, standards, and responsibilities to their clients. Many of these firms attempt to imply in external communication that they are a Fiduciary, while disclaiming their responsibilities in the fine print.”); CFA 2017 Letter.

    391See PIABA 2017 Letter, at 17.

    392See Pefin 2017 Letter, at 3. See also First Ascent 2017 Letter.

    393See CFA 2017 Letter, at 2.

    394See id., at 11.

    395See Comment letter of the U.S. Chamber of Commerce (Dec. 13, 2017), at 10.

    396See Comment letter of the Steering Group for the Committee for the Fiduciary Standard (Nov. 8, 2017) (“Committee for the Fiduciary Standard 2017 Letter”), at 3.

    397See Pefin 2017 Letter, at 9.

    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.398 In adopting our final rule, which was subsequently vacated on other grounds by the Court of Appeals for the D.C. Circuit,399 we declined to follow this approach, believing that the better approach was to require broker-dealers to clearly inform their customers receiving investment advice that they are entering into a brokerage, and not an advisory, relationship.400 However, in light of comments in response to Chairman Clayton's Request for Comment and our experience, we believe that it is appropriate to revisit that approach.

    398 Certain Broker-Dealers Deemed Not To Be Investment Advisers, Exchange Act Release No. 50980 (Jan. 6, 2005), [70 FR 2716 (Jan. 14, 2005)] (“Broker Dealer Reproposing Release”).

    399Financial Planning Association v. Securities and Exchange Commission, 482 F.3d 481 (D.C. Cir. 2007).

    400 As further discussed in the 2005 final rule release, we considered but did not adopt a rule which would have placed limitations on how a broker-dealer may hold itself out or titles it may employ without registering as an investment adviser and complying with the Advisers Act. In deciding to not prohibit the use of specific titles such as “financial advisor,” “financial consultant” or other similar names, we noted that “the statutory broker-dealer exception is a recognition by Congress that a broker-dealer's regular activities include offering advice that could bring the broker-dealer within the definition of investment adviser, but which should nonetheless not be covered by the Act.” As a result, we noted that the “terms `financial advisor' and `financial consultant,' for example, were descriptive of such services provided by broker-dealers.” We also stated our view that these titles were generic terms that describe what various persons in the financial services industry do, including banks, trust companies, insurance companies, and commodity professionals. See 2005 Broker Dealer Release, supra note 7; see also Broker Dealer Reproposing Release, supra note 398.

    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.401 While we believe such advice is important for providing retail investors access to a variety of services, products, and payment options, for example, thereby increasing investor choice, we are concerned that use of the terms “adviser” and “advisor” in a name or title would continue to result in some retail investors being misled that their firm or financial professional is an investment adviser (i.e., a fiduciary), resulting in investor harm. We believe that these terms can obscure the fact that investment advisers and broker-dealers typically have distinct business models with varying services, fee structures, standards of conduct, and conflicts of interest.402

    401 The Advisers Act regulates the activities of certain “investment advisers,” which are defined in section 202(a)(11) as persons who receive compensation for providing advice about securities as part of a regular business. Broker-dealers are excluded from the definition of investment adviser by section 202(a)(11)(C) provided that they meet two prongs: (i) The broker-dealer's advisory services must be “solely incidental to” its brokerage business; and (ii) the broker-dealer must receive no “special compensation” for the advice.

    402See RAND Study, supra note 5, at 18 (“There were also concerns as to what investors understand regarding similarities and differences of brokerage and advisory accounts, the legal obligations of each type of account, and the effect of titles and marketing used by investment professionals on the expectations of investors.”).

    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,403 and provides services it may not offer, such as regular monitoring of the account, offering advice on a regular basis, and communicating with the investor on a regular basis.

    403See supra note 375. Cf. Comment letter of Russel Walker (Jun. 17, 207); Comment letter of Jeanne Davis (Jul. 20, 2017); Comment letter of Nancy Lowell (Jul. 20, 2017); Comment letter of John Dalton (Jul. 21, 2017); Comment letter of Nancy Tew (Jul. 21, 2017); Comment letter of Bonitta Knapp (Jul. 21, 2017); Comment letter of Alan Gazetski (Jul. 21, 2017); Comment letter of A. Arias (Jul. 21, 2017); Comment letter of Al Cohen (Jul. 21, 2017); Comment letter of James Melloh (Jul. 21, 2017); Comment letter of Mary Pellecchia (Jul. 21, 2017); Comment letter of William Muller (Jul. 21, 2017); Comment letter of Susan Lee (Jul. 22, 2017); Comment letter of Steve Daniels (Jul. 22, 2017); AARP 2017 Letter; AFL-CIO 2017 Letter; Pefin 2017 Letter; PIABA 2017 Letter; IAA 2017 Letter; CFA 2017 Letter. These commenters argued that as a result of the use of certain titles and communications, retail investors are confused and are erroneously led to believe that their financial professionals are required to act “in their best interest.”

    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 after the retail investor has initially decided to meet with the firm or its financial professional. The retail investor may make a selection based on such person's name or title. If firms and financial professionals that are not investment advisers are restricted from using “adviser” or “advisor” in their names or titles, retail investors would be less likely to be confused or potentially misled about the type of financial professional being engaged or nature of the services being received. Conversely, an associated natural person of a broker-dealer using the term “adviser” or “advisor” may result in an investor believing that such financial professional is an adviser with a fiduciary duty, as discussed in the relationship summary the investor would receive.404 Similarly, requiring firms and their associated natural persons or supervised persons, as applicable, to disclose whether the firms are broker-dealers or investment advisers would help to address investor confusion and complement the information provided in the proposed relationship summary.

    404See proposed Item 5.B.3. of Form CRS.

    B. Restrictions on Certain Uses of “Adviser” and “Advisor”

    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.405

    405See Exchange Act proposed rule 151-2.

    1. Firms Solely Registered as Broker-Dealers and Associated Natural Persons

    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.406 This would include names or titles which include, in whole or in part, the term “adviser” or “advisor” such as financial advisor (or adviser), wealth advisor (or adviser), trusted advisor (or adviser), and advisory (e.g., “Sample Firm Advisory”) when communicating with any retail investor. In addition, we believe that the proposed rule should apply to communications with retail investors (i.e., natural persons), rather than institutions, for reasons similar to those detailed above for the relationship summary.407 Additionally, our proposed rule appropriately applies to retail investors and not to institutions, as institutions generally would be less likely to be misled by such names or titles. The proposed rule, however, would not restrict a broker-dealer's or its associated natural persons' use of the terms “adviser” or “advisor” when acting on behalf of a bank or insurance company, or when acting on behalf of a municipal advisor or a commodity trading advisor.

    406See id.

    407See supra note 29 and accompanying text. See also Exchange Act proposed rule 151-2(b).

    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.408 As discussed above, we believe that 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 interest, and legal standards of conduct to which broker-dealers and investment advisers are subject.409 Conversely, we preliminarily believe that other terms, even if investors might find them confusing, unclear, or misleading (as some commenters have suggested), do not necessarily imply that a firm or its financial professional is an “investment adviser” who would have the principal services, compensation structures, conflicts of interest, disclosure obligations, and legal standards of conduct that are typically associated with being an investment adviser.410

    408See section 202(a)(11)(A) of the Advisers Act, defining an “investment adviser” 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 or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.”

    409See supra note 402 and accompanying text. We are not proposing restrictions on names or titles for investment advisers. Our staff is not aware of an investment adviser using a name or title that could cause retail investors to mistakenly believe that such adviser provides brokerage services. Studies and commenters also have not identified retail investor confusion as relating to an investment adviser's use of names or titles. We request comment on our understanding below.

    410 Firms and financial professionals should keep in mind the applicability of the antifraud provisions of the federal securities laws, including section 17(a) of the Securities Act, and section 10(b) of the Exchange Act and rule 10b-5 thereunder, to the use of names or titles. See also generally FINRA Rule 2210 (stating in part “[a]ll retail communications and correspondence must: (A) Prominently disclose the name of the member, or the name under which the member's broker-dealer business primarily is conducted as disclosed on the member's Form BD, and may also include a fictional name by which the member is commonly recognized or which is required by any state or jurisdiction; (B) reflect any relationship between the member and any non-member or individual who is also named; and (C) if it includes other names, reflect which products or services are being offered by the member.”)

    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 (e.g., services, fees, standards of conduct, conflicts). While the proposed relationship summary is designed to help retail investors to distinguish between investment advisers and broker-dealers, we are concerned that the effectiveness of the relationship summary could be undermined if we do not restrict a broker-dealer from using in a name or title the terms “adviser” and “advisor.”

    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 investment adviser because of the name or title. For example, if a retail investor were to engage a financial professional with the title “wealth advisor” who solely provides brokerage services but who is associated with a dually registered firm,411 such investor would likely receive the dually registered firm's relationship summary. The relationship summary would include a description of both business models; however, the retail investor could incorrectly match the services he or she would receive from such “wealth advisor” to the description in the relationship summary of investment advisory services. As a result, the retail investor may be misled to believe that the brokerage services provided by the “wealth advisor” are in fact the investment advisory services as described in the relationship summary.

    411 For the purposes of Section III, we are defining a “dually registered firm” in the same manner as it is defined in the baseline of the Economic Analysis. See infra Section IV, note 453.

    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 broker-dealer business model. As a result, there would be an inconsistency between the description of the broker-dealer business model and the investors' likely perceptions that their professional is an investment adviser. Therefore, the proposed restriction on the use of names or titles would increase the effectiveness of the relationship summary by reducing the risk of a mismatch between investor preferences and type of services received.

    We acknowledge that studies have demonstrated that many retail investors select financial professionals and firms based on personal referrals by family, friends, or colleagues.412 Even if the name or title of the firm or professional may not impact choices made by such investors, we preliminarily believe that the protections offered to other investors by the proposed restriction and disclosure requirements justify the rules.

    412See infra note 546 and accompanying text. See also Section IV.A.3.g.

    2. Dually Registered Firms and Dual Hatted Financial Professionals

    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.413 The proposed rule would, however, only permit an associated natural person of a dually registered firm to use these terms where such person is a supervised person of a registered investment adviser and such person provides investment advice on behalf of such investment adviser.414 This would limit the ability of natural persons associated with a broker-dealer who do not provide investment advice as an investment adviser from continuing to use the term “adviser” or “advisor” simply by virtue of the fact that they are associated with a dually registered firm.415 We discuss these aspects of the rule in further detail below.

    413See Exchange Act proposed rule 151-2(a)(1).

    414See Exchange Act proposed rule 151-2(a)(2).

    415See section 202(a)(25) of the Advisers Act [15 U.S.C. 80b-2(a)(25)] defining “supervised person” as “any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser”.

    a. Dually Registered Firms

    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, i.e., whether a dually registered firm is acting solely as a broker-dealer and not offering investment advisory services. If we were to apply the restriction in this manner, it could result in firms using multiple names and titles, which may lead to further confusion and create operational and compliance complexities. Accordingly, this could lead to dually registered firms avoiding the use of the title “adviser” or “advisor” unless they believe they would always offer investment advisory services, which we believe is not necessary to avoid the potential investor harm. Additionally, we also seek to avoid the potential misimpression that may result should a firm use a name or title to reflect only its brokerage services and not its investment advisory services. In such a circumstance, a retail investor may not know that such firm offers both business models and could be led to believe that only brokerage services are available.

    b. Dual Hatted Financial Professionals

    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.416 We believe that the relationship summary can sufficiently reduce the risk of investors being misled and avoid investor harm because it contains parallel information with respect to each of the services the dual hatted financial professional offers.

    416See Exchange Act proposed rule 151-2(a)(2).

    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, i.e., a financial professional that only offers brokerage services to retail investors, should be restricted from using the title “adviser” or “advisor” despite such person's association with a dually registered firm.

    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, i.e., whether a dual hatted professional is offering only brokerage services to that particular investor and not offering investment advisory services.417 Moreover, we are proposing in Regulation Best Interest to require a broker-dealer to make certain disclosures, including the capacity of the financial professional and firm.418 We request comment below on whether and if so how the proposed rule should address this particular circumstance.

    417See supra note 410. Firms and financial professionals should keep in mind the applicability of the antifraud provisions of the federal securities laws, including section 17(a) of the Securities Act, and section 10(b) of the Exchange Act and rule 10b-5 thereunder, to the use of names or titles.

    418 See Regulation Best Interest Proposal, supra note 24.

    C. Alternative Approaches

    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.419 Under section 202(a)(11)(C), a broker-dealer is excluded from the definition of investment adviser if its “performance of [advisory] services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.” 420 In this regard, and as an alternative to our proposed rule today, 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 cannot be considered to provide investment advice solely incidental to the conduct of its business as a broker-dealer and therefore is not excluded from the definition of investment adviser under section 202(a)(11)(C). We also considered proposing a rule that would preclude a broker-dealer from relying on the exclusion when such a broker-dealer held itself out as an investment adviser. We are not proposing these alternatives for the reasons discussed below. However, we request comment on these alternatives below.

    419See, e.g., Comment letter of Investment Counsel Association of America (Feb. 7, 2005) (“ICAA 2005 Letter); Comment letter of T. Rowe Price (Feb. 22, 2005) (“T. Rowe Price 2005 Letter”) on Broker Dealer Reproposing Release, supra note 398. See also Certain Broker-Dealers Deemed Not to Be Investment Advisers, Exchange Act Release No. 42099 (Nov. 4, 1999) (“Release 42099”).

    420 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 in a manner that suggests that they are offering advisory accounts, including through the use of names or titles.421 While we have never viewed the broker-dealer exclusion as precluding a broker-dealer from marketing itself as providing some amount of advisory services, we have noted that these marketing efforts raised “troubling questions as to whether the advisory services are not (or would be perceived by investors not to be) incidental to the brokerage services.” 422 Certain commenters have voiced similar concerns, arguing that the use of certain titles, such as “financial advisor,” is inconsistent with the broker-dealer exclusion, with some noting that the marketing of advisory services by a broker-dealer is inconsistent with those services being solely incidental to the brokerage business.423 Others, however, contended that the titles are consistent with the services provided by broker-dealers, whether in fee-based or commission-based accounts.424

    421See, e.g., Release 42099, supra note 419.

    422See id.

    423See, e.g., ICAA 2005 Letter; T. Rowe Price 2005 Letter. See also e.g. AFL-CIO 2017 Letter; CFA 2017 Letter; Comment letter of CFA Institute (Jan. 10, 2018); Comment letter of The Committee for the Fiduciary Standard (Jan. 12, 2018).

    424See Broker Dealer Reproposing Release.

    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.425 In considering this alternative, we questioned whether a broker-dealer that uses these terms to market or promote its services to retail investors is doing so because its advice is significant or even instrumental to its brokerage business. Consequently, we questioned whether that broker-dealer's provision of advice is therefore no longer solely incidental to its brokerage business. Similarly, we believe 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 its financial professionals' titles, the broker-dealer is indicating that advice is an important part of its retail investor broker-dealer business. As compared to the more principles-based “holding out” approach below, this alternative may offer more certainty and clarity to broker-dealers. It also specifically addresses our concerns about the use of “adviser” and “advisor,” as discussed in this release.

    425 As with the proposal, our alternative approach would likewise preclude an associated natural person of a dually registered firm from using the term “adviser” or “advisor” in a name or title unless he or she is a supervised person of an investment adviser and provides investment advice on behalf of such investment adviser.

    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.426 For example, “holding out” could encompass a broker-dealer that represented or implied through any communication or other sales practice (including through the use of names or titles) that it was offering investment advice to retail investors subject to a fiduciary relationship with an investment adviser. As with our alternative approach above, we questioned whether these activities could suggest, or could reasonably be understood as suggesting, that such broker-dealer or its associated natural persons were performing investment advisory services in a manner that was not solely incidental to their business as a broker-dealer. In particular, this approach could reduce the risk that if we restricted certain titles (or limited the use of certain titles used to market services) other potentially misleading titles could proliferate. Certain commenters to Chairman Clayton's Request for Comment also supported this approach, so that retail investors receiving advice from firms “holding out” as investment advisers would receive appropriate protections, either under the Advisers Act or through a heightened standard of conduct for broker-dealers.427 However, we preliminarily believe that a “holding out” approach would create uncertainty regarding which activities (and the extent of such activities) would be permissible. Such an approach could also reduce investor choice, as broker-dealers may decide to provide fewer services out of an abundance of caution.

    426See AFL-CIO 2017 Letter, at 3 (stating that “[o]ne way for the SEC to proceed is to clarify that those firms that offer advisory services, or hold themselves out as offering such services, cannot take advantage of the existing broker-dealer `solely incidental to' exemption from the Investment Advisers Act.”); IAA 2017 Letter; AICPA 2017 Letter.

    427See IAA 2017 Letter, at 11 (“We urge the Commission to address this source of investor confusion by prohibiting firms or individuals from holding themselves out as trusted advisers without being subject to either the Advisers Act fiduciary principles or a new equally stringent best interest standard under the Exchange Act, discussed above.”). See also, e.g. AFL-CIO 2017 Letter, at 3 (“clarify that those firms that offer advisory services, or hold themselves out as offering such services, cannot take advantage of the existing broker-dealer “solely incidental to” exemption from the Investment Advisers Act. Permitting brokers to rely on this exemption when engaged in advisory activities has had the effect of exempting them from the fiduciary duty appropriate to that advisory role. Adopting this approach would require the SEC to determine what constitutes “holding out” as an adviser, addressing marketing practices, as well as job titles, that create the reasonable expectation among investors that they will receive advice and not just sales recommendations.”).

    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.428

    428See, e.g., rule 10b-5 under the Securities Exchange Act and section 17(a) of the Securities Act.

    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 restriction? To what extent could it be a substitute?

    • 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 (e.g., should we address it through affirmative disclosures of account types in account statements or another form of disclosure)?

    • 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? 429

    429See section 208(c) of the Advisers Act: “[i]t shall be unlawful for any person registered under section 203 of this title to represent that he is an investment counsel or to use the name `investment counsel' as descriptive of his business unless (1) his or its principal business consists of acting as investment adviser, and (2) a substantial part of his or its business consists of rendering investment supervisory services.”

    • 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 (e.g., the differences as to the standard of conduct their financial professional owes, the duration of the relationship, fees charged, compensation)? Are investors harmed by this confusion? If so, how? Do you agree that “adviser” and “advisor” are often associated with the statutory term “investment adviser”? Do you believe that retail investors understand what the terms “adviser” and “broker-dealer” mean and can correctly identify what type of financial professional they have engaged?

    • We understand that the terms “adviser” or “advisor” are included in some professional designations earned by financial professionals.430 We also understand that particular professional designations have been an area of concern for FINRA and NASAA.431 Should we include an exception to permit the use of professional designations that use the terms “adviser” or “advisor”? What factors should the Commission consider if it were to include such an exception? For example, should such an exception be conditioned on prominent disclosure that the individual is not an investment adviser or supervised by one?

    430See FINRA, Professional Designations, available at https://www.finra.org/investors/professional-designations.

    431See Senior Designations, FINRA Notice 11-52 (Nov. 2011), available at http://www.finra.org/sites/default/files/NoticeDocument/p125092.pdf; NASAA, NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations (Mar. 20, 2008), available at http://www.nasaa.org/wp-content/uploads/2011/07/3-Senior_Model_Rule_Adopted.pdf.

    • 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? 432 Should we instead exclude certain categories of natural persons based on their net worth or income level, such as accredited investors,433 qualified clients 434 or qualified purchasers? 435 If we did exclude certain categories of natural persons based on their net worth, what threshold should we use for measuring net worth? Should we exclude certain categories of natural persons for other reasons?

    432See supra notes 28-32 and accompanying text.

    433See supra note 66.

    434See supra note 67.

    435See supra note 68.

    • 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 not an investment adviser or investment adviser representative, respectively, each time they use or refer to the term “adviser” or “advisor”? Would this approach address investor confusion or mitigate the likelihood that investors may be misled when broker-dealers and their associated natural persons use the term “adviser” or “advisor”? Should this approach be coupled with an affirmative obligation that a dually registered broker-dealer or its dual hatted associated natural persons disclose that it is an investment adviser or an investment adviser representative, respectively, when using terms other than “adviser” or “advisor”? Would this requirement discourage broker-dealers from using these terms even if they were not prohibited? How would this approach impact our proposed rule requiring disclosure of the firm's regulatory status and the financial professional's association with the firm? How would this approach impact dually registered firms and dually hatted financial professionals? Are there operational and compliance challenges associated with this approach, and if so, what are they?

    • 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.436 Given that there are definitions of “adviser” under other federal regulations that capture entities and individuals who are not regulated under the Advisers Act, would a restriction on the use of the term “adviser” that applies only to registered broker-dealers and their registered representatives contribute to investor confusion or result in conflicting regulations, and possibly increased compliance burdens, or affect competition?

    436See ERISA § 408 (g)(11)(A); Code § 4975(f)(8)(J)(i) and 29 CFR 2550.408g-1. In addition, under the DOL's BIC Exemption, the term “Adviser” would mean an individual who is an employee or other agent (including a registered representative) of a state or federally registered investment adviser, registered broker-dealer, bank or similar financial institution, or an insurance company. See Corrected BIC Exemption, infra note 504, section VIII(a).

    • 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?

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

    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.437 We are also proposing as part of our proposed Exchange Act rule to require an associated natural person of a broker or dealer to 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.438 In addition, we are proposing as part of our Advisers Act rule to require a supervised person of an investment adviser registered under section 203 to 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.439 For example, an investment adviser registered with the Commission would prominently disclose the following on its print or electronic communications: “[Name of Firm], an investment adviser registered with the Securities and Exchange Commission” or “[Name of Firm], an SEC-registered investment adviser.” Dually registered firms would similarly be required to prominently disclose both registration statuses in their print or electronic communications, for example: “[Name of Firm], an SEC-registered broker-dealer and SEC-registered investment adviser.” Similarly, an associated natural person of a broker-dealer would prominently disclose the following, for example, on his or her business card or signature block: “[Name of professional], a [title] of [Name of Firm], an associated person of an SEC-registered broker-dealer.” Alternatively, a supervised person of an investment adviser would prominently disclose the following on, for example, his or her business card or signature block: “[Name of professional], a [title] of [Name of Firm], a supervised person of an SEC-registered investment adviser.” Finally, a financial professional who is both an associated person of a broker-dealer and a supervised person of an investment adviser would prominently disclose the following, for example: “[Name of professional], a [title] of [Name of Firm], an associated person of an SEC-registered broker-dealer and a supervised person of an SEC- registered investment adviser.”

    437See Exchange Act proposed rule 15l-3(a) and Advisers Act proposed rule 211h-1(a). We note that in Form ADV investment advisers are required to state that registration with the Commission does not imply a certain level of skill or training. See Item 1.C. of Form ADV Part 2A. We are requesting comment on whether we should require broker-dealers and investment advisers to include this statement in addition to disclosing their applicable regulatory status.

    438See Exchange Act proposed rule 15l-3(b).

    439See Advisers Act proposed rule 211h-1(b).

    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.440 Accordingly, we preliminarily believe that requiring a firm to disclose whether it is a broker-dealer or an investment adviser in print or electronic communications to retail investors would assist retail investors to determine which type of firm is more appropriate for their specific investment needs.

    440 For similar reasons, we are requiring the use of the terms “supervised person” and “associated person” as they are defined legal terms generally describing the financial professional's association with the investment adviser or broker-dealer, respectively.

    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.441 As discussed above, while we acknowledge that broker-dealers and investment advisers are similar in that they provide investment advice, they commonly are dissimilar in a variety of key areas such as disclosure of conflicts of interest, types of fees charged, and standard of conduct. In particular, the proposed relationship summary would inform retail investors about many of these differences, and in so doing, would be addressing investor confusion. As a result, even if investors are currently confused, over time they should better understand that investment advisers and broker-dealers may be different, and how they are different.

    441See supra Section III.A. See also, e.g., RAND Study, supra note 5, at 19, 20 (“Many [industry interview] participants reported that they thought that offering such [fee-based account] products and services meant that broker-dealers and investment advisers became less distinguishable from one another. They claimed that bundling of advice and sales by broker-dealers also added to investor confusion . . . . [Industry Representative] interviews suggest that individual investors do not distinguish between investment advisers and broker-dealers. Marketplace changes that have resulted in investment advisers and broker-dealers offering similar services have added to investor confusion.”).

    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.442 To be “prominent,” for example, we believe the disclosures should be included, at a minimum, on the front of a business card or in another communication, in a manner clearly intended to draw attention to it. In addition, we are proposing to require the disclosure to be presented in the body of the communication and not in a footnote.443 If a communication is delivered through an electronic communication or in any publication by radio or television, the disclosure must be presented in a manner reasonably calculated to draw retail investors' attention to it.444 For example, in a televised or video presentation, a voice overlay and on-screen text could clearly convey the required information. Finally, we propose to stage the compliance date to ensure that firms and financial professionals can phase out certain older communications from circulation through the regular business lifecycle rather than having to retroactively change them.445

    442See Exchange Act proposed rule 15l-3(c)(1) and Advisers Act proposed rule 211h-1(c)(1).

    443See supra note 442.

    444See Exchange Act proposed rule 15l-3(c)(2) and Advisers Act proposed rule 211h-1(c)(2). See also Proposed Amendments to Investment Company Advertising Rules, Investment Company Act Release No. 25575 (May 17, 2002); Amendments to Investment Company Advertising Rules, Investment Company Act Release No. 26195 (Sept. 29, 2003) (stating that “radio and television advertisements [must] give the required narrative disclosures emphasis equal to that used in the major portion of the advertisement”). See also 17 CFR 230.420.

    445 Similarly, we are not requiring firms to send new communications to replace all older print communications as this would be overly burdensome and costly for firms.

    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 (e.g., his or her services, compensation structures, conflicts of interest, and legal obligations)?

    • 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 (i.e., brokerage and advisory)?

    • 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 (e.g., that the disclosure be not 20% smaller than the principal text)?

    • 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 “communication” in our proposed rules, should we use “advertisements” as defined in rule 206(4)-1 under the Advisers Act, or a different term? 446

    446See FINRA Rule 2210(a); rule 206(4)-1 under the Advisers Act.

    • 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, e.g. communications that do not make any financial or investment recommendation or otherwise promote a product or service of the member? 447

    447See FINRA Rule 2210(b)(1)(D)(iii) (exempting certain communications from principal pre-approval).

    • 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?

    IV. Economic Analysis

    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.448 Further, when making rules under the Exchange Act, section 23(a)(2) of the Exchange Act requires the Commission to consider the impact such rules would have on competition.449 Section 23(a)(2) of the Exchange Act also prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.450

    448See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f).

    449See 15 U.S.C. 78w(a)(2).

    450Id.

    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.451 The Commission provides both a qualitative assessment of the potential effects and, where feasible, quantitative estimates of the potential aggregate initial and aggregate ongoing costs. In some cases, however, quantification is particularly challenging due to the difficulty of predicting how market participants would act under the conditions of the proposed rules. For example, although we expect that the proposal would increase retail investors' understanding of the services provided to them, investors could respond differently to the increased understanding—by transferring to a different financial firm or professional, hiring a financial professional for the first time, or entirely abandoning the financial services market while moving their assets to other products or markets (e.g., bank deposits or insurance products). The Commission encourages commenters to provide any data and information that could help us quantify these long-term effects.

    451 15 U.S.C. 80b-2(c).

    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.

    A. Baseline

    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.

    1. Providers of Financial Services a. Broker-Dealers

    As noted above, one market that would be affected by these proposed rules 452 is the market for broker-dealer services, including firms that are dually registered as broker-dealers and investment advisers.453 The market for broker-dealer services encompasses a small set of large broker-dealers and thousands of small broker-dealers competing for niche or regional segments of the market.454

    452 “Proposed rules” used in this economic analysis is inclusive of Form CRS and related proposed forms as well as the proposed rules themselves.

    453 Not all firms that are dually registered as an investment adviser and a broker-dealer offer both brokerage and advisory accounts to retail investors—for example, some dual registrants offer advisory accounts to retail investors but offer only brokerage services, such as underwriting services, to institutional clients. For purposes of the discussion of the baseline in this economic analysis, a dual registrant is any firm that is dually registered with the Commission as an investment adviser and a broker-dealer. For the purposes of the relationship summary, however, we propose to define dual registrant as a firm that is dually registered as a broker-dealer and an investment adviser and offers services to retail investors as both a broker-dealer and investment adviser. See supra note 25.

    454See Risk Management Controls for Brokers or Dealers with Market Access, Securities Exchange Act Release No. 63241 (Nov. 3, 2010) [75 FR 69791, 69822 (Nov. 15, 2010)].

    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.455 More than two-thirds of all brokerage assets and close to one-third of all customer accounts are held by the 16 largest broker-dealers, as shown in Table 1, Panel A.456 Of the broker-dealers registered with the Commission as of December 2017, 366 broker-dealers were dually registered as investment advisers; 457 however, these firms hold nearly 90 million (68%) customer accounts.458 Approximately 546 broker-dealers (14%) reported at least one type of non-securities business, including insurance, retirement planning, mergers & acquisitions, and real estate, among others.459 Approximately 74% of registered broker-dealers report retail customer activity.460

    455 Assets are estimated by Total Assets (allowable and non-allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II, available at https://www.sec.gov/files/formx-17a-5_2.pdf) and correspond to balance sheet total assets for the broker-dealer. The Commission does not have an estimate of the total amount of customer assets for broker-dealers. We estimate broker-dealer size from the total balance sheet assets as described above.

    456 Approximately $3.91 trillion of total assets of broker-dealers (98%) are at firms with total assets in excess of $1 billion. Of the 30 dual registrants in the group of broker-dealers with total assets in excess of $1 billion, total assets for these dual registrants are $2.46 trillion (62%) of aggregate broker-dealer assets. Of the remaining 88 firms, 81 have affiliated investment advisers.

    457 Because this number does not include the number of broker-dealers who are also registered as state investment advisers, the number undercounts the full number of broker-dealers that operate in both capacities. Further, not all firms that are dually registered as an investment adviser and a broker-dealer offer both brokerage and advisory accounts to retail investors—for example, some dual registrants offer advisory accounts to retail investors but offer only brokerage services, such as underwriting services, to institutional customers. For purposes of the discussion of the baseline in this economic analysis, a dual registrant is any firm that is dually registered with the Commission as an investment adviser and a broker-dealer.

    458 Some broker-dealers may be affiliated with investment advisers without being dually registered. From Question 10 on Form BD, 2,145 broker-dealers report that directly or indirectly, they either control, are controlled by, or under common control with an entity that is engaged in the securities or investment advisory business. Comparatively, 2,478 (19.57%) SEC-registered investment advisers report an affiliate that is a broker-dealer in Section 7A of Schedule D of Form ADV, including 1,916 SEC-registered investment advisers that report an affiliate that is a registered broker-dealer. Approximately 75% of total assets under management of investment advisers are managed by these 2,478 investment advisers.

    459 We examined Form BD filings to identify broker-dealers reporting non-securities business. For the 546 broker-dealers reporting such business, staff analyzed the narrative descriptions of these businesses on Form BD, and identified the most common types of businesses: Insurance (208), management/financial/other consulting (101), advisory/retirement planning (80), mergers & acquisitions (71), foreign exchange/swaps/other derivatives (31), real estate/property management (31), tax services (15), and other (141). Note that a broker-dealer may have more than one line of non-securities business.

    460 The value of customer accounts is not available from FOCUS data for broker-dealers. Therefore, to obtain estimates of firm size for broker-dealers, we rely on the value of broker-dealers total assets as obtained from FOCUS reports. Retail sales activity is identified from Form BR, which categorizes retail activity broadly (by marking the “sales” box) or narrowly (by marking the “retail” or “institutional” boxes as types of sales activity). We use the broad definition of sales as we preliminarily believe that many firms will just mark “sales” if they have both retail and institutional activity. However, we note that this may capture some broker-dealers that do not have retail activity, although we are unable to estimate that frequency. We request comment on whether firms that intermediate both retail and institutional customer activity generally market only “sales” on Form BR.

    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.461 Of those broker-dealers serving retail investors, 360 are dually registered as investment advisers.462

    461 Total assets and customer accounts for broker-dealers that serve retail customers also include institutional accounts. Data available from Form BD and FOCUS data is not sufficiently granular to identify the percentage of retail and institutional accounts at firms.

    462 Of the 36 dual registrants in the group of retail broker-dealers with total assets in excess of $500 million, total assets for these dual registrants are $2.19 trillion (60%) of aggregate retail broker-dealer assets. Of the remaining 72 retail broker-dealers, 67 have affiliated investment advisers.

    463 The data is obtained from FOCUS filings as of December 2017. Note that there may be a double-counting of customer accounts among in particular the larger broker-dealers as they may report introducing broker-dealer accounts as well in their role as clearing broker-dealers.

    464 In addition to the approximately 130 million individual accounts at broker-dealers, there are approximately 293,000 omnibus accounts (0.2% of total accounts at broker-dealers), across all 3,841 broker-dealers, of which approximately 99% are held at broker-dealers with greater than $1 billion in total assets. See also supra note 455. Omnibus accounts reported in FOCUS data are the accounts of non-carrying broker-dealers with carrying broker-dealers. These accounts may have securities of multiple customers (of the non-carrying firm), or securities that are proprietary assets of the non-carrying broker-dealer. We are unaware from the data available to determine how many customer accounts non-carrying broker-dealers may have. The data does not allow the Commission to parse the total assets in those accounts to determine to whom such assets belong. Therefore, our estimate may be underinclusive of all customer accounts held at broker-dealers.

    465 Customer Accounts includes both broker-dealer and investment adviser accounts for dual registrants.

    Table 1—Panel A: Registered Broker-Dealers as of December 2017 463 [Cumulative Broker-Dealer Total Assets and Customer Accounts 464] Size of broker-dealer
  • (total assets)
  • Total number
  • of BDs
  • Number of
  • dual-registered BDs
  • Cumulative
  • total assets
  • Cumulative
  • number of
  • customer
  • Accounts 465
  • >$50 billion 16 10 $2,717 bil. 40,969,187 $1 billion to $50 billion 102 20 1,196 bil. 81,611,933 $500 million to $1 billion 38 7 26 bil. 4,599,330 $100 million to $500 million 118 26 26 bil. 1,957,981 $10 million to $100 million 482 94 17 bil. 2,970,133 $1 million to $10 million 1,035 141 4 bil. 233,946 <$1 million 2,055 68 1 bil. 5,588 Total 3,841 366 3,987 bil. 132,348,098
    Table 1—Panel B: Registered Retail Broker-Dealers as of December 2017 [Cumulative Broker-Dealer Total Assets and Customer Accounts] Size of broker-dealer
  • (total assets)
  • Total number
  • of BDs
  • Number of
  • dual-registered BDs
  • Cumulative
  • total assets
  • Cumulative
  • number of
  • customer
  • accounts
  • >$50 billion 15 10 $2,647 bil. 40,964,945 $1 billion to $50 billion 70 19 923 bil. 77,667,615 $500 million to $1 billion 23 7 16 bil. 4,547,574 $100 million to $500 million 93 25 20 bil. 1,957,981 $10 million to $100 million 372 94 14 bil. 2,566,203 $1 million to $10 million 815 139 3 bil. 216,158 <$1 million 1,469 66 $.4 bil. 5,588 Total 2,857 360 $3,624 bil. 127,926,064

    Table 2 reports information on brokerage commissions,466 fees, and selling concessions from the fourth quarter of 2017 for all broker-dealers, including dual registrants.467 On average, broker-dealers, including those that are dually registered as investment advisers, earn about $2.1 million per quarter in revenue from commissions and more than double that amount in fees,468 although the Commission notes that fees encompass a variety of fees, not just those related to advisory services.469 The level of revenues earned from broker-dealers for commissions and fees increases with broker-dealer size, but also tends to be more heavily weighted towards commissions for broker-dealers with less than $10 million in assets and is weighted more heavily towards fees for broker-dealers with assets in excess of $10 million. For example, for the 102 broker-dealers with assets between $1 billion and $50 billion, average revenues from commissions are $25 million, while average revenues from fees are approximately $91 million.470

    466 FOCUS data does not provide mark-ups or mark-downs as a separate revenue category and they are not included as part of the brokerage commission revenue.

    467 Source: FOCUS data.

    468 Fees, as detailed in the FOCUS data, include fees for account supervision, investment advisory and administrative services. Beyond the broad classifications of fee types included in fee revenue, we are unable to determine whether fees such as 12b-1 fees, sub-accounting, or other such service fees are included. The data covers both broker-dealers and dually-registered firms. FINRA's Supplemental Statement of Income, Line 13975 (Account Supervision and Investment Advisory Services) denotes that fees earned for account supervision are those fees charged by the firm for providing investment advisory services where there is no fee charged for trade execution. Investment Advisory Services generally encompass investment advisory work and execution of client transactions, such as wrap arrangements. These fees also include fees charged by broker-dealers that are also registered with the Commodity Futures Trading Commission (“CFTC”), but do not include fees earned from affiliated entities (Item A of question 9 under Revenue in the Supplemental Statement of Income).

    469 With respect to the FOCUS data, additional granularity of what services comprise “advisory services” is not available.

    470 A rough estimate of total fees in this size category would be 102 broker-dealers with assets between $1 billion and $50 billion multiplied by the average fee revenue of $91 million, or $9.381 billion in total fees. Divided by the number of customer accounts in this size category (81,611,933), the average account would be charged approximately $115 in fees per quarter, or $460 per year.

    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.

    Table 2—Panel A: Average Broker-Dealer Revenues From Revenue Generating Activities 471 Size of broker-dealer in total assets N Commissions Fees 472 Sales of
  • IC shares
  • >$50 billion 16 $176,193,599 $365,014,954 $20,493,769 $1 billion-$50 billion 102 25,109,619 91,966,559 18,808,687 $500 million-$1 billion 38 6,322,803 11,312,112 6,724,401 $100 million-$500 million 118 7,698,889 11,338,175 4,536,407 $10 million-$100 million 483 1,801,079 2,811,290 3,653,475 $1 million-$10 million 1,035 633,720 372,757 217,444 <$1 million 2,049 66,503 38,618 26,270 Average of All Broker-Dealers 3,841 2,132,544 4,897,521 1,322,759

    471 The data obtained from December 2017 FOCUS reports and averaged across size groups.

    472 Fees, as detailed in the FOCUS data, include fees for account supervision, investment advisory and administrative services. The data covers both broker-dealers and dually-registered firms.

    473See id.

    Table 2—Panel B: Aggregate Total Revenues From Revenue Generating Activities for Broker-Dealers Based on Dual Registrant Status Broker-dealer type N Commissions Fees 473 Sales of IC shares Dual Registered as IAs 366 $4.27 bil. $15.88 bil. $2.8 bil. Standalone Registered BDs 3,475 3.92 bil. 2.93 bil. 2.28 bil. All 3,841 8.19 bil. 18.81 bil. 5.08 bil. i. Disclosures for 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.474 Broker-dealers report whether a broker-dealer or any of its control affiliates have been subject to criminal prosecutions, regulatory actions, or civil actions in connection with any investment-related activity, as well as certain financial matters.475 Once a broker-dealer is registered, it must keep its Form BD current by amending it promptly when the information is or becomes inaccurate for any reason.476 In addition, firms report similar information and additional information to FINRA pursuant to FINRA Rule 4530.477 The current Paperwork Reduction Act estimate for the total industry-wide annual filing burden to comply with rule 15b1-1 and file Form BD is approximately 4,999 hours, with an estimated internal cost of compliance associated with those burden hours for all broker-dealers of $1,394,721.

    474See generally Form BD.

    475See Item 11 and Disclosure Reporting Pages, Form BD.

    476See Exchange Act rule 15b3-1(a).

    477See supra Section II.B.7.

    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.478

    478 FINRA Rule 8312 governs the information FINRA releases to the public via BrokerCheck. See supra note 280 and accompanying text.

    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.479 Disclosure has also been a feature of other regulatory efforts related to financial services, including those of DOL and certain FINRA rules.480

    479 A broker-dealer also may be liable if it does not disclose “material adverse facts of which it is aware”. See, e.g., Chasins v. Smith, Barney & Co., 438 F.2d at 1172; SEC v. Hasho, 784 F. Supp. at 1110; Release 48758, supra note 243 (“When a securities dealer recommends stock to a customer, it is not only obligated to avoid affirmative misstatements, but also must disclose material adverse facts of which it is aware. That includes disclosure of “adverse interests” such as “economic self-interest” that could have influenced its recommendation.”) (citations omitted).

    480See, infra Section IV.A.1.c; FINRA Notice 10-54, supra note 12. Generally, all registered broker-dealers that deal with the public must become members of FINRA, a registered national securities association, and may choose to become exchange members. See Exchange Act section 15(b)(8) and Exchange Act rule 15b9-1. FINRA is the sole national securities association registered with the SEC under section 15A of the Exchange Act. Accordingly, for purposes of discussing a broker-dealer's regulatory requirements when providing advice, we focus on FINRA's regulation, examination and enforcement with respect to member broker-dealers. FINRA disclosure rules include but are not limited FINRA rules 2210(d)(2) (communications with the public), 2260 (disclosures), 2230 (customer account statements and confirmations), and 2270 (day-trading risk disclosure statement).

    b. Investment Advisers

    Other parties that would be affected by the proposed rules and proposed Form CRS are SEC-registered investment advisers.481 This section first discusses SEC-registered investment advisers, followed by a discussion of state-registered investment advisers.

    481 In addition to SEC-registered investment advisers, which are the focus of this section, the proposed rules and proposed Form CRS could also affect banks, trusts, insurance companies, and other providers of financial advice.

    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.482

    482 Of the approximately 12,700 SEC-registered investment advisers, 7,979 (64%) report in Item 5.G.(2) of Form ADV that they provide portfolio management services for individuals and/or small businesses. In addition, there are approximately 17,800 state-registered investment advisers, of which 145 are also registered with the Commission. Approximately 13,800 state-registered investment advisers are retail facing (see Item 5.D of Form ADV).

    Of all SEC-registered investment advisers, 366 identified themselves as dually registered broker-dealers.483 Further, 2,478 investment advisers (20%) reported an affiliate that is a broker-dealer, including 1,916 investment advisers (15%) that reported an SEC-registered broker-dealer affiliate.484 As shown in Panel A of Table 3 below, in aggregate, investment advisers have over $72 trillion in assets under management (“AUM”). A substantial percentage of AUM at investment advisers is held by institutional clients, such as investment companies, pooled investment vehicles, and pension or profit sharing plans; therefore, although the dollar value of AUM for investment advisers and of customer assets in broker-dealer accounts is comparable, the total number of accounts for investment advisers is only 27% of the number of customer accounts for broker-dealers.

    483 See supra note 457.

    484 Item 7.A.1 of Form ADV.

    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 3.485 In total, these firms have approximately $32 trillion of assets under management.486 Approximately 6,600 registered investment advisers (52%) serve 29 million non-high net worth individual clients and have approximately $5.33 trillion in assets under management, while nearly 7,400 registered investment advisers (58%) serve approximately 4.8 million high net worth individual clients with $6.56 trillion in assets under management.487

    485 We use the responses to Items 5.D.(a)(1), 5.D.(a)(3), 5.D.(b)(1), and 5.D.(b)(3) of Part 1A. If at least one of these responses was filled out as greater than 0, the firm is considered as providing business to retail investors. Form ADV Part 1A.

    486 The aggregate AUM reported for these investment advisers that have retail investors includes both retail AUM as well as any institutional AUM also held at these advisers.

    487 Estimates are based on IARD system data as of December 31, 2017. The AUM reported here is specifically that of those non-high net worth clients. Of the 7,600 investment advisers serving retail investors, 360 may also be dually registered as broker-dealers.

    Table 3—Panel A: Registered Investment Advisers (RIAs) as of December 2017 [Cumulative RIA assets under management (AUM) and accounts] Size of investment adviser
  • (AUM)
  • Number of RIAs Number of dual-registered RIAs Cumulative AUM Cumulative
  • number of
  • accounts
  • >$50 billion 246 15 $48,221 bil. 17,392,968 $1 billion to $50 billion 3,238 115 21,766 bil. 11,560,805 $500 million to $1 billion 1,554 53 1,090 bil. 2,678,084 $100 million to $500 million 5,568 129 1,303 bil. 3,942,639 $10 million to $100 million 1,103 24 59 bil. 198,659 $1 million to $10 million 172 2 1 bil. 5,852 <$1 million 778 28 .02 bil. 31,291 Total 12,659 366 72,439 bil. 35,810,298
    Table 3—Panel B: Retail Registered Investment Advisers (RIAs) as of December 2017 [Cumulative RIA assets under management (AUM) and accounts] Size of investment adviser
  • (AUM)
  • Number of RIAs Number of
  • dual-registered RIAs
  • Cumulative AUM Cumulative
  • number of
  • accounts
  • >$50 billion 106 15 $22,788 bil. 16,638,548 $1 billion to $50 billion 1,427 114 8,472 bil. 10,822,275 $500 million to $1 billion 934 52 652 bil. 2,602,220 $100 million to $500 million 4,114 126 917 bil. 3,814,900 $10 million to $100 million 711 24 40 bil. 231,663 $1 million to $10 million 98 1 .4 bil. 5,804 <$1 million 198 29 .02 bil. 31,271 Total 7,588 361 32,870 bil. 34,146,681

    As an alternative to registering with the Commission, smaller investment advisers could register with state regulators.488 As of December 2017, there are 17,635 state registered investment advisers,489 of which 145 are also registered with the Commission. Of the state-registered investment advisers, 236 are dually registered as broker-dealers, while 5% (920) report a broker-dealer affiliate. In aggregate, state-registered investment advisers have approximately $341 billion in AUM. Eighty-two percent of state-registered investment advisers report that they provide portfolio management services for individuals and small businesses, compared to just 64% for SEC-registered investment advisers.

    488 Pursuant to the Dodd-Frank Act, Item 2.A. of Part 1A of Form ADV requires an investment adviser to register with the SEC if it (i) is a large adviser that has $100 million or more of regulatory assets under management (or $90 million or more if an adviser is filing its most recent annual updating amendment and is already registered with the SEC); (ii) is a mid-sized adviser that does not meet the criteria for state registration or is not subject to examination; (iii) meets the requirements for one or more of the revised exemptive rules under section 203A discussed below; (iv) is an adviser (or subadviser) to a registered investment company; (v) is an adviser to a business development company and has at least $25 million of regulatory assets under management; or (vi) received an order permitting the adviser to register with the Commission. Although the statutory threshold is $100 million, the SEC raised the threshold to $110 million for those investment advisers that do not already file with the SEC.

    489 There are 79 investment advisers with latest reported Regulatory Assets Under Management in excess of $110 million but are not listed as registered with the SEC. For the purposes of this rulemaking, these are considered erroneous submissions.

    Approximately 77% of state-registered investment advisers (13,470) have some portion of their business dedicated to retail investors,490 and in aggregate, these firms have approximately $308 billion in AUM.491 Approximately 12,700 (72%) state-registered advisers serve 616,000 non-high net worth retail clients and have approximately $125 billion in AUM, while over 11,000 (63%) state-registered advisers serve approximately 194,000 high net worth retail clients with $138 billion in AUM.492

    490 We use the responses to Items 5.D.(a)(1), 5.D.(a)(3), 5.D.(b)(1), and 5.D.(b)(3) of Part 1A. If at least one of these responses was filled out as greater than 0, the firm is considered as providing business to retail investors. Form ADV Part 1A.

    491 The aggregate AUM reported for these investment advisers that have retail investors includes both retail AUM as well as any institutional AUM also held at these advisers.

    492 Estimates are based on IARD system data as of December 31, 2017. The AUM reported here is specifically that of those non-high net worth investors. Of the 13,471 investment advisers serving retail investors, 144 may also be dually registered as broker-dealers.

    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 493 to their investors.

    493 Some investment advisers report on Item 5.E. of Form ADV that they receive “commissions.” As a form of deferred sales load, all payments of ongoing sales charges to intermediaries would constitute transaction-related compensation. Intermediaries receiving those payments should consider whether they need to register as broker-dealers under section 15 of the Exchange Act.

    Table 4—Registered Investment Advisers Compensation by Type Compensation type Yes No A percentage of assets under management 12,041 617 Hourly charges 3,670 8,988 Subscription fees (for a newsletter or periodical) 119 12,539 Fixed fees (other than subscription fees) 5,406 7,252 Commissions 490 12,168 Performance-based fees 4,780 7,878 Other 1,846 10,812

    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.494 From the data available, we are unable to determine how many advisers provide advice about investing in wrap fee programs, because advisers providing such advice may be neither sponsors nor portfolio managers.

    494 A wrap fee program sponsor is 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. See General Instructions to Form ADV.

    ii. Disclosures for Investment Advisers

    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.495 Consistent with this duty and those requirements, investment advisers file Form ADV to register with the Commission or state securities authorities, as applicable, and provide an annual update to the form.496 Part 1 of Form ADV provides information to regulators, and made available to clients, prospective clients, and the public, about the registrants' ownership, investors, and business practices. Advisers also prepare a Form ADV Part 2A narrative brochure that contains information about the investment adviser's business practices, fees, conflicts of interest, and disciplinary information,497 in addition to a Part 2B brochure supplement that includes information about the specific individuals, acting on behalf of the investment adviser, who actually provide investment advice and interact with the client.498 Currently, the Part 2A brochure is the primary client-facing disclosure document,499 however, Parts 1 and 2A are both made publicly available by the Commission through IAPD,500 and advisers are generally required to deliver Part 2A and Part 2B to their clients. The current Paperwork Reduction Act estimate of the average annual cost and hour burden for investment advisers to complete, amend, and file all parts of Form ADV are $6,051 and 23.77 hours.501

    495See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. at 194; see also Brochure Adopting Release, supra note 157. See also 913 Study, supra note 3, at n.92. For example, if an adviser selects or recommends other advisers to investors, it must disclose any compensation arrangements or other business relationships between the advisory firms, along with the conflicts created, and explain how it addresses these conflicts. See Item 10 of Form ADV Part 2A. See also 913 Study, supra note 3, at n.93. Other potential conflicts of interest include acting as a principal in transactions with investors and compensation received thereof; incentives provided by third parties to sell their services and products; and agency cross-trades, where the advisers is also a broker-dealer and executes a client's order by crossing the orders with those of non-advisory clients. See Interpretation of Section 206(3) of the Investment Advisers Act of 1940, Investment Advisers Act Release No. 1732 (Jul. 20, 1998), at n.3.

    496See Advisers Act rules 203-1 and 204-1. Part 1A (1B) of Form ADV is the registration application for the Commission (and state securities authorities). Part 2 of Form ADV consists of a narrative “brochure” about the adviser and “brochure supplements” about certain advisory personnel on whom clients may rely for investment advice. See Brochure Adopting Release, supra note 157.

    497 Part 2A of Form ADV contains 18 mandatory disclosure items about the advisory firm, including information about an adviser's: (1) Range of fees; (2) methods of analysis; (3) investment strategies and risk of loss; (4) brokerage, including trade aggregation polices and directed brokerage practices, as well as the use of soft dollars; (5) review of accounts; (6) client referrals and other compensation; (7) disciplinary history; and (8) financial information, among other things. Much of the disclosure in Part 2A addresses an investment adviser's conflicts of interest with its investors, and is disclosure that the adviser, as a fiduciary, must make to investors in some manner regardless of the form requirements. See Brochure Adopting Release, supra note 157.

    498 Part 2B, or the “brochure supplement,” includes information about certain advisory personnel that provide retail client investment advice, and contains educational background, disciplinary history, and the adviser's supervision of the advisory activities of its personnel. See Instruction 5 of General Instructions for Form ADV. Registrants are not required to file Part 2B (brochure supplement) electronically, but must preserve a copy of the supplement(s) and make them available upon request.

    499See Brochure Adopting Release, supra note 157.

    500See Investment Adviser Public Disclosure, available at https://adviserinfo.sec.gov/.

    501See infra Section V.A.2.

    c. Disclosure Obligations for Broker-Dealers and Investment Advisers Under DOL Rules and Exemptions

    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.502 For example, DOL regulations under a statutory exemption for investment advice services provided to plan participants and IRAs requires firms and financial professionals to disclose information about the services that they will provide and their fees and other compensation, and to acknowledge that the adviser is acting as a fiduciary.503

    502 See supra note 11.

    503 See 29 CFR 2550.408g-1(b)(7). In general, firms and financial professionals who receive commissions or other transaction-related compensation in connection with providing certain fiduciary investment recommendations relating to the assets of ERISA-covered workplace retirement plans and IRAs could violate provisions under the Code prohibiting fiduciaries from engaging in self-dealing and receiving compensation from third parties in connection with investments by these plans and IRA (and, with respect to such plans, substantially similar prohibited transaction rules that apply under ERISA to transactions involving ERISA plans but not IRAs). To receive such compensation, firms have historically complied with one or more prohibited transaction exemptions (“PTEs”) issued by the DOL over time, which generally required (among other conditions) disclosures about, e.g., direct and indirect compensation received in connection with a recommended transactions. See Definition of the Term “Fiduciary;” Conflict of Interest Rule—Retirement Investment Advice, 81 FR 20945, 20991-92 (Apr. 8, 2016) (to be codified at 20 C.F.R. pts. 2509, 2510 and 2550) (“DOL Fiduciary Rule Adopting Release”) (describing action to adopt new and amended PTEs and revoke certain PTEs applicable to investment advice services).

    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)  504 generally must (among other conditions) provide disclosure about the services to be performed (including monitoring of recommendations, offering proprietary products and limiting recommendations) and how the investor will pay for services, material conflicts of interest (including third party compensation to the firm, affiliates and financial professionals), and must also make certain ongoing disclosures on a public website.505 The DOL adopted the BIC Exemption in connection with the amendment of its regulation defining “investment advice,” which had the effect of expanding the circumstances under which broker-dealers and investment advisers may be fiduciaries for purposes of the prohibited transaction provisions under ERISA and the Code (the “DOL Fiduciary Rule”).506 Although a decision of the Court of Appeals for the Fifth Circuit recently vacated the DOL Fiduciary Rule,507 we understand that many firms already have taken steps to implement conditions under the BIC Exemption.508

    504See Best Interest Contract Exemption, 81 FR 21002, 21006-7 (Apr. 8, 2016) (“BIC Exemption Release”) Best Interest Contract Exemption; Correction (Prohibited Transaction Exemption 2016-01), 81 FR 44773 (July 11, 2016) (“Corrected BIC Exemption”), as amended 18-Month Extension of Transition Period and Delay of Applicability Dates; Best Interest Contract Exemption (PTE 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (PTE 2016-02); Prohibited Transaction Exemption 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters (PTE 84-24), 82 FR 56545 (Nov. 29, 2017). Depending on how they are compensated, investment advisers receiving a level fee may not be subject to the full set of contract, disclosure and other conditions of the BIC Exemption.

    505See Corrected BIC Exemption, supra note, 504, at sections II and III. Ongoing website disclosure would include information about certain material conflicts of interest and third party payments, a schedule of typical fees and service charges, a description of the compensation and incentive arrangements for individual financial professionals, and a written description of the financial institution's policies and procedures. Id., at section III. In the case of recommendations provided to an IRA, the firm also would be required to enter into a written contract with the IRA owner that includes an acknowledgement of fiduciary status and an enforceable promise to adhere to certain “impartial conduct standards” (including a best interest standard of conduct). Id., at section II(a).

    506See DOL Fiduciary Rule Adopting Release, supra note 503.

    507See Chamber of Commerce of the U.S.A., e. al. v. U.S. Dep't of Labor, et. al., No. 17-10238 (5th Cir. Mar 15, 2018).

    508See SIFMA and Deloitte, The DOL Fiduciary Rule: A study on how financial institutions have responded and the resulting impacts on retirement investors (Aug. 9, 2017), available at https://www.sifma.org/wp-content/uploads/2017/08/;Deloitte-White-Paper-on-the-DOL-Fiduciary-Rule-August-2017.pdf.

    The Commission does not currently have data on the number of firms that are subject to disclosure obligations under applicable DOL rules and exemptions.509 However, because we understand that most broker-dealers expected that they would be required to comply with the BIC Exemption to continue to provide services to retail investors in IRAs and participant-directed workplace retirement plans,510 the Commission can broadly estimate the maximum number of broker-dealers that could be subject to disclosure obligations under DOL rules and exemption including the BIC Exemption from the number of broker-dealers that have retail investor accounts. Approximately 74.4% (2,857) of registered broker-dealers report sales to retail customers.511 Similarly, approximately 60% (7,600) of investment advisers serve high net worth and non-high net worth individual clients. The Commission believes that this number likely overestimates those broker-dealers and investment advisers that provide retirement account services. Therefore, these 2,850 broker-dealers and 7,600 investment advisers that provide retail services represent an upper bound of the number of broker-dealers and investment advisers that would likely be subject to compliance with disclosure obligations under DOL rules and exemptions and may have taken steps to comply with the contract, disclosure and other conditions under the DOL's BIC Exemption.512

    509 In order to obtain this information, the Commission would need to know which financial firms have retirement-based accounts as part of their business model. Under the current reporting regime for both broker-dealers and investment advisers, they are not required to disclose whether (or what fraction) of their accounts are held by retail investors in retirement-based accounts.

    510See BIC Exemption Release, supra note 504, at 21006-07 (DOL states that it “anticipates that the [DOL Fiduciary Rule] will cover many investment professionals who did not previously consider themselves to be fiduciaries under ERISA or the Code.”).

    511 As of December 2017, 3,841 broker-dealers filed Form BD. Retail sales by broker-dealers were obtained from Form BD.

    512 The DOL's Regulatory Impact Analysis estimated that the numbers of broker-dealers and investment advisers (including state-registered investment advisers) that could be affected by their rule are approximately 2,500 and 17,500, respectively. See Regulatory Impact Analysis for Final Rule and Exemptions, Definition Of The Term “Fiduciary” Conflicts Of Interest—Retirement Investment Advice (Apr. 2016), at 215-229, available at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/conflict-of-interest-ria.pdf.

    d. Trends in the Relative Numbers of Providers of Financial Services

    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.

    BILLING CODE 8011-01-P EP09MY18.002

    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 (i.e., robo-advisers and online trading platforms), product proliferation (e.g., index mutual funds and exchange-traded products), and industry consolidation driven by economic and market conditions, particularly among broker-dealers.513 Commission staff has observed the transition by broker-dealers from traditional brokerage services to also providing investment advisory services (often under an investment adviser registration, whether federal or state), and many firms have been more focused on offering fee-based accounts than accounts that charge commissions. 514 Broker-dealers have indicated that the following factors have contributed to this migration: Provision of stability or increase in profitability,515 perceived lower regulatory burden, and provisions of more services to retail customers.

    513See, Hester Peirce, Dwindling numbers in the financial industry, Brookings Center on Markets and Regulation (May 15, 2017), available at https://www.brookings.edu/research/dwindling-numbers-in-the-financial-industry/ (“Brookings Report”) which notes that “SEC restrictions have increased by almost thirty percent [since 2000],” and that regulations post-2010 were driven in large part by the Dodd-Frank Act, page 5. Further, the Brookings Report observation of increased regulatory restrictions on broker-dealers only reflects CFTC or SEC regulatory actions, but does not include regulation by FINRA, SROs, NFA, or the MSRB.

    514 The Brookings Report, supra note 513, also discusses the shift from broker-dealer to investment advisory business models for retail investors, in part due to the DOL Fiduciary Rule (page 7). See also the RAND Study, supra note 5, which documents a shift from transaction-based to fee-based accounts prior to recent regulatory changes. Declining transaction-based revenue due to declining commission rates and competition from discount brokerage firms has made fee-based products and services more attractive. Although discount brokerage firms generally provide execution-only services and do not compete directly in the advice market with full service broker-dealers and investment advisers, entry by discount brokers has contributed to lower commission rates throughout the broker-dealer industry. Further, fee-based activity generates a steady stream of revenue regardless of the customer trading activity, unlike commission-based accounts.

    515 Commission staff examined a sample of recent Form 10-K or Form 10-Q filings of large broker-dealers, many of which are dually registered as investment advisers, that have a large fraction of retail customer accounts to identify relevant broker-dealers. See, e.g., Edward Jones 9/30/2017 Form 10-Q available at https://www.sec.gov/Archives/edgar/data/815917/000156459017023050/ck0000815917-10q_20170929.htm; Raymond James 9/30/2017 Form 10-K available at https://www.sec.gov/Archives/edgar/data/720005/000072000517000089/rjf-20170930x10k.htm; Stifle 12/31/2016 Form 10-K available at https://www.sec.gov/Archives/edgar/data/720672/000156459017022758/sf-10q_20170930.htm; Wells Fargo 9/30/2017 10-Q available at https://www.sec.gov/Archives/edgar/data/72971/000007297117000466/wfc-09302017x10q.htm; and Ameriprise 12/31/2016 Form 10-K available at https://www.sec.gov/Archives/edgar/data/820027/;000082002717000007/ameriprisefinancial12312016.htm. We note that discussions in Form 10-K and 10-Q filings of this sample of broker-dealers here may not be representative of other large broker-dealers or of small to mid-size broker-dealers. Some firms have reported record profits as a result of moving clients into fee-based accounts, and cite that it provides “stability and high returns.” See “Morgan Stanley Wealth Management fees climb to all-time high,” Bloomberg, Jan. 18, 2018, available at https://www.bloomberg.com/news/articles/2018-01-18/morgan-stanley-wealth-management-fees-hit-record-on-stock-rally. Morgan Stanley increased the percentage of client assets in fee-based accounts from 37% in 2013 to 44% in 2017, while decreasing the dependence on transaction-based revenues from 30% to 19% over the same time period (Morgan Stanley Strategic Update, (Jan. 18, 2018), available at https://www.morganstanley.com/about-us-ir/shareholder/4q2017-strategic-update.pdf). See also Beilfuss, Lisa & Brian Hershberg, WSJ Wealth Adviser Briefing: The Reinvention of Morgan and Merrill, Adviser Profile, The Wall Street Journal (Jan. 25, 2018), available at https://blogs.wsj.com/moneybeat/2018/01/25/wsj-wealth-adviser-briefing-the-reinvention-of-morgan-and-merrill-adviser-profile/.

    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.

    EP09MY18.003 BILLING CODE 8011-01-C e. Registered Representatives of Broker-Dealers, Investment Advisers and Dually Registered Firms

    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 representatives” or “RR”s). 516 Similarly, we approximate the number of supervised persons of registered investment advisers through the number of registered investment adviser representatives (or “registered IAR”s), who are supervised persons of investment advisers who meet the definition of investment adviser representatives in Advisers Act rule 203A-3 and are registered with one or more state securities authorities to solicit or communicate with clients.517

    516 The number of associated natural persons of broker-dealers may be different from the number of registered representatives of broker-dealers, because clerical/ministerial employees of broker-dealers are associated persons, but are not required to register with the firm. Therefore, using the registered representative number does not include such persons. However, we do not have data on the number of associated natural persons and therefore are not able to provide an estimate of the number of associated natural persons. We believe that the number of registered representatives is an appropriate approximation because they are the individuals at broker-dealers that provide advice and services to customers.

    517See Advisers Act rule 203A-3. However, we note that the data on numbers of registered IARs may undercount the number of supervised persons of investment advisers who provide investment advice to retail investors because not all supervised persons who provide investment advice to retail investors are required to register as IARs. For example, Commission rules exempt from IAR registration supervised persons who provide advice only to non-individual clients or to individuals that meet the definition of “qualified client.” As discussed above, the definition of retail investor for purposes of this proposed rulemaking would include qualified clients who are natural persons and trusts that represent natural persons. Proposed General Instruction 9.(e) to Form CRS. In addition, state securities authorities may impose different criteria for requiring registration as an investment adviser representative.

    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.518 We only consider employees at firms who have retail-facing business, as defined previously.519 We observe in Table 5, that approximately 61% of registered financial professionals are employed by dually registered entities. The percentage varies by the size of the firm. For example, for firms with total assets between $1 billion and $50 billion, 72% of all registered financial professionals in that size category are employed by dually registered firms. Focusing on dually registered firms only, approximately 59.7% of total licensed representatives at these firms are dual-hatted, approximately 39.9% are only registered representatives; and less than one percent are only registered investment adviser representatives.

    518 We calculate these numbers based on Form U4 filings. Representatives of broker-dealers, investment advisers, and issuers of securities must file this form when applying to become registered in appropriate jurisdictions and with self-regulatory organizations. Firms and representatives have an obligation to amend and update information as changes occur. Using the examination information contained in the form, we consider an employee a financial professional if he has an approved, pending, or temporary registration status for either Series 6 or 7 (RR) or is registered as an investment adviser representative in any state or U.S. territory (IAR). We limit the firms to only those that do business with retail investors, and only to licenses specifically required to be licensed as an RR or IAR.

    519See supra notes 460 and 485.

    520 The classification of firms as dually registered, standalone broker-dealers, and standalone investment advisers comes from Forms BD, FOCUS, and ADV as described earlier. The number of representatives at each firm is obtained from Form U4 filings. Note that all percentages in the table have been rounded to the nearest whole percentage point.

    Table 5—Total Licensed Representatives at Broker-Dealers, Investment Advisers, and Dually Registered Firms With Retail Investors 520 Size of firm (total assets for standalone BDs and dually registered firms; AUM for standalone IAs) Total number of representatives % of representatives in
  • dually
  • registered
  • firms
  • % of representatives in
  • standalone
  • BD
  • % representatives
  • in standalone
  • IA
  • >$50 billion 82,668 75 8 18 $1 billion to $50 billion 150,662 72 10 18 $500 million to $1 billion 31,673 67 16 16 $100 million to $500 million 62,539 58 24 18 $10 million to $100 million 116,047 52 47 1 $1 million to $10 million 37,247 34 63 2 <$1 million 13,563 7 87 6 Total Licensed Representatives 494,399 61 27 12

    In Table 6 below, we estimate the number of employees who are registered representatives, registered investment adviser representatives, or both (“dual-hatted representatives”).521 Similar to Table 5, we calculate these numbers using Form U4 filings. Here, we also limit the sample to employees at firms that have retail-facing businesses as discussed previously.522

    521 We calculate these numbers based on Form U4 filings.

    522See supra notes 460 and 485.

    523 Firm size is defined as total assets from the balance sheet (source: FOCUS reports) for broker-dealers and dual registrants and is assets under management for investment advisers (source: Form ADV).

    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,523 approximately 36% of all registered employees are both registered representatives and investment adviser representatives. In contrast, for firms with total assets below $1 million, 15% of all employees are dual-hatted representatives.

    Table 6—Number of Employees at Retail Facing Firms Who Are Registered Representatives, Investment Adviser Representatives, or Both 524 Size of firm
  • (total assets for standalone BDs and dually registered firms;
  • AUM for standalone IAs)
  • Total
  • number of
  • employees
  • Percentage of
  • dual-hatted
  • representatives
  • Percentage of RRs only Percentages of IARs only
    >$50 billion 216,655 18 17 1 $1 billion to $50 billion 292,663 36 11 3 $500 million to $1 billion 50,531 15 40 6 $100 million to $500 million 112,119 23 24 8 $10 million to $100 million 189,318 19 41 1 $1 million to $10 million 61,310 19 39 1 <$1 million 19,619 15 46 3 Total Employees at Retail Facing Firms 942,215 24 24 3

    Approximately 88% of investment adviser representatives are dual-hatted as registered representatives. This percentage is relatively unchanged from 2010. According to information provided in a FINRA comment letter in connection with the 913 Study, 87.6% of registered investment adviser representatives were dually registered as registered representatives as of mid-October 2010.525 In contrast, approximately 50% of registered representatives were dually registered as investment adviser representatives at the end of 2017.526

    524See supra notes 520-521. Note that all percentages in the table have been rounded to the nearest whole percentage point.

    525 Comment letter of FINRA to File Number 4-606; Obligations of Brokers, Dealers and Investment Advisers (Nov. 3, 2010), at 1, available at https://www.sec.gov/comments/4-606/4606-2836.pdf.

    526 In order to obtain the percentage of IARs that are dually registered as registered representatives of broker-dealers, we sum the representatives at dually-registered entities and those at investment advisers, across size categories to obtain the aggregate number of representatives in each of the two categories. We then divide the aggregate dually-registered representatives by the sum of the dually-registered representatives and the IARs at investment adviser-only firms. We perform a similar calculation to obtain the percentage of registered representatives of broker-dealers that are dually registered as IARs.

    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 527 and U5 528 for their representatives. Self-regulatory organizations, regulators and jurisdictions report disclosure events on Form U6.529 FINRA's BrokerCheck system discloses to the public certain information on registered representatives and investment adviser representatives such as principal place of business, business activities, owners, and criminal prosecutions, regulatory actions, and civil actions in connection with any investment-related activity.

    527 Form U4 requires disclosure of registered representatives' and investment adviser representatives' criminal, regulatory, and civil actions similar to those reported on Form BD or Form ADV as well as certain customer-initiated complaints, arbitration, and civil litigation cases. See generally Form U4.

    528 Form U5 requires information about representatives' termination from their employers.

    529See FINRA, Current Uniform Registration Forms for Electronic Filing in Web CRD, available at http://www.finra.org/industry/web-crd/current-uniform-registration-forms-electronic-filing-web-crd.

    f. Current Use of Names and Titles

    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.530 Of these broker-dealers, 16 reported at least one type of non-securities business. Approximately 39 percent of the 103 broker-dealers described above used a proper name coupled with the term “advisor” alone,531 and an additional 31 percent used a proper name coupled with the term “capital advisor.” In addition to those terms, less than 10% of these broker-dealers use the terms “financial advisor,” “investment advisor,” or “wealth advisor” in their corporate name. The remainder of the broker-dealers (approximately 25 firms) use unique combinations of other words along with “adviser,” “advisor” or “advisory.”

    530 Source: Form BD.

    531E.g. “ABC Advisor.”

    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.532 Commission staff reviewed firm websites to collect the terms that were used on the website to describe the firm.533 Many firms provided multiple descriptions of their businesses.534

    532 From the full sample of broker-dealers with retail investors (2,857) and investment advisers with retail investors (7,600), the Commission staff used a random number generator to select 20 firms in each of the size categories listed in Table 7, from which to construct a sample of firms for which staff hand-collected data on firm descriptions from firm website homepages and “About” pages, as available. When a size category contained less than 20 firms we sampled all firms in that category. Relative to the overall proportion of firms, we oversampled firms from the larger size categories because they employ a majority of all licensed representatives and are therefore the firms the average retail investor is most likely to come in contact with. Overall, 83 randomly selected standalone broker-dealers, 100 randomly selected investment advisers, and 91 randomly selected dual registrants based on the previously identified size categories (either total assets for broker-dealers and dual registrants or assets under management for investment advisers) provided the sample reviewed in the staff study. Further, the 917 Financial Literacy Study (see supra note 20) showed that a substantial percentage of retail investors use information obtained from firm websites in making the selection of their financial professional.

    533See Table 7, Panel A for firm level identifiers for broker-dealers, Panel B for identifiers for investment advisers, and Panel C for dual registrants. Not all firms provided a description of their firm on their website, which we coded as “N/A” for not available.

    534 For purposes of our classification analysis, if “ABC & Co.” were to be a SEC-registered standalone broker-dealer and, on ABC's webpage in describing its business and operations, ABC refers to itself as a brokerage firm and a wealth manager, we would classify, ABC & Co. as using both “brokerage” and “wealth manager” as descriptors in our analysis.

    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 describe their business, while less than 10% use “financial advisor,” “wealth advisor,” or “investment advisor.” Registered investment advisers (Panel B) are more likely to use the term “investment advisor,” “wealth advisor,” or “financial advisor” as a description of their business compared to broker-dealers (approximately 40%). Nearly 50% of the sampled standalone investment advisers use the term “investment manager” or “wealth manager” to describe their business model compared to less than 10% of broker-dealers that use these terms. Dually registered firms (Panel C) are much more diverse in their use of firm descriptions; approximately 40% use the term “brokerage,” “broker-dealer,” “broker,” or “dealer,” while nearly 30% use a firm description that contains the term “adviser” or “advisor.”

    535 Broker-dealers are randomly drawn from Form BD data (as of Dec. 2017). The data on firm descriptions is hand collected from individual broker-dealer websites.

    536 Investment advisers are randomly drawn from Form ADV data (as of Dec. 2017). The data on firm descriptions is hand collected from individual investment adviser websites.

    537 Dual registrants are randomly drawn from Form BD data (as of Dec. 2017). The data on firm descriptions is hand collected from individual dually-registered firms' websites.

    Table 7—Panel A: Description of Standalone Broker-Dealer Firms on Firm Websites 535 Broker-
  • dealer
  • Investment
  • bank
  • Wealth/
  • investment
  • management
  • Advisory Other N/A
    >$50 billion 2 2 0 2 0 0 $1 billion to $50 billion 15 6 0 0 0 1 $500 million to $1 billion 14 2 0 0 1 0 $100 million to $500 million 12 7 4 2 4 0 $10 million to $100 million 11 2 5 3 4 0 Total 54 19 9 7 9 1
    Table 7—Panel B: Description of Standalone Investment Adviser Firms on Firm Website 536 Broker-
  • dealer
  • Investment
  • bank
  • Wealth/
  • investment
  • management
  • Advisory Other N/A
    >$50 billion 0 1 16 3 4 0 $1 billion to $50 billion 0 0 13 5 8 0 $500 million to $1 billion 0 0 10 13 9 0 $100 million to $500 million 0 0 6 7 9 3 $10 million to $100 million 2 0 2 10 7 1 Total 2 1 47 38 37 4
    Table 7—Panel C: Description of Dually-Registered Firms on Firm Website 537 Broker-
  • dealer
  • Investment
  • bank
  • Wealth/
  • investment
  • management
  • Advisory Other N/A
    >$50 billion 5 8 2 4 1 0 $1 billion to $50 billion 7 8 5 6 9 0 $500 million to $1 billion 3 1 2 1 2 0 $100 million to $500 million 13 3 1 7 6 0 $10 million to $100 million 10 1 3 10 7 0 Total 38 21 13 28 25 0

    Regarding the use of titles by individual financial professionals, a 2008 RAND Study,538 found that households responding to the survey 539 reported a wide variety of titles were used by financial professionals with whom they worked. The RAND Study Table 6.3 (replicated below in Table 8) provides an overview of the most commonly used titles by services provided. As shown in the table, financial professionals providing brokerage services use a large variety of titles to describe their business and the services that they offer, including “financial advisor,” “financial consultant,” “banker,” and “broker.” Around 31% of professionals providing only brokerage services used titles containing the terms “adviser” or “advisor.” Professionals providing advisory services or both brokerage and advisory services similarly also use a wide variety of titles, but the proportion of professionals who use titles containing the terms “adviser” or “advisor” are somewhat larger at 35%. Note that the RAND Study did not distinguish financial professionals' use of tiles based on whether they were RRs or IARs, but rather by type of services provided.

    538 RAND Study, supra note 5.

    539 Internet survey administered to members of the American Life Panel; 654 (out of 1000) households completed the survey.

    Table 8—Replication of Table 6.3 of the RAND Study—Professional Titles Most Commonly Reported by Respondents Title All individual professionals Provide
  • advisory
  • services only
  • Provide
  • brokerage
  • services only
  • Provide both types of
  • services
  • Advisor 11 1 1 9 Banker 21 2 8 11 Broker, stockbroker, or registered representative 38 0 8 30 CFP (Certified Financial Planner) 21 3 3 15 Financial adviser or financial advisor 78 7 11 60 Financial consultant 25 2 0 23 Financial planner 44 6 1 37 Investment adviser or investment advisor 22 3 3 16 President or vice president 20 0 2 18
    2. Investor Account Statistics

    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.540 In 2016, a total of 43.3 million U.S. households have either an IRA or a brokerage account, of which an estimated 20.2 million U.S. households have a brokerage account and 37.7 million households have an IRA (including 72% of households that also hold a brokerage account).541 Table 9 below provides an overview of account ownership segmented by account type (e.g., IRA, brokerage, or both) and investor income category based on the Survey of Consumer Finances (SCF).542

    540See ICI Research Perspective, The Role of IRAs in U.S. Households' Saving for Retirement, 2016 (Jan. 2017), available at https://www.ici.org/pdf/per23-01.pdf.

    541 The data is obtained from the Federal Reserve System's 2016 Survey of Consumer Finances (“SCF”), a triennial survey of approximately 6,200 U.S. households and imputes weights to extrapolate the results to the entire U.S. population. As noted, some survey respondent households have both a brokerage and an IRA. Federal Reserve, Survey of Consumer Finances (2016), available at https://www.federalreserve.gov/econres/scfindex.htm. The SCF data does not directly examine the incidence of households that could use advisory accounts instead of brokerage accounts; however, some fraction of IRA accounts reported in the survey could be those held at investment advisers.

    542Id. To the extent that investors have IRA accounts at banks that are not also registered as broker-dealers, our data may overestimate the numbers of IRA accounts held by retail investors that could be subject to this proposed rulemaking.

    Table 9—Ownership by Account Type in the U.S. by Income Group [As reported by the 2016 SCF] Income category % Brokerage
  • only
  • % IRA only % Both
  • brokerage
  • and IRA
  • Bottom 25% 1.2 7.6 2.4 25%-50% 3.2 14.5 5.4 50%-75% 4.1 21.4 11.4 75%-90% 7.5 33.4 16.5 Top 10% 12.0 24.7 43.9 Average 4.4 18.3 11.6

    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.543 Panel A of Table 10 below presents the breakdown of where households who have brokerage accounts seek advice about savings and investments. The table shows that of those respondents with brokerage accounts, 23% (4.7 million households) used advice services of broker-dealers for savings and investment decisions, while 49% (7.8 million households) took advice from a “financial planner.” Approximately 36% (7.2 million households) sought advice from other sources such as bankers, accountants, and lawyers. Almost 25% (5.0 million households) did not use advice from the above sources.

    543 The SCF specifically asks participants “Do you get advice from a friend, relative, lawyer, accountant, banker, broker, or financial planner? Or do you do something else?” (see Federal Reserve, Codebook for 2016 Survey of Consumer Finances (2016), available at https://www.federalreserve.gov/econres/files/codebk2016.txt). Other response choices presented by the survey included “Calling Around,” “Magazines,” “Self,” “Past Experience,” “Telemarketer,” and “Insurance Agent,” as well as other choices. Respondents could also choose “Do Not Save/Invest.” The SCF allows for multiple responses, so these categories are not mutually exclusive. However, we would note that the list of terms in the question did not specifically include “investment adviser.”

    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.

    Table 10—Panel A: Sources of Advice for Households Who Have a Brokerage Account in the U.S. by Income Group 544 Income category % Taking
  • advice from
  • brokers
  • % Taking
  • advice from
  • financial
  • planners
  • % Taking
  • advice from
  • lawyers,
  • bankers, or
  • accountants
  • % Taking
  • no advice or
  • from other
  • sources
  • Bottom 25% 20.55 53.89 35.64 24.30 25%-50% 22.98 38.03 43.92 32.36 50%-75% 20.75 52.00 31.42 23.61 75%-90% 22.56 48.94 32.25 28.10 Top 10% 25.29 50.53 38.47 21.06 Average 23.02 49.02 35.99 24.94
    Table 10—Panel B: Sources of Advice for Households Who Have an IRA in the U.S. by Income Group 545 Income category % Taking
  • advice from
  • brokers
  • % Taking
  • advice from
  • financial
  • planners
  • % Taking
  • advice from
  • bankers,
  • accountants, or lawyers
  • % Taking
  • no advice or
  • from other
  • sources
  • Bottom 25% 12.14 38.30 43.69 31.85 25%-50% 9.79 43.82 40.67 32.74 50%-75% 14.93 45.20 41.23 25.23 75%-90% 14.68 52.14 41.65 24.26 Top 10% 21.40 55.40 40.03 18.56 Average 15.25 48.45 41.17 25.28
    3. Investor Perceptions About Broker-Dealers and Investment Advisers

    544Id.

    545Id.

    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.

    g. How Investors Select Financial Firms or Professionals

    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.546 For instance, the RAND Study reported that 46% of survey respondents indicated that they located a financial professional from personal referral, although this percentage varied depending on the type of service provided (e.g., only 35% of survey participants used personal referrals for brokerage services). After personal referrals, RAND survey participants ranked professional referrals (31%), print advertisements (4%), direct mailings (3%), online advertisements (2%), and television advertisements (1%), as their source of locating individual professionals. The RAND Study separately inquired about locating a financial firm, which yielded substantially different results from the selection of the financial professional.547 Respondents reported selecting financial firm (of any type) based on: Referral from family or friends (29%), professional referral (18%), print advertisement (11%), online advertisements (8%), television advertisements (6%), direct mailings (2%), with a general “other” category (36%).

    546 See RAND Study, supra at 5; 917 Financial Literacy Study, supra note 20.

    547 The Commission notes that only one-third of the survey respondents that responded to “method to locate individual professionals” also provided information regarding locating the financial firm.

    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.548 In the 917 Financial Literacy Study,549 51% of survey participants received a referral from family, friends, or colleagues. Other sources of information or referrals came from: referral from another financial professional (23%), online search (14%), attendance at a financial professional-hosted investment seminar (13%), advertisement (e.g., television or newspaper) (11.5%), other (8%), while approximately 4% did not know or could not remember how they selected their financial firm or financial professional. Twenty-five percent of survey respondents indicated that the “name or reputation of the financial firm or financial professional” affected the selection decision.

    548See 917 Financial Literacy Study, supra note 20.

    549 The data used in the 917 Financial Literacy Study comes from the Siegel & Gale Investor Research Report (Jul. 26, 2012), available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part3.pdf, at 249-250.

    h. Nature of the Relationship

    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 commenters in response to Chairman Clayton's recent Request for Comment highlighted investor confusion about whether financial services providers are subject to the fiduciary duty.550 Particularly, some commenters tied investor confusion about the standard of care applicable to financial service providers to the names or titles of such firms and financial professionals.551 Similarly, during the public comment process as part of the 913 Study, commenters indicated that retail investors did not understand or found confusing the distinctions between broker-dealers and investment advisers, for example, in terms of services provided and applicable standards of care.552 Investor advocate groups submitted comments that reiterated the view that many market participants also believe that financial professionals should act in investors' best interests.553 913 Study commenters also expressed beliefs that certain titles used by firms and financial professionals are confusing to investors.554

    550See, e.g., CFA 2017 Letter; PIABA 2017 Letter; IAA 2017 Letter; Pefin 2017 Letter.

    551See Chamber 2017 Letter, at 10; Committee for the Fiduciary Standard 2017 Letter, at 3; Pefin 2017 Letter, at 9.

    552See 913 Study, supra note 3, at section III.A.

    553Id. See also AFL-CIO 2017 Letter; AARP 2017 Letter.

    554See, e.g., Comment letters on 913 Study, available at https://www.sec.gov/comments/4-606/4-606.shtml. Comment letter of Bert Oshiro (Aug. 29, 2010) (“Years ago, I was pretty sure who I was dealing with based on their titles. . . Today it's a totally different story. All kinds of products such as securities, insurance, fee based products, bank accounts, loans, health insurance, auto/homeowners insurance, etc. are sold by people calling themselves: Financial advisors; financial consultants; investment advisors; investment consultants; financial planners; asset managers; financial services advisors; [and] registered representatives. . . It has come to the point that I really don't know who I'm dealing with.”); Comment letter of Larry J. Massung (Aug. 29, 2010) (“I believe there is considerable confusion within the general public with the fiduciary duty, responsibilities, and titles of brokers, dealers and investment advisors”); and Comment letter of Cecylia Escarcega (Aug. 30, 2010) (“Personally, I find the titles confusing because the broker, dealer or investment advisor typically does not tell me what their role is and the scope of their fiduciary duty to me as an investor”).

    Further findings of investor confusion about the roles and titles of financial professionals comes from studies conducted by Siegel & Gale 555 in 2004, RAND 556 in 2008 and CFA in 2010.557 The Siegel & Gale Study found that focus group participants did not understand that the roles and legal obligations of broker-dealers differed from investment advisers, and were further confused by different labels or titles used by advice providers (e.g., financial planner, financial advisor, financial consultant, broker-dealer, or investment adviser). More specifically, participants in the Siegel & Gale Study focus groups believed that brokers executed trades and were focused on “near-term” advice, while financial advisors and consultants provided many of the same services as brokers, but also provided a greater scope of long-term planning advice (e.g., portfolio allocation). “Investment adviser,” on the other hand, was a term unfamiliar to many participants, but financial professionals using this label were perceived to provide similar services to financial advisors and financial consultants. Financial planners were viewed to provide services related to insurance and estate planning in addition to investment advice, and encompassed long-term financial planning including college, retirement, and other long-term savings and investment goals. The Siegel & Gale Study focus group participants assumed that financial advisors/consultants, investment advisers, and financial planners provided planning services, while brokers, financial advisors/consultants, and investment advisers provided trade execution services.558 Further, the focus group participants generally did not understand certain legal terms, such as “fiduciary.”

    555 The Commission retained Siegel and Gale in 2004 to conduct the focus group testing in order to determine how investors distinguish the roles, legal obligations, and compensation structures between broker-dealers and investment advisers. See Siegel & Gale Study, supra note 549.

    556 The RAND Study contained two components: (1) An analysis of business practices at broker-dealers and investment advisers based on regulatory filings and interviews with stakeholders (including members of the broker-dealer and investment adviser industries); and (2) a survey of 654 households or focus group testing on household investment behavior and preferences, experience with financial service providers, and understanding of the different types of providers. See RAND Study, supra note 5.

    557See CFA Survey, supra note 5.

    558 The Commission notes that the results of the Siegel & Gale Study relied on a small sample of focus group testing conducted over a decade ago. While relevant to our understanding of investor perception about broker-dealers and investment advisers, the results of the study may not reliably reflect the current views of the general population of U.S. retail investors.

    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.559 Further, participants responded similarly that investment advisers and brokers are required to act in the client's best interest. Similar to the Siegel and Gale Study, focus group participants did not understand the term fiduciary, or how the fiduciary standard differed from suitability. In addition, the RAND Study noted that the confusion about titles, services, legal obligations, and compensation persisted even after a fact sheet on broker-dealers and investment advisers was provided to participants.560

    559 RAND study participants “commented that the interchangeable titles and `we do it all' advertisements [by broker-dealers] made it difficult to discern broker-dealers from investment advisers.” Although the RAND Study indicates that investors are confused the services provided and the titles used by financial professionals, more than 70% of participants also answered that they were “very satisfied with the service received from the firm,” that “they trust the firm acts in their best interest,” and that “the firm provides a valuable service.” These numbers increased to 80% when the length of time spent at a firm was at least 10 years. The Commission notes that the results of the RAND Study relied on testing conducted nearly 10 years ago; therefore, the results of the study may not reliably reflect the current views of the general population of U.S. retail investors

    560See RAND Study, supra note 5, at 111. The fact sheet provided to RAND Study participants included information on the definition of broker and investment adviser, including a description of common job titles, legal duties and typical compensation. Participants in the RAND Study focus groups indicated that they were confused over common job titles of broker-dealers and investment advisers, thought that because brokers are required to be licensed, investment advisers were not as qualified as brokers, deemed the term “suitable” too vague, and concluded that it would be difficult to prove whether or not an investment adviser was not acting in the client's best interest.

    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.561 With respect to conduct-related questions, 91% of those surveyed believed that broker-dealers and investment advisers should follow the same investor protection rules if providing the same sort of advisory services, while 85% believed that the person providing advice should put the retail customer's interest ahead of theirs and should disclose fees and commissions earned or any conflicts of interest that could affect the advice provided. More than two-thirds believed that a fiduciary duty is owed to customers by broker-dealers, suggesting a degree of investor confusion.562

    561See CFA Study, supra note 5.

    562 In some circumstances, broker-dealers may owe a fiduciary duty to their customers. For example, there is a body of case law holding 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, or the scope of obligations that attach by virtue of that duty. See, e.g., U.S. v. Skelly, 442 F.3d 94, 98 (2d Cir. 2006) (fiduciary duty found “most commonly” where “a broker has discretionary authority over the customer's account”); United States v. Szur, 289 F.3d 200, 211 (2d Cir. 2002) (“Although it is true that there `is no general fiduciary duty inherent in an ordinary broker/customer relationship,' a relationship of trust and confidence does exist between a broker and a customer with respect to those matters that have been entrusted to the broker.”) (citations omitted); Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953-954 (E.D. Mich. 1978), aff'd, 647 F.2d 165 (6th Cir. 1981) (recognizing that a broker who has de facto control over non-discretionary account generally owes customer duties of a fiduciary nature; looking to customer's sophistication, and the degree of trust and confidence in the relationship, among other things, to determine duties owed); Arleen W. Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948) (Commission Opinion), aff'd sub nom. Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949) (noting that fiduciary requirements generally are not imposed upon broker-dealers who render investment advice as an incident to their brokerage unless they have placed themselves in a position of trust and confidence, and finding that Hughes was in a relationship of trust and confidence with her clients).

    i. Fees

    The 917 Financial Literacy Study showed that, prior to engaging an investment adviser,563 approximately 76.4% of survey participants indicated that disclosure of the fees and compensation of investment advisers was an absolutely essential element to any disclosure.564 With respect to how investors prefer information about fees and compensation to advisers, 23% of respondents preferred a table format with examples, 21% preferred a bulleted format with examples, 20% preferred a bulleted format, and 12% preferred a table format.565

    563 The 917 Financial Literacy Study, supra note 20, uses the term financial intermediary when discussing the importance of certain disclosures of firms or financial professionals.

    564See 917 Financial Literacy Study, supra note 20, at 67.

    565 23% of respondents also preferred the “status quo”—“the way it was presented” in the example.

    In 2015, FINRA conducted an “Investor Survey” which included questions about investors' understanding of fees charged for investment services.566 Approximately 70% of survey participants reported that they thought investment firm (generically referred to as “adviser” in the study) compensation and account fees to be very clear, with less than 4% stating that they thought compensation to be unclear. Between 54.7% and 57.6% of respondents indicated that they considered account fees to be “reasonable,” while between 0% and 2.3% of respondents indicated that account fees were not reasonable. Of investors that have commission-based accounts, approximately 28% believed that commissions did not affect advice given. Those percentages decline to 15% or less when asked to consider whether selling incentives and third party compensation had not affected the advice provided by investment firms.

    566See FINRA Report on Conflicts of Interest, (Oct. 2013), at 6, available at http://www.finra.org/sites/default/files/Industry/p359971.pdf (“Investor Survey”).

    Table 11—Investor Perception of Compensation to Financial Professionals [As obtained from the 2015 FINRA Investor Survey] Unadvised
  • (%)
  • Advised:
  • asset fee
  • (%)
  • Advised:
  • commission-based fee
  • (%)
  • Advisor Compensation Clear? Very NA 70.9 68.5 Somewhat NA 27.6 28.0 Not NA 1.5 3.5 Account Fees Clear? Very 68.0 70.3 74.7 Somewhat 29.0 29.7 23.5 Not 2.9 0 1.8 Account Fees Reasonable? Agree 55.6 54.7 57.6 Somewhat Agree 42.1 45.3 40.2 Disagree 2.3 0 2.2 Commissions Affect Advice? Great Deal 58.3 21.8 29.7 Somewhat 32.8 57.8 42.5 Not At All 8.9 20.4 27.7 Selling Incentives Affect Advice? Great Deal 66.1 41.9 44.3 Somewhat 28.4 43.7 40.6 Not At All 5.5 14.4 15.1 Third Party Compensation Affects Advice? Great Deal 68.6 32.8 41.4 Somewhat 26.3 56.4 45.3 Not At All 5.1 10.8 13.4

    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.567

    567 Experimental evidence from the U.S. mutual fund market is provided by, James J. Choi, David Laibson, & Brigitte C. Madrian, Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds Review of Financial Studies 23(4): 1405-1432 (Nov. 14, 2009) (“Choi Laibson Article”) (finding that experimental subjects fail to minimize fees among four different actual S&P 500 index funds and 80-90% of the subjects in the study presented with simplified fee disclosures still failed to select the lowest-priced options among products with similar characteristics). Field-based evidence from the payday loans market is provided by, Marianne Bertrand & Adair Morse, Information Disclosure, Cognitive Biases, and Payday Borrowing, The Journal of Finance 46(6): 1865-1893 (Nov. 14, 2011). For a comprehensive survey of the literature see George Loewenstein, Cass R. Sunstein, & Russell Golman, Disclosure: Psychology Changes Everything, Annual Review of Economics 6: 391-419 (Aug. 2014) (“Loewenstein Sunstein Article”).

    j. Conflicts of Interest

    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,568 approximately 52.1% of survey participants indicated that an essential component of any disclosure would be their financial intermediary's conflicts of interest, while 30.7% considered information about conflicts of interest to be important, but not essential. Investors also were asked to rate their level of concern about potential conflicts of interest that their adviser might have. Approximately 36% of the investors expressed concerns that their adviser might recommend investments in products for which its affiliate receives a fee or other compensation, while 57% were concerned that their adviser would recommend investments in products for which it gets paid by other sources. In addition to conflicts directly related to compensation practices of financial professionals, some investors were concerned about conflicts related to the trading activity of these firms. For example, more than 26% of participants were concerned that an adviser might buy and sell from its account at the same time it is recommending securities to investors; and more than 55% of investors were also concerned about their adviser's engaging in principal trading.

    568 Section 917 of the Dodd-Frank Act further required the Commission to conduct a study to identify the level of financial literacy among retail investors as well as methods and efforts to increase the financial literacy of investors. See 917 Financial Literacy Study, supra note 20.

    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.569

    569See S. Sah & G. Loewenstein, Nothing to declare: Mandatory and voluntary disclosure leads advisors to avoid conflicts of interest, Psychological Science 25, 575-584 (2014).

    k. Disciplinary History

    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.570 Despite this, most investors do not actively seek disciplinary information for their advisers and broker-dealers.571 A recent FINRA survey, however, found that only 15% of survey respondents checked their financial professional's background, although the Commission notes that the study encompasses a wide group of advisers, such as debt counselors and tax professionals.572 Another FINRA survey found that only 7% of survey respondents use FINRA's BrokerCheck and approximately 14% of survey respondents are aware of the Investment Adviser Public Disclosure (IAPD) website.573

    570See 917 Financial Literacy Study, supra note 20, at nn. 311 and 498 and accompanying text (Approximately 67.5% of the online survey respondents considered information about an adviser's disciplinary history to be absolutely essential, and about 20.0% deemed it important, but not essential, and “When asked how important certain factors would be to them if they were to search for comparative information on investment advisers, the majority of online survey respondents identified the fees charged and the adviser's disciplinary history as the most important factors.”).

    571 For example, the FINRA 2015 Investor Survey finds that only 24% of investors are aware of Investor.gov; only 16% are aware of BrokerCheck; only 14% are aware of the IAPD website, and only 7% have used BrokerCheck. Investor Survey, supra note 566.

    572 2009 National Survey Initial Report, supra note 275.

    573See Investor Survey, supra note 566.

    B. Form CRS Relationship Summary 1. Broad Economic Considerations

    We are proposing to require broker-dealers, investment advisers, and firms that are dually registered to deliver a relationship summary to retail investors.574 The economic tradeoffs involved in disclosures made by financial firms and financial professionals are complex and affected by a wide range of factors, which we consider in more detail below. In this section, we discuss the characteristics of disclosures that may effectively convey information that is useful to retail investors when they are searching for a financial firm and to facilitate matching between retail investors' expectations and the choice of financial firm or financial professional.

    574See supra Section II.

    Disclosure requirements provide benefits to participants in financial markets because disclosing parties may lack private incentives to voluntarily disclose or standardize relevant information.575 Disclosure can benefit not only investors but also the disclosing parties,576 as well as provide indirect benefits to financial markets.577

    575See, e.g., Confirmation Requirements and Point of Sale Disclosure Requirements for Transactions in Certain Mutual Funds and Other Securities, and Other Confirmation Requirement Amendments, and Amendments to the Registration Form for Mutual Funds, Exchange Act Release No. 8358 (Jan. 29, 2004) [69 FR 6437 (Feb. 10, 2004)] (“The Commission believes that permitting investors to more readily obtain information about distribution-related costs that have the potential to reduce their investment returns and to give investors a better understanding of some of the distribution-related arrangements that create conflicts of interest for brokers, dealers, municipal securities dealers, and their associated natural persons. The disclosure of information about these costs and arrangements can help investors make better informed investment decisions.”). See also P. Healy & K. Palepu, Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical corporate disclosure literature, Journal of Accounting and Economics 31, 405-440 (2001).

    576See, Michael Jensen & William Meckling, Theory of the firm: Managerial behavior, agency costs, and ownership structure, Journal of Financial Economics 3, 305-360 (1976); Patel, S. and G. Dallas, Transparency and disclosure: Overview of methodology and study results, United States, Standard & Poor's, New York (2002); A. Ferrell, Mandatory disclosure and stock returns: Evidence from the over-the-counter market, The Journal of Legal Studies 36, 213-253 (2007). Regarding the effect of corporate disclosures on improved corporate governance, see, e.g. B. Hermalin & M. Weisbach, Transparency and corporate governance, NBER Working paper No. W12875 (2007); R. Lambert, C. Leuz, & R. Verrecchia, Accounting information, disclosure, and the cost of capital, Journal of Accounting Research 45, 385-420 (2007).

    577See L. Holder-Webb, J. Cohen, L. Nath, & D. Wood, A survey of governance disclosures among U.S. firms, Journal of Business Ethics 83, 543-563 (2008); Z. Rezaee, Causes, consequences, and deterrence of financial statement fraud, Critical Perspectives on Accounting 16, 277-298 (2005).

    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.578 By requiring both investment advisers and broker-dealers to deliver to existing and prospective retail investors and file a publicly available concise relationship summary that discusses, in one place, both types of services and their differences, the proposed rules for Form CRS would also help retail investors to compare certain different types of accounts and firms.

    578 For comparison, the disclosure conditions under applicable DOL regulations and exemptions apply only to financial firms and financial professionals servicing IRAs and ERISA-covered retirement plans and participants in such plans.

    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.579

    579See, Justine S. Hastings & Lydia Tejeda-Ashton, Financial Literacy, Information, and Demand Elasticity: Survey and Experimental Evidence from Mexico, NBER Working Paper 14538 (Dec. 2008) (finding that providing fee disclosures to Mexican investors in peso rather than percentage terms caused financially inexperienced investors to focus on fees); See, Richard G. Newell & Juha Siikamaki, Nudging Energy Efficiency Behavior, Resources for the Future Discussion Paper 13-17 (Jul. 10, 2013) (finds that providing dollar operating costs in simplified energy efficiency labeling significantly encouraged consumers to choose higher energy efficiency appliances, while another related study presents similar evidence from payday loans).

    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.580 This framing effect could lead investors to draw different conclusions depending on how information is presented. For example, if the disciplinary history information is presented first, it could affect the way investors perceive all subsequent disclosures in the relationship summary and, possibly, discount more heavily the information provided by firms with disciplinary events than by firms with clean record. The effect of the disciplinary history information would be moderated if this information is provided at the end of the relationship summary.

    580See Tversky, A., Kahneman, D., 1981. The framing of decisions and the psychology of choice. Science 211, 453-458 (“Tversky Kahneman Article”).

    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.581 This bias can be caused by “moral licensing,” a belief that the disclosing party has already fulfilled its moral obligations in the relationship and therefore can act in any way, or it can be caused by “strategic biasing,” aimed at compensating the disclosing party for the anticipated loss of profit due to the disclosure.582 Experimental evidence also suggests that disclosure could turn some clients or customers into “reluctant altruists.” 583 For example, if financial professionals disclose that they earn a referral fee if a customer enrolls in a program, the customer may implicitly feel that they are being asked to help their financial professional receive the fee. One study also found evidence that disclosure of a professional's financial interests (particularly in face-to-face interactions) can induce a panhandler effect, whereby customers may face an implicit social pressure to meet the professional's financial interests.584 The above literature indicates that conflicts of interest disclosures could undermine the intended benefits of the disclosures for investors if investors become reluctant altruists or feel an obligation to succumb to the panhandler effect. However, these studies also suggest certain factors that may mitigate the unintended consequences. For example, in the case of the “panhandler effect,” researchers have found that distancing the client or customer from the financial professional either in the decision or disclosure phase can dampen this effect.585

    581See, Daylian Cain, George Loewenstein & Don Moore, The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest, Journal of Legal Studies 34: 1-25 (Jan. 2005) (“Cain 2005 Article”); Daylian Cain, George Loewenstein & Don Moore, When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest, Journal of Consumer Research 37: 1-45 (Aug. 27, 2010); Bryan Church & Xi Kuang, Conflicts of Disclosure and (Costly) Sanctions: Experimental Evidence, Journal of Legal Studies 38 2: 505-532 (Jun. 2009); Christopher Tarver Robertson, Biased Advice, Emory Law Journal 60: 653-703 (Feb. 17, 2011). These papers study conflicts of interest in general, experimental settings, not specialized to the provision of financial advice.

    582 Although disclosures in general may cause negative unintended consequences, existing rules and regulations for broker-dealers and investment advisers, as well as proposed Regulation Best Interest, are likely to moderate the effects of moral licensing or strategic bias for financial professionals.

    583See J. Dana, D. Cain & R. Dawes, What you don't know won't hurt me: Costly (but quiet) exit in dictator games, Organizational Behavior and Human Decision Processes 100:193-201 (2006).

    584 Daylian Cain, George Loewenstein & Don Moore, The burden of disclosure: Increased compliance with distrusted advice, Journal of Personality and Social Psychology, 104(2): 289-304 (2013) (“Burden of Disclosure Article”).

    585See id.

    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.586

    586See Loewenstein Sunstein Article, supra note 567. The paper provides a comprehensive survey of the literature relevant to disclosure regulation.

    First, existing research demonstrates that individuals exhibit limited ability to absorb and process information.587 These cognitive limitations suggest that more targeted and simpler disclosures may be more effective in communicating information to investors than more complex disclosures. As discussed more thoroughly below, costs, such as increased investor confusion or reduced understanding of the key elements of the disclosure, are likely to increase as disclosure documents become longer, more convoluted, or more reliant on narratives.588 Moreover, empirical evidence suggests that simplification benefits consumers of disclosed information.589 These results appear to support requirements of simple disclosures, which provide benefits to consumers of that information.

    587See Nisbett RE & Ross L. Human Inference: Strategies and Shortcomings of Social Judgment (1980). Englewood Cliffs, NJ: Prentice Hall. David Hirshleifer & Siew Hong Teoh, Limited attention, information disclosure, and financial reporting, Journal of Accounting and Economics 36, 337-386 (Dec. 2003).

    588See, e.g., S.B. Bonsall IV & B.P. Miller, The Impact of Narrative Disclosure Readability on Bond Ratings and the Cost of Capital, The Review of Accounting Studies 2 (2017) and A. Lawrence, Individual Investors and Financial Disclosure, Journal of Accounting & Economics 56, 130-47 (2013).

    589See supra notes 35, 46—48 and accompanying text. See also S. Agarwal, S. Chomsisengphet, N. Mahoney & J. Stroebel, Regulating consumer financial products: evidence from credit cards, NBER Working Paper 19484 (Jun. 2014) (finding that a series of requirements in the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), including several provisions designed to promote simplified disclosure, has produced substantial decreases in both over-limit fees and late fees, thus saving U.S. credit card users $12.6 billion annually).

    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.590 Within the context of disclosures, more salient information, such as information presented in bold text, would be more effective in attracting attention than less salient information, such as information presented in a footnote. There is also empirical evidence that visualization improves individual perception of information.591 For example, one experimental study shows that tabular reports lead to better decision making and graphical reports lead to faster decision making (when people are subject to time constraints).592

    590 Daniel Kahneman, Thinking, Fast and Slow, New York: Farrar, Strauss, Giroux (2013). Susan Fiske & Shelley E. Taylor, Social cognition: From Brains to Culture, SAGE Publications Ltd; 3rd ed. (2017).

    591 J. Hattie, Visible learning. A synthesis of over 800 meta-analyses relating to achievement, Oxon: Routledge (2008) (“Hattie”).

    592 I. Benbasat & A.S. Dexter, An Investigation of the Effectiveness of Color and Graphical Presentation under Varying Time Constraints, MIS Quarterly 10, 59-83 (Mar. 1986) (“Benbasat & Dexter”).

    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.593 Standardization could be particularly important for the disclosure of certain quantitative aspects of financial services, such as the level and structure of fees.

    593See, e.g., JR Kling, S. Mullainathan, E. Shafir, LC Vermeulen & MV Wrobel, Comparison friction: experimental evidence from Medicare drug plans, Quarterly Journal of Economics 127, 199-235 (2012) (finding that in a randomized field experiment, in which some senior citizens choosing between Medicare drug plans that were randomly selected to receive a letter with personalized, standardized, comparative cost information (“the intervention group”) while another group (“the comparison group”) received a general letter referring them to the Medicare website, plan switching was 28% in the intervention group, but only 17% in the comparison group, and the intervention caused an average decline in predicted consumer cost of about $100 a year among letter recipients); CK Hsee, GF Loewenstein, S. Blount & MH Bazerman, Preference reversals between joint and separate evaluations of options: a review and theoretical analysis, Psychological Bulletin 125, 576-590 (Oct. 2006).

    Finally, personalization may further enhance the effectiveness of disclosure.594 This approach might involve, for example, adjusting the presentation to take account of the receiver's interests, expectations, or format preferences or to tailor the information based on what the receiver already knows in order not to repeat existing knowledge. Personalization is usually achieved at the expense of standardization, however, and can be costly to create.

    594See Loewenstein Sunstein Article, supra note 567.

    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.

    2. Economic Effects of the Relationship Summary

    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.595

    595 Economic effects of the proposal on the market for financial services, including on indirectly-affected parties such as banks or insurers that are not regulated by the SEC, are considered in the following section.

    a. 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.596 This, in turn, supports the notion that a well-functioning market for financial services may provide benefits to investors by helping them obtain information and guidance from firms and financial professionals and thereby make better investment decisions. At the same time, however, evidence also suggests that investors do not fully comprehend the nature of the business relationships and responsibilities in the market which makes them vulnerable to confusion and being misled by firms and financial professionals; 597 it also implies that any improvement of retail investor understanding of their relationship with financial professionals could improve investor's investment decisions.

    596See 917 Financial Literacy Study, supra note 20.

    597See 913 Study, supra note 3, at section III.A.; Siegel & Gale Study, supra note 550; RAND Study, supra note 5.

    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),598 conflicts of interest, and some additional information, including the existence of currently reportable legal or disciplinary events. The Commission believes that the information in the relationship summary could help alleviate investor confusion and would promote effective communication between the firm and its retail investors and 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 preferences and expectations. Although the relationship summary applies only to broker-dealers and registered investment advisers, its impact could extend beyond the current and prospective clients of these institutions and impact a larger set of investors through various channels such as public filings and website posting. Both the content and the form of the relationship summary are designed to increase the likelihood that the disclosed information is consumed easily and effectively by retail investors. We discuss the potential benefits and costs of the relationship summary and its components in detail below.

    598 For purposes of the relationship summary, we propose to define a standalone investment adviser as a registered investment adviser that offers services to retail investors and (i) is not dually registered as a broker-dealer or (ii) is dually registered as a broker-dealer but does not offer services to retail investors as a broker-dealer. We propose to define a standalone broker-dealer as a registered broker-dealer that offers services to retail investors and (i) is not dually registered as an investment adviser or (ii) is dually registered as an investment adviser but does not offer services to retail investors as an investment adviser. Proposed General Instruction 9.(f) to Form CRS.

    i. Structure of the Relationship Summary

    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 81/2 x 11 inch paper if converted to PDF format, with a specified font size and margin requirements. Existing research suggests that shorter disclosures help investors absorb and process information.599 Shorter disclosure would also facilitate a layered approach to disclosure. The Commission acknowledges that a limit on overall document length (or equivalent length for electronic disclosure) may entail limiting the information provided through the relationship summary. However, based on the studies described above, we preliminarily believe that limiting the length of the relationship summary appropriately trades off the benefits of additional detail against the costs of increased complexity associated with longer disclosures. Similarly, while the required standardization across the relationship summary limits the ability of firms to provide customized information to potential retail investors, we preliminarily believe these constraints are appropriate to facilitate comparability.

    599See supra Section IV.B.1.

    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.600 Consistent with this research, firms would be permitted to use graphical presentations, and dual registrants would be required in certain aspects, to use tables to simplify and highlight the information. For example, dual registrants will be required to provide a side-by-side tabular presentation of all relevant information provided in the relationship summary.

    600See commenters' feedback in the Financial Literacy Study, supra note 20, at iv, xx, 21-22.

    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. 601 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. As discussed above, standardization facilitates comparisons of content across disclosures.602 We believe that allowing only the required and permitted information would promote standardization of the information presented to retail investors, and would allow retail investors to focus on information that we believe is particularly helpful in deciding among firms. At the same time, we acknowledge that standardization of disclosures not only limits personalization that may be valuable to retail investors but also could result in disclosures that are less precise. Further, all information in the relationship summary must be true and not misleading. In particular, the Instructions permit firms to omit or modify any prescribed statement that is inapplicable to their business or would be misleading to a reasonable retail investor. In addition, for certain items, firms will have some flexibility in how they include the required information.

    601See supra note 593.

    602See supra Section IV.B.1.

    ii. Introduction

    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.

    iii. Relationships and Services

    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 account. As noted above, the relationships and services of firms can differ in nature, scope, and duration. The Commission believes that a better understanding of the relationships and services could lower search costs and the risk of mismatch for retail investors, by facilitating cross-firm comparisons, and make it easier for them to find a firm and a financial professional that most closely meet their expectations, depending on how important different types of fee structures, services, standards of conduct or other information points are to them.

    iv. Obligations to the Retail Investor—Standard of Conduct

    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,603 and the Commission believes that providing retail investors with a brief description of legal obligations of firms and professionals could help alleviate this confusion. Furthermore, to the extent this section makes the issue of standard of conduct more salient to the investors, it may encourage additional information gathering by the investors about the standard of conduct, which could further increase investors' understanding.

    603See, e.g., Siegel & Gale Study, supra note 5 and RAND Study, supra note 5. See also CFA Survey, supra note 5.

    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.

    v. Summary of Fees and Costs

    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.604 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 factors that would help a reasonable retail investor understand the fees that he or she is likely to pay. As such, the improved disclosure of the categories of fees, including wrap fees, could help improve retail investor's decision to engage a firm and a financial professional.

    604See supra Section II.B.4.

    vi. Comparisons

    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.

    vii. Conflicts of Interest

    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 (i.e., principal trading). Including these disclosures prominently, in one place, at or before the start of a retail investor's relationship with a firm or financial professional could facilitate retail investors' understanding of the incentives that may be present throughout the course of the relationship. Such disclosure of financial incentives could assist investors in matching their expectations when choosing a firm or professional and type of account to help to ensure they receive services that meet their expectations. In addition, to the extent that the specified conflicts of interest disclosures could draw retail investors' attention to conflicts, monitoring of firms and financial professionals by retail investors could be improved.

    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 interest in the relationship summary could match retail investor expectations with the choices of firms and financial professionals, some studies have found that disclosures of conflicts of interest, in some cases, could undermine the motivations of people to behave ethically or to take moral license in their actions.605 In the context of providing investment advice, the perception that an investor has been warned (via the disclosure) of a firm's and financial professional's potential bias may make them believe that they are less obligated to provide unbiased advice.606 Further, other studies have suggested that disclosures of conflicts of interest could also make firms and financial professionals appear more trustworthy and as a result reduce the incentives for retail investors to examine additional information more carefully.607 The Commission preliminarily believes, however, that the securities laws and existing rules and regulations thereunder, such as investment advisers' fiduciary duty,608 broker-dealers' requirements under proposed Regulation Best Interest 609 standard, as well as under existing self-regulatory organizations' rules and the Exchange Act,610 reduce the risk that broker-dealers and investment advisers might use the proposed relationship summary to exploit potential conflicts of interest between themselves and their retail investors because these regulations may raise the cost of misconduct.611

    605See Geneviève Helleringer, Trust Me, I Have a Conflict of Interest! Testing the Efficacy of Disclosure in Retail Investment Advice, Oxford Legal Studies Research Paper No. 14/2016 (Mar. 2016), available at https://ssrn.com/abstract=2755734; and Cain 2005 Article, supra note 581. As discussed above, existing and proposed rules and regulations for broker-dealers and investment advisers could mitigate the negative unintended consequences of disclosures of conflicts of interest.

    606See supra Section IV.B.1.

    607See Burden of Disclosure Article, supra note 584. Further, this “panhandler effect” suggests that in some cases disclosure of financial professionals' conflicts of interests (particularly in face-to-face interactions) may create social pressure on retail investors to meet the financial professionals' interests.

    608 Under the Advisers Act, an adviser is a fiduciary whose duty is to serve the best interest of its clients, including an obligation not to subrogate clients' interest to its own. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. at 194 (the United States Supreme Court held that, under section 206 of the Investment Advisers Act of 1940, advisers have an affirmative obligation of utmost good faith and full and fair disclosure of all material facts to their clients, as well as a duty to avoid misleading them). Section 206 applies to all firms and persons meeting the Advisers Act's definition of investment adviser, whether registered with the Commission, a state securities authority, or not at all. See also Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979) (“[T]he Act's legislative history leaves no doubt that Congress intended to impose enforceable fiduciary obligations.”).

    609See Regulation Best Interest Proposal, supra note 24. Proposed Regulation Best Interest would establish a standard of conduct for broker-dealers and associated persons of broker-dealers to act in the best interest of the retail customer at the time at recommendation is made without placing the financial or other interest of the broker-dealer or associated person of a broker-dealer ahead of the interest of the retail customer. The standard of conduct obligation shall be satisfied if the broker-dealer or associated person of the broker-dealer discloses at the time of the recommendation material facts relating to the scope and terms of the relationship, which may be satisfied in part by the relationship summary, and all material conflicts associated with the recommendation. In addition, broker-dealers would be required to satisfy the Care and Conflicts of Interest Obligations, as discussed more fully in the Regulation Best Interest Proposal.

    610 For example, a broker-dealer may recommend a security even when a conflict of interest is present, but that recommendation must be suitable. See FINRA Rule 2111. The antifraud provisions of the federal securities laws and the implied obligation of fair dealing prohibit a broker-dealer from, among other things, making unsuitable recommendations and require broker-dealers to investigate an issuer before recommending the issuer's securities to a customer. See, e.g., Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969). See also Municipal Securities Disclosure, Exchange Act Release No. 26100 (Sept. 22, 1988), at n.75. The fair dealing obligation also requires a broker-dealer to reasonably believe that its securities recommendations are suitable for its customer in light of the customer's financial needs, objectives and circumstances (customer-specific suitability). See Release 8662, supra note 118, at 18 (involving excessive trading and recommendations of speculative securities without a reasonable basis).

    611 Consistent with this belief, one study also finds that regulations and legal sanctions on conflicted advice can mitigate the effects of moral licensing discussed above. See Bryan Church & Xi Kuang, Conflicts of Disclosure and (Costly) Sanctions: Experimental Evidence, Journal of Legal Studies 38 2: 505-532 (Jun. 2009).

    viii. Additional Information

    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 “Investor.gov.” While the disclosure of the existence of disciplinary events does not provide new information to the market,612 this simple disclosure in the relationship summary, if applicable, could help retail investors more easily identify firms that have reported disciplinary events for themselves or their financial professionals and where to find more information about the events. By including this disclosure, in combination with the requirement to include a specific question for retail investors to ask about disciplinary history in the “Key Questions to Ask” section (discussed further below), the relationship summary would potentially make retail investors more likely to seek out disciplinary history information to use in their evaluation of firms and financial professionals and would make them better informed when they choose a firm and a financial professional. Finally, retail investors themselves have indicated that they consider disciplinary information important.613

    612See Parts 1 and 2 of Form ADV; Form BD; Form U4.

    613See 917 Financial Literacy Study, supra note 20.

    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.614 As a consequence, such disclosures of disciplinary history could promote retail investor confidence in the market.

    614See Mark Egan, Gregor Matvos & Amit Seru, The Market for Financial Adviser Misconduct, Journal of Political Economy (Dec. 14, 2017), available at https://ssrn.com/abstract=2739170.

    One potential cost of the increased salience of the existence of disciplinary events may be that retail investors could be deterred from hiring a firm or financial professional with a disciplinary record, even if they would be better off to do so, without further investigating the nature of the disciplinary event. Alternatively, an investor may also incorrectly assume that a firm that does not report legal/disciplinary history is a “better” or a “more compliant” firm than a firm that does report such history; i.e., the lack of currently reportable disciplinary history could signify a stamp of approval for some investors. Therefore, disclosures of the existence of disciplinary events could have an unintended consequence of keeping some investors out of the market for financial advice or by selecting financial professionals that could lead to a mismatch with the expectations of the retail investor.

    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 ex ante on financial professionals to the benefit of all retail investors in this market. For example, if retail investors, once aware of how to contact the Commission or FINRA are more likely to do so as a result of the information provided by the relationship summary, firms and financial professionals may improve standards and implement policies and procedures aimed at reducing conduct that would warrant potential outreach to regulators by retail investors.

    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.

    ix. Key Questions To Ask

    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,615 as applicable to their particular business, to help retail investors to elicit more information concerning the items discussed in the relationship summary.616 Given that standardization of disclosures limits personalization that may be valuable to retail investors, the Commission preliminarily believes that the proposed questions would serve an important purpose in the relationship summary—namely, to prompt retail investors to ask their financial professionals for more personalized information.

    615 We are proposing to allow firms to modify or omit portions of any of these questions that are not applicable to their business. We are also proposing to require a standalone broker-dealer and a standalone investment adviser, to modify the questions to reflect the type of account they offer to retail investors (e.g., advisory or brokerage account). In addition, we are proposing that firms could include any other frequently asked questions they receive following these questions. Firms would not, however, be permitted to exceed fourteen questions in total. See supra Section II.B.8.

    616See proposed Item 8 of Form CRS.

    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.617 In addition, framing the questions as “Key Questions” could lead some retail investors to believe that any other questions they may have due to their own particular circumstances may be of second order importance, even if they may not be.618

    617 Anchoring is a cognitive bias, whereby receivers of information strongly rely on the initial information received when making decisions, and do not sufficiently adjust to new information received. See, Anderson, Jorgen Vitting, Detecting Anchoring in Financial Markets, Journal of Behavior Finance 11, 129-133 (2010) available at https://www.tandfonline.com/doi/abs/10.1080/15427560.2010.483186.

    618See, e.g., Tversky Kahneman Article, supra note 580, on the importance of framing.

    x. Other Benefits and Costs to Investors

    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.619

    619 Although the 917 Financial Literacy Study indicated that nearly 90% of survey participants believed that certain disclosures would have been helpful to have in advance of their selection of their current adviser, under the current proposal, firms may and are highly encouraged, though not required, to deliver the relationship summary in advance of the time a retail investor enters into an advisory contract with an investment adviser or engages the services of a broker-dealer. Firms would be required to file the relationship summary with the Commission and the disclosure would be made available on public websites of broker-dealers and investment advisers, which indicates that prospective investors could have access to a given firm's relationship summary in advance of initial contact with the firm or its financial professionals. In general, however, the Commission preliminarily anticipates that most prospective retail investors would receive the relationship summary at the time that they meet with a financial professional to consider entering into an agreement or engaging services.

    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.620 The inclusion of key questions as part of the relationship summary also could serve to reduce search costs as well as the potential for mismatched expectations borne by retail investors if such questions foster greater discussion about the services, costs and fees, and possible conflicts associated with broker-dealer and investment adviser business models.

    620 Insofar as retail customers may also search for other providers of financial advice, such as insurance companies or banks and trust companies, the reduction in search costs obtainable from the relationship summary would be lower.

    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.

    b. Broker-Dealers and Investment Advisers

    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.621

    621See infra Section V.A. for estimates of some of these compliance costs for purposes of the Paperwork Reduction Act.

    With respect to initial delivery, the relationship summary would need to be provided to retail investors 622 in the case of an investment adviser, before or at the time the firm enters into an advisory agreement or, in the case of a broker-dealer, before or at the time the retail investor first engages the firm's services. A dual registrant should 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. Firms would be permitted to deliver the relationship summary (including updates) electronically, consistent with prior Commission guidance.623 Firms would also be required 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, firms 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. Firms also would be required to implement a one-time delivery of the relationship summary to all existing retail investors within 30 days after the date the firm is first required to file its relationship summary with the Commission.624

    622 In addition to the firm's delivery requirements, firms would also file their relationship summary with the Commission, to be publicly available. See supra Section II.C.1.

    623See supra Section II.C.2.

    624 Currently, investment advisers have approximately 29 million non-high net worth individual clients and 5 million high net worth individual clients, and the total number of individual clients of investment advisers has increased by 10 million since 2012. Therefore, investment advisers would need to deliver relationship summaries to approximately 35 million existing retail clients, and on average, would expect approximately 2.5 million new clients per year. Item 5.D of Form ADV. Although the Commission is unable to estimate the number of broker-dealer retail customers, we could assume that the number of relationship summaries for broker-dealer customers would be at least as many, if not more, than what would have to be delivered for investment advisers.

    Regardless of the method of delivery (e.g., paper or electronic delivery) firms would incur costs associated with delivering the relationship summary to retail investors. Such flexibility in the method of delivery, while being consistent with Commission guidance, could increase efficiency by allowing a firm to communicate with retail investors in the same medium by which it typically communicates other information. Further, firms could reduce costs by utilizing technologies to deliver information to retail investors at lower costs than they may face with paper delivery.625 While we recognize that some firms are likely to use electronic delivery methods, and that these methods may be lower cost than paper delivery, some firms may still produce paper versions of the relationship summary, particularly if they have some retail investors that prefer delivery of disclosure in this method, or do not have access to the Internet, or if firms are delivering the relationship summary in the same format alongside other deliverables, such as Form ADV or account statements. Firms would also incur costs of posting the relationship summary on their websites and filing the summary with the Commission.

    625 Firms would be required to create and maintain records of deliveries of the relationship summary. See supra Section II.E. See supra Section II.E (discussing recordkeeping requirements relating to the relationship summary). If choosing electronic delivery, firms would have compliance costs in providing notice to retail investors that the relationship summary would be available electronically. See supra Section II.C.2 (discussing elements of Commission guidance about electronic delivery of certain documents).

    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.626 The firm would be required to communicate updated information to retail investors who are existing customers or clients of the firm within 30 days whenever any information in the relationship summary becomes materially inaccurate.627 Firms could communicate this information by delivering the amended relationship summary or by communicating the information another way to the retail investor. For example, if an investment adviser communicated a material change to information contained in its relationship summary to a retail investor by delivering an amended Form ADV brochure or Form ADV summary of material changes containing the updated information, this generally would support a reasonable belief that the information had been communicated to the retail investor, and the investment adviser generally would not be required to deliver an updated relationship summary to that retail investor. This requirement provides firms the ability to disclose changes without requiring them to duplicate disclosures and incur additional costs. The updated relationship summary would also need to be posted prominently to the firm's website if the firm has one and filed electronically with the Commission. In addition, firms could also incur some costs to keep records of how the updated relationship summary or the information in the updated relationship summary was delivered to retail investors.

    626 Along this line, firms could also incur some costs of modifying prescribed disclosure per the parameters of Instruction 3.

    627 The requirement to communicate updated information to retail investors, rather than deliver an updated relationship summary could reduce the effectiveness of the information to the extent that the communication does not allow retail investors to see the context in which information was changed.

    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 investor customers.628 Similarly, given that the average dual registrant has more customer accounts than the average investment adviser, and that the preparation of relationship summaries for dual registrants may require more effort than for standalone broker-dealers or investment advisers, the compliance costs could be larger for these firms.

    628 The Commission is unable to obtain from Form BD or FOCUS data information on broker-dealer numbers of customers, and instead, is only provided with the number of customer accounts. The number of customer accounts will exceed the number of customers as a customer could have multiple accounts at the same broker-dealer.

    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.629

    629 For example, investment advisers may already have specialized staff dealing with disclosure issues.

    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.630 For example, a firm with a disciplinary history that provides exceptionally good customer service could be at a disadvantage compared to other firms with no disciplinary history because the relationship disclosure may not summarize relevant information about the quality of customer service or the full scope of services offered by the firm.

    630 Complexity is not necessarily linked to size—for example, there are large, simple firms and small, complex firms.

    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.631 The estimated aggregate combined internal and external costs to investment advisers industry-wide for initially preparing and filing the relationship summary would be approximately $22 million.632 Similarly, for broker-dealers, the average cost to a firm for preparing Form CRS for the first time is estimated to range between approximately $4,000 and $6,100, based on the estimate provided in Section V.D.633 The estimated aggregate combined internal and external costs to broker-dealers industry-wide of initially preparing and filing the relationship summary would be approximately $15 million.634 In terms of the initial cost of delivering the relationship summary to current retail investors, we estimate that the cost to existing and newly registered investment advisers would be approximately $43.4 million in aggregate, or approximately $5,350 per adviser.635 For broker-dealers, the estimated initial cost of delivering the relationship summary to current retail investors would be approximately $121.5 million in aggregate, or approximately $42,500 per broker-dealer.636 For both investment advisers and broker-dealers, the estimated annual costs of the requirement to deliver the relationship summary 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, is approximately 10% of the respective estimated costs of the initial delivery to existing retail investors.637

    631 The lower end estimate is based on the assessment that, without additional external help, it will take an average investment adviser 5 hours to prepare the relationship summary for the first time, see infra Section V.A.2.a. We assume that performance of this function will be equally allocated between a senior compliance examiner and a compliance manager at a cost of $229 and $298 per hour, (see infra note 743 for how we arrived at these costs). Thus, the cost for one investment adviser to produce the relationship summary for the first time is estimated at $1,317 (2.5 hours × $229 + 2.5 hours × $298 = $1,317) if no external help is needed. In addition, we estimate that if the investment adviser needs external help, the average cost to an investment adviser for the most expensive type of such help (i.e., compliance consulting services) would be $2,109, see infra note 732, which brings the total cost to $3,426.

    632See infra Sections V.A.2.a and V.A.2.b for estimates of aggregate internal and external costs, respectively, of the initial preparation and filing of the relationship summary.

    633 The lower end estimate is based on the assessment that, without additional external help, it will take an average broker-dealer 15 hours to prepare the relationship summary for the first time, see infra Section V.D.2.a. We assume that performance of this function will be equally allocated between a senior compliance examiner and compliance manager at a cost of $229 and $298 per hour, respectively (see infra note 743 for how we arrived at these costs). Thus, the cost for one broker-dealer to produce the relationship summary for the first time is estimated a $3,953 (7.5 hours × $229 + 7.5 hours × $298 = $3,953) if no external help is needed. In addition, we estimate that if the broker-dealer needs external help, the average cost to a broker-dealer for the most expensive type of such help (i.e., compliance consulting services) would be $2,109, see infra note 826, which brings the total cost to $6,062.

    634See infra Sections V.D.2.a and V.D.2.b for estimates of aggregate internal and external costs, respectively, of the initial preparation and filing of the relationship summary.

    635See infra Section V.C.2.b.i for the estimate of costs investment advisers would incur to deliver the relationship summary to their existing clients. Note that the analysis includes investment advisers that are dual registrants.

    636See infra Section V.D.2.d.i for the estimate of costs investment advisers would incur to deliver the relationship summary to their existing clients. Note that thee analysis includes broker-dealers that are dual registrants.

    637See infra Section V.C.2.b.ii for the estimate of these costs for investment advisers and infra Section V.D.2.d.ii for the analysis of these costs for broker-dealers.

    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 expectations of a financial services provider with the type of provider they have engaged may lodge complaints with the SEC or FINRA for perceived misconduct by their financial professional without understanding the nature of their relationship (e.g., an investor may file a complaint of discretionary trading in an investment advisory account because they did not understand the nature of the services for which they contracted). These complaints are costly to firms and financial professionals, and the Commission preliminarily believes that the relationship summary could alleviate search costs for investors and the likelihood of mismatch between investor expectations and their choice of firm or financial professional.

    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.

    3. Impact on Efficiency, Competition, and Capital Formation

    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.638 The Commission preliminarily believes that the relationship summary, which draws investor awareness to potential conflicts of interest at the outset of the relationship with a firm or financial professional, would address similar concerns related to the material facts associated with the scope and terms of the relationship as required by proposed Regulation Best Interest. Relative to the disclosures required by proposed Regulation Best Interest, the relationship summary conflicts of interest disclosures apply not only to broker-dealers and dually-registered firms, but also to investment advisers.

    638 Further, proposed Regulation Best Interest would establish policies and procedures to identify and at a minimum disclose or mitigate material conflicts of interest associated with such recommendations, as well as policies and procedures to identify, disclose and mitigate or eliminate material conflicts of interest arising from financial incentives associated with such recommendations.

    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.639 We note, however, that this effect could be mitigated by the possibility that people may still be willing to pay higher prices for other reasons, including firm reputation. Competition also provides incentives for firms to develop and innovate. Additional competition among financial services firms could provide incentives for broker-dealers and investment advisers to seek alternative ways to generate profits. In the process, firms could develop new and better ways of providing services to retail investors, for example, by utilizing recent developments in information technologies to deliver information to retail investors at lower cost. In this way, innovation could thus improve the satisfaction of retail investors and the profitability of firms in the financial services provider market.

    639See Jean Tirole, The Theory Of Industrial Organization, M.I.T. Press (1989).

    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 (i.e., fewer opportunities for customer complaints) and against hiring experienced financial professionals with some (minor) customer complaints. The expected economic impact of the above effect across small and large firms, however, is generally unclear. For investment advisers and broker-dealers, reportable disciplinary events are less common for smaller firms than for larger firms.640

    640 For example, while only 10% of registered investment advisers with less than $1 million of AUM disclose at least one disciplinary action as of January 1, 2018, 66% of registered investment advisers with more than $50 billion of AUM disclosed at least one disciplinary action that year. Form ADV. Similarly, while 89% of broker-dealers with less than $1 million in total assets disclose at least one disciplinary action as of January 1, 2018, 100% of broker-dealers with more than $50 billion total assets disclosed at least one disciplinary action that year. Form BD.

    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.641 They are also more likely to report if they have more disciplinary issues. Reporting from Form BD with respect to broker-dealer disclosures of disciplinary actions taken by any regulatory agency or SRO shows that 308 (84%) out of 366 dual-registered broker-dealers disclosed a disciplinary action. By contrast, 1,650 (47%) out of 3,475 standalone broker-dealers have a disclosed disciplinary action. For investment advisers, Form ADV requires disclosures of any disciplinary actions taken in the past ten years. 289 (79%) out of 366 dual-registered investment advisers disclosed a disciplinary action. A much lower fraction, 1,732 (14%) of 12,293, standalone investment advisers disclosed a disciplinary action.642 The fact that broker-dealers have relatively more reportable legal and disciplinary events than investment advisers may cause retail investors to engage investment advisers rather than broker-dealers, thus creating a competitive advantage for some investment advisers.

    641See supra notes 251, 253—255 and accompanying text.

    642 Source: Items 11C, 11D, and 11E of Form BD and Items 11.C., 11.D. and 11.E. of Form ADV. Form BD asks if the SEC, CFTC, other federal, state, or foreign regulatory agency, or a self-regulatory organization have ever found the applicant broker-dealer or control affiliate to have (1) made a false statement or omission, (2) been involved in a violation of its regulations or statues, (3) been a cause of an investment related business having its authorization to do business denied, suspended, revoked, or restricted, or (4) imposed a civil money penalty or cease and desist order against the applicant or control affiliate. Likewise, Form ADV asks similar questions of registered investment advisers and advisory affiliates.

    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.643 Despite their prevalence and importance, however, financial professionals are often perceived as dishonest and consistently rank among the least trustworthy professionals.644 This perception has been partly shaped by highly publicized scandals that have affected the industry over the past decade. Systematic mistrust may suppress household stock market participation below the optimal threshold predicted by academic investment theory, as documented in household survey based studies.645 The Commission preliminarily believes that the increased transparency of the existing business practices of financial professionals could raise the level of investor trust in the market. The enhanced trust could promote retail investor participation in capital markets which could increase the availability of funds for businesses. Depending on the magnitude of the effect, greater availability of funds could lower firms' cost of capital, allowing firms to accumulate more capital over time.

    643See supra note 541. Survey of Consumer Finances, 2016. The percentage aggregates all respondents indicating that they use at least one of the following sources in making saving and investment decisions—brokers, financial planners, accountants, lawyers, or bankers. 26% of the respondents indicate that they have used brokers or financial planners.

    644See Edelman Trust Barometer, 2015 Edleman Trust Barometer Executive Summary (2015), available at https://www.edelman.com/2015-edelman-trust-barometer/; Anna Prior, Brokers are Trusted Less than Uber Drivers, Survey Finds, Wall Street Journal (Jul. 28, 2015), available at https://www.wsj.com/articles/brokers-are-trusted-less-than-uber-drivers-survey-finds-1438081201; Luigi Zingales, Does Finance Benefit Society, Journal of Finance 70, 1327-1363 (Jan. 2015).

    645See, e.g., Luigi Guiso, Paola Sapienza & Luigi Zingales, Trusting in the Stock Market, The Journal of Finance, Vol. 63, No. 6, 2557-2600 (2012); and J. Campbell, Household Finance, The Journal of Finance, Vol. 61, No. 4, 1553-1604 (2006) (“Campbell Article”).

    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.646

    646See Jeremy Ko, Economics Note: Investor Confidence (Oct. 2017), available at https://www.sec.gov/files/investor_confidence_noteOct2017.pdf.

    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.647 For example, a mutual fund may provide a selling concession, in the form of a sales charge, some portion of which could be remitted to the broker-dealer that recommended the product.

    647See supra Table 2, Section IV.A.1.a.

    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.

    4. Alternatives to the Proposed Relationship Summary

    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.

    a. Amendment to Existing Disclosures

    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.648 For example, the instructions to Form BD contain a section on the explanation of terms which could be extended to include basic (registrant-specific) information on the business practices of the registrant.

    648 We note, however, that Form BD is a registration/application form (rather than an existing brochure-type disclosure form).

    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 (e.g., two investment advisers), but also across categories (e.g., investment advisers and broker-dealers). Further, the relationship summary would be designed to be easily comprehensible by retail investors, relying on short, easy-to-read disclosure that would provide an overview of information about the firm and its financial professionals to retail investors when choosing a firm and account type. We believe that the proposed relationship summary would benefit retail investors by highlighting succinct information that is relevant to a decision to select a firm, financial professional, or account type and services, at the time such decisions are made, and relying on layered disclosure to provide additional detail.

    b. Form and Format of the Relationship Summary

    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.

    c. Extensiveness of Disclosure

    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.649 With respect to the specific topics of additional information, evaluating the performance, investment style and business practices of a firm or financial could be subjective or speculative, and may be more suited for marketing materials rather than prescribed language in the relationship summary.650 For all these reasons, we believe that these additional disclosure topics are not appropriate for inclusion in the relationship summary.

    649See also supra note 50 and accompanying text (discussing comment letters to the 917 Financial Literacy Study regarding the length of disclosure documents).

    650 In terms of performance, studies have shown that investors take into account information about historic fund performance in their investment choice; see, e.g., Choi Laibson Article, supra note 567.

    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,651 to be created for each retail investor, detailing the specific fees and costs associated with the retail investor's account, presented both in dollars and as a percentage of the value of the retail investor's account. These fee schedules could also include compensation received by the firm and its financial professionals related to the account, and the indirect fees that are payable by the retail investor to others (e.g., mutual fund and exchange-traded fund fees and expenses). However, ex ante identifying possible fee schedules for investors at the outset of a relationship as opposed to at the time of the transaction could impose costs to both investors and firms. For example, firms might need to outline a long list of possible transactions and the associated fee schedules, which in turn could be confusing to investors.

    651 One requirement of proposed Regulation Best Interest would be to provide to investors at the time of or prior to a recommendation the expected fees and costs, and possibly a fee schedule, associated with the individual transaction.

    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.652 For example, firms could disclose potential conflicts of interest associated with execution services, such as those required to be reported in rule 606 disclosures.653

    652See supra Section II.B.6 for a discussion of conflicts, or specific details of conflicts, that would not be required to be disclosed in the proposed Form CRS.

    653See 17 CFR 242.606 (requiring that broker-dealers make publicly available a quarterly report on order routing information, including a discussion of the material aspects of their relationship with venues executing non-directed orders, including arrangements for payment for order flow and any profit-sharing arrangement).

    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.654 This disclosure, however, does not apply to non-retirement accounts. Investment advisers also prepare a Form ADV Part 2A narrative brochure but such a retail disclosure document is not currently required for broker-dealers. As a result, the Commission preliminary believes that retail investors could benefit from the proposed relationship summary given its wide coverage, delivery method, and design.

    654See supra Section IV.A.1.c (discussing disclosure obligations under DOL rules and exemptions).

    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.655

    655See supra note 20.

    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.656 Retail investors, therefore, may become overwhelmed if presented with lengthy disclosure, which could bury the information that is most important to investors and reduce the effectiveness of those disclosures.657 Further, the compliance and production costs of additional disclosure would increase significantly the overall compliance costs to broker-dealers and registered investment advisers.

    656See, e.g., 917 Financial Literacy Study, supra note 20.

    657See also supra note 50 and accompanying text (discussing comment letters to the 917 Financial Literacy Study regarding the length of disclosure documents).

    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, and could highlight the differences between brokerage and advisory services and fees, and flag for retail investors the existence of firms' and financial professionals' conflicts of interest without discussing any specific conflicts. However, the one-page relationship summary would be the same or very similar across firms, and therefore likely would not facilitate detailed comparison across firms or provide enough information to highlight the differences for most retail investors.

    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.658 This would result in more detailed disclosures on specific account types, and would potentially provide retail investors with more relevant information about account types that they are interested in reviewing (and less extraneous information about account types that they are not interested in reviewing). However, providing such focused relationship summaries could decrease comparability across account types, as the relationship summary would not present, in one place, the differences in accounts and services offered.659 In addition, this would result in more costs to firms with multiple advisory and brokerage services, as they would be required to prepare several relationship summaries, although they may also have the resources to do this. The Commission preliminarily believes that, as a tool for layered disclosure, the relationship summary as proposed facilitates retail investors' ability to obtain more detailed disclosures on account types by encouraging retail investors to ask questions and request more information.

    658See Comment letter of Fidelity responding to FINRA's Regulatory Notice 10-54 (Dec. 27, 2010), available at http://www.finra.org/sites/default/files/NoticeComment/p122723.pdf.

    659 We note that firms with multiple account types within brokerage or advisory would not have the flexibility to describe/distinguish the different account types (e.g., a brokerage firm that offers a range of accounts—from completely self-directed to mutual-fund only to full-service).

    d. Delivery

    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.

    e. Communicating Updated Information

    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.660 Each firm would also be required to post the updated relationship summary prominently on its website (if it has one) and electronically file the current version of the summary with the Commission.

    660See supra Section II.C.3.

    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.

    5. Request for Comments

    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.

    C. Restrictions on the Use of Certain Names and Titles and Required Disclosures

    As discussed above, several studies suggest that retail investors may lack financial literacy and are confused about the differences between broker-dealers and investment advisers.661 Part of this confusion may be related to the current use of professional names and titles as indicated by these studies and commenters.662 This proposal would seek to reduce investor confusion related to the use of certain terms in firm names and professional titles and prevent retail investors from potentially being misled that their firm or financial professional is an investment adviser, resulting in investor harm. In particular, our proposed rule seeks to restrict a 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 such 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.663 In addition to the restriction on the use of certain names and titles, we are proposing rules that require both broker-dealers and investment advisers to prominently disclose their registration status with the Commission and for their financial professionals to disclose their association with such firm in all print and electronic retail investor communications. Dual registrants would be required to disclose both registration statuses.

    661See Siegel & Gale Study, supra note 549 and RAND Study, supra note 5. Although these studies do not limit the types of financial professionals exclusively to broker-dealers or investment advisers, the majority of the survey questions focus on differences between advisory services versus brokerage services.

    662Id. See supra note 4.

    663See section 202(a)(25) of the Advisers Act [15 U.S.C. 80b-2(a)(25)] defining “supervised person” as any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser.

    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.

    1. Broad Economic Considerations

    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,664 or harm associated with inadvertently selecting, or potentially being misled to select, a type of firm and financial professional that is not consistent with their preferences and expectations. The harm from a mismatched relationship could be, for example, a higher-than-expected cost of services or reduced protection for the investor.

    664 According to the 2009 National Survey Initial Report (see supra note 275), of the 816 survey respondents that used a financial professional in the last five years, 56% indicated that when looking for a financial professional, they met or talked with more than one professional before making their choice.

    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 differences between broker-dealers and investment advisers generally are unlikely to face a mismatch in the selection of a financial professional, and that the names and titles, in this case primarily serve to reduce search costs.

    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 (e.g., search costs) and financial intermediaries (e.g., customer acquisition costs) are minimized by the use of distinct names and titles clearly identifying financial intermediary type.

    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.665 A portion of these investors are also persuadable, to some degree, to contract for whatever service is offered to them by any given financial professional they contact, regardless of whether that type of service matches the investors' preferences.

    665 The assumptions underlying this hypothetical example are meant to be illustrative of the incentives of firms and financial professionals to pick certain names and titles when their pool of potential customers is relatively uninformed. Should the relationship summary disclosure be provided to potential and existing customers, we believe that some of the confusion regarding the nature of services would be addressed/mitigated; however, some investors may still, even in the event that the relationship summary is provided be confused about what type of firm or financial professional or which particular service is best for their investing situation.

    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.666 Once these investors make contact, a firm and financial professional hypothetically may be able to persuade the investor to hire them regardless of the type of financial advice relationship offered, to the extent that the investor cannot distinguish the characteristics of different types of advice relationships that best fit their preferences, does not know the most cost effective way to pay for that relationship, and cannot easily distinguish between the types of relationships that are offered by different firms and their financial professionals. In order to attract this type of investors, firms may favor titles that indicate their financial professionals' ability to dispense guidance and advice. For example, they may select titles that include the word “adviser” or “advisor,” such as “financial advisor”.667

    666 Although a number of studies discussed in the baseline provide survey evidence that investors are confused about titles, we are unaware of any direct evidence that titles alone affect the choice of firms or financial professionals that are contacted or eventually hired. However, in conjunction with the proposed relationship summary, we expect that investors would gain better understanding of the services provided by, and standards of conduct applicable to, broker-dealers and investment advisers, which could lead to more informed decision making about choosing the type of financial intermediary that best matches to the investors' own expectations regarding services and standard of conduct.

    667 Alternatively, these firms may choose relatively generic names or titles that in other ways suggest an advisory service, such as “financial planner” or “financial consultant,” which are not subject to the present rulemaking proposal.

    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.668 In situations where the pool of less knowledgeable investors is likely to be large, one likely outcome is that many firms and financial professionals could end up using similar names or titles, which would potentially increase search costs for those more knowledgeable investors who otherwise may use names and titles as an initial sorting mechanism.

    668 To the extent generic titles in use today such as “financial planner” and “financial consultant” make it more likely less knowledgeable investors can identify both investment advisers and broker-dealers that offer advice, there may be benefits to some of these investors if they in their contacts with financial professionals of both types learn about which relationship and payment models is most consistent with their preferences.

    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.

    2. Economic Effects of the Proposed Restrictions on the Use of Certain Titles and Required Disclosures

    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.

    a. Investors

    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.

    i. Benefits of Restrictions on the Use of Certain Names or Titles

    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.669 Specifically, to the extent investors looking for an advice relationship of the type provided by investment advisers, and believe that names or titles containing the terms “adviser” or “advisor” are associated with this type of advice relationship, the proposed rule would make it easier to identify firms and financial professionals that offer such advice relationships, thereby reducing investor confusion, search costs, and any mismatch in the advice relationship that may occur from the potential misleading nature of such names or titles, as well as any associated harm with such mismatch.670

    669 We note that a potential mismatch could occur because investors may contact the wrong type of firm or financial professional and may not fully understand the type of financial advice that best match their preferences (even if the proposed relationship summary is made available), may be persuaded to hire the wrong type of firm or financial professional, or may be misled that a firm or financial professional will provide the type of service that the investor prefers, but in fact, does not.

    670See supra discussion in Section IV.C.1.

    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.671 Moreover, beyond registered investment advisers, dual registrants, and their supervised persons, other types of financial services providers, such as insurance companies and banks, may also continue to use the terms “adviser” and “advisor” in their names and professional titles, and any confusion and search costs borne by investors related to the use of such names and titles by financial intermediaries not affected by this proposed rule would not be reduced. As noted above, the Commission recognizes that terms such as “financial advisor” or “financial consultant” may be used by banks, trust companies, insurance companies, and commodities professionals.672

    671 As discussed above, these other communications by firms and financial professionals would continue to be subject to antifraud rules. See supra note 309.

    672See supra note 400. Further, as identified by Commission staff, as of December 2017, approximately 546 broker-dealers reported at least one type of non-securities business, such as insurance, retirement planning, and real estate; see supra note 459.

    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.673 In particular, investors that prefer the type of investment advice relationship and the associated standard of conduct offered by investment advisers may believe that names or titles containing the terms “adviser” or “advisor” are only associated with that type of advisory relationship. If some of these investors are persuaded by financial professionals associated with broker-dealers (who are not themselves investment advisers or supervised persons of investment advisers who provide advice on behalf of such adviser) that they could have a similar type of advice relationship as they would with an investment adviser, a potential mismatch between investor preferences and the advice relationship received may occur, which in turn may lead to investor harm such as higher payments for the services by the investor than necessary.674 Thus, the proposed prohibition on the use of “adviser” or “advisor” by certain broker-dealers may reduce the risk of a mismatch between investors seeking advisory services of the type provided by investment advisers and the type of services for which they contract, as these investors under the proposed restriction would be potentially less likely to be misled or inadvertently approach and hire a type of firm or financial professional that does not match with their preferences and expectations.

    673 As discussed in Section IV.A.3.b, survey evidence suggest that many investors in general do not have a clear understanding about the differences in the nature of the advisory services provided by, and standard of conduct applicable to, different types of financial professionals.

    674 Broker-dealers may elect to provide some services similar to those of many investment advisers, such as ongoing monitoring, thereby potentially mitigating any mismatches between preferred services and the services provided.

    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 how many investors have contracted for services that do not meet their preferences, or are paying more than they would have preferred for services, due to confusion about the names and titles of financial intermediaries. Further, to the extent that confusion exists among retail investors regarding the names and titles used by firms and their financial professionals, surveys of retail investors with brokerage accounts suggest that they tend to be satisfied with their firms and financial professionals, and also believe that services provided by these firms and financial professionals are valuable, which further complicates any estimate of the incidence or magnitude of harmful mismatch.675

    675See RAND Study, supra note 5, at 98.

    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 broker-dealers and their associated natural persons do not use the proposed prohibited terms in their names and titles. This would also be the case to the extent that registered representatives of dually-registered broker-dealers who are not themselves supervised persons of an investment adviser or who are supervised persons but do not provide investment advice on behalf of such investment adviser do not use those terms. The potential reduction in mismatch risk due to this proposed rule would also be limited to extent the rule is limited to firm name and individual job titles, and would not itself affect firms and financial professionals from using terms such as “advisory” in other content. Moreover, other types of financial intermediaries may use the terms “adviser” and “advisor” in their names and titles, such as banks, trust companies, insurance companies, and commodities professionals.676 Therefore, the potential gains associated with a reduction in mismatch risk due to the prohibition on certain names and titles may be limited because some confused investors seeking an advice relationship from investment advisers could continue to inadvertently hire these other types of financial intermediaries that also use “adviser” or advisor” in their names and titles.

    676See supra note 400.

    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.677 Finally, for retail investors that rely on professional or personal recommendations in their search for financial professionals, the proposed prohibition on the use of certain titles is likely to have a limited effect on both search costs and the risk of mismatch in the advice relationship.

    677 As discussed above, however, financial professionals who are not themselves investment advisers or supervised persons of investment advisers and who provide advice on behalf of such advisers would also not be able to use the terms “adviser” or “advisor” in their professional titles.

    ii. Costs of the Restriction on the Use of Certain Titles

    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.678 For example, prospective customers familiar with a firm's name or financial professional's title may be especially confused by a change of either name or title to the extent that the term “adviser” or “advisor” is part of the firm's name brand or the titles of the professionals. Any increase in confusion as a result of the rule along these lines would likely be larger if the changed names or titles of broker-dealer firms that currently contain the words “adviser” or “advisor” are widely recognized as brands by investors.679 Further, even if the broker-dealer name or title is unlikely to change, some investors may remove certain firms from their search list as professional names or titles change as a result of the rule. If, for example, a prospective investor is using the search term “financial advisor” to search for firms and financial professionals located in their city, some firms and financial professionals will be removed from any possible searches by these investors as a result of the proposed rule, even though these financial professionals might have been the best match to the preferences and expectations of the investor. However, these kind of potential costs to some current investors are likely to be limited to the extent that proposed rule is limited to firm name or title and individual job name or title and would not require firms and financial professionals to remove the restricted terms from other content, if they are not using such terms as a name or a title.

    678 As discussed in the baseline, several studies indicate that many investors receive personal or professional referrals in the selection of their broker-dealer or investment advisor. However, even these investors may investigate these referrals prior to undertaking outreach, and therefore, may avoid certain financial professionals as a result of the name or title change.

    679 As discussed in the baseline, approximately 87 broker-dealers that are not dually registered as investment advisers and do not report non-securities business use the words “adviser,” “advisor,” or “advisory” as part of their current company name. These firms would likely have to change their company name as a result of this proposed rule. However, any loss in brand value due to this change could be mitigated to the extent the prohibited terms are not an important part of the firm's brand.

    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.680 Either of these changes to business practices could reduce the availability of broker-dealer services for investors.681 To the extent the costs of exiting the retail investor market or associated initial and ongoing costs of becoming a registered investment adviser (or a supervised person of an investment adviser who provides investment advice on behalf of such investment adviser) are greater than the costs associated with complying with the proposed rule, the likelihood of exit from the retail market or a change to the existing business model from a brokerage to advisory model would be low. In this case, the anticipated effect on investors from the loss of existing broker-dealer advice is expected to be limited. However, if it is costlier to change names or titles than to switch business model for broker-dealers, we expect some investors may experience a reduction in supply of broker-dealer advice services. Finally, because the Commission recognizes that a standalone broker-dealer can provide advice to retail investors without being regulated as an investment adviser provided that such advice is merely “solely incidental to” its brokerage business and the broker-dealer receives no “special compensation” for the advice, the proposed restriction would not prevent standalone broker-dealers from conveying the services that they provide in other content, without using the titles or names “adviser” or “advisor.” This may also limit the likelihood of exit from the retail market or a change to the existing business model from a brokerage to an advisory model.

    680 Some firms could potentially increase their profits by moving some customers from a brokerage account to an advisory account (e.g., customers who rarely trade). Such firms would have incentives to cut back on marketing of existing brokerage services to such customers and instead market the new advisory services.

    681 For example, in the event of exit by a broker-dealer, investors who want broker-dealer services would be forced to undertake search costs to find another firm and financial professional to meet their perceived needs, but also bear an increased cost associated with mismatch if they choose the wrong type of firm and financial professional. In the event of a switch from a brokerage model to an advisory model, investors may be forced to bear the costs associated with an advisory account that could exceed costs associated with services provided by a broker-dealer, or face costs associated with search and mismatch if they choose to change financial intermediaries, as discussed above.

    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.682 For this set of investors, the proposed rule would likely have little impact on search costs or potential for mismatch between their preferences and expectations and the type of advisory service for which they contract. We also note that we are not able to provide quantitative estimates of potential changes in search costs. Search costs for investors as well as costs due to mismatch would depend on a large set of individual specific factors, such as exactly what procedures investors use to search for financial professionals, what restrictions they put on their search (for example, choice of market, how many firms or professionals they are willing to sample before making a decision), the method they use to evaluate different alternative financial professionals they have identified, etc. The costs will to a large part not be monetary in nature but rather in the form of time and effort spent. The monetized value of that time and effort will also be individual specific. We do not have access to data that would provide us with this type of information, which we would need to estimate search costs. Similarly, we also are unable to provide estimates of changes in costs due to changes in the potential for mismatch as we do not currently have data on the percentage of the investor population that is mismatched, or the extent of harm that comes from mismatch.683 For example, we don't have an analysis of how well someone would have done in their portfolio (especially after costs) if they had been correctly matched.

    682 RAND Study, supra note 5 and 917 Financial Literacy Study, supra note 20.

    683 To estimate the potential harm from mismatch we would need to analyze how well someone could have done in their portfolio (after costs) if they had been correctly matched. This requires a rich set of investor characteristics as well as information about the investment menus and fee structures of potential alternative firms and financial professionals investors could have hired. We do not currently have access to such detailed information.

    iii. Benefits and Costs of the Required Disclosures About Regulatory Status of a Financial Services Provider

    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 prefer, including how they want to pay for it, as well as professionals' titles, disclosure of registration status alone may not be sufficient to alleviate confusion in the type of advisory services provided by or the standard of conduct applicable to firms or financial professionals. Finally, for retail investors that rely on professional or personal recommendations in their search for financial professionals, the disclosure requirement is likely to have a limited effect on both search costs and the risk of mismatch in the advice relationship. As discussed above, we do not have access to information that would allow us to provide quantitative estimates of the potential costs and benefits to the investor from these proposed disclosure requirements.

    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.

    b. Standalone Registered Broker-Dealers

    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%.684 When it comes to names or titles by registered representatives at standalone broker-dealers, the RAND Study evidence discussed in Section IV.A.1.f suggests that around 31% of professionals providing only brokerage services used titles containing the terms “adviser” or “advisor.” If the evidence presented in the baseline, is representative of the overall universe of standalone registered broker-dealers, the fraction of firms and associated natural persons that would be affected by the proposed prohibition may be relatively low.685

    684 As discussed in supra Section IV.A.1.f, there are 87 (103−16 = 87) retail facing standalone broker-dealers without non-securities business that are currently using one of these terms in their firm names, which represents approximately 3.5% of the 2,497 retail acing standalone broker-dealers (2,857−360 = 2,497; see supra Table 1, Panel B). If we go beyond firm names and instead look at how firms' publicly describe themselves on their websites, the evidence presented in Section IV.A.1.f suggests that of the sampled standalone broker-dealers, less than 10% describe themselves using the terms “adviser” or “advisor.” Although some of these website descriptions may still be allowed under the proposed rule, it suggests that the fraction of standalone broker-dealers that rely on these terms to describe themselves may be relatively low.

    685 We estimate that approximately 226,132 (942,215 × 0.24 = 226,132; see supra Table 6) registered representatives of broker-dealers are not also registered as investment advisory representatives. Among these registered representatives, approximately 119,729 are employed by dually registered firms (494,399 × 0.61 × 0.397 = 119,729; see supra Section IV.A.1.e), which means 106,403 are employed by standalone broker-dealers. Further, if only 31% of broker-dealer registered representatives that are not dual-hatted (see supra Table 8) use titles containing the terms “adviser” or “advisor,” then we estimate that the total number of non-dual hatted registered representatives that would be potentially subject to this proposed prohibition would be 70,101, which is approximately 15.5% of all registered representatives. Of these representatives, 32,985 (0.31 × 106,403 = 32,985) are employed by standalone broker-dealers and approximately 37,116 (0.31 × 119,729 = 37,116) are employed by dual registrants. Note, the number of non-dual hatted registered representatives at dual registrants that would be potentially affected by the rule is likely lower than the estimated 37,166 because some of these representatives may be supervised persons providing advisory service without being dual-hatted. We are not able to estimate how large the fraction of such registered representatives would be. On the other hand, we do not have information about how many dual-hatted registered representatives among dual registrants that they are not supervised persons providing advisory services despite being dual-hatted, and therefore would also be subject to the proposed restriction on the use of certain titles.

    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.686

    686 Note that any such benefits from the proposed rules relies on an assumption that some broker-dealers are not currently optimizing to receive such benefits by voluntarily changing names and titles or prominently display their registration status. However, as noted above, we expect in an efficient market, firms have already chosen names and titles that they view as effective marketing tools. As a result, we expect this benefit will be limited to the extent firms are currently rationally optimizing their choice of names and titles.

    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 (e.g., print ads or television commercials), website and social media appearances that use the current company name or title, among other items, resulting in direct compliance costs. Similarly, all personal communications tools used by financial professionals, such as business cards, letterhead, social media profiles, and signature blocks would need to be amended to reflect new company and financial professionals' names or titles. The proposed requirement to prominently disclose registration status in print or electronic retail investor communications is also expected to require changes to the same set of materials and communication tools, and therefore, also would have to be modified to incorporate the registration status in the manner the rule prescribes.687

    687See infra Section V.G for estimates of some of these compliance costs developed for the purpose of the Paperwork Reduction Act.

    To the extent that the costs discussed above have a fixed-cost component (i.e., a print ad would likely cost the same regardless of the size of the firm), the costs associated with producing new communication and advertising materials would be disproportionately higher for smaller broker-dealer firms. Other costs, however, may increase with the size of the broker-dealer, such as costs associated with revisions to each individual representative's communication and advertising materials, and therefore would increase with a broker-dealer's size.

    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.688 This kind of outreach, however, could be costly to financial professionals and firms if it diverted time and resources away from the core business of the broker-dealer.689 Further, the greater the name recognition of a current company or the larger the size of the company, the costlier such an outreach is likely to be as more current and prospective customers would need to be informed of the name change. Finally, to the extent that a broker-dealer's company name is recognized as a brand in the market and therefore represents a valuable intangible asset to the firm, some of its “brand value” may be lost following a company name change.690 We note that the number of broker-dealer firms whose brand value may be negatively affected by the rule is relatively limited, as only around 3.5% of the broker-dealer firms that would be subject to the rule are using any of the prohibited terms in their company names.691

    688 In particular, without outreach, some broker-dealers could experience a temporary reduction in the flow of prospective customers that would have relied on the use of titles prohibited by the proposed rule. In the absence of the prohibitions, these investors would have ended up contracting with the broker-dealers, but due to confusion over new company names and titles that would be required to be used, these investors may avoid broker-dealers subject to the change in names and titles, and these broker-dealers could earn less revenue. Only after the potential customer base becomes familiar with the new names and titles associated with a given broker-dealer and its financial professionals, or the search costs associated with these new titles decline, could these firms potentially recover a portion of the prospective customer base that was originally lost during the name transition period as a result of the changeover confusion. The Commission does not have access to the type of detailed customer information of individual broker-dealers that would allow us to estimate the percentage of customers that might be confused as a result of the name change or what fraction of these customers might eventually be recovered by a broker-dealer.

    689 Although such outreach is not required by the proposed rule, we anticipate that at least some percentage of affected broker-dealers or financial professionals would undertake such efforts in order to maintain good relationships with existing customers.

    690 Academic evidence suggest corporate brands are valuable intangible assets to firms; see, e.g., M. E. Barth, M. B. Clement, G. Foster, & R. Kasznik, Brand values and capital market valuation, Review of Accounting Studies, 3(1), 41-68 (1998).

    691See supra note 648. Specifically, 3% refers to the total number of broker-dealers that do not report non-securities business.

    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.692 Therefore, a segment of broker-dealers that are currently using terms that would be restricted under the proposed rule could experience a reduction in the efficiency of their marketing efforts, which in turn might lead to fewer customers and a loss of revenue compared to the baseline. In particular, those broker-dealers that rely on advice services as an important part of their value proposition to retail investors and directly compete with investment advisers may lose competiveness, if names and titles become less descriptive of this aspect of their business in the eyes of retail investors. These marketing efficiency costs would be mitigated to the extent the broker-dealers would use new names and titles that are equally efficient at conveying they are providing advice, or to the extent that the proposed restriction would not affect the use of terms such as “advisory services” in other content, or using them in metadata to attract internet search engines.693

    692See discussion in Section IV.C.1.

    693 Note that to the extent affected broker-dealers would choose other names and titles that convey a similar signal to investors as those containing the terms “adviser” or “advisor,” it would reduce the efficiency of the proposed prohibition. In Section IV.C.4.a we discuss an alternative that would prohibit a broker-dealer from otherwise “holding out” as an investment adviser, which would potentially also prevent the use of some similar names and titles.

    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.694 Depending on how effective the terms “adviser” or “advisor” are at attracting customers, costs associated with the loss of certain titles or names could be substantial for some broker-dealers.695

    694See supra note 20.

    695 For example, if investors know that they are seeking advice related to individual transactions (e.g., the type of mutual fund or exchange-traded fund in which to invest), they may have a preference for terms such as “financial advisor” compared to terms such as “financial planner” or “investment strategist,” depending on their colloquial understanding of what an these terms might imply for the level of service and standard of conduct. If certain broker-dealers are restricted from using “financial advisor,” these firms may lose these potential customers. Moreover, these investors could potentially expend search costs as they sort through investment advisers that use the term “financial advisor” until the investor is able to match with the right type of financial professional.

    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.

    c. Investment Advisers (Including Dual Registrants)

    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 change their names.696 As a result, some investment advisers could experience an increase in revenues due to an increase in customer flow. The benefits may also be larger for investment advisers or dual registrants that are able to continue to use names or titles that include the term “adviser” or “advisor” as these terms could be the draw that currently attracts customer flow to certain firms and financial professionals, and that would be diverted due to a restriction on the use of these terms by standalone registered broker-dealers. In addition, assuming that small broker-dealers and investment advisers select geographic areas where competition from larger firms is low, then, as result of the proposed rule restricting the use of certain names or titles by broker-dealers, small investment advisers could especially benefit at the expense of small broker-dealers in these locations.

    696 To the extent that investor confusion about the market for financial services generally increases during the period when affected firms and financial professionals remove the term “adviser” or “advisor” from their names and titles, investment advisers that are not required to change their names or titles may see an increase in the diversion of customer flow from broker-dealers to investment advisers until investor confusion over the change in titles subsides. To the extent that some investors that are not currently making an efficient choice of a broker-dealer as indicated by investor confusion about titles and associated standards of conduct, and would choose an investment adviser after the proposed rules were adopted, this proposed rule change may assist them in making a more efficient choice to a service they would prefer.

    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.697

    697 However, as noted previously, all firms and financial professionals can already voluntarily choose to prominently display their registration status, therefore implying that the direct benefits to firms and financial professionals from the proposed rule requiring disclosure of registration status may be limited.

    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.698 Similar to standalone registered broker-dealers, we expect that to the extent the required changes have a fixed-cost component, smaller investment adviser firms would incur relatively higher costs associated with this disclosure. Larger investment advisers and dual registrants, however, would likely bear an increase in the variable costs associated with such disclosures, as the amount of revisions associated with individual representative's and firm's communications will rise.699

    698See infra Section V.H. for estimates of some of these compliance costs developed for the purpose of the Paperwork Reduction Act.

    699 Consistent with this argument, we estimate in the Paperwork Reduction Act analysis in infra Section V.H.2, that the initial one-time burden for complying with the disclosure requirements would be 72 hours per large investment adviser and 15 hours per small investment adviser.

    3. Impact on Efficiency, Competition, and Capital Formation

    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.

    a. Efficiency

    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; 700 (ii) the extent to which the proposed restriction would not affect the use of terms such as “advisory services” in communications which do not convey a name or title; (iii) financial intermediaries and professionals not regulated by the Commission could still use the terms “adviser” or advisor” in their names and titles.701

    700 The use of names and titles by firms and financial professionals is discussed in Section IV.A.1.f. Only around 87 current standalone broker-dealers with retail investors use the terms “advisor” or “adviser” in their company names. Further, around 31% of professionals providing only brokerage services used titles containing the terms “adviser” or “advisor” according to the RAND Study.

    701See discussion of other such financial intermediaries and professionals in supra Section III.B.1.

    The proposed requirements to disclose a firm's regulatory status and a financial professional's association may increase the efficiency in the search and matching process in the market for financial advice to the extent retail investors understand the meaning of the registration status and would use it in their search for financial professionals. Among firms, the potential efficiency benefits may be larger for dual registrants, as the prominent display of both types of registrations may help attract investors that are looking for both brokerage services and an investment advice relationship, or investors who are in general unsure about which type of services they want.

    b. Competition

    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.702 To the extent it is primarily investors who prefer the services provided by investment advisers who would experience a reduction in search costs, we would expect in particular an increase in the average price elasticity of demand for investment adviser services and therefore greater competition in the investment adviser market segment. However, a reduction in search cost may also increase retail investor participation in the market for financial advice. Investors at the high end of the search cost distribution who previously may have refrained from seeking financial advice altogether may enter the market for financial advice if there is a reduction in search costs. Because these new entrants to the market for financial advice would likely have higher search costs than the existing investors in the market, average investor demand elasticity may go down, which in turn would reduce competition at the margin.703 To the extent it is mainly investors that prefer investment adviser services who would experience a reduction in search costs; we expect the new entrants to primarily belong to this group of investors. Therefore, the average demand elasticity may potentially decrease in particular for investment adviser services and reduce competition in the investment adviser market segment.

    702 All else equal, we would expect customers in a marketplace with differentiated products to prolong their search for the right product at the right price if search costs are reduced. The resulting increase in demand elasticity would increase downward pressure on prices in the market, see, e.g. S. Anderson & R. Renault, Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model, The RAND Journal of Economics, 30, 719-735 (1999).

    703 For a theoretical model on how lower search costs may increase the average price elasticity of demand in this manner, see, e.g., J. L. Moraga-González, Z. Sándor, & M.R. Wildenbeest, Prices and heterogeneous search costs, The RAND Journal of Economics, 48, 125-146 (2017). A study of the U.S. mutual fund industry also provide empirical evidence consistent with this type of effect; see A. Hortaçsu & C. Syverson, Product differentiation, search costs, and competition in the mutual fund industry: A case study of S&P 500 Index funds, The Quarterly Journal of Economics, Vol. 119, Issue 2, 403-456 (May 2004).

    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 remaining investors would be those at the lower end of the search cost distribution and consequently would have higher price sensitivity. To the extent it is mainly investors that prefer broker-dealer services who would experience an increase in search costs we expect the investors exiting the market to primarily be such investors. Therefore, the average demand elasticity may potentially increase in particular for broker-dealer adviser services and increase competition in the broker-dealer market segment.

    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 (i.e., broker-dealers that do not use the restricted terms), dual-registrants, investment advisers, and financial intermediaries that are not registered as investment advisers (such as banks, trust companies, insurance companies, commodity trading advisers, and municipal advisors) may to a varying degree gain business at these affected firms expense. That is, by only affecting a subset of firms, the proposed restriction on the use of certain names and titles may change competitive positions among different suppliers in the market for financial advice. In addition, the proposed requirement to disclose registration status may benefit the competitive positon of dual registrants, as the prominent display of both types of registrations may help attract investors that are looking for both brokerage services and an investment advice relationship, or investors who are in general unsure about which type of services they want.

    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.704

    704See discussion of mitigating factors in supra Section IV.C.3.a.

    c. Capital Formation

    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.705

    705See discussion of mitigating factors in supra Section IV.C.3.a.

    4. Alternatives to the Proposed Rules

    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.

    a. No “Solely Incidental” Exclusion

    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.

    b. Prohibit Broker-Dealers From Holding Themselves Out as Investment Advisers

    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.

    c. Disclosure of Registration Status Only

    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. This alternative, however, would allow broker-dealers to continue to use titles or names that include “Adviser/Advisor” and therefore would likely result in a lower overall cost of rebranding their financial professionals or the firm itself in all other communications.

    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 (e.g., because there are fixed costs in producing an advertisement, the reduction in benefits is more likely to affect retail investors that use such small broker-dealers or investment advisers). Therefore, the Commission preliminarily believes that the potential compliance cost savings for limiting communications that would require such disclosure do not justify the reduced level of investor protection under such alternative.

    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.

    d. Additional Requirements for Dual Registrants

    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.706 Although the proposed rule restricts supervised persons of dual registrants who do not provide investment advice on behalf of such investment adviser, a percentage of dually registered firms would not be affected by the proposed restriction of certain names and titles. To address this issue, we considered an alternative to the proposed rule which would prohibit the name or title containing the terms “adviser” or “advisor” unless a “a substantial part of the business consists of rendering investment supervisory services.” 707 We also considered limiting dual registrants' use of the term “adviser” or “advisor” to when they provide advice to a retail investor in the capacity as an investment adviser, and prohibiting dual registrants from using such terms when acting in the capacity of a broker-dealer to a particular customer.

    706 As shown in supra Table 1, Panel B those broker-dealer firms that were registered in a dual capacity were 360 of approximately 2,857 firms (about 13%) as of December 31, 2017. Using data from Form ADV filings, these 360 dually-registered firms had approximately $4.3 trillion of AUM. As discussed in Section IV.A,1.e, almost all registered financial professionals at dual registrants are either dual-hatted or registered representatives. Because dual registrants employ approximately 61% of all licensed financial professionals (see supra Table 5) and approximately 94% of all financial professionals are either dual hatted or registered representatives (48/51 = 0.94; see supra Table 6), it means that approximately 65% (0.61/0.94 = 0.65) of all registered representatives, whether dual hatted or not, work at dual registrants.

    707See section 208(c) of the Advisers Act.

    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.

    5. Request for Comments

    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 benefits to retail investors are reduced search costs and a lower risk of mismatch? 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?

    • 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.

    D. Combined Economic Effects of Form CRS Relationship Summary and Restrictions on the Use of Certain Titles and Required Disclosures About a Firm's Regulatory Status

    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 investment advisory services. In this case, the proposed restriction on names or titles and the requirement to disclose regulatory status would increase the effectiveness of Form CRS by reducing the risk of any mismatch between investor preferences and type of services received due to this kind of misunderstanding, which in turn may lead to harm such as the investor paying too much for advice if it if it leads to frequent trading. To the extent investors who received a relationship summary shares it with family and friends, the potential importance of having the restriction on the use of certain names and titles would be increased, because it could also reduce the risk of this type of misunderstanding being spread to a greater set of retail investors.

    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 (e.g., after initial contact with a financial professional is made) relative to the initial stage where names and titles of firms and financial professionals may be a useful search tool to investors. Similarly, we do not believe that the relationship summary would alter the incremental effects on search costs from the proposed requirement to disclose registration status in retail investor communications, because investors would likely encounter communications disclosing a firm's registration status prior to being provided a firm's relationship summary.

    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 registration status to facilitate investors' learning about the different types of financial firms and professionals because it would highlight many of the key differences between investment advisers and broker-dealers in different communications and different times, consistent with the layered approach to disclosure that the relationship summary is designed to further. Likewise, if the disclosure of registration status makes such status more salient to less knowledgeable investors, such disclosure may induce a more careful reading of related parts in the relationship summary or provide incentives to discuss the information contained in disclosure with a financial professional. Thus, the combination of the disclosure of registration status and the relationship summary may further help facilitate the search process also for investors initially confused about the difference between broker-dealers and investment advisers, and help them ultimately better match to an appropriate financial professional.

    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.

    V. Paperwork Reduction Act Analysis

    Certain provisions of our proposal contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).708 The Commission is submitting these collections of information to the Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The titles for the existing collections of information that we are proposing to amend are (i) “Form ADV” (OMB control number 3235-0049), (ii) “Rule 204-2 under the Investment Advisers Act of 1940” (OMB control number 3235-0278), (iii) “Rule 17a-3; Records to be Made by Certain Exchange Members, Brokers and Dealers” (OMB control number 3235-0033) and (iv) “Rule 17a-4; Records to be Preserved by Certain Exchange Members, Brokers and Dealers” (OMB control number 3235-0279). The new collections of information relate to (i) “Rule 204-5 under the Investment Advisers Act of 1940,” (ii) “Form CRS and rule 17a-14 under the Exchange Act,” (iii) “Rule 15l-3 under the Securities Exchange Act,” and (iv) “Rule 211h-1 under the Investment Advisers Act of 1940.” 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 Commission is also including a short-form tear sheet for investors to provide feedback on the relationship summary.709

    708 44 U.S.C. 3501 et seq.

    709See Appendix F. The Commission determines that using this short-form tear sheet to obtain information from investors is in the public interest and will protect investors. See Securities Act section 19(e).

    A. Form ADV

    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.710

    710 We are proposing conforming technical amendments to the General Instructions of Form ADV to add references to the Part 3, but these amendments would not affect the burden of Part 1 or Part 2. See proposed amendments to Form ADV: General Instructions.

    1. Respondents: Investment Advisers and Exempt Reporting Advisers

    The respondents to current Form ADV are investment advisers registered with the Commission or applying for registration with the Commission and exempt reporting advisers.711 As of December 31, 2017, 12,721 investment advisers were registered with the Commission, and 3,848 exempt reporting advisers report information to the Commission.

    711 An exempt reporting adviser is an investment adviser that relies on the exemption from investment adviser registration provided in either section 203(l) of the Advisers Act because it is an adviser solely to one or more venture capital funds or 203(m) of the Advisers Act because it is an adviser solely to private funds and has assets under management in the United States of less than $150 million. An exempt reporting adviser is not a registered investment adviser and therefore would not be subject to the relationship summary requirements.

    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.712

    712 Based on responses to Item 5.D. of Form ADV. These advisers indicated that they advise either high net worth individuals or individuals (other than high net worth individuals), which includes trusts, estates, and 401(k) plans and IRAs of individuals and their family members, but does not include businesses organized as sole proprietorships. The proposed definition of retail investor would include a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust. We are not able to determine, based on responses to Form ADV, exactly how many advisers provide investment advice to these types of trusts or other entities; however, we believe that these advisers most likely also advise individuals and are therefore included in our estimate.

    This would leave 5,096 registered investment advisers that do not provide advice to retail investors 713 and 3,848 exempt reporting advisers that would not be subject to Form ADV Part 3 requirements, but are included in the PRA analysis for purposes of updating the overall Form ADV information collection.714 We also note that these figures include the burdens for 366 registered broker-dealers that are dually registered as investment advisers as of December 31, 2017.715

    713 12,721 registered investment advisers—7,625 = 5,096 registered investment advisers not providing advice to retail investors.

    714 Based on IARD system data.

    715See supra note 457.

    2. Changes in Burden Estimates and New Burden Estimates

    Based on the prior revision of Form ADV,716 the currently approved total aggregate annual hour burden estimate for all advisers of completing, amending and filing Form ADV (Part 1 and Part 2) with the Commission is 363,082 hours, or a blended average of 23.77 hours per adviser,717 with a monetized total of $92,404,369, or $6,051 per adviser.718 The currently approved annual cost burden is $13,683,500. This burden estimate is based on: (i) The total annual collection of information burden for SEC-registered advisers to file and complete Form ADV (Part 1 and Part 2); and (ii) the total annual collection of information burden for exempt reporting advisers to file and complete the required items of Part 1A of Form ADV. Broken down by adviser type, the current approved total annual hour burden is 29.22 hours per SEC-registered adviser, and 3.60 hours per exempt reporting adviser.719 The proposed amendments would increase the current burden estimate due in part to the proposed amendments to Form ADV to add Form ADV Part 3: Form CRS (the relationship summary) and the increased number of investment advisers and exempt reporting advisers since the last burden estimate. We are not proposing any changes to Part 1 or Part 2 of Form ADV.

    716See Form ADV and Investment Advisers Act Rules, Final Rule, Investment Advisers Act Release No. 4509 (Aug. 25, 2016) [81 FR 60418 (Sep. 1, 2016)] (“2016 Form ADV Paperwork Reduction Analysis”).

    717 363,082 hours/(12,024 registered advisers + 3,248 exempt reporting advisers) = 23.77 hours.

    718 $92,404,369 hours/(12,024 registered advisers + 3,248 exempt reporting advisers) = $6,051.

    719See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR 60454.

    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, i.e., new Form ADV Part 3: Form CRS, and the increase due to the updated number of respondents that would not be subject to the proposed amendments.

    a. Initial Preparation and Filing of Relationship Summary

    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 equivalent limit if in electronic format). Thus, while we recognize that different firms may require different amounts of time to prepare the relationship summary, we believe that this is an appropriate average number for estimating an aggregate amount for the industry for purposes of the PRA analysis. Moreover, a considerable amount of language within each topic area also would be prescribed, thereby limiting the amount of time required to prepare the relationship summary. Based on these factors, we believe that the estimate of five hours to prepare and file the relationship summary is appropriate. We therefore estimate that the total burden of preparing and filing the relationship summary would be 38,125 hours.720 As with the Commission's prior Paperwork Reduction Act estimates for Form ADV, we believe that most of the paperwork burden would be incurred in advisers' initial preparation and submission of Part 3: Form CRS, and that over time this burden would decrease substantially because the paperwork burden would be limited to updating information.721 As under the currently approved collection, the estimated initial burden associated with preparing the relationship summary would be amortized over the estimated period that advisers would use the relationship summary, i.e., over a three-year period.722 The annual hour burden of preparing and filing the relationship summary would therefore be 12,708.723 In addition, based on IARD system data, the Commission assumes that 1,000 new investment advisers will file Form ADV with us annually. Of these, we estimate that 477 would be required to prepare and file the relationship summary.724 Therefore, the aggregate initial burden for newly registered advisers to prepare the relationship summary would be 2,385 725 and, amortized over three years, 795 on an annual basis.726 In sum, the annual hour burden for existing and newly registered investment advisers to prepare and file a relationship summary would be 13,503 hours,727 or 1.67 hours per adviser.728

    720 5.0 hours × 7,625 investment advisers = 38,125 total aggregate initial hours.

    721 We discuss the burden for advisers making annual updating amendments to Form ADV in Section V.A.3 below.

    722See 2016 Form ADV Paperwork Reduction Analysis, supra note 716.

    723 5.0 hours × 7,625 investment advisers/3 = 12,708 total annual aggregate hours.

    724 The number of new investment advisers is calculated by looking at the number of new advisers in 2016 and 2017 and then determining the number each year that serviced retail investors. (455 for 2016 + 499 for 2017)/2 = 477.

    725 477 new RIAs required to prepare relationship summary × 5.0 hours = 2,385 hours for new RIAs to prepare relationship summary.

    726 477 × 5.0 hours/3 = 795.

    727 (38,125 + 2,385)/3 years = 13,503 annual hour burden for existing and new advisers to prepare and file relationship summary.

    728 13, 503 hours/(7,625 existing advisers + 477 new advisers) = 1.67 hours per year.

    b. Estimated External Costs for Investment Advisers Preparing the Relationship Summary

    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.729 We do not anticipate that the amendments we are proposing today will affect the per adviser cost burden for those existing requirements but anticipate that some advisers may incur a one-time initial incremental cost for outside legal and consulting fees in connection with the initial preparation of the relationship summary. We do not anticipate external costs to investment advisers in the form of website set-up, maintenance, or licensing fees because they 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 also do not expect other ongoing external costs for the relationship summary. Although advisers 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 the investment adviser 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 investment advisers will need to incur ongoing external costs for the preparation and review of relationship summary amendments. Although advisers that would be subject to the relationship summary requirement may vary widely in terms of the size, complexity and nature of their advisory business, we believe that the amount of disclosure required would not vary substantially among advisers. Accordingly, we believe that the amount of time, and thus cost, required for outside legal and compliance review is unlikely to vary substantially among those advisers who elect to obtain outside assistance.730

    729See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR 60452. We do not anticipate that the amendments we are proposing to add Form ADV Part 3 will affect those per adviser cost burden estimates for outside legal and compliance consulting fees. The estimated external costs of outside legal and consulting services for the relationship summary are in addition to the estimated hour burden discussed above.

    730 We estimate that an external service provider would spend 3 hours helping an adviser prepare an initial relationship summary. In estimating the external cost for the initial preparation of Form ADV Part 2, we estimated that small, medium, and large advisers would require 8, 11, and 26 hours of outside assistance, respectively, to prepare Form ADV Part 2. In comparison, as discussed above, the relationship summary is limited to four pages in length (or equivalent limit if in electronic format) and is standardized across investment advisers in terms of the mandated selection and sequence of topic areas. While we recognize that different firms may require different amounts of external assistance in preparing the relationship summary, we believe that this is an appropriate average number for estimating an aggregate amount for the industry purposes of the PRA analysis. See Brochure Adopting Release, supra note 157, at 75 FR at 49257.

    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 $1,416.731 We estimate that the initial per existing adviser cost for compliance consulting services related to the preparation of the relationship summary would be $2,109.732 Thus, the incremental external cost burden for existing investment advisers is estimated to be $10,739,813, or $3,579,938 annually when amortized over a three-year period.733 In addition, we assume that 1,000 new advisers will register with us annually, 477 of which would be required to prepare a relationship summary. For these 477 new advisers, we estimate that they will require $671,855 in external costs to prepare the relationship summary.734 In summary, the annual external legal and compliance consulting cost for existing and new advisers relating to relationship summary obligations is estimated to total $4,251,792, or $525 per adviser.735

    731 External legal fees are in addition to the projected hour per adviser burden discussed above. $472 per hour for legal services × 3 hours per adviser = $1,416. The hourly cost estimate of $472 is based on an inflation-adjusted figure and our consultation with advisers and law firms who regularly assist them in compliance matters.

    732 External compliance consulting fees are in addition to the projected hour per adviser burden discussed above. Data from the SIFMA Management and Professional Earnings Report, modified to account for an 1,800-hour work year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead, and adjusted for inflation (“SIFMA Management and Professional Earnings Report”), suggest that outside management consulting services cost approximately $703 per hour. $703 per hour for outside consulting services × 3 hours per adviser = $2,109.

    733 25% × 7,625 existing advisers × $1,416 for legal services = $2,699,250 for legal services. 50% × 7,625 existing advisers × $2,109 for compliance consulting services = $8,040,563. $2,699,250 + $8,040,563 = $10,739,813 in external legal and compliance consulting costs for existing advisers. $10,739,813/3 = $3,579,938 annually.

    734 25% × 477 new advisers × $1,416 for legal services = $168,858. 50% × 477 new advisers × $2,109 for compliance consulting services = $502,997. $168,858 + $502,997 = $671,855 annually in external legal and compliance consulting costs for newly registered advisers.

    735 $3,579,938 in external legal and compliance consulting costs for existing advisers + $671,855 for new advisers = $4,251,792 annually for existing and new advisers. $4,251,792/($7,625 existing advisers + 477 new advisers) = $525 per adviser.

    c. Amendments to the Relationship Summary and Filing of Amendments

    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 736 due to amendments to the relationship summary,737 for those advisers required to prepare and file a relationship summary. 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 an average of 1.80 times per year.738 The collection of information burden of 0.5 hours for amendments to the relationship summary would include filing it. Based on the number of other-than-annual amendments filed by investment advisers with retail investors last year, we estimate that advisers will file an estimated total of 1.80 739 relationship summary amendments per year for an estimated total paperwork burden of 6,878 hours per year.740

    736 We have previously estimated that investment advisers would incur 0.5 hours to prepare an interim (other-than-annual) amendment to Form ADV. See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR at 60452. We believe that an amendment to the relationship summary would take a similar amount of time, if not less.

    737 Similarly, we estimated that 0.5 hours would be required for interim updating amendments to Form ADV Part 2. See Brochure Adopting Release, supra note 157, at 75 FR at 49257.

    738 This estimate is based on IARD system data regarding the number of filings of Form ADV amendments.

    739 Based on IARD data, 7,625 investment advisers with retail clients filed 13,756 other-than-annual amendments to Form ADV. 13,756 other-than-annual amendments/7,625 investment advisers = 1.80 amendments per investment adviser.

    740 7,625 investment advisers amending relationship summaries × 1.80 amendments per year × 0.5 hours = 6,878 hours.

    d. Incremental Increase to Form ADV Hourly and External Cost Burdens Attributable to Proposed Amendments

    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,741 or 2.52 hours per adviser,742 and a monetized cost of $5,248,193, or $648 per adviser.743 The incremental external legal and compliance cost is estimated to be $4,251,792.744

    741 13,503 hours for initial preparation and filing of the relationship summary + 6,878 hours for amendments to the relationship summary = 20,381 total aggregate annual hour burden attributable to the Form ADV amendments to add Part 3: Form CRS.

    742 20,381 hours/(7,625 existing advisers + 477 newly registered advisers) = 2.52 hours per adviser.

    743 20,381 total aggregate annual hour burden for preparing and filing a relationship summary. We expect that performance of this function will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the SIFMA Management and Professional Earnings Report suggest that costs for these positions are $229 and $298 per hour, respectively. 20,381 hours × 0.5 × $229 = $2,211,375. 20,381 hours × 0.5 × $298 = $3,036,819. $2,211,375 + $3,036,819 = $5,248,193. $5,248,193/(7,625 existing registered advisers + 477 newly registered advisers) = $648 per adviser.

    744See supra note 735.

    3. Total Revised Burden Estimates for Form ADV a. Revised Hourly and Monetized Value of Hourly Burdens

    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.745 On an aggregate basis, this totals 257,122 hours for existing and newly registered advisers, with a monetized value of $66,208,857.746

    745 29.22 hours + 2.52 hours for increase in burden attributable to initial preparation and filing of, and amendments to, relationship summary = 31.74 hours total.

    746 31.74 hours × 7,625 existing RIAs required to prepare a relationship summary + 477 newly registered RIAs required to prepare a relationship summary = 257,122 total aggregate annual hour burden for preparing, filing and amending a relationship summary. We expect that performance of this function will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the SIFMA Management and Professional Earnings Report suggest that costs for these positions are $229 and $298 per hour, respectively. 257,122 hours × 0.5 × $229 = $27,897,712. 257,122 hours × 0.5 $298 = $38,311,144. $27,897,712 + $38,311,144 = $66,208,857.

    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.747 To that end, using the currently approved total annual hour estimate of 29.22 hours per registered investment adviser to prepare and amend Form ADV, we estimate that the updated annual hourly burden for all existing and newly-registered investment advisers not required to prepare a relationship summary would be 164,187,748 with a monetized value of $43,263,322.749 The revised total annual collection of information burden for exempt reporting advisers, using the currently approved estimate of 3.60 hours per exempt reporting adviser, would be 15,653 hours,750 for a monetized cost of $4,124,513, or $949 per exempt reporting adviser.751

    747 12,721 registered investment advisers—7,625 registered investment advisers with retail investors = 5,096 registered investment advisers without retail investors.

    748 29.22 hours × (5,096 existing and 523 newly-registered investment advisers without retail investors) = approximately 164,187 total annual hour burden for RIAs not preparing a relationship summary.

    749 We expect that performance of this function for registered advisers will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the 2018 SIFMA Management and Professional Earnings Report suggest that costs for these positions are $229 and $298 per hour, respectively. 164,187 hours × 0.5 × $229 = $18,799,432. 164,187 hours × 0.5 × $298 = $24,463,890. $18,799,432 + $24,463,890 = $43,263,322.

    750 3.60 hours × 3,848 exempt reporting advisers currently + 500 new exempt reporting advisers = 15,653 hours.

    751 As with preparation of the Form ADV for registered advisers, we expect that performance of this function for exempt reporting advisers will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the 2018 SIFMA Management and Professional Earnings Report suggest that costs for these positions are $229 and $298 per hour, respectively. 15,653 hours × 0.5 × $229 = $1,792,246. 15,653 hours × 0.5 × $298 = $2,322,267. $1,792,246 + $2,322,267 = $4,124,513. $4,124,513/(3,848 exempt reporting advisers currently + 500 new exempt reporting advisers) = $949 per exempt reporting adviser.

    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 436,962,752 for a monetized cost of $115,139,422.753 This results in a blended average per adviser burden for Form ADV of 26.37 hours 754 and $6,949 per adviser.755 This is an increase of 73,880 hours, 756 or $22,735,053 757 in the monetized value of the hour burden, from the currently approved annual aggregate burden estimates, increases which are attributable primarily to the proposed burden estimates on the larger registered investment adviser and exempt reporting adviser population since the most recent approval, adjustments for inflation, and the amendments to Form ADV.

    752 257,122 annual hour burden for RIAs preparing relationship summary + 164,187 annual hour burden for RIAs not preparing relationship summary + 15,653 annual hour burden for exempt reporting advisers = 436,962 total updated Form ADV annual hour burden.

    753 $66,208,857 for RIAs preparing relationship summary + $43,263,890 for RIAs not preparing relationship summary + $4,124,513 for exempt reporting advisers = $115,139,422 total updated Form ADV annual monetized hourly burden.

    754 436,962/(12,721 registered investment advisers + 3,843 exempt reporting advisers) = 26.37 hours per adviser.

    755 $115,139,422/12,721 registered investment advisers + 3,843 exempt reporting advisers) = $6,949 per adviser.

    756 436,962 hours estimated—363,082 hours currently approved = 73,880 hour increase in aggregate annual hourly burden.

    757 $115,139,422 monetized hourly burden−$92,404,369 = $22,735,053 increase in aggregate annual monetized hourly burden.

    b. Revised Estimated External Costs for Form ADV

    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.758 The currently approved annual cost burden for Form ADV is $13,683,500, $3,600,000 of which is attributable to external costs incurred by new advisers to prepare Form ADV Part 2, and $10,083,500 of which is attributable to obtaining the fair value of certain private fund assets.759 We do not expect any change in the annual external costs relating to new advisers preparing Form ADV Part 2. Due to the slightly higher number of registered advisers with private funds, however, the cost of obtaining the fair value of private fund assets may be higher. We estimate that 6% of registered advisers have at least one private fund client that may not be audited. Based on IARD system data as of December 31, 2017, 4,670 registered advisers advise private funds. We therefore estimate that approximately 281 registered advisers may incur costs of $37,625 each on an annual basis, for an aggregate annual total cost of $10,572,625.760

    758See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR 60452. We do not anticipate that the amendments we are proposing to add to Form ADV Part 3 will affect those per adviser cost burden estimates for outside legal and compliance consulting fees. The estimated external costs of outside legal and compliance consulting services for the relationship summary are in addition to the estimated hour burden discussed above.

    759See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR at 60452-53. The $10,083,500 is based on 4,469 registered advisers reporting private fund activity as of May 16, 2016.

    760 6% × 4,760 = 281 advisers needing to obtain the fair value of certain private fund assets. 281 advisers × $37,625 = $10,572,625.

    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.761 This represents a $4,740,917 increase from the current external costs estimate for the information collection.762

    761 $3,600,000 for preparation of Form ADV Part 2 + $10,572,625 for registered investment advisers to fair value their private fund assets + $4,251,792 to prepare relationship summary = $18,424,417 in total external costs for Form ADV. $18,424,417/12,721 total registered advisers as of December 31, 2017 = $1,448 per registered adviser.

    762 $18,424,417 − $13,683,500 = $4,740,917.

    B. Rule 204-2 Under the Advisers Act

    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 information generally is kept confidential.763

    763See section 210(b) of the Advisers Act (15 U.S.C. 80b-10(b)).

    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.

    1. Changes in Burden Estimates and New Burden Estimates

    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.764 We estimate that the proposed amendments would result in an increase in the collection of information burden estimate by 0.2 hours 765 for each of the estimated 7,625 registered advisers with relationship summary obligations,766 resulting in a total of 183.2 hours per adviser. This would yield an annual estimated aggregate burden of 1,396,900 hours under amended rule 204-2 for all registered advisers with relationship summary obligations,767 for a monetized cost of $85,476,311.768 In addition, the 5,096 advisers 769 not subject to the proposed amendments would continue to be subject to an unchanged burden of 183 hours under rule 204-2, or a total aggregate annual hour burden of 932,568,770 for a monetized cost of $57,063,836.771 In summary, taking into account the estimated annual burden of registered advisers that would be required to maintain records of the relationship summary, as well as the estimated annual burden of registered advisers that do not have relationship summary obligations and whose information collection burden is unchanged, the revised annual aggregate burden for all respondents to rule 204-2, under the proposed amendments, would be estimated to be 2,329,468 total hours,772 for a monetized cost of $142,540,147.773

    764See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR at 60454-55.

    765 In the Paperwork Reduction Act analysis for amendments to Form ADV adopted in 2016, we estimated that 1.5 hours would be required for each adviser to make and keep records relating to (i) the calculation of performance the adviser distributes to any person and (ii) all written communications received or sent relating to the adviser's performance. Because the burden of preparing of the relationship summary is already included in the collection of information estimates for Form ADV, and because the relationship is a short, standardized document, we assume that recordkeeping burden for the relationship summary would be considerably less than 1.5 hours and estimate that 0.2 hours would be appropriate.

    766See supra note 674.

    767 7,625 registered investment advisers required to prepare relationship summary × 183.2 hours = 1,396,900 hours.

    768 As with our estimates relating to the previous amendments to rule 204-2 (see 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR at 60454-55, we expect that performance of this function will most likely be allocated between compliance clerks and general clerks, with compliance clerks performing 17% of the function and general clerks performing 83% of the function. Data from the SIFMA Office Salaries in the Securities Industry Report, modified to account for an 1,800-hour work year and multiplied by 2.93 to account for bonuses, firm size, employee benefits, and overhead (“SIFMA Office Salaries Report), suggest that costs for these positions are $67 and $60, respectively. (17% × 1,396,9001 hours × $67) + (83% × 1,396,900 hours × $60) = $85,476,311.

    769See supra note 681.

    770 5,096 registered investment advisers not required to prepare the relationship summary × 183 hours = 932,568.

    771 As with our estimates relating to the previous amendments to rule 204-2 (see 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR at 60454-55, we expect that performance of this function will most likely be allocated between compliance clerks and general clerks, with compliance clerks performing 17% of the function and general clerks performing 83% of the function. Data from the SIFMA Office Salaries Report suggest that costs for these positions are $67 and $60, respectively. (17% × 932,568 hours × $67) + (83% × 932,568 hours × $60) = $57,063,836.

    772 7,625 registered investment advisers required to prepare relationship summary × 183.2 hours = 1,396,900 hours. 5,096 registered investment advisers not required to prepare the relationship summary × 183 hours = 932,568 hours. 1,396,900 hours + 932,568 hours = 2,329,468 hours.

    773 $85,476,311 + $57,063,836 = $142,540,147.

    2. Revised Annual Burden Estimates

    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.774 The revised annual aggregate hourly burden for rule 204-2 would be 2,329,468 775 hours, represented by a monetized cost of $142,540,147,776 based on an estimate of 7,625 registered advisers with the relationship summary obligation and 5,096 registered advisers without, as noted above. This represents an increase of 129,677 777 annual aggregate hours in the hour burden and an annual increase of $12,224,035 from the currently approved total aggregate monetized cost for rule 204-2.778 These increases are attributable to a larger registered investment adviser population since the most recent approval and adjustments for inflation, as well as the proposed rule 204-2 amendments relating to the relationship summary as discussed in this proposing release.

    774 2,199,791 hours/12,024 registered advisers = 183 hours per adviser.

    775See supra note 772.

    776See supra note 773.

    777 2,329,467 hours − 2,199,791 hours = 129,677 hours.

    778 $142,540,073 − $130,316,112 = $12,224,035.

    C. Rule 204-5 Under the Advisers Act

    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.

    1. Respondents: Investment Advisers

    The likely respondents to this information collection would be the approximately 7,625 investment advisers registered with the Commission that would be required to deliver a relationship summary per proposed new rule 204-5. We also note that these figures include the 366 registered broker-dealers that are dually registered as investment advisers.779

    779See supra note 457 and accompanying text.

    2. Initial and Annual Burdens a. Posting of the Relationship Summary to Website

    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.780 Based on IARD system data, 91.1% of investment advisers with individual clients report at least one public website. Therefore, we estimate that 91.1% of the 7,625 existing and 477 newly-registered investment advisers with relationship summary obligations would incur a total of 3,690 aggregate burden hours to post relationship summaries to their websites,781 with a monetized cost of $221,428.782 As with the initial preparation of the relationship summary, we amortize the estimated initial burden associated with posting the relationship summary over a three-year period.783 Therefore, the total annual aggregate hourly burden related to the initial posting of the relationship summary is estimated to be 1,230 hours, with a monetized cost of $73,809.784 We do not anticipate external costs to rule 204-5 because investment advisers without a public website would not be required to establish or maintain one. External costs for the preparation of the relationship summary are already included for the collection of information estimates for Form ADV, in Section V.A, above.

    780 This estimate is based upon staff experience. See e.g., Enhanced Mutual Fund Disclosure Adopting Release, supra note 47 (“we estimate, as we did in the proposing release, that rule 498 will impose a 1/2 hour burden per portfolio annually associated with the compilation of the additional information required on a cover page or at the beginning of the Summary Prospectus. Rule 498 also imposes annual hour burdens associated with the posting of a fund's Summary Prospectus, statutory prospectus, SAI, and most recent report to shareholders on an Internet website. We estimate that the average hour burden for one portfolio to comply with the Internet website posting requirements will be approximately one hour annually.”) Because rule 204-5 pertains to one document, the relationship summary, which is much shorter than the several documents to which rule 498 applies, we estimate that each adviser on average would incur approximately 0.5 hours for the preparation of the relationship summary for posting, and for the posting itself.

    781 0.5 hours to prepare and post the relationship summary × 91.1% × (7,625 existing advisers + 477 newly-registered advisers with relationship summary obligations) × 0.5 hours = 3,690 hours.

    782 Based on data from the SIFMA Office Salaries Report, we expect that requirement for investment advisers to post their relationship summaries to their websites will most likely be performed by a general clerk at an estimated cost of $60 per hour. 0.5 hours per adviser × $60 = $30 in monetized costs per adviser. $30 per adviser × (7,625 existing advisers + 477 newly registered advisers = $221,428 total aggregate monetized cost.

    783See 2016 Form ADV Paperwork Reduction Analysis, supra note 716.

    784 43,688 hours/3 years = 1,230 hours annually. $221,428/3 years = $73,809 in annualized monetized costs.

    b. Delivery to Existing Clients i. One-Time Initial Delivery to Existing Clients

    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.785 Although advisers may either deliver the relationship summary separately, in a “bulk delivery” to clients, or as part of the delivery of information that advisers already provide, such as the annual Form ADV update, account statements or other periodic reports, we base our estimates here on a “bulk delivery” to existing clients. This is similar to the approach we took in estimating the delivery costs for amendments to rule 204-3 under the Advisers Act, which requires investment advisers to deliver their Form ADV Part 2 brochures and brochure supplements to their clients.786 As with the estimates for rule 204-3, we estimate that advisers would require approximately 0.02 hours to deliver the relationship summary to each client.787 Based on IARD data as of December 31, 2017, we estimate that advisers with the obligation to deliver the relationship summary under proposed rule 204-5 have, on average, 4,461 clients who are retail investors, per adviser. Thus, we estimate the total burden hours for 7,625 advisers for initial delivery of the relationship to existing clients to be 89.22 hours per adviser, or 722,860 total aggregate hours, for the first year after the rule is in effect,788 with a monetized cost of $5,353 789 per adviser or $43,339,507 in aggregate.790 Amortized over three years, the total annual hourly burden is estimated to be 29.74 hours per adviser, or 240,953 annual hours in aggregate,791 with annual monetized costs of $1,784 per adviser, or $14,457,209 in aggregate.792 We do not expect that investment advisers will incur external costs for the initial delivery of the relationship summary to existing clients because we assume that advisers will make such deliveries along with another required delivery, such as an interim or annual update to the Form ADV Part 2.

    785 Based on IARD system data as of December 31, 2017.

    786See Brochure Adopting Release, supra note 157, at 75 FR at 49259.

    787 This is the same estimate we made in the Form ADV Part 2 proposal and for which we received no comment. Brochure Adopting Release, supra note 157, at 75 FR at 49259 We note that the burden for preparing relationship summaries is already incorporated into the burden estimate for Form ADV discussed above.

    788 (0.02 hours per client × 4,461 retail clients per adviser) = 89.22 hours per adviser. 89.22 hours per adviser × (7,625 existing advisers + 477 newly registered advisers) = 722,860 total aggregate hours.

    789 Based on data from the SIFMA Office Salaries Report, we expect that initial delivery requirement to existing clients of rule 204-5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 89.22 hours per adviser × $60 = $5,353 in monetized costs per adviser. We estimate that advisers will not incur any incremental postage costs because we assume that they will make such deliveries with another mailing the adviser was already delivering to clients, such as interim or annual updates to the Form ADV, or will deliver the relationship summary electronically.

    790 $5,353 in monetized costs per adviser × (7,625 existing advisers + 477 newly registered advisers) = $43,339,507 in total aggregate costs.

    791 89.22 initial hours per adviser/3 = 29.74 total annual hours per adviser. 722,860 initial aggregate hours/3 = 240,953 total annual aggregate hours.

    792 $5,353 in monetized costs per adviser/3 = $1,784 annualized monetized cost per adviser. $43,339,507 initial aggregate monetized cost/3 = $14,14,457,209 in total annual aggregate monetized cost.

    ii. Delivery for New Account Types or Material Changes in the Nature or Scope of the Advisory Relationship

    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,793 with a monetized cost of $535 per adviser  794 and $4,337,163 in aggregate.795 We do not expect advisers to incur external costs related to deliveries of the relationship summary due to new account type openings, or material changes to the nature or scope of the relationship, because we assume that advisers will deliver the relationship summary along with new account agreements and other information normally required in such circumstances.

    793 10% of 4,461 retail clients per adviser × .02 hours to deliver the relationship summary = 9 hours per adviser. 9 hours × (7,625 existing advisers + 477 new advisers) = 72,286 total aggregate hours.

    794 Based on data from the SIFMA Office Salaries Report, we expect that delivery requirements of rule 204-5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 9 hours per adviser × $60 = $535 per adviser. We estimate that advisers will not incur any incremental postage costs in the delivery of the relationship summary to existing clients for changes in accounts, because we assume that advisers will make such deliveries with another mailing the adviser was already delivering to clients, such as new account agreements and other documentation normally required in such circumstances.

    795 $535 in monetized costs per adviser × (7,625 existing advisers + 477 newly registered advisers) = $4,337,163 in total aggregate costs.

    iii. Posting of Amended Relationship Summaries to Websites and Communicating Changes to Amended Relationship Summaries, Including by Delivery

    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.796 As above, we estimate that preparation of the relationship summary for posting to the web and the posting itself will require 0.5 hours. Therefore, once again using the same percentage of investment advisers reporting public websites, 91.1% of 7,625 advisers would incur a total annual burden of 0.91 hours per adviser, or 6,286 hours in aggregate,797 to post the amended relationship summaries to their website. This translates into an annual monetized cost of $54.30 per adviser, or $377,188 in the aggregate for existing registered advisers with relationship summary obligations.798 Investment advisers also will be required to communicate any changes in an amended relationship summary to existing clients who are retail investors. The communication can be made by delivering the relationship summary or by communicating the information in another way. For this requirement, we estimate that 50% of advisers will choose to deliver the relationship summary to communicate the updated information, and that the delivery will be made along with other disclosures already required to be delivered, such as an interim or annual Form ADV update. We therefore estimate a burden of 615,674 799 hours, or 161.5 hours per adviser,800 at a monetized cost of $36,940,426 in aggregate,801 or $9,689 per adviser,802 for the 50% of advisers that choose to deliver amended relationship summaries in order to communicate updated information. Similar to the other delivery requirements discussed above for proposed rule 204-5, we do not expect investment advisers to incur external costs in delivering amended relationship summaries because we assume that they will make this delivery with other disclosures required to be delivered, such as an interim or annual update to Form ADV.

    796 This estimate is based on IARD system data regarding the number of filings of Form ADV amendments. See also supra note 702 and accompanying text.

    797 0.5 hours to post the amendment × 1.81 amendments annually = 0.91 hours per adviser annually to post amendments to the website. 0.91 × 7,625 existing advisers amending the relationship summary × 91.1% of advisers with public websites = 6,286 aggregate annual hours to post amendments of the relationship summary.

    798 Based on data from the SIFMA Office Salaries Report, we expect that the posting requirements of rule 204-5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 0.91 hours per adviser × $60 = $54.30 per adviser. $54.30 per adviser × 91.1% × 7,625 existing advisers = $377,188 in annual monetized costs.

    799 7,625 advisers amending the relationship summary × 4,461 retail clients per adviser × 50% delivering the amended relationship summary to communicate updated information × 0.02 hours per delivery × 1.81 amendments annually = 615,674 hours to deliver amended relationship summaries.

    800 4,461 retail clients per adviser × 0.02 hours per delivery × 1.81 amendments annually = 161.5 hours per adviser.

    801 Based on data from the SIFMA Office Salaries Report, we expect that delivery requirements of rule 204-5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 615,674 hours × $60 = $36,940,426. We estimate that advisers will not incur any incremental postage costs to deliver the relationship summary for communicating updated information by delivering the relationship summary, because we assume that advisers will make the delivery along with other documents already required to be delivered, such as an interim or annual update to Form ADV, or will deliver the relationship summary electronically.

    802 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour work-year and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that delivery requirements of rule 204-5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 161.5 hours per adviser × $60 per hour = $9,689 per adviser.

    c. Delivery to New Clients or Prospective New Clients

    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.803 Based on IARD system data from 2015 to 2017, we estimate that the client base for investment advisers will grow by approximately 4.5% annually.804 Based on our experience with Form ADV Part 2, we estimate the annual hour burden for initial delivery of a relationship summary would be the same by paper or electronic format, at 0.02 hours for each relationship summary,805 or 4 annual hours per adviser.806 Therefore, we estimate that the aggregate annual hour burden for initial delivery of the relationship summary to new clients would be 30,614 hours,807 at a monetized cost of $1,836,817, or $241 per adviser.808 We do not expect that advisers will incur external costs to deliver the relationship summary to new or prospective clients because we assume that advisers will make the delivery along with other documentation normally provided in such circumstances, such as Form ADV Part 2, or will deliver the relationship summary electronically.

    803 This average is based on advisers' responses to Item 5 of Part 1A of Form ADV as of December 31, 2017.

    804 The number of retail clients reported by RIAs changed by 6.7% between December 2015 and 2016, and by 2.3% between December 2016 and 2017. (6.7% + 2.3%)/2 = 4.5% average annual rate of change over the past two years.

    805 This is the same as the estimate for the burden to deliver the brochure required by Form ADV Part 2. See Brochure Adopting Release, supra note 157.

    806 4,461 clients per adviser with retail clients × 4.5% = 201 new clients per adviser. 201 new clients per adviser × .02 hours per delivery = 4.0 hours per adviser for delivery of a relationship summary to new or prospective new clients.

    807 4.0 hours per adviser for delivery obligation to new or prospective clients × 7,625 advisers = 30,614 hours.

    808 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour work-year and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that delivery requirements of rule 204-5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 7,625 hours × $60 = $1,836,817. We estimate that advisers will not incur any incremental postage costs to deliver the relationship summary to new or prospective clients because we assume that advisers will make the delivery along with other documentation normally provided in such circumstances, such as Form ADV Part 2. $1,835,371/7,625 investment advisers = $241 per adviser.

    d. Total New Initial and Annual Burdens

    Altogether, we estimate the total collection of information burden for proposed new rule 204-5 to be 967,044 annual aggregate hours per year,809 or 126.8 hours per respondent,810 for a total annual aggregate monetized cost of $58,022,611,811 or $7,610 812 per adviser. We request comment on the estimated hourly and cost burdens for the new collection of information under proposed rule 204-5.

    809 1,230 annual hours for posting initial relationship summaries to adviser websites + 240,953 annual hours for initial delivery to existing clients + 72,286 hours for delivery to existing clients based on material changes to accounts or scope of relationship + 6,286 annual hours to post amended relationship summary to website + 615,674 hours for delivery to existing clients to communicate updated information in amended relationship summaries + 30,614 hours for delivery to new or prospective clients = 967,044 annual total hours for investment advisers to post and deliver the relationship summary under proposed rule 204-5.

    810 967,044 hours (initial and other deliveries)/7,625 advisers = 126.8 hours per adviser.

    811 $73,809 for posting initial relationship summaries to adviser websites + $14,457,209 for initial delivery to existing clients + $4,337,162 for delivery to existing clients based on material changes to accounts or scope of relationship + $377,188 to post amended relationship summary to website + $36,940,426 for delivery to existing clients to communicate updated information in amended relationship summaries + $1,836,817 for delivery to new or prospective clients = $58,022,611 in total annual aggregate monetized cost for investment advisers to post and deliver the relationship summary under proposed rule 204-5.

    812 $58,022,611/7,625 advisers = $7,610 per adviser.

    D. Form CRS and Rule 17a-14 Under the Exchange Act

    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.

    1. Respondents: Broker-Dealers

    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,813 and therefore likely would be required to prepare and deliver the relationship summary.814 We also note that these include 366 broker-dealers that are dually registered as investment advisers.815 To a great extent, the burden for dual registrants to prepare and deliver the relationship summary and post it to a website is already accounted for in the estimated burdens for investment advisers under the proposed amendments to Form ADV and proposed new rule 204-5, discussed in Sections V.A and V.C above. However, dually registered broker-dealers will incur burdens related to their business as an investment adviser that standalone broker-dealers will not incur, such as the requirement to file the relationship summary with IAPD (in addition to EDGAR as a broker-dealer), and to deliver to both investment advisory clients and brokerage customers, to the extent those groups of retail investors do not overlap. Therefore, although treating dually registered broker-dealers in this way may be over-inclusive, we base our burden estimates for proposed rule 17a-14 and Form CRS on 2,857 broker-dealers with relationship summary obligations, including those dually registered as broker-dealers. 816

    813See supra note 461 and accompanying text. Retail sales activity is identified from Form BR (see supra note 280, which categorizes retail activity broadly (by marking the “sales” box) or narrowly (by marking the “retail” or “institutional” boxes as types of sales activity). We use the broad definition of sales as we preliminarily believe that many firms will just mark “sales” if they have both retail and institutional activity. However, we note that this may capture some broker-dealers that do not have retail activity, although we are unable to estimate that frequency.

    814 For purposes of Form CRS, a “retail investor” would be defined as: a prospective or existing client or customer who is a natural person (an individual) and would include a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust.

    815See supra note 457 and accompanying text.

    816See supra note 457 and accompanying text.

    2. Initial and Annual Burdens a. Initial Preparation, Filing, and Posting of Relationship Summary

    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.817

    817See supra note 780.

    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 hours,818 for a monetized value of $11,292,293.819 We estimate that the initial burden of posting the relationship summary to their websites, if they have one, would be 1,428 hours,820 for a monetized value of $85,710.821 To arrive at an annual burden for preparing, filing, and posting the relationship summary, as for advisers, the initial burden would be amortized over a three-year period. Therefore, the total annual aggregate hour burden for registered broker-dealers to prepare, file, and post a relationship summary to their website, if they have one, would be 14,761 hours, or 5.17 hours per broker-dealer,822 for an annual monetized cost of $3,792,668, or $1,328 per broker-dealer.823

    818 15.0 hours × 2,857 broker-dealers with retail accounts = 42,855 total hours.

    819 42,855 total aggregate initial hour burden for preparing and filing a relationship summary. We expect that performance of this function will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the SIFMA Management and Professional Earnings Report suggest that costs for these positions are $229 and $298 per hour, respectively. (21,427.5 hours × $229 + (21,427.5 hours × $298 = $11,292,293).

    820 0.5 hours × 2,857 broker-dealers = 1,248 hours to prepare and post relationship summary to the website.

    821 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour work-year and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that performance of this function will most likely be performed by a general clerk at an estimated cost of $60 per hour. 1,429 hours × $60 = $85,710 total aggregate monetized cost.

    822 42,855 hours/3 years = 14,761 total aggregate annual hour burden to prepare and file relationship summary. 14,761 hours/2,857 broker-dealers with retail accounts = 5.17 hours annually per broker-dealer.

    823 ($11,292,293 total initial aggregate monetized cost for preparation and filing + $85,710 for posting to the website)/3 = $3,792,668 total annual monetized cost for preparation, filing and posting the relationship summary. $3,792,668/2,857 broker-dealers subject to relationship summary obligations = $1,328 per broker-dealer.

    b. Estimated External Costs for Initial Preparation of Relationship Summary

    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.824 The relationship summary is short, standardized, and contains largely prescribed language. Because the information required in the relationship summary pertains largely to the broker-dealer's own business practices, the information is likely more readily available to the broker-dealer than to an external legal or compliance consultant. As a result, we anticipate that only a quarter of broker-dealers 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 broker-dealer cost for legal services related to the preparation of the relationship summary would be $1,416.825 We estimate that the initial per broker-dealer cost for compliance consulting services related to the preparation of the relationship summary would be $2,109.826 Accordingly, we estimate that 715 broker-dealers will use outside legal services, for a total initial aggregate cost burden of $1,011,378,827 and 1,429 broker-dealers will use outside compliance consulting services, for a total initial aggregate cost burden of $3,012,707,828 resulting in a total initial aggregate cost burden among all respondents of $4,024,085, or $1,409 per broker-dealer, for outside legal and compliance consulting fees related to preparation of the relationship summary.829 Annually, this represents $1,341,362, or $470 per broker-dealer, when amortized over a three-year period.830

    824 We estimate that an external service provider would spend 3 hours helping a broker-dealer prepare an initial relationship summary.

    825 External legal fees are in addition to the projected hour per broker-dealer burden discussed above. $472 per hour for legal services × 3 hours per broker-dealer = $1,416. The hourly cost estimate of $472 is adjusted for inflation and based on our consultation with broker-dealers and law firms who regularly assist them in compliance matters.

    826 External compliance consulting fees are in addition to the projected hour per broker-dealer burden discussed above. Data from the SIFMA Management and Professional Earnings Report suggest that outside management consulting services cost approximately $703 per hour. $703 per hour for outside consulting services × 3 hours per adviser = $2,109.

    827 25% × 2,857 SEC registered broker-dealers = 715 broker-dealers. $1,416 for legal services × 715 broker-dealers = $1,011,378.

    828 50% × 2,857 SEC registered broker-dealers = 1,429 broker-dealers. $2,109 for compliance consulting services × 1,429 broker-dealers = $3,012,707.

    829 $1,011,378 + $3,012,707 = $4,024,085. $4,024,085/2,857 broker-dealers = $1,409 per broker-dealer.

    830 $4,024,085 initial aggregate hours/3 years = $1,341,362 annually. $1,409 initial hours per broker-dealer/3 years = $469.50.

    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.

    c. Amendments to the Relationship Summary and Filing and Posting of 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.831 We also estimate that on average, each broker-dealer preparing a relationship summary may amend the disclosure once more during the year, due to emerging issues. Therefore, we assume that broker-dealers would update their relationship summary, on average, twice a year, and as with investment advisers, we estimate that broker-dealers would require 0.5 hours to amend and file the updated relationship summary, and 0.5 hours to post it to their website. Thus, we estimate that broker-dealers would incur a total annual aggregate hourly burden of 5,714 hours per year, to prepare and file, and post to their websites an estimated total of 5,714 amendments per year.832

    831 FINRA rules set an annual supervisory review as a minimum threshold for broker-dealers, for example in FINRA Rules 3110 (requiring an annual review of the businesses in which the broker-dealer engages), 3120 (requiring an annual report detailing a broker-dealer's system of supervisory controls, including compliance efforts in the areas of antifraud and sales practices); and 3130 (requiring each broker-dealer's CEO or equivalent officer to certify annually to the reasonable design of the policies and procedures for compliance with relevant regulatory requirements).

    832 2,857 broker-dealers amending relationship summaries × 2 amendments per year = 5,714 amendments per year. 5,714 amendments × (0.5 hours to amend and file + 0.5 hours to post to website) = 5,714 hours.

    d. Delivery of the Relationship Summary

    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.

    i. One-Time Initial Delivery to Existing Customers

    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.833 We estimate that, under the proposed rule, broker-dealers would send their relationship summary along with other required disclosures, such as periodic account statements, in order to comply with initial delivery requirement for the relationship summary. As with investment advisers, we estimate that a broker-dealer will require no more than 0.02 hours to send the relationship summary to each customer, or an aggregate initial burden of 2,024,960 hours, or approximately 709 hours per broker-dealer for the first year after the rule is in effect.834 We would therefore expect the aggregate monetized cost for broker-dealers to make a one-time initial delivery of relationship summaries to existing customers to be $121,497,600.835 Amortized over three years, the total annual hourly burden is estimated to be 674,987 hours, or approximately 236.3 hours per broker-dealer,836 with annual monetized costs of $40,499,200 and $14,175, respectively.837 We do not expect that broker-dealers will incur external costs for the initial delivery of the relationship summary to existing clients because we assume that they will make such deliveries along with another required delivery, such as periodic account statements.

    833See supra notes 428-437 and accompanying text. 2,857 broker-dealers (including dual registrants) report 128 million customer accounts. We are aware that, based on data from IARD, investment advisers reporting retail activity have approximately 79.1% retail clients and 21.9% non-retail clients. While acknowledging the differences between the investment adviser and broker-dealer models, we apply the 79.1% in estimating the proportion of broker-dealer accounts that belong to retail customers. Therefore, 79.1% × 128 million accounts = 101.248 million accounts. This number likely overstates the number of deliveries to be made due to the double-counting of deliveries to be made by dual registrants to a certain extent, and the fact that one customer may own more than one account.

    834 (0.02 hours per customer account × 101.248 million customer accounts) = 2,024,960 hours. We note that the burden for preparing updated relationship summaries is already incorporated into the burden estimate for Form CRS discussed above. 2,024,960 hours/2,857 broker-dealers = approximately 709 hours per broker-dealer.

    835 Based on data from SIFMA's Office Salaries Report, we expect that initial delivery requirement to existing clients of rule 17a-14 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 2,024,960 hours × $60 = $121,497,600. We estimate that broker-dealers will not incur any incremental postage costs because we assume that they will make such deliveries with another mailing the broker-dealer was already delivering to clients, such as periodic account statements.

    836 2,024,960 initial aggregate hours/3 = 674,987 total annual aggregate hours. 709 initial hours per broker-dealer/3 = 236.3 total annual hours per broker-dealer.

    837 $121,497,600 initial aggregate monetized cost/3 = $40,499,200 annual aggregate monetized cost. $40,499,200/2,857 broker-dealers = $14,175 annual monetized cost per broker-dealer.

    ii. Delivery for New Account Types or Material Changes in the Nature or Scope of the Brokerage Relationship

    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,838 at an annual aggregate monetized cost of $12,149,760, or approximately $4,253 per broker-dealer.839 We do not expect broker-dealers to incur external costs related to deliveries of the relationship summary due to new account type openings, or material changes to the nature or scope of the relationship, because we assume that broker-dealers will deliver the relationship summary along with new account agreements and other documentation normally required in such circumstances, or with periodic account statements.

    838 10% of 101.248 million customers × .02 hours = 202,496 hours. 202,496 hours/2,857 broker-dealers = 71 hours per broker-dealer.

    839 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour work-year and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that delivery requirements of rule 17a-14 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 202,496 hours × $60 = $12,149,760. $12,149,760/2,857 broker-dealers = $4,253 per broker-dealer. We estimate that broker-dealers will not incur any incremental postage costs in these deliveries of the relationship summary to existing customers, because we assume that broker-dealers will make such deliveries with another mailing the broker-dealer was already delivering to clients, such as periodic account statements, or new account agreements and other similar documentation.

    iii. Communicating Changes to Amended Relationship Summaries, Including by Delivery

    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 would be approximately 2,024,960 hours, or 709 hours per broker-dealer,840 translating into a monetized cost of $121,497,600 in aggregate, or $42,526 per broker-dealer.841 Similar to the other delivery requirements relating to proposed rule 17a-14, we do not expect broker-dealers to incur external costs in delivering amended relationship summaries because we assume that they will make this delivery with other documents required to be delivered, such as periodic account statements.

    840 2 amendments per year × 101.248 million customer accounts × 50% delivering the amended relationship summary to communicate updated information × 0.02 hours per delivery = 2,024,960 hours to deliver amended relationship summaries. 2,024,960 hours/2,857 broker-dealers = 709 hours per broker-dealer.

    841 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour work year and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that delivery requirements of rule 17a-14 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 2,024,960 hours × $60 = $121,497,600. $121,467,600/2,857 broker-dealers = $42,526 per broker-dealer. We estimate that broker-dealers will not incur any incremental postage costs to deliver these relationship summaries, because we assume that advisers will make the delivery along with other documentation they normally would provide, such as account opening documents.

    e. Delivery to New Clients or Prospective New Customers

    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.842 Based on FOCUS data over the past five years, we estimate that broker-dealers grow their customer base and enter into new agreements with, on average, 8% more new retail investors each year.843 We estimate the hour burden for initial delivery of a relationship summary would be the same by paper or electronic format, at 0.02 hours for each relationship summary, as we have estimated above. Therefore, the aggregate annual hour burden for initial delivery of the relationship summary by broker-dealers to new or prospective new customers would be 161,917 hours, or 56.7 hours per broker-dealer.844 at a monetized cost of $9,715,001 at an aggregate level, or $3,400 per broker-dealer.845

    842See supra notes 429-439 and accompanying text.

    843 This represents the average annual rate of growth from 2012-2016 in the number of accounts for all broker-dealers reporting retail activity.

    844 101.248 million customer accounts × 8% increase = 8,095,834 new customers. 8,095,834 new customers × 0.02 hours per delivery = 161,917 total annual aggregate hours. 161,917/2,857 broker-dealers = 56.7 hours per broker-dealer for delivery to new customers.

    845 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour work-year and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that these functions will most likely be performed by a general clerk at an estimated cost of $60 per hour. 161,917 hours × $60 = $9,715,001. $9,715,001/2,857 broker-dealers = $3,400 per broker-dealer for delivery to new customers. We estimate that broker-dealers will not incur any incremental postage costs to deliver the relationship summary to new or prospective clients because we assume that broker-dealers will make the delivery along with other documentation, such as periodic account statements.

    f. Total New Initial and Annual Burdens

    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.846 This translates into an aggregate annual monetized cost of $188,578,462, or $66,066 on a broker-dealer basis per year.847 In addition, we estimate that broker-dealers would incur external legal and compliance costs in the initial preparation of the relationship summary of approximately $4,024,085 in aggregate, or $1,409 per broker-dealer, translating into $1,341,362 annually, or $470 per broker-dealer, when amortized over a three year period.

    846 14,761 hours per year for initial preparation, filing, and posting of relationship summary + 5,714 hours per year for amendments, filing, and posting of amendments + 674,987 hours for one-time initial delivery to existing customers + 202,496 hours for delivery to existing customers making material changes to their accounts + 2,024,960 hours for delivery of amendments + 161,917 hours for delivery to new customers = 3,084,835 total annual aggregate hours. 3,084,835 hours/2,857 broker-dealers = 1,080 hours per broker-dealer.

    847 $3,792,668 per year for initial preparation, filing, and posting of relationship summary + $924,240 per year for amendments, filing, and posting of amendments + $40,499,200 for one-time initial delivery to existing customers (amortized over three years) + $12,149,760 for delivery to existing customers making material changes to their accounts + $121,497,600 for delivery of amendments + $9,715,001 for delivery to new customers = $188,578,468 in total annual aggregate monetized cost. $188,578,468/2,857 broker-dealers = $66,066 per broker-dealer.

    E. Recordkeeping Obligations Under Rule 17a-3 of the Exchange Act  848

    848 In a concurrent release, we are proposing additional burden adjustments to rules 17a-3 and 17a-4 of the Exchange Act. See Regulation Best Interest Proposal, supra note 24.

    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.849 The likely respondents to this collection of information requirement are the approximately 2,857 broker-dealers currently registered with the Commission that offer services to retail investors, as defined above.850

    849See section 24(b) of the Exchange Act (15 U.S.C. 78x-24(b)).

    850See supra note 29 and accompanying text.

    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.” 851 Exchange Act rules 17a-3 and 17a-4 specify minimum requirements with respect to the records that broker-dealers must make, and how long those records and other documents must be kept, respectively.

    851See section 17(a) 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.852

    852 We apply the same 0.2 hour estimate as with investment advisers, but divided equally between creating a record of the relationship summary and its deliveries and the maintenance of those records.

    The incremental hour burden for broker-dealers to maintain the relationship summary would therefore be 286 hours,853 for a monetized cost of 17,481 in aggregate, or $6.00 per broker-dealer.854

    853 2,857 broker-dealers × 0.1 hours annually = 286 annual hours for recordkeeping.

    854 As with our estimates relating to the proposed amendments to rule 204-2 under the Advisers Act (see, e.g., supra note 771 and accompanying text), we expect that performance of this function will most likely be allocated between compliance clerks and general clerks, with compliance clerks performing 17% of the function and general clerks performing 83% of the function. Data from the SIFMA Office Salaries Report suggest that costs for these position are $67 and $60, respectively. (17% × 286 hours × $67) + (83% × 286 hours × $60) = $17,481. $17,481/2,857 broker-dealers = $6.00 per broker-dealer.

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

    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.” 855 Exchange Act rule 17a-4 specifies minimum requirements with respect to how long records created under Exchange Act rule 17a-3 and other documents must be kept. We are proposing amendments to rule 17a-4 that would require broker-dealers to retain copies of each relationship summary, including amendments, and to preserve the record of dates that each relationship summary and each amendment thereto was delivered to any existing customer or to any new or prospective customer, pursuant to the proposed new requirements under amended rule 17a-3, discussed above. These records would be required to be maintained in an easily accessible place for at least six years after such record or relationship summary is created. This collection of information would be found at 17 CFR 240.17a-4 and would be mandatory. The Commission staff would use the collection of information in its examination and oversight program. Requiring maintenance of these disclosures as part of the broker-dealer'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 information generally is kept confidential.856

    855See section 17(a) of the Exchange Act.

    856 See section 24(b) of the Exchange Act (15 U.S.C. 78x-24(b)).

    The likely respondents to this collection of information requirement are the approximately 2,857 broker-dealers that report retail activity, as described above.

    1. Changes in Burden Estimates and New Burden Estimates

    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.857 The currently approved external cost estimate to respondents is $20,520,000.858 We estimate that the proposed amendments would result in an increase in the collection of information burden estimate by 0.10 hours 859 for each of the estimated 2,857 currently registered broker-dealers that report retail sales activity and would have relationship summary obligations.860 This would yield an annual estimated aggregate burden of 754,964 hours for all broker-dealers with relationship summary obligations to comply with rule 17a-4,861 for a monetized cost of approximately $48.6 million.862 In addition, the 984 broker-dealers 863 not subject to the proposed amendments would continue to be subject to an unchanged burden of 254 hours per broker-dealer, or 249,936 hours for these broker-dealers.864 In addition, those maintaining an internal broker-dealer system would continue to be subject to an unchanged burden of 450 hours annually, under rule 17a-4. In summary, taking into account the estimated annual burden of broker-dealers that would be required to maintain records of the relationship summary, as well the estimated annual burden of broker-dealers that do not have relationship summary obligations and whose information collection burden is unchanged, the revised annual aggregate burden for all broker-dealer respondents to the recordkeeping requirements under rule 17a-4 is estimated to be 976,350 total annual aggregate hours,865 for a monetized cost of approximately $65.4 million.866

    857 (4,104 broker-dealers × 254 hours per broker-dealer) + (150 broker-dealers maintaining internal broker-dealer systems × 3 hours) = (1,042,416 hours + 450 hours ) = 1,042,866 hours each year. The monetized cost was based on these functions being performed by a compliance clerk earning an average of $65 per hour, resulting in a total internal cost of compliance of (1,042,416 × $65) + (450 × $65) = $67,786. See 17a-4 Supporting Statement, available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201607-3235-007.

    858 4,104 broker-dealers × $5,000 annual recordkeeping cost per broker-dealer = $20,520,000. See id.

    859 We apply the same 0.2 hour estimate as with investment advisers, but divided equally between creating a record of the relationship summary and its deliveries and the maintenance of those records.

    860See supra note 616.

    861 2,857 broker-dealers required to prepare relationship summary × (254 hours + 0.1 hour) = 725,964 hours.

    862 Consistent with our prior paperwork reduction analyses for rule 17a-4, we expect that performance of this function will most likely be performed by compliance clerks. Data from the SIFMA Office Salaries Report suggest that costs for these positions are $67 per hour. 725,964 hours × $67 = $48,639,568.

    863See supra note 618.

    864 984 broker-dealers × 254 hours = 249,936 hours for broker-dealers not preparing a relationship summary.

    865 725,964 + 249,936 + 450 = 976,350 total aggregate hours.

    866 Consistent with our prior paperwork reduction analyses for rule 17a-4, we expect that performance of this function will most likely be performed by compliance clerks. Data from the SIFMA Office Salaries Report suggest that costs for these positions are $67 per hour. 976,650 hours × $67 = $65,415,430.

    2. Revised Annual Burden Estimates

    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 976,350 867 hours, represented by a monetized cost of approximately $65.4 million,868 based on an estimate of 2,857 broker-dealers with the relationship summary obligation and 984 broker-dealers without, as noted above. This represents a decrease of 66,516 869 annual aggregate hours in the hour burden and an annual decrease of approximately $2.37 million from the currently approved total aggregate monetized cost for rule 17a-4.870 These changes are attributable to the proposed amendments to rule 17a-4 relating to the relationship summary as discussed in this proposing release and the decline in the number of registered broker-dealer respondents. The revised external cost to respondents is estimated at approximately $19.2 million, or a reduction of $1.3 million from the currently approved external cost burden of $20,520,000.871

    867See supra note 865.

    868See supra note 739.

    869 1,042,866 hours − 976,350 hours = 66,516 hours.

    870 $67,786,290 − $65,415,430 = $2,370,860.

    871 3,841 registered broker-dealers as of December 31, 2017 × $5,000 per broker-dealer in record maintenance costs = $19,205,000. $20,520,000−$19,205,000 = $1,315,000.

    G. Rule 151-3 Under the Exchange Act

    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-dealer that is, registered with the Commission as a broker-dealer 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.

    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.

    1. Respondents: Broker-Dealers and Associated Natural Persons

    Currently, there are 3,841 registered broker-dealers and 435,071 associated natural persons licensed with FINRA.872 Of these registered broker-dealers, we estimate that approximately 74% or 2,857 distribute print or electronic retail investor communications 873 while 435,071 associated natural persons distribute print or electronic retail investor communications at standalone broker-dealers or dually registered firms.874 Of these broker-dealers that distribute print or electronic retail investor communications, 1,388 are large broker-dealers and 1,469 are small broker-dealers.875 Accordingly, the Commission estimates that 2,857 broker-dealers and 435,071 associated natural persons would be required to comply with proposed rule 15l-3. For the purposes of this analysis of the paperwork burden associated with the proposed rules, the Commission preliminarily estimates that there would be approximately 2,857 broker-dealer respondents and 435,071 associated natural person respondents. 876

    872 The number of broker-dealers is as of Dec. 31, 2017. Such associated natural persons are registered as registered representatives with FINRA through Form U4 as of Dec. 31, 2017. We took the total 494,399 registered representatives across standalone broker-dealers, dually registered firms, and standalone investment advisers and isolated those registered representatives that act on behalf of standalone broker-dealers and dually registered firms (i.e. 88%). See supra Section IV.A.1.e, Economic Analysis: Registered Representatives of Broker-Dealers, Investment Advisers and Dually Registered Firms.

    873See Section IV.A, supra note 460 and accompanying text. As noted above, as of December 2017, 3,841 broker-dealers filed Form BD. Retail sales by broker-dealers were obtained from Form BR.

    874See supra Section IV.A.1.e, at Table 5. For the purposes of the Paperwork Reduction Act analysis applicable to proposed rules 15l-3 and 211h-1, we are defining a “dually registered firm” in the same manner as “dual registrant” is defined in the baseline of the Economic Analysis. See supra Section IV, note 453.

    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.

    875 For the purposes of this proposed rule, we define large broker-dealers as those with total assets greater than 1 million and small broker-dealers as those with less than 1 million in total assets. See Table 1, Panel B supra Section IV.A.1.a. We note that this distinction differs from the distinction used for proposed rule 211h-1 below because historically we have used the number of employees rather than total assets to distinguish small and large investment advisers. See cf. Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No. 3221 (Jun. 22, 2011), at n.727 (“Release 3221”). Additionally, we believe that because broker-dealer services encompass a small set of large broker-dealers and thousands of smaller broker-dealers competing for niche or regional segments of the market, the number of employees would not provide the best estimate for how firms would be impacted by our proposed rule based on the number of communications produced. Instead, we believe that total assets properly account for the varying sizes of these smaller broker-dealers and are a better indicator as to how many communications would be impacted in proportion to a firm's size. More specifically, we assume that the greater the total assets, the larger the firm and associated number of customer accounts which in turn would lead to a greater number of communications with retail investors.

    876 We note that we are not analyzing new broker-dealers or associated natural persons because there has been a downward trend in broker-dealer registration and the number of associated natural persons has not shown signs of a noticeable increase over the past few years. From 2016 through 2018 the number of broker-dealers registered with the Commission decreased by 160. (4064 − 3904) = 160. See also FINRA Statistics, available at https://www.finra.org/newsroom/statistics#reps.

    2. Initial and Annual Burdens

    We estimate that the initial one time burden for complying with the disclosure requirements would be 72 hours per large broker-dealer 877 and 15 hours per small broker-dealer.878 We note that we are staging the compliance date to ensure that firms can phase out certain older communications from circulation through the regular business lifecycle rather than having to retroactively change them.879 As a result of this staged compliance, our burden estimates do not reflect the burdens that would have been imposed had these firms had to replace all outstanding communications.

    877 (8 hours for print communications per large broker-dealer + 64 hours for electronic communications per large broker-dealer).

    878 (5 hours for print communications per small broker-dealer + 10 hours for electronic communications per small broker-dealer).

    879 Similarly, we are not requiring firms to send new communications to replace all older print communications as this would be overly burdensome and costly for firms.

    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,880 broker-dealers would need to review their communications, identify which would need to be amended, make the changes, and verify that all firm communications comply with the rule's requirements including its technical specifications such as the type size, font, and prominence. Therefore, for existing print communications for large broker-dealers, we preliminarily estimate that the total burden for broker-dealers would be 8 hours for compliance and business operations personnel to review, identify, and make changes across all print communications.881 For smaller broker-dealers, we preliminarily estimate that the total burden for broker-dealers would be 5 hours for compliance and business operations personnel to review, identify, and make changes across all print communications.882 We note that there is a difference between large broker-dealers and smaller broker-dealers. We assume that 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.

    880 Such communications could include business cards, letterheads, newspaper advertisements, and article reprints from an unaffiliated magazine or newspaper.

    881 This estimate is based upon staff experience and industry sources more generally. See e.g., Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change to Amend FINRA Rule 2210, Exchange Act Release No. 34-75377 (Jul. 7, 2015), at Economic Impact Assessment (“FINRA 2015-22 Notice”) (stating with reference to adding BrokerCheck links to mid-size and smaller firm communications, which we believe is analogous to the manual changes made to print communications, that “mid-size and small members typically have less complex websites, which they manage and maintain with nontechnical staff. These members would use personnel in non-technical roles to accomplish the required updates to their websites . . . [I]t would take mid-size or small members approximately eight hours of non-technical staffs' time to make the required updates . . .”).

    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.

    882 This estimate is based upon staff experience and industry sources more generally. See e.g., FINRA 2015-22 Notice, supra note 881. To compute the 5 hours internal initial burden we assume 1 hour by compliance personnel and 4 hours by business operations personnel of the broker-dealer.

    With respect to electronic communications,883 we preliminarily anticipate that it would take large broker-dealers approximately 64 hours 884 to review, identify and make the required updates coupled with verifying that such communications (present and future) would be compliant with the proposed rule. Our estimates take into account that larger firms likely have full-featured websites that generate other webpages based on complex system code and logic.885 In order to make changes to comply with our proposed rule, we assume that business operations and information technology personnel would likely be required to update the underlying code and logic to automate the implementation of the required language to populate across all associated electronic media. Additionally, we assume that these teams would need to test to ensure that such changes were implemented correctly.

    883 We believe such communications could include websites, smart phone apps, social media, emails, and blogs.

    884 This estimate is based upon staff experience and industry sources more generally. See e.g., FINRA 2015-22 Notice, supra note 881. (“These estimates are based on FINRA's assumption that large members typically have full-featured websites that dynamically generate webpages based on data and logic. The technology personnel at these members would be required to update the underlying information in order to automate the implementation of references and hyperlinks to BrokerCheck across all applicable webpages. FINRA estimates that on average it would take large members approximately 60 hours of technology staffs' time to make the required updates . . .”). To compute the 64 hours internal initial burden we assume 4 hours by compliance personnel and 60 hours by business operations and information technology personnel of the broker-dealer.

    885 This is based upon staff experience and industry sources more generally. See e.g., FINRA 2015-22 Notice, supra note (discussing the burdens associated with the inclusion of a BrokerCheck reference and hyperlink across all firm communications for certain firms).

    With respect to smaller broker-dealers, we preliminarily anticipate that it would take approximately 10 hours 886 to review, identify and make the required updates coupled with verifying that such communications (present and future) would be compliant with the proposed rule. Our estimate for smaller broker-dealers assumes that smaller broker-dealers have fewer electronic communications that would be subject to our proposed rule as compared to larger firms, resulting in a lower burden preliminary estimate.

    886 This estimate is based upon staff experience and industry sources more generally. See e.g., FINRA 2015-22 Notice, supra note 881 (stating with reference to adding BrokerCheck links to firm communications that “mid-size and small members typically have less complex websites, which they manage and maintain with nontechnical staff. These members would use personnel in non-technical roles to accomplish the required updates to their websites . . . [I]t would take mid-size or small members approximately eight hours of non-technical staffs' time to make the required updates . . .”).

    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.887 We preliminarily estimate a cost of approximately $33,179,514 for broker-dealers.888 This would be an annual average burden of 43 hours per broker-dealer 889 (as monetized, is an average annual burden per broker-dealer of $11,613).890

    887 (8 hours for print communications per large broker-dealer + 64 hours for electronic communications per large broker-dealers) = 72 hours per large broker-dealer. (72 hours × 1,388 large broker-dealers) = 99,936 total initial burden for large 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.

    888 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. The average technology and business rate is ($268 business rate + $270 technology rate)/2 = $269 average rate.

    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.

    889 (8 hours for print communications per large broker-dealer + 64 hours for electronic communications per large broker-dealers) = 72 hours per large broker-dealer. (72 hours × 1,388 large broker-dealers) = 99,936 total initial burden for large 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.

    890 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. The average technology and business rate is ($268 business rate + $270 technology rate)/2 = $269 average rate.

    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.891 Based on staff experience, we anticipate that many firms will make many communication changes for their associated natural persons, including their business cards and letterheads, leaving only certain responsibilities to the individual such as changes to their individual social media profile(s) and email signatures. Therefore, we preliminarily estimate that the total initial one-time burden for associated natural persons is 217,536 hours.892 We preliminarily estimate a monetized cost of approximately $31,107,576.50 for associated natural persons.893 This would be an annual average burden of 0.5 hours per associated natural person 894 (as monetized, is an average annual burden per associated natural person of $71.50).895

    891 This estimate is based upon staff experience. See e.g., Custody of Funds or Securities of Clients by Investment Advisers, Investment Advisers Act Release No. 2968 (Dec. 30, 2009) (“Release 2968”) (“We further estimate that the adviser will spend 10 minutes per client drafting and sending the notice.”); Enhanced Mutual Fund Disclosure Adopting Release, supra note 47 (“we estimate, as we did in the proposing release, that rule 498 will impose a 1/2 hour burden per portfolio annually associated with the compilation of the additional information required on a cover page or at the beginning of the Summary Prospectus. Rule 498 also imposes annual hour burdens associated with the posting of a fund's Summary Prospectus, statutory prospectus, SAI, and most recent report to shareholders on an Internet website. We estimate that the average hour burden for one portfolio to comply with the Internet website posting requirements will be approximately one hour annually.”).

    892 (0.5 hours × 435,071 associated natural persons) = 217,536 total initial burden for associated natural persons.

    893 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    894 (0.5 hours × 435,071 associated natural persons) = 217,536 total initial burden for associated natural persons.

    (217,536 total initial burden/435,071 total associated natural persons) = 0.5 total initial burden per associated natural person.

    895 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.896 We assume that the amount of outsourced legal assistance would vary among various sizes of broker-dealers and their number of associated natural persons. As a result, we preliminarily estimate that large broker-dealers together with their associated natural persons may initially outsource approximately 8 hours of legal time in order to understand the implications of our proposed rule, including which communications are subject to the proposed rule and how best to comply with the technical specifications.897 For small broker-dealers, we anticipate that such firms will outsource 4 hours of legal time.898 Our preliminary estimates take into account that large firms have more communications affected by our proposed rule and more associated natural persons to supervise than smaller firms. We estimate initial outside legal costs associated with the proposed rule of $8,014,560 for broker-dealers 899 or $2,805 per broker-dealer.900

    896 We are assuming that associated natural persons would not independently seek outside counsel and would instead rely on the advice received from outside counsel to the firm. Therefore, we are not including a separate estimate for associated natural persons.

    897 This estimate is based upon staff experience. See e.g. Disclosure of Order Handling Information Proposed Rule, Securities Exchange Act Release No. 34-78309 (July 13, 2016) (“Release 34-78309”) (estimating 4 hours for legal burden “to assign each order routing strategy for institutional orders into passive, neutral, and aggressive categories and establish and document its specific methodologies for assigning order routing strategies as required by Rule 606(b)(3)(v)”); Regulation of NMS Stock Alternative Trading Systems Proposed Rule, Securities Exchange Act Release No. 34-76474 (Nov. 18, 2015) (“Release 34-76474”) (estimating 7 legal hours “to put in writing its safeguards and procedures to protect subscribers' confidential trading information and the oversight procedures to ensure such safeguards and procedures are followed . . .”).

    898 This estimate is based upon staff experience. See supra note 897.

    899 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for legal services is $472/hour.

    ($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.

    900 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for legal services is $472/hour.

    ($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 901 (or $216,258 per broker-dealer).902 We assume that because small broker-dealers have fewer associated natural persons there will be less communications that will require printing.

    901 Our estimates are based on staff experience and industry sources. In particular, staff factored in its cost estimate the costs associated with printing envelopes, pitch books, letterheads, and business cards. For large broker-dealers, the staff assumes a printing cost of $445,121. For small broker-dealers, the staff assumes a printing cost of $20,359.

    ($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.

    902 ($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/2,857 broker-dealers = $216,258 total cost per broker-dealer.

    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.903 We anticipate that broker-dealers will need to add the registration disclosure to each new communication which they create, however we anticipate the burdens associated with this task to be minimal and therefore we do not believe there is a material difference between large and small broker-dealers.904 We preliminarily estimate that the total ongoing annual aggregate burden for broker-dealers is 1,429 hours.905 We preliminarily estimate a total ongoing monetized cost of approximately $204,275.50 for broker-dealers.906 This would be an annual average burden of 0.5 hours per broker-dealer 907 (as monetized, is an average annual burden per broker-dealer of $71.50).908

    903 This estimate is based upon staff experience. See e.g., Release 2968, supra note 891; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47.

    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.

    904 Our assumption of no material difference between large and small rests on the fact that all major systems changes would already have been implemented as part of the initial one-time burden. Therefore, any new electronic communications would have the disclosure statement required by our proposed rule built in at the outset which should take minimal time rather than having to retroactively insert it into the systems logic which is a more onerous task. We note that such communications will need to be reviewed by compliance staff for compliance with applicable securities laws and associated self-regulatory agency rules, including FINRA Rule 2210. We anticipate that compliance with proposed rule 151-3's requirements will be reviewed as part of this larger compliance check.

    905 (0.5 hours × 2,857 broker-dealers) = 1,429 total ongoing burden for broker-dealers.

    906 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    907 (0.5 hours × 2,857 broker-dealers) = 1,429 total ongoing burden for broker-dealers.

    (1,429 total ongoing burden for broker-dealers/2,857 total broker-dealers) = 0.5 total initial burden per broker-dealer.

    908 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.909 Therefore, we preliminarily estimate that the total ongoing annual aggregate burden for associated natural persons is 217,536 hours.910 We preliminarily estimate a total ongoing monetized cost of approximately $31,107,576.50 for associated natural persons.911 This would be an ongoing annual average burden of 0.5 hours per associated natural person 912 (as monetized, is an average ongoing annual burden per associated natural person of $71.50).913

    909 This estimate is based upon staff experience. See e.g., Release 2968, supra note 891; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47.

    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.

    910 (0.5 hours × 435,071 associated natural persons) = 217,536 total ongoing burden for associated natural persons.

    911 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    912 (0.5 hours × 435,071 associated natural persons) = 217,536 total ongoing annual burden 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.

    913 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    H. Rule 211h-1 Under the Advisers Act

    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.

    1. Respondents: Investment Advisers and Supervised Persons

    Currently, there are 12,721 registered investment advisers and approximately 942,215 supervised persons.914 Of these, 7,625 investment advisers distribute print or electronic retail investor communications while 245,408 supervised persons distribute print or electronic retail investor communications at standalone investment advisers or dually registered firms.915 Additionally, of these investment advisers 2,738 are large advisers and 4,887 are small advisers.916 Accordingly, the Commission estimates that 7,625 investment advisers and 245,408 supervised persons would be required to comply with proposed rule 211h-1. There are also 477 new SEC registered investment advisers per year on average and 3,000 new supervised persons per year.917

    914 The investment adviser and supervised person numbers are as of December 31, 2017. See supra Section IV.A.1.b, at Table 3, Panel A. We note that our estimate of supervised persons is based on those supervised persons identified in the baseline in the Economic Analysis. See Section IV.A.1.e, at Table 6.

    915 We estimate the number of supervised persons who distribute print or electronic retail investor communications using several data points. First, we analyzed those supervised persons who only hold a series 65 at a dual registrant or an investment adviser firm, totaling 27,879. Next we analyzed those supervised persons at dual registrants or investment advisers holding a combination of either a series 6 and 65 or a series 7 and 65, totaling 15,381 and 172,304 respectively. Finally, we analyzed those supervised persons at dual registrants or investment advisers holding a series 6, 7, and 65, totaling 29,944. (27,879 + 15,281 + 172,304 + 29,944) = 245,408 total supervised persons who engage retail investors through print or electronic communications. We note that our estimate does not reflect supervised persons who hold various designations (e.g. Chartered Financial Analyst) in lieu of the licenses we used to identify supervised persons of investment advisers who distribute print or electronic retail investor communications. Finally, our estimate does not employ rounding as compared to Table 6 in the Economic Analysis Baseline. See Table 6: Number of Employees at Retail Facing Firms who are Registered Representatives, Investment Adviser Representatives, or Both, Section I.V.A.1.e. These numbers are as of December 31, 2017.

    916 For purposes of this estimate, we categorize small advisers as advisers with 10 or fewer employees and large advisers as those with 10 or more employees. See cf. Release 3221, supra note 875, at n.727.

    917 The number of new investment advisers is calculated by looking at the number of new advisers in 2016 and 2017 and then isolating the number each year that services retail investors. (455 for 2016 + 499 for 2017)/2) = 477.

    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.

    2. Initial and Annual Burdens

    We estimate that the initial one-time burden for complying with the disclosure requirements would be 72 hours per large investment adviser 918 and 15 hours per small investment adviser.919 We note that we are staging the compliance date to ensure that firms can phase out certain older communications from circulation through the regular business lifecycle rather than having to retroactively change them.920 As a result of this staged compliance, our burden estimates do not reflect the burdens that would have been imposed had these firms had to replace all outstanding communications.

    918 (8 hours for print communications per broker-dealer + 64 hours for electronic communications per broker-dealer).

    919 (5 hours for print communications per broker-dealer + 10 hours for electronic communications per broker-dealer).

    920 Similarly, we are not requiring firms to send new communications to replace all older print communications as this would be overly burdensome and costly for firms.

    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,921 investment advisers would need to review their communications, identify which would need to be amended, make the changes, and verify that all firm communications comply with the rule's requirements including its technical specifications such as the type size, font, and prominence. Our preliminary estimates differ for large and small investment advisers. We drew these distinctions because we assume that the larger an adviser is the more communications it would need to review, identify and change and in turn have its compliance staff verify that such communications are compliant with our proposed rule.

    921 Such communications could include business cards, letterheads, newspaper advertisements, and article reprints from an unaffiliated magazines or newspaper.

    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.922 For small investment advisers, we preliminarily estimate that the total burden for investment advisers would be 5 hours for compliance and business operations personnel to review, identify, and make changes across all print communications.923

    922 This estimate is based upon staff experience and industry sources more generally. See e.g., FINRA 2015-22 Notice, supra note 881.

    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.

    923 This estimate is based upon staff experience and industry materials more generally. See e.g., FINRA 2015-22 Notice, supra note 881. To compute the 5 hours internal initial burden we assume 1 hour by compliance personnel and 4 hours by business operations personnel of the investment adviser.

    With respect to electronic communications 924 we preliminarily anticipate that it would take large investment advisers approximately 64 hours 925 to review, identify and make the required updates coupled with verifying that such communications (present and future) would be compliant with the proposed rule. Our estimates take into account that larger firms likely have full-featured websites that generate other webpages based on complex system code and logic.926 In order to make changes to comply with our proposed rule, we assume that business operations and information technology personnel would likely be required to update the underlying code and logic to automate the implementation of the required language to populate across all associated electronic media. Additionally, we assume that these teams would need to test to ensure that such changes were implemented correctly.

    924 We believe such communications could include websites, smart phone apps, social media, emails, and blogs.

    925 This estimate is based upon staff experience and industry materials more generally. See e.g., FINRA 2015-22 Notice, supra note 881. To compute the 64 hours internal initial burden we assume 4 hours by compliance personnel and 60 hours by business operations and information technology personnel of the investment adviser.

    926 This is based upon staff experience and industry materials more generally. See e.g., FINRA 2015-22 Notice, supra note 881 (discussing the burdens associated with the inclusion of a BrokerCheck reference and hyperlink across all firm communications for certain firms).

    With respect to small investment advisers, we preliminarily anticipate that it would take approximately 10 hours 927 to review, identify and make the required updates coupled with verifying that such communications (present and future) would be compliant with the proposed rule. Our estimate for small investment advisers assumes that small investment advisers have fewer electronic communications that would be subject to our proposed rule as compared to larger firms, resulting in a lower burden preliminary estimate.

    927 This estimate is based upon staff experience and industry materials more generally. See e.g., FINRA 2015-22 Notice, supra note 881.

    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.928 We preliminarily estimate a cost of approximately $73,650,210 for investment advisers.929 This would be an annual average burden of 35 hours per investment adviser 930 (as monetized, an annual average cost of $9,659 per investment adviser).931

    928 (8 hours for print communications per large investment adviser + 64 hours for electronic communications per large investment adviser) = 72 hours per large investment adviser.

    (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.

    929 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services in the securities industry is $298, for business services is $268, and for technology services is $270. The average technology and business rate is ($270 technology rate + $268 business rate)/2 = $269 average rate.

    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.

    930 (8 hours for print communications per large investment adviser + 64 hours for electronic communications per large investment adviser) = 72 hours per large investment adviser.

    (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.

    931 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. The average technology and business rate is ($268 business rate + $270 technology rate)/2 = $269 average rate.

    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.932 Based on staff experience, we anticipate that many firms will make many communication changes for their supervised persons, including their business cards and letterheads, leaving only certain responsibilities to the individual such as changes to their individual social media profile(s) and email signatures. Therefore, we preliminarily estimate that the total initial one-time burden for supervised persons is 122,704 hours.933 We preliminarily estimate a monetized cost of approximately $17,546,672 for supervised persons.934 This would be an annual average burden of 0.5 hours per supervised person 935 (as monetized, is an annual average cost of $71.50 per supervised person).936

    932 This estimate is based upon staff experience. See e.g., Release 2968, supra note 891; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47.

    933 (0.5 hours × 245,408 supervised persons) = 122,704 total initial burden for supervised persons.

    934 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    935 (0.5 hours × 245,408 supervised persons) = 122,704 total initial burden 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.

    936 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.937 We assume that the amount of outsourced legal assistance would vary among various sizes of investment advisers and their number of supervised persons. As a result, we preliminarily estimate that large investment advisers together with their supervised persons may initially outsource approximately 8 hours of legal time in order to understand the implications of our proposed rule and how best to comply with the technical specifications.938 For small investment advisers, we anticipate that such firms will outsource 4 hours of legal time.939 The hour differences in our preliminary estimates take into account that larger firms have more communications affected by our proposed rule and more supervised persons to supervise than small firms. We estimate initial outside legal costs associated with the proposed rule of $19,565,344 for investment advisers 940 (or $2,566 on average per investment adviser.) 941

    937 We are assuming that supervised persons would not independently seek outside counsel and would instead rely on the advice received from outside counsel to the firm. Therefore, we are not including a separate estimate for supervised persons.

    938 This estimate is based upon staff experience. See e.g., Release 34-78309, supra note 897; Release 34-76474, supra note 897.

    939 This estimate is based upon staff experience. See supra note 938.

    940 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for legal services is $472/hour.

    ($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.

    941 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for legal services is $472/hour.

    ($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 estimate initial costs to amend certain communications associated with the proposed rule of $346,787,187 for investment advisers 942 (or $45,480 per investment adviser.) 943 We assume that because small investment advisers have fewer supervised persons there will be less communications that will require printing.

    942 Our estimates are based on staff experience and industry materials. In particular, staff factored in its cost estimate the costs associated with printing envelopes, pitch books, letter heads, and business cards. For large investment advisers, we assume printing costs of $65,973. For small investment advisers, we assume printing costs of $33,999.

    ($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.

    943 ($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/7,625 investment advisers = $45,480 total cost per investment adviser.

    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.944 We anticipate that investment advisers will need to add the registration disclosure to each new communication which they create, however we anticipate the burdens associated with this task to be minimal and therefore we do not believe there is a material difference between large and small investment advisers.945 We preliminarily estimate that the total ongoing annual aggregate burden for investment advisers is 3,812.50 hours.946 We preliminarily estimate a total ongoing monetized cost of approximately $545,187.50 for investment advisers.947 This would be an annual average burden of 0.5 hours per investment advisers 948 (as monetized, is an annual average cost of $71.50 per investment adviser).949

    944 This estimate is based upon staff experience. See e.g., Release 2968, supra note 891; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47.

    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.

    945 Our assumption of no material difference between large and small investment advisers rests on the fact that all major systems changes would already have been implemented as part of the initial burden. Therefore, any new electronic communications would have the disclosure statement required by our proposed rule built in at the outset which should take minimal time rather than having to retroactively insert it into the systems logic which is a more onerous task. We note that such communications would likely be reviewed by compliance staff for compliance with applicable securities laws including rule 206(4)-1 of the Advisers Act. We anticipate that compliance with proposed rule 211h-1's requirements would be reviewed as part of this larger compliance check.

    946 (0.5 hours × 7,625 investment advisers) = 3,812.50 total ongoing burden for investment advisers.

    947 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    948 (0.5 hours × 7,625 investment advisers) = 3,812.50 total ongoing burden for investment advisers.

    (3,812.5/7,625 total investment advisers) = 0.5 hours average initial burden per investment adviser.

    949 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.950 Therefore, we preliminarily estimate that the total ongoing annual aggregate burden for supervised persons is 122,704 hours.951 We preliminarily estimate a total ongoing monetized cost of approximately $17,546,672 for supervised persons.952 This would be an annual average burden of 0.5 hours per supervised person 953 (as monetized, is an annual average cost of $71.50 per supervised person).954

    950 This estimate is based upon staff experience. See e.g., Release 2968, supra note 891; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47.

    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.

    951 (0.5 hours × 245,408 supervised persons) = 122,704 total ongoing burden for supervised persons.

    952 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    953 (0.5 hours × 245,408 supervised persons) = 122,704 total ongoing annual burden 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.

    954 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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 costs, depending on their size, as discussed above. We do not believe that such new investment advisers would incur outside printing costs as a result of our proposed rule because these new firms would have their print communications produced with the appropriate disclosure initially as part of other materials they seek to have printed. Therefore, we preliminarily estimate that the total burden for new investment advisers is 238.50 hours.955 Additionally, we preliminarily estimate a cost of approximately $34,105.50 for new investment advisers.956 This would be an initial average burden of 0.5 hours per new investment adviser 957 (as monetized, is an initial average cost of $71.50 per new investment adviser).958 Additionally, we anticipate 1,500 hours 959 for new supervised persons of an investment adviser and costs of approximately $214,500 for new supervised persons 960 of an investment adviser resulting from these requirements. This would be an initial average burden of 0.5 hours per new supervised person 961 (as monetized, is an initial average cost of $71.50 per supervised person).962

    955 (0.5 hours × 477 new investment advisers) = 238.50 total burden for new investment advisers.

    956 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    957 (0.5 hours × 477 new investment advisers) = 238.50 total initial burden 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.

    958 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    959 (0.5 hours × 3,000 new supervised persons) = 1,500 total burden for new supervised persons.

    960 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    961 (0.5 hours × 3,000 new supervised persons) = 1,500 total initial burden 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.

    962 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270.

    This figure was calculated as follows: 0.5 hours/3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category

    ($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.

    I. Request for Comment

    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.

    VI. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory Flexibility Analysis (“IRFA”) in accordance with section 3(a) of the Regulatory Flexibility Act (“RFA”).963 It relates to: (i) Proposed new rule 204-5 under the Advisers Act and proposed amendment to, Form ADV (17 CFR 279.1), to add a new Part 3: Form CRS; (ii) proposed amendments to rule 203-1 under the Advisers Act; (iii) proposed amendments to rule 204-1 under the Advisers Act; (iv) proposed amendments to rule 204-2 under the Advisers Act; (v) proposed new rule 17a-14 under the Exchange Act and new Form CRS (17 CFR 249.640); (vi) proposed amendments to rules 17a-3 and 17a-4 under the Exchange Act; (vii) proposed new rules 15l-2 and 15l-3 under the Exchange Act; and (viii) proposed new rule 211h-1 under the Advisers Act.

    963 5 U.S.C. 603(a).

    A. Reason for and Objectives of the Proposed Action

    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.964 These differences include the scope and nature of the services they provide, the fees and costs associated with those services, conflicts of interest, and the applicable legal standards and duties owed to investors. Studies also indicate that retail investors are confused about whether their firm and financial professional are broker-dealers or investment advisers, or both.965 Based on these studies, it appears that certain names or titles used by broker-dealers, including “financial advisor,” contribute to this confusion and 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.966

    964See Siegel & Gale Study, supra note 5; Rand Study, supra note 5; and CFA Survey, supra note 5.

    965See Siegel & Gale Study, supra note 5; Rand Study, supra note 5; and 913 Study, supra note 3.

    966See supra note 375.

    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.967 We believe it is important to ensure that retail investors receive the information they need to clearly understand the services, standard of conduct, fees, conflicts, and disciplinary history of firms and financial professionals they are considering. We also believe 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 decision about which firm type and financial professional they are engaging or seeking to engage and avoid potential harm.

    967See supra notes 6-22 and accompanying text, referring to the Siegel & Gale Study, the RAND Study, the 913 Study, commenters responding to the 2013 Request for Data, the 917 Financial Literacy Study, comment letters of commenters providing input for these studies, the recommendation of the Commission's Investor Advisory Committee, and comment letters of commenters responding to Chairman Clayton's Request for Comment.

    1. Proposed Form CRS Relationship Summary

    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 (e.g., switching or adding account types), as further discussed above, is appropriate and in the public interest and will improve investor protection, and will deter potentially misleading sales practices by helping retail investors to make a more informed choice among the types of firms and services available to them.968

    968See supra note 36 and accompanying text.

    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.969

    969See, e.g., Sections IV.B.2.b and V.

    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 advisers.970 The relationship summary would alert retail investors to important information for them to consider when choosing a firm and a financial professional and prompt retail investors to ask informed questions. In addition, the content of the relationship summary would facilitate comparisons across firms. As discussed in Section II above, 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 information about the services, fees, conflicts, and disciplinary history for broker-dealers.971

    970See, e.g., supra note 33 and accompanying text.

    971See supra text accompanying note 316. In addition, under Regulation Best Interest, broker-dealers would be required to 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 that are associated with the recommendation. See supra note 296.

    2. Proposed Rules Relating to Restrictions on the Use of Certain Terms and Required Disclosure of Regulatory Status and a Financial Professional's Firm Association

    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.

    B. Legal Basis

    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.

    C. Small Entities Subject to the Rule and Rule Amendments

    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.

    1. Investment Advisers

    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.972 As discussed in Section V, above, the Commission estimates that based on IARD data as of December 31, 2017, approximately 7,625 investment advisers would be subject to the proposed new rule 204-5 under the Advisers Act, Form CRS (required by a new Part 3 of Form ADV), the proposed amendments to rules 203-1, 204-1, and rule 204-2 under the Advisers Act, and the proposed new rule 211h-1 under the Advisers Act.973 Our proposed new rules and amendments would not affect most investment advisers that are small entities (“small advisers”) because they are generally registered with one or more state securities authorities and not with the Commission. Under section 203A of the Advisers Act, most small advisers are prohibited from registering with the Commission and are regulated by state regulators. Based on IARD data, we estimate that as of December 31, 2017, approximately 618 SEC-registered advisers are small entities under the RFA.974 Of these, 179 provide advice to individual high net worth and individual non-high net worth clients, and would therefore be subject to the proposed Form CRS requirements and the related new and amended rules under the Advisers Act, and proposed new rule 211h-1 under the Advisers Act requiring disclosure of Commission registration status and a financial professional's association in certain communications with retail investors.975

    972 Advisers Act rule 0-7(a).

    973See supra Section V, at note 712 and accompanying text. Based on responses to Item 5.D. of Form ADV. These advisers indicated that they advise either high net worth individuals or individuals (other than high net worth individuals), which includes trusts, estates, and 401(k) plans and IRAs of individuals and their family members, but does not include businesses organized as sole proprietorships. The proposed definition of retail investor would include a trust or other entity similar entity that represents of natural persons, even if another person is a trustee or managing agent of the trust. We are not able to determine, based on responses to Form ADV, exactly how many advisers provide investment advice to these types of trusts or other entities; however, we believe that these advisers most likely also advise individuals and are therefore included in our estimate.

    974 Based on SEC-registered investment adviser responses to Items 5.F. and 12 of Form ADV.

    975 Based on SEC-registered investment adviser responses to, Items 5.D.(a), 5.D.(b), 5.F. and 12 of Form ADV, which indicate that the adviser has clients that are high net worth individuals and/or individuals (other than high net worth individuals) and that the adviser is a small entity. Of these, 3 firms are dually registered as a broker-dealer and an investment adviser and may offer services to retail investors as both a broker-dealer and investment adviser (e.g., “dual registrants” for purposes of the relationship summary). See supra note 25. Dual registrants would file Form CRS on both IARD and EDGAR describing their retail advisory and retail brokerage businesses. In this RFA, dual registrants are counted in both the total number of small entity investment advisers and broker-dealers that would be subject to Form CRS and the proposed related rules and rule amendments. We believe that counting these firms twice is appropriate because of their additional burdens of complying with the rules with respect to both their advisory and brokerage businesses and filing Form CRS with IARD and EDGAR.

    2. Broker-Dealers

    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,976 or, if not required to file such statements, had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small business or small organization.

    976See 17 CFR 240.0-10(c).

    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.977 Further, based on FOCUS Report data, the Commission estimates that as of December 31, 2017, approximately 1,040 broker-dealers may be deemed small entities under the RFA.978 Of these, approximately 802 have retail business, and would be subject to the proposed Form CRS requirements and related proposed new and amended rules, the proposed rule requiring disclosure of Commission registration status in certain communications with retail investors, and the proposed rule regarding the prohibition of certain terms in names or titles in certain communications with retail investors.979

    977See supra note 461 and accompanying text. Retail sales activity is identified from Form BD, which categorizes retail activity broadly (by marking the “sales” box) or narrowly (by marking the “retail” or “institutional” boxes as types of sales activity). We use the broad definition of sales as we preliminarily believe that many firms will just mark “sales” if they have both retail and institutional activity. However, we note that this may capture some broker-dealers that do not have retail activity, although we are unable to estimate that frequency.

    978 The Commission's estimate is obtained from Form BD filings. Although Form BD filings are updated on a more frequent basis than annually, FOCUS data, which also informs this baseline with respect to broker-dealers, is only sparsely updated throughout the year. Moreover, instead, broker-dealers tend to make their most complete updates in the fourth calendar quarter of each year. Therefore, in order to minimize discrepancies in the broker-dealer data between Form BD and FOCUS data, we have normalized all of the data to the most recently complete FOCUS data, which is for December 2017.

    979Id.

    D. Projected Reporting, Recordkeeping and Other Compliance Requirements 1. Initial Preparation of Form CRS Relationship Summary

    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.980 In addition, as discussed in our Paperwork Reduction Analysis, above, we anticipate that some advisers may incur a one-time initial cost for outside legal and consulting fees in connection with the initial preparation of the relationship summary.981 Generally, all advisers, including small advisers that advise retail investors are currently required to prepare and distribute Part 2 of Form ADV (the firm brochure). Because advisers already provide disclosures about their services, fees, conflicts and disciplinary history in their firm brochures,982 they would be able to use some of this information to respond to the disclosure requirements of the relationship summary. They would, however, have to draft completely new disclosure to comply with the proposed new format of Form CRS. As discussed above, approximately 179 small advisers currently registered with us would be subject to the proposed new Form ADV Part 3.983 As discussed above in our Paperwork Reduction Act Analysis, we expect these 179 small advisers to spend, on average, an additional total of 23,152 annual hours, or approximately 129.34 hours per adviser,984 which translates into an approximate monetized cost of $1,478,055, or $8,257 per adviser, attributable to the initial preparation, filing, posting, and delivery related to Form CRS.985 We expect the incremental external legal and compliance cost for small entity investment advisers to be estimated at $525 per adviser, or $93,936 in aggregate for small advisers.986

    980See supra notes 621-637 and accompanying text (discussing the direct costs of Form CRS and related requirements on broker-dealers and investment advisers, including costs associated with delivery, preparation, and firm-wide implementation of the relationship summary, as well as training and monitoring for compliance).

    981See supra notes 729-730 and accompanying text (stating, however, that we do not anticipate external costs to investment advisers in the form of website set-up, maintenance, or licensing fees because they 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, and we also do not expect other ongoing external costs for the relationship summary).

    982 Much of the disclosure in Part 2A addresses an investment adviser's conflicts of interest with its clients, and is disclosure that the adviser, as a fiduciary, must make to clients in some manner regardless of the form requirements. See supra note 314.

    983See supra note 975 and accompanying text.

    984See supra Sections V.A.2, V.B, and V.C. 2.52 hours for preparing and filing of the relationship summary + 126.8 hours for posting to the website and delivery = 129.3 hours per adviser.

    985See supra Sections V.A.2, V.B, and V.C. 129.3 hours × 179 small advisers = $23,152 in total annual aggregate hours for small advisers. $8,257 × 179 small advisers = $1,478,055 in total annual aggregate monetized cost for small advisers.

    986See supra Section V.A.2.b.

    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.987 In addition, as discussed in our Paperwork Reduction Analysis, above, we 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.988 As discussed above,989 unlike investment advisers, 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 such as the investment advisory firm brochure.990 Under existing provisions of the Exchange Act and self-regulatory organization rules, however, a broker-dealer is required to disclose certain information to its customers.991 To the extent that some of the new Form CRS disclosure burdens would apply to small broker-dealers, these broker-dealers are therefore already obligated to make certain of these disclosures to retail investors, although the disclosure is not currently required to be included in one comprehensive document such as Form ADV. As discussed above,992 approximately 802 broker-dealers that are small entities would be subject to the proposed Form CRS requirements and proposed new and amended rules. As discussed above, we expect these 802 small broker-dealers to spend, on average, 1,080 hours per broker-dealer,993 for a monetized value of $66,006 per broker-dealer,994 or 865,956 aggregate annual hours to respond to the proposed new Form CRS requirements,995 for an annual monetized burden of approximately $52,936,812. We expect the aggregate annual external third-party cost to small broker-dealers associated with this process would be $376,940.996

    987See supra notes 621-637 and accompanying text (discussing the direct costs of Form CRS and related requirements on broker-dealers and investment advisers, including costs associated with delivery, preparation, and firm-wide implementation of the relationship summary, as well as training and monitoring for compliance).

    988See supra Section V.D.1. (stating, however, that we do not expect ongoing external legal or compliance consulting costs for the relationship summary).

    989See supra Section IV, at note 629 and accompanying text.

    990 Broker-dealers are required under certain circumstances, such as when effecting certain types of transactions, to disclose certain conflicts of interest to their customers in writing, in some cases at or before the time of the completion of the transaction. See 913 Study, supra note 3, at nn.256-259 and accompanying text. See supra note 311 and accompanying text. Under Regulation Best Interest, broker-dealers would also be required to disclose the material facts relating to the scope and terms of the relationship. Regulation Best Interest Proposal, supra note 24.

    991See supra Section II, at notes 309-312 and accompanying text. See also Regulation Best Interest Proposal, supra note 24.

    992See supra note 979.

    993See supra note 846.

    994See supra note 847.

    995See supra note 823 and accompanying text. 802 small broker-dealers × 1,080 hours per broker-dealer = 865,956 annual aggregate hours. 802 small broker-dealers × $66,006 in monetized cost per broker-dealer = 52,936,812 annual aggregate hours.

    996See supra note 829 and accompanying text. 802 small broker-dealers × $470 in external legal and compliance costs on average per broker-dealer = $376,940.

    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.997

    997See supra note 628 and accompanying text (discussing the Commission's preliminary belief that compliance costs could be different across firms with relatively smaller or larger numbers of retail investors as customers or clients).

    Filing, Delivery, and Updating Requirements Related to Form CRS. As discussed above, a firm would be required to give a relationship summary to each retail investor, if the firm is an investment adviser, before or at the time the firm enters into an investment advisory agreement with the retail investor, or if the firm is a broker-dealer, before or at the time the retail investor first engages the services of the broker-dealer.998 A firm would be required to deliver the relationship summary even if the firm's agreement with the retail investor is oral. A dual registrant 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. In order to ensure that existing retail investors receive the disclosures in the relationship summary, the Commission proposes that firms would deliver the relationship summary to retail investors who are existing clients and customers 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.999 In addition, firms would be required to deliver the relationship summary to a retail investor who is an existing client or customer 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. This would include, for example, before or at the time the firm recommends that the retail investor transfers from an investment advisory account to a brokerage account or from a brokerage account to an investment 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.

    998See supra Section II.C for a discussion of the delivery requirements.

    999See supra Section II.D for a discussion of the delivery requirements during the proposed transition period following the effectiveness of the proposed new rule.

    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.1000 Firms also would be required to post the latest version on its website (if it has one), and electronically file the relationship summary with the Commission. Firms would be required to communicate any changes in the 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 firm could communicate the information by delivering the amended relationship summary or by communicating the information in another way to the retail investor. We believe that this flexibility would minimize the burden of the communication requirement for all firms, including small advisers and broker-dealers. Firms also would also be required to deliver the relationship summary to a retail investor upon the retail investor's request.

    1000See supra Section II.C.3 for a discussion of updating requirements.

    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.1001

    1001See supra Sections V.A.-F.

    Recordkeeping Requirements Related to Form CRS. The proposed amendments would impose new recordkeeping requirements on many investment advisers and broker-dealers, including some small advisers and broker-dealers. We are proposing 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. Firms would also be required to maintain each amendment and revision to the relationship summary and a record of dates that each relationship summary and each amendment was delivered.

    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.1002 As discussed in the Paperwork Reduction Act Analysis in Section IV above, the proposed amendments to rule 204-2 under the Advisers Act would increase the annual burden by approximately 0.2 hours per adviser, or 35.80 hours in aggregate for small advisers.1003 We therefore expect the annual monetized aggregate cost to small advisers associated with our proposed amendments would be $2,148.1004 Also as discussed in the Paperwork Reduction Act Analysis in Section IV above, the proposed amendments to rules 17a-3 and 17a-4 under the Exchange Act would increase the burden by approximately 0.2 annual hours per broker-dealer, or 160.4 annual hours in the aggregate.1005 We expect the aggregate cost to small broker-dealers associated with our proposed amendments would be $9,624.1006

    1002See supra note 371 (referencing Advisers Act rule 204-2(e)(1) and Exchange Act rule 17a-4(e)(10), and stating that pursuant to Advisers Act rule 204-2(e)(1), investment advisers will be required to maintain the relationship summary for a period of five years, while Exchange Act rule 17a-4(e)(5) will require broker-dealers to maintain the relationship summary for a period of six years).

    1003See supra note 765. 0.2 hours × 179 small entity retail investment advisers = 35.8.

    1004See supra note 768.

    1005 0.2 hours × 802 small broker-dealers = 160.4 hours.

    1006See supra note 854 and accompanying text. $12 per broker-dealer × 802 small broker-dealers = $9,624.

    2. Rule 15l-2 Relating to Restrictions on the Use of Certain Terms in Names and Titles

    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 (e.g., “Sample Firm Advisory”) when communicating with any retail investor.

    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 1007 to use these terms where such person is also a supervised person of an investment adviser registered with the Commission or with a state and provides investment advice on behalf of such investment adviser. This would limit the ability of natural persons associated with a broker-dealer that do not typically provide investment advisory services to retail investors from continuing to use the term “adviser” or “advisor” by virtue of the fact that they are affiliated with a dually registered firm.

    1007 For purposes of rules 15l-2, 15l-3 and 211h-1, we are defining a “dually registered firm” in the same manner as a “dual registrant” is defined in the baseline of the Economic Analysis. See supra Section IV, note 453. See also supra note 411. We use the more narrowly defined “dual registrant” for purposes of the relationship summary discussion only.

    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 discussed in Section IV above, the Commission estimates that as of December 31, 2017, approximately 2,857 broker-dealers would be subject to the proposed rule 151-2 under the Exchange Act.1008 As discussed in Section IV, above, 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. To the extent these broker-dealers, some of which may be small entities, advise retail investors and would be subject to proposed rule 151-2, they would be subject to potentially substantial, one-time costs associated with the proposed rule. Broker-dealer firms subject to the restriction on the use of certain names or titles would be required to change current company names (if the company name contains “adviser/advisor”), marketing materials, advertisements (e.g., print ads or television commercials), website and social media appearance, among other items, resulting in direct compliance costs.

    1008See supra Section IV.A.1.a.

    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.” 1009 To the extent their associated natural persons use the terms adviser” or “advisor” when communicating with a retail investor, firms would need to assess whether to require their associated natural persons to change their names or title to comply with the proposed rule and modify their retail investor communications. We request comment on how many associated natural persons of broker-dealers, including small entity broker-dealers, are currently using the terms “adviser” or “advisor” in their names or titles, and how many of these associated natural persons are supervised persons of an investment adviser registered with the Commission or with a state and who provide investment advice on behalf of such investment adviser.

    1009 As discussed in Section IV, approximately 39 percent of the 103 broker-dealers described above used a proper name coupled with the term “advisor” alone, and an additional 31 percent used a proper name coupled with the term “capital advisor.” Additionally, as discussed in the RAND Study, professionals providing advisory services or both brokerage and advisory services similarly also use a wide variety of titles, but the proportion of professionals who use titles containing the terms “adviser” or “advisor” are somewhat larger at 35%. See supra Section IV, Table 8: Replication of Table 6.3 of the RAND Study—Professional Titles Most Commonly Reported by Respondents, and accompanying text.

    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.

    3. Rules 15l-3 and 211h-1 Relating to Disclosure of Commission Registration Status and Financial Professional Association

    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.1010 We preliminarily estimate that the costs associated with complying with the proposed rule regarding electronic communications would similarly be lower for small broker-dealers than for large broker-dealers, because we assume that small broker-dealers have fewer electronic communications that are subject to our proposed rule as compared to large firms. For investment advisers, as discussed above in Section V, we preliminarily estimate that large firms would require larger costs than small firms to comply with the proposed rule (e.g., large firms have a greater amount of retail investor communications subject to our proposed rule that would need to be reviewed, changed, and verified).

    1010 As stated in Section III.D above, we are not requiring firms to send new communications to replace all older print communications as this would be overly burdensome and costly for firms. Instead, we are staging the compliance date to ensure that firms can phase out certain older communications from circulation through the regular business lifecycle rather than having to retroactively change them.

    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.1011 Specifically, large broker-dealers would have to review, identify and change more print and electronic communications and in turn have their compliance staff verify more communications as being compliant with our proposed rules as compared to small broker-dealers which would have fewer communications. Similarly, with respect to investment advisers, we estimate that small investment advisers would have fewer print and electronic communications that would be subject to our proposed rule as compared to large firms, resulting in a lower burden preliminary estimate. In addition, the Commission estimates that small entity advisers have fewer employees performing investment advisory functions than large advisers.1012 Therefore, we anticipate that small entity retail investment advisers would require fewer resources to oversee their employees' compliance with the proposed rule.

    1011See Section IV.

    1012 Based on adviser responses to Item 5.B.(1) of Form ADV, we estimate that as of September 30, 2017, the median small entity retail investment adviser employed 1 person performing investment advisory functions, and the median non-small entity retail investment advisers employed 5 persons performing investment advisory functions.

    E. Duplicative, Overlapping, or Conflicting Federal Rules

    As noted above, broker-dealers and investment advisers have other disclosure obligations under the federal securities laws and other federal laws.1013 For example, the information required by the relationship summary is generally already provided in greater detail for investment advisers 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 their relationship with a particular firm, to compare different types of accounts, and to compare that firm with other firms. 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.

    1013See supra notes 308-316.

    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.1014 By having firms file the relationship summaries with the Commission, the Commission can more easily monitor the filings for compliance with Form CRS. We believe that requiring dual registrants to file on both EDGAR and IARD is appropriate and in the public interest and will improve investor protection. This is because retail investors seeking brokerage services (but not investment advisory services) would be likely to search EDGAR, and retail investors seeking investment advisory services (but not brokerage services) would be likely to search IARD.

    1014See supra Section II.C.1.

    F. Significant Alternatives

    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.

    1. Form CRS Relationship Summary

    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 investors of larger firms.1015 To establish different disclosure requirements for small entities would diminish this investor protection for clients of small advisers.

    1015See supra Section I (discussing the benefits of retail investors having access to diverse business models and of preserving investor choice among brokerage services, advisory services, or both).

    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.1016 In addition, as also discussed below, some firms may not maintain a website, and therefore their relationship summaries would not otherwise be accessible to the public.1017 We do not believe that proposing different filing requirements for large and small firms would be appropriate given our belief that the benefits of electronic filing are important for retail investors clients and customers of both large and small firms. Furthermore, almost all advisers, including small advisers, have Internet access and use the Internet for various purposes.1018

    1016See supra note 320 and accompanying text.

    1017Id.

    1018See 2000 Brochure Proposing Release, supra note 271, at n.304 and accompanying text. However, an adviser that is a small business may be eligible for a continuing hardship exemption for Form ADV filings, which would include proposed Form CRS, if it can demonstrate that filing electronically would impose an undue hardship. See Instruction 17 of General Instructions to Form ADV.

    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.1019 In other ways, as well, the proposal incorporates flexibility for smaller broker-dealers and investment advisers to comply with the proposed requirements. For instance, we are proposing to require firms to communicate 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 and without charge.1020 This requirement provides firms the ability to disclose changes without requiring them to duplicate disclosures and incur additional costs.

    1019See supra note 320 (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).

    1020 Advisers Act proposed rule 204-5(b)(4) and Exchange Act proposed rule 17a-14(c)(2)(iv4); proposed General Instruction 6.(b) to Form CRS. See supra Section II.C.3. Firms could communicate this information by delivering the amended relationship summary or by communicating the information another way to the retail investor. Id.

    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,1021 updating the relationship summary within 30 days whenever any information in the relationship summary becomes materially inaccurate,1022 and delivery of the relationship summary to an existing retail investor client or customer at certain points during the relationship.1023 Firms would also be required to file their relationship summaries with the Commission and post them on their firm websites, if they have a public website.

    1021See supra Section II.C.2. 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. Id.

    1022See supra Section II.C.3.

    1023See supra Section II.C.2. For example, our proposal would require firms to communicate 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 and without charge.

    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.1024 Also, as discussed above, we are requiring firms to use prescribed wording in many items, and we are proposing that firms may not include disclosure in the relationship summary other than disclosure that is required or permitted by the Instructions.1025 We believe that allowing only the proposed mandatory or permissible information would promote consistency of information presented to investors, and allow investors to focus on information that we believe is particularly helpful in deciding among firms.1026

    1024 For example we are proposing to require dual registrants to present all of the information required by Items 2 through 4 and Item 6 in a tabular format, comparing advisory services and brokerage services side-by-side, with prescribed headings. See proposed General Instruction 1.(e) to Form CRS. Similarly, standalone broker-dealers and investment advisers would be required to provide general information about fee types in tabular format, in a separate comparison section. See proposed Item 5 of Form CRS.

    1025See supra notes 54-55 and accompanying text.

    1026 It would also encourage impartial information by preventing firms from adding information commonly used in marketing materials, such as performance.

    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.1027 In addition, we have proposed permitting, but not requiring, the use of graphical formats where doing so does not unduly constrain effective description of a range of information. With respect to the prescribed wording, we are proposing that if a prescribed statement is inapplicable to a firm's business or would be misleading to a reasonable retail investor, the firm would be permitted to omit or modify that statement.1028

    1027See supra note 56.

    1028See proposed General Instruction 3 to Form CRS. Firms may omit or modify prescribed wording or other statements required to be part of the relationship summary if such statements are inapplicable to a firm's business or would be misleading to a reasonable retail investor.

    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.1029

    1029See requests for comment in Sections II.A and II.B with respect to the proposed prescribed wording in places throughout the relationship summary, and the proposed prescribed headings, order and format.

    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 (e.g., switching account types) is appropriate and in the public interest and will improve investor protection, and will deter potentially misleading sales practices by helping retail investors to make a more informed choice among the types of firms and services available to them. Since we view investor confusion about brokerage and advisory services as an issue for many retail investors who are clients and customers of advisers and broker-dealers, it would be inconsistent with the purpose of the relationship summary to specify different requirements for small entities.1030

    1030See supra note 3, citing studies that show retail investor confusion about the differences among broker-dealers and investment advisers.

    2. Rule 15l-2 Relating to Restrictions on the Use of Certain Terms in Names and Titles

    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 investment adviser (i.e., a fiduciary) on the basis of his name or title.

    Additionally, we considered two performance-based standards, as discussed above in Section III.C.1031 However, we believe that either performance standard would be less effective than our proposed design standard in addressing investor confusion stemming from their association with the statutory term investment adviser. In the first alternative approach, 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. For the second alternative approach, we considered precluding a broker-dealer from relying on the solely incidental exclusion of section 202(a)(11)(C) if it “held itself out” as an investment adviser to retail investors such as by 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. Under this second approach, there would be a prohibition on certain broker-dealer and its associated natural person communications that suggest, or could reasonably be understood as suggesting, that such broker-dealer or its associated natural persons are performing investment advisory services in a manner that would subject them to the Advisers Act rather than as solely incidental to their business as a broker-dealer. For the reasons we set out in Section III above, we believe that our proposed restriction on the use of “adviser” and “advisor” in combination with the requirement to deliver a relationship summary is 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. As a result, we believe that our proposed approach is more tailored toward creating greater clarity than our alternative approaches.

    1031See supra 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.

    3. Rule 15l-3 Relating to Disclosure of Commission Registration Status and Financial Professional Association

    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 (e.g., member of Securities Investor Protection Corporation). In such cases, retail investors would be unable to readily discern whether a firm is a broker-dealer or investment adviser and thus avoid making an uniformed choice of which firm or financial professional to engage or seek to engage, undermining a key purpose of our proposed rules. Therefore, we believe that our proposed design standards would facilitate the presentation of required information to retail investors. Specifically, as we noted above, disclosures as important as a firm's registration status or a financial professional's association with such firm should not be disclosed inconspicuously 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. In addition, we are proposing to require the disclosure to be presented in the body of the communication and not in a footnote. Finally, we are also proposing that if a communication is delivered through an electronic communication or in any publication by radio or television, the disclosure must be presented in a manner reasonably calculated to draw retail investors' attention to it. We believe that through these design standards retail investors would have the information necessary to facilitate an informed choice of financial firm and its professionals.

    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.

    G. Solicitation of Comments

    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.

    VII. Consideration of the Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or “SBREFA,” 1032 we must advise OMB whether a proposed regulation constitutes a “major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results in or is likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers or individual industries; or (3) significant adverse effects on competition, investment or innovation.

    1032 Public Law 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601).

    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.

    VIII. Statutory Authority

    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 15l-2 and 15l-3 under the authority set forth in sections 10, 15, 23, and 36 of the Securities Exchange Act of 1934 [15 U.S.C. 78j, 78o, 78w, and 78mm] and new rule 211h-1 under the authority set forth in sections 211(h), 206A, 211(a) of the Investment Advisers Act of 1940 [15 U.S.C. 80b-11(h), 80b-6a, 80b-11(a)].

    IX. Text of Rule and Form List of Subjects 17 CFR Parts 240 and 249

    Brokers, Reporting and recordkeeping requirements, Sales practice and disclosure requirements, Securities.

    17 CFR Parts 275 and 279

    Investment advisers, Reporting and recordkeeping requirements, Securities.

    Text of Proposed Rules

    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:

    PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 1. The general authority citation for part 240 continues to read as follows and sectional authorities for 240.15l-2, 240.15l-3, and 240.17a-14 are added to read as follows: Authority:

    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, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.

    Section 240.15l-2 is also issued under Public Law 111-203, sec. 913, 124 Stat. 1376 (2010).

    Section 240.15l-3 is also issued under Public Law 111-203, sec. 913, 124 Stat. 1376 (2010).

    Section 240.17a-14 is also issued under Public Law 111-203, sec. 913, 124 Stat. 1376 (2010).

    2. Section 240.15l-2 is added to read as follows:
    § 240.15l-2 Use of the Term “Adviser” or “Advisor”.

    (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 retail investor has the meaning set forth in § 240.17a-14.

    3. Section 240.15l-3 is added to read as follows:
    § 240.15l-3 Disclosure of Registration Status.

    (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 retail investor has the meaning set forth in § 240.17a-14.

    4. Section 240.17a-3 is amended by adding paragraph (a)(24) to read as follows:
    § 240.17a-3 Records to be made by certain exchange members, brokers and dealers.

    (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.

    5. Section 240.17a-4 is amended by adding paragraph (e)(10) to read as follows:
    § 240.17a-4 Records to be preserved by certain exchange members, brokers and dealers.

    (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.

    6. Section 240.17a-14 is added to read as follows:
    § 240.17a-14 Form CRS, for preparation, filing and delivery of Form CRS.

    (a) Scope of Section. This section shall apply to every broker or dealer registered with the Commission pursuant to section 15 of the Act that offers services to a retail investor.

    (b) Form CRS. You must:

    (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) Delivery of Form CRS. You must:

    (1) Deliver to each retail investor your current Form CRS before or at the time the retail investor first engages your services.

    (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) Other disclosure obligations. Delivering a Form CRS in compliance with this section does not relieve you of any other disclosure obligations arising under the federal securities laws and regulations or other laws or regulations (including the rules of a self-regulatory organization).

    (e) Definitions. For purposes of this section:

    (1) Current Form CRS means the most recent version of the Form CRS.

    (2) Retail investor means a customer or prospective customer who is a natural person (an individual). This term includes a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust.

    (f) Transition rule. (1) You must begin to comply with this section by [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM], including by filing your Form CRS in accordance with paragraph (b)(2) of this section by that date.

    (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.

    Editorial Note:

    For Federal Register citations affecting Form CRS, see the List of CFR Sections Affected, which appears in the Finding Aids section of the printed volume and at www.fdsys.gov.

    PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 7. The authority citation for part 249 is amended by adding sectional authorities to read as follows: Authority:

    15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124 Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012); Sec. 107, Pub. L. 112-106, 126 Stat. 313, (2012), and Sec. 72001, Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.

    Section 249.640 is also issued under Public Law 111-203, sec. 913, 124 Stat. 1376 (2010).

    8. Section 249.640 is added to read as follows:
    § 249.640 Form CRS, Relationship Summary for Broker-Dealers Providing Services to Retail Investors, pursuant to § 240.17a-14 of this chapter.

    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.

    PART 275—RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940 9. The general authority citation for part 275 continues to read as follows and sectional authorities for 275.204-5 and 275.211h-1 are added to read as follows: Authority:

    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).

    10. Amend § 275.203-1 by revising paragraph(a) to read as follows:
    § 275.203-1 Application for investment adviser registration.

    (a) Form ADV. (1) To apply for registration with the Commission as an investment adviser, you must complete Form ADV (17 CFR 279.1) by following the instructions in the form and you must file Part 1A of Form ADV, the firm brochure(s) required by Part 2A of Form ADV and Form CRS required by Part 3 of Form ADV electronically with the Investment Adviser Registration Depository (IARD) unless you have received a hardship exemption under § 275.203-3. You are not required to file with the Commission the brochure supplements required by Part 2B of Form ADV.

    (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.

    Note to paragraph (a)(1):

    Information on how to file with the IARD is available on the Commission's Web site at http://www.sec.gov/iard. If you are not required to deliver a brochure or Form CRS to any clients, you are not required to prepare or file a brochure or Form CRS, as applicable, with the Commission. If you are not required to deliver a brochure supplement to any clients for any particular supervised person, you are not required to prepare a brochure supplement for that supervised person.

    11. Amend § 275.204-1 by revising paragraphs (a) and (b) to read as follows:
    § 275.204-1 Amendments to Form ADV.

    (a) When amendment is required. You must amend your Form ADV (17 CFR 279.1):

    (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) Electronic filing of amendments. (1) Subject to paragraph (b)(3) of this rule, you must file all amendments to Part 1A, Part 2A and Part 3 of Form ADV electronically with the IARD, unless you have received a continuing hardship exemption under § 275.203-3. You are not required to file with the Commission amendments to brochure supplements required by Part 2B of Form ADV.

    (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].

    Note to paragraphs (a) and (b):

    Information on how to file with the IARD is available on our Web site at http://www.sec.gov/iard. For the annual updating amendment: Summaries of material changes that are not included in the adviser's brochure must be filed with the Commission as an exhibit to Part 2A in the same electronic file; and if you are not required to prepare a brochure, a summary of material changes, an annual updating amendment to your brochure, or Form CRS you are not required to file them with the Commission. See the instructions for Part 2A and Part 3 of Form ADV.

    12. Section 275.204-2 is amended by revising paragraph (a)(14)(i) as follows:
    § 275.204-2 Books and records to be maintained by investment advisers.

    (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.

    13. Section 275.204-5 is added to read as follows:
    § 275.204-5 Delivery of Form CRS.

    (a) General requirements. If you are registered under the Act as an investment adviser, you must deliver Form CRS, required by Part 3 of Form ADV [17 CFR 279.1], to each retail investor.

    (b) Delivery requirements. You (or a supervised person acting on your behalf) must:

    (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) Other disclosure obligations. Delivering Form CRS in compliance with this section does not relieve you of any other disclosure obligations you have to your retail investors under any federal or state laws or regulations.

    (d) Definitions. For purposes of this section:

    (1) Current Form CRS means the most recent version of the Form CRS.

    (2) Retail investor means a client or prospective client who is a natural person (an individual). This term includes a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust.

    (3) Supervised person means any of your officers, partners or directors (or other persons occupying a similar status or performing similar functions) or employees, or any other person who provides investment advice on your behalf.

    (e) Transition rule.

    (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 comply with the requirements of paragraph (b) of this section.

    14. Section 275.211h-1 is added to read as follows:
    § 275.211h-1 Disclosure of Registration Status.

    (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 retail investor has the meaning set forth in Rule 204-5 (§ 275.204-5 of this chapter).

    PART 279—FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 1940 15. The authority citation for part 279 is revised to read as follows: Authority:

    The Investment Advisers Act of 1940, 15 U.S.C. 80b-1, et seq., Pub. L. 111-203, 124 Stat. 1376.

    16. Form ADV [referenced in § 279.1] is amended by: a. In the instructions to the form, revising the section entitled “Form ADV: General Instructions.” The revised version of Form ADV: General Instructions is attached as Appendix A; b. In the instructions to the form, adding the section entitled “Form ADV, Part 3: Instructions to Form CRS.” The new version of Form ADV, Part 3: Instructions to Form CRS is attached as Appendix B.

    By the Commission.

    Dated: April 18, 2018. Brent J. Fields, Secretary.
    Note:

    The text of Form ADV does not and the amendments will not appear in the Code of Federal Regulations.

    Appendices APPENDIX A FORM ADV (Paper Version) • UNIFORM APPLICATION FOR INVESTMENT ADVISER REGISTRATION AND • REPORT FORM BY EXEMPT REPORTING ADVISERS Form ADV: General Instructions

    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 (i.e., the advisory firm).

    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 private fund adviser filing an umbrella registration, “you” means the filing adviser and each relying adviser, unless the instructions or the form provide otherwise. The information in Items 1, 2, 3 and 10 (including corresponding schedules) should be provided for the filing adviser only.

    Terms that appear in italics are defined in the Glossary of Terms to Form ADV.

    1. Where can I get more information on Form ADV, electronic filing, and the IARD?

    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 state securities authority, on its website: <http://www.nasaa.org>.

    FINRA provides information about the IARD and electronic filing on the IARD website: <http://www.iard.com>.

    2. What is Form ADV used for?

    Investment advisers use Form ADV to:

    • Register with the Securities and Exchange Commission • Register with one or more state securities authorities • Amend those registrations; • Report to the SEC as an exempt reporting adviser • Report to one or more state securities authorities as an exempt reporting adviser • Amend those reports; and • Submit a final report as an exempt reporting adviser 3. How is Form ADV organized?

    Form ADV contains five parts:

    • Part 1A asks a number of questions about you, your business practices, the persons who own and control you, and the persons who provide investment advice on your behalf. ○ All advisers registering with the SEC or any of the state securities authorities must complete Part 1A. Exempt reporting advisers (that are not also registering with any state securities authority) must complete only the following Items of Part 1A: 1, 2, 3, 6, 7, 10, and 11, as well as corresponding schedules. Exempt reporting advisers that are registering with any state securities authority must complete all of Form ADV.  Part 1A also contains several supplemental schedules. The items of Part 1A let you know which schedules you must complete. ○ Schedule A asks for information about your direct owners and executive officers. ○ Schedule B asks for information about your indirect owners. ○ Schedule C is used by paper filers to update the information required by Schedules A and B (see Instruction 18). ○ Schedule D asks for additional information for certain items in Part 1A. ○ Schedule R asks for additional information about relying advisers. ○ Disclosure Reporting Pages (or DRPs) are schedules that ask for details about disciplinary events involving you or your advisory affiliates. • Part 1B asks additional questions required by state securities authorities. Part 1B contains three additional DRPs. If you are applying for SEC registration or are registered only with the SEC, you do not have to complete Part 1B. (If you are filing electronically and you do not have to complete Part 1B, you will not see Part 1B). • Part 2A requires advisers to create narrative brochures containing information about the advisory firm. The requirements in Part 2A apply to all investment advisers registered with or applying for registration with the SEC, but do not apply to exempt reporting advisers. Every application for registration must include a narrative brochure prepared in accordance with the requirements of Part 2A of Form ADV. See Advisers Act Rule 203-1. • Part 2B requires advisers to create brochure supplements containing information about certain supervised persons. The requirements in Part 2B apply to all investment advisers registered with or applying for registration with the SEC, but do not apply to exempt reporting advisers. • Part 3 requires advisers to create a relationship summary (Form CRS) containing information for retail investors. The requirements in Part 3 apply to all investment advisers registered or applying for registration with the SEC, but do not apply to exempt reporting advisers. Every adviser that has retail investors to whom it must deliver a relationship summary must include in the application for registration a relationship summary prepared in accordance with the requirements of Part 3 of Form ADV. See Advisers Act Rule 203-1. 4. When am I required to update my Form ADV? SEC- and State-Registered Advisers: Annual updating amendments: You must amend your Form ADV each year by filing an annual updating amendment within 90 days after the end of your fiscal year. When you submit your annual updating amendment, you must update your responses to all items, including corresponding sections of Schedules A, B, C, and D and all sections of Schedule R for each relying adviser. You must submit your summary of material changes required by Item 2 of Part 2A either in the brochure (cover page or the page immediately thereafter) or as an exhibit to your brochure. Other-than-annual amendments: In addition to your annual updating amendment, if you are registered with the SEC or a state securities authority, you must amend Part 1 and Part 2 of your Form ADV, including corresponding sections of Schedules A, B, C, D, and R, by filing additional amendments (other-than-annual amendments) promptly, if: you are adding or removing a relying adviser as part of your umbrella registration; information you provided in response to Items 1 (except 1.O. and Section 1.F. of Schedule D), 3, 9 (except 9.A.(2), 9.B.(2), 9.E., and 9.F.), or 11 of Part 1A or Items 1, 2.A. through 2.F., or 2.I. of Part 1B or Sections 1 or 3 of Schedule R becomes inaccurate in any way; information you provided in response to Items 4, 8, or 10 of Part 1A, or Item 2.G. of Part 1B, or Section 10 of Schedule R becomes materially inaccurate; or information you provided in your brochure becomes materially inaccurate (see note below for exceptions).

    Notes: Part 1: If you are submitting an other-than-annual amendment, you are not required to update your responses to Items 2, 5, 6, 7, 9.A.(2), 9.B.(2), 9.E., 9.F., or 12 of Part 1A, Items 2.H. or 2.J. of Part 1B, Section 1.F. of Schedule D or Section 2 of Schedule R even if your responses to those items have become inaccurate.

    Part 2: You must amend your brochure supplements (see Form ADV, Part 2B) promptly if any information in them becomes materially inaccurate. If you are submitting an other-than-annual amendment to your brochure, you are not required to update your summary of material changes as required by Item 2. You are not required to update your brochure between annual amendments solely because the amount of client assets you manage has changed or because your fee schedule has changed. However, if you are updating your brochure for a separate reason in between annual amendments, and the amount of client assets you manage listed in response to Item 4.E. or your fee schedule listed in response to Item 5.A. has become materially inaccurate, you should update that item(s) as part of the interim amendment.

    If you are an SEC-registered adviser, you are required to file your brochure amendments electronically through IARD. You are not required to file amendments to your brochure supplements with the SEC, but you must maintain a copy of them in your files. If you are a state-registered adviser, you are required to file your brochure amendments and brochure supplement amendments with the appropriate state securities authorities through IARD. Part 3 amendments: You must amend your relationship summary and file your relationship summary amendments in accordance with the Form ADV, Part 3 (Form CRS), General Instructions, 6. Exempt reporting advisers: Annual Updating Amendments: You must amend your Form ADV each year by filing an annual updating amendment within 90 days after the end of your fiscal year. When you submit your annual updating amendment, you must update your responses to all required items, including corresponding sections of Schedules A, B, C, and D. Other-than-Annual Amendments: In addition to your annual updating amendment, you must amend your Form ADV, including corresponding sections of Schedules A, B, C, and D, by filing additional amendments (other-than-annual amendments) promptly if: information you provided in response to Items 1 (except Item 1.O. and Section 1.F. of Schedule D), 3, or 11 becomes inaccurate in any way; or information you provided in response to Item 10 becomes materially inaccurate. Failure to update your Form ADV, as required by this instruction, is a violation of SEC rules or similar state rules and could lead to your registration being revoked. 5. What is SEC umbrella registration and how can I satisfy the requirements of filing an umbrella registration?

    An umbrella registration is a single registration by a filing adviser and one or more relying advisers who advise only private funds and certain separately managed account clients that are qualified clients and collectively conduct a single advisory business. Absent other facts suggesting that the filing adviser and relying adviser(s) conduct different businesses, umbrella registration is available under the following circumstances:

    i. The filing adviser and each relying adviser advise only private funds and clients in separately managed accounts that are qualified clients and are otherwise eligible to invest in the private funds advised by the filing adviser or a relying adviser and whose accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds.

    ii. The filing adviser has its principal office and place of business in the United States and, therefore, all of the substantive provisions of the Advisers Act and the rules thereunder apply to the filing adviser's and each relying adviser's dealings with each of its clients, regardless of whether any client of the filing adviser or relying adviser providing the advice is a United States person.

    iii. Each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser's supervision and control and, therefore, each relying adviser, its employees and the persons acting on its behalf are “persons associated with” the filing adviser (as defined in section 202(a)(17) of the Advisers Act).

    iv. The advisory activities of each relying adviser are subject to the Advisers Act and the rules thereunder, and each relying adviser is subject to examination by the SEC.

    v. The filing adviser and each relying adviser operate under a single code of ethics adopted in accordance with SEC rule 204A-1 and a single set of written policies and procedures adopted and implemented in accordance with SEC rule 206(4)-7 and administered by a single chief compliance officer in accordance with that rule.

    To satisfy the requirements of Form ADV while using umbrella registration the filing adviser must sign, file, and update as required, a single Form ADV (Parts 1 and 2) that relates to, and includes all information concerning, the filing adviser and each relying adviser (e.g., disciplinary information and ownership information), and must include this same information in any other reports or filings it must make under the Advisers Act or the rules thereunder (e.g., Form PF). The filing adviser and each relying adviser must not be prohibited from registering with the SEC by section 203A of the Advisers Act (i.e., the filing adviser and each relying adviser must individually qualify for SEC registration).

    Unless otherwise specified, references to “you” in Form ADV refer to both the filing adviser and each relying adviser. The information in Items 1, 2, 3 and 10 (including corresponding schedules) should be provided for the filing adviser only. A separate Schedule R should be completed for each relying adviser. References to “you” in Schedule R refer to the relying adviser only.

    A filing adviser applying for registration with the SEC should complete a Schedule R for each relying adviser. If you are a filing adviser registered with the SEC and would like to add or delete relying advisers from an umbrella registration, you should file an other-than-annual amendment and add or delete Schedule Rs as needed.

    Note: Umbrella registration is not available to exempt reporting advisers.

    6. Where do I sign my Form ADV application or amendment?

    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 exempt reporting adviser), and all amendments to Form ADV must include at least one Execution Page.

    • If you are applying for or are amending your SEC registration, or if you are reporting as an exempt reporting adviser or amending your report, you must sign and submit either a: ○ Domestic Investment Adviser Execution Page, if you (the advisory firm) are a resident of the United States; or Non-Resident Investment Adviser Execution Page, if you (the advisory firm) are not a resident of the United States. • If you are applying for or are amending your registration with a state securities authority, you must sign and submit the State-Registered Investment Adviser Execution Page. 7. Who must sign my Form ADV or amendment?

    The individual who signs the form depends upon your form of organization:

    • For a sole proprietorship, the sole proprietor. • For a partnership, a general partner. • For a corporation, an authorized principal officer. • For a “separately identifiable department or division” (SID) of a bank, a principal officer of your bank who is directly engaged in the management, direction, or supervision of your investment advisory activities. • For all others, an authorized individual who participates in managing or directing your affairs.

    The signature does not have to be notarized, and in the case of an electronic filing, should be a typed name.

    8. How do I file my Form ADV?

    Complete Form ADV electronically using the Investment Adviser Registration Depository (IARD) if:

    • You are filing with the SEC (and submitting notice filings to any of the state securities authorities), or • You are filing with a state securities authority that requires or permits advisers to submit Form ADV through the IARD.

    Note: SEC rules require advisers that are registered or applying for registration with the SEC, or that are reporting to the SEC as an exempt reporting adviser, to file electronically through the IARD system. See SEC rules 203-1 and 204-4.

    To file electronically, go to the IARD website (www.iard.com), which contains detailed instructions for advisers to follow when filing through the IARD.

    Complete Form ADV (Paper Version) on paper if:

    • You are filing with the SEC or a state securities authority that requires electronic filing, but you have been granted a continuing hardship exemption. Hardship exemptions are described in Instruction 17. • You are filing with a state securities authority that permits (but does not require) electronic filing and you do not file electronically. 9. How do I get started filing electronically?

    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 CRD number (identification number for your firm) and a user I.D. code and password (identification number and system password for the individual(s) who will submit Form ADV filings for your firm). Your firm may request an I.D. code and password for more than one individual. FINRA also will create a financial account for you from which the IARD will deduct filing fees and any state fees you are required to pay. If you already have a CRD account with FINRA, it will also serve as your IARD account; a separate account will not be established.

    Once you receive your CRD number, user I.D. code and password, and you have funded your account, you are ready to file electronically.

    Questions regarding the Entitlement Process should be addressed to FINRA at 240.386.4848.

    10. If I am applying for registration with the SEC, or amending my SEC registration, how do I make notice filings with the state securities authorities?

    If you are applying for registration with the SEC or are amending your SEC registration, one or more state securities authorities may require you to provide them with copies of your SEC filings. We call these filings “notice filings.” Your notice filings will be sent electronically to the states that you check on Item 2.C. of Part 1A. The state securities authorities to which you send notice filings may charge fees, which will be deducted from the account you establish with FINRA. To determine which state securities authorities require SEC-registered advisers to submit notice filings and to pay fees, consult the relevant state investment adviser law or state securities authority. See General Instruction 1.

    If you are granted a continuing hardship exemption to file Form ADV on paper, FINRA will enter your filing into the IARD and your notice filings will be sent electronically to the state securities authorities that you check on Item 2.C. of Part 1A.

    11. I am registered with a state. When must I switch to SEC registration?

    If at the time of your annual updating amendment you meet at least one of the requirements for SEC registration in Item 2.A.(1) to (12) of Part 1A, you must apply for registration with the SEC within 90 days after you file the annual updating amendment. Once you register with the SEC, you are subject to SEC regulation, regardless of whether you remain registered with one or more states. See SEC rule 203A-1(b)(2). Each of your investment adviser representatives, however, may be subject to registration in those states in which the representative has a place of business. See Advisers Act section 203A(b)(1); SEC rule 203A-3(a). For additional information, consult the investment adviser laws or the state securities authority for the particular state in which you are “doing business.” See General Instruction 1.

    12. I am registered with the SEC. When must I switch to registration with a state securities authority?

    If you check box 13 in Item 2.A. of Part 1A to report on your annual updating amendment that you are no longer eligible to register with the SEC, you must withdraw from SEC registration within 180 days after the end of your fiscal year by filing Form ADV-W. See SEC rule 203A-1(b)(2). You should consult state law or the state securities authority for the states in which you are “doing business” to determine if you are required to register in these states. See General Instruction 1. Until you file your Form ADV-W with the SEC, you will remain subject to SEC regulation, and you also will be subject to regulation in any states where you register. See SEC rule 203A-1(b)(2).

    13. I am an exempt reporting adviser. When must I submit my first report on Form ADV? All exempt reporting advisers: You must submit your initial Form ADV filing within 60 days of relying on the exemption from registration under either section 203(l) of the Advisers Act as an adviser solely to one or more venture capital funds or section 203(m) of the Advisers Act because you act solely as an adviser to private funds and have assets under management in the United States of less than $150 million. Additional instruction for advisers switching from being registered to being exempt reporting advisers: If you are currently registered as an investment adviser (or have an application for registration pending) with the SEC or with a state securities authority, you must file a Form ADV-W to withdraw from registration in the jurisdictions where you are switching. You must submit the Form ADV-W before submitting your first report as an exempt reporting adviser. 14. I am an exempt reporting adviser. Is it possible that I might be required to also register with or submit a report to a state securities authority?

    Yes, you may be required to register with or submit a report to one or more state securities authorities. If you are required to register with one or more state securities authorities, you must complete all of Form ADV. See General Instruction 3. If you are required to submit a report to one or more state securities authorities, check the box(es) in Item 2.C. of Part 1A next to the state(s) you would like to receive the report. Each of your investment adviser representatives may also be subject to registration requirements. For additional information about the requirements that may apply to you, consult the investment adviser laws or the state securities authority for the particular state in which you are “doing business.” See General Instruction 1.

    15. What do I do if I no longer meet the definition of “exempt reporting adviser”? Advisers Switching to SEC Registration: ○ You may no longer be an exempt reporting adviser and may be required to register with the SEC if you wish to continue doing business as an investment adviser. For example, you may be relying on section 203(l) and wish to accept a client that is not a venture capital fund as defined in SEC rule 203(l)-1, or you may have been relying on SEC rule 203(m)-1 and reported in Section 2.B. of Schedule D to your annual updating amendment that you have private fund assets of $150 million or more. If you are relying on section 203(l), unless you qualify for another exemption, you would violate the Advisers Act's registration requirement if you accept a client that is not a venture capital fund as defined in SEC rule 203(l)-1 before the SEC approves your application for registration. You must submit your final report as an exempt reporting adviser and apply for SEC registration in the same filing. If you were relying on SEC rule 203(m)-1 and you reported in Section 2.B. of Schedule D to your annual updating amendment that you have private fund assets of $150 million or more, you must register with the SEC unless you qualify for another exemption. If you have complied with all SEC reporting requirements applicable to an exempt reporting adviser as such, you have up to 90 days after filing your annual updating amendment to apply for SEC registration, and you may continue doing business as a private fund adviser during this time. You must submit your final report as an exempt reporting adviser and apply for SEC registration in the same filing. Unless you qualify for another exemption, you would violate the Advisers Act's registration requirement if you accept a client that is not a private fund during this transition period before the SEC approves your application for registration, and you must comply with all SEC reporting requirements applicable to an exempt reporting adviser as such during this 90-day transition period. If you have not complied with all SEC reporting requirements applicable to an exempt reporting adviser as such, this 90-day transition period is not available to you. Therefore, if the transition period is not available to you, and you do not qualify for another exemption, your application for registration must be approved by the SEC before you meet or exceed SEC rule 203(m)-1's $150 million asset threshold. ○ You will be deemed in compliance with the Form ADV filing and reporting requirements until the SEC approves or denies your application. If your application is approved, you will be able to continue business as a registered adviser. ○ If you register with the SEC, you may be subject to state notice filing requirements. To determine these requirements, consult the investment adviser laws or the state securities authority for the particular state in which you are “doing business.” See General Instruction 1. Note:

    If you are relying on SEC rule 203(m)-1 and you accept a client that is not a private fund, you will lose the exemption provided by SEC rule 203(m)-1 immediately. To avoid this result, you should apply for SEC registration in advance so that the SEC has approved your registration before you accept a client that is not a private fund.

    The 90-day transition period described above also applies to investment advisers with their principal offices and places of business outside of the United States with respect to their clients who are United States persons (e.g., the adviser would not be eligible for the 90-day transition period if it accepted a client that is a United States person and is not a private fund).

    Advisers Not Switching to SEC Registration: ○ You may no longer be an exempt reporting adviser but may not be required to register with the SEC or may be prohibited from doing so. For example, you may cease to do business as an investment adviser, become eligible for an exemption that does not require reporting, or be ineligible for SEC registration. In this case, you must submit a final report as an exempt reporting adviser to update only Item 1 of Part 1A of Form ADV. ○ You may be subject to state registration requirements. To determine these requirements, consult the investment adviser laws or the state securities authority for the particular state in which you are “doing business.” See General Instruction 1. 16. Are there filing fees?

    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 annual updating amendment. There is no filing fee for an other-than-annual amendment, a final report as an exempt reporting adviser, or Form ADV-W. The IARD filing fee schedule is published at http://www.sec.gov/iard; http://www.nasaa.org and http://www.iard.com.

    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.

    17. What if I am not able to file electronically?

    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.

    • A temporary hardship exemption is available if you file electronically, but you encounter unexpected difficulties that prevent you from making a timely filing with the IARD, such as a computer malfunction or electrical outage. This exemption does not permit you to file on paper; instead it extends the deadline for an electronic filing for seven business days. See SEC rules 203-3(a) and 204-4(e). • A continuing hardship exemption may be granted if you are a small business and you can demonstrate that filing electronically would impose an undue hardship. You are a small business, and may be eligible for a continuing hardship exemption, if you are required to answer Item 12 of Part 1A (because you have assets under management of less than $25 million) and you are able to respond “no” to each question in Item 12. See SEC rule 0-7.

    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.

    18. I am eligible to file on paper. How do I make a paper filing?

    When filing on paper, you must:

    • Type all of your responses. • Include your name (the same name you provide in response to Item 1.A. of Part 1A) and the date on every page. • If you are amending your Form ADV: ○ complete page 1 and circle the number of any item for which you are changing your response. ○ include your SEC 801-number (if you have one), or your 802-number (if you have one), and your CRD number (if you have one) on every page. ○ complete the amended item in full and circle the number of the item for which you are changing your response. ○ to amend Schedule A or Schedule B, complete and submit Schedule C.

    Where you submit your paper filing depends on why you are eligible to file on paper:

    • If you are filing on paper because you have been granted a continuing hardship exemption, submit one manually signed Form ADV and one copy to: IARD Document Processing, FINRA, P.O. Box 9495, Gaithersburg, MD 20898-9495. If you complete Form ADV on paper and submit it to FINRA but you do not have a continuing hardship exemption, the submission will be returned to you. • If you are filing on paper because a state in which you are registered or in which you are applying for registration allows you to submit paper instead of electronic filings, submit one manually signed Form ADV and one copy to the appropriate state securities authorities. 19. Who is required to file Form ADV-NR?

    Every non-resident general partner and managing agent of all SEC-registered advisers and exempt reporting advisers, whether or not the adviser is resident in the United States, must file Form ADV-NR in connection with the adviser's initial application or report. A general partner or managing agent of an SEC-registered adviser or exempt reporting adviser who becomes a non-resident after the adviser's initial application or report has been submitted must file Form ADV-NR within 30 days. Form ADV-NR must be filed on paper (it cannot be filed electronically).

    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.

    Failure to file Form ADV-NR promptly may delay SEC consideration of your initial application. Federal Information Law and Requirements

    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 exempt reporting advisers. The SEC maintains the information submitted on this form and makes it publicly available. The SEC may return forms that do not include required information. Intentional misstatements or omissions constitute federal criminal violations under 18 U.S.C. § 1001 and 15 U.S.C. § 80b-17.

    SEC's Collection of Information

    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 exempt reporting advisers. Every applicant for registration with the SEC as an adviser, and every exempt reporting adviser, must file the form. See 17 C.F.R. §§ 275.203-1 and 204-4. By accepting a form, however, the SEC does not make a finding that it has been completed or submitted correctly. The form is filed annually by every adviser, no later than 90 days after the end of its fiscal year, to amend its registration or its report. It is also filed promptly during the year to reflect material changes. See 17 C.F.R. § 275.204-1. The SEC maintains the information on the form and makes it publicly available through the IARD.

    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 Federal Register the Privacy Act System of Records Notice for these records.

    [Form ADV, Part 3:] 1 Instructions to Form CRS

    1 The bracketed text will be included for Form ADV, Part 3 (17 CFR 279.1) only.

    General Instructions

    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 retail investors a relationship summary disclosing information about the firm. Read all the General Instructions as well as the particular item requirements before preparing or updating the relationship summary.

    1. Narrative and Graphical Format.

    a. The relationship summary must include the required items enumerated below. The items require you to provide specific information and, in some cases, prescribe the particular wording that you must use. b. You must respond to each item and must provide responses in the same order as the items appear in these instructions. Unless otherwise noted, you must also present the required information within each item in the order listed. c. Whether in electronic or paper format, the relationship summary must not exceed four 8½″ x 11″ pages if converted to PDF format, using at least an 11 point font size and a minimum 0.75” margins on all sides. d. You may not include disclosure in the relationship summary other than disclosure that is required or permitted by these Instructions and the applicable item. e. If you are a dual registrant, present the information in Items 2 through 4 and Item 6 in a tabular format, comparing advisory services and brokerage services side-by-side. In the column discussing brokerage services, include the heading “Broker-Dealer Services” and the sub-heading “Brokerage Accounts.” In the column discussing investment advisory services, include the heading “Investment Adviser Services” and the sub-heading “Advisory Accounts.” Dual registrants should not complete Item 5, which must be completed by standalone investment advisers and standalone broker-dealers. f. You may use charts, graphs, tables, and other graphics or text features to explain the required information, so long as the information: (i) is responsive to and meets the requirements in these instructions (including space limitations); (ii) is not inaccurate or misleading; and (iii) does not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. When using interactive graphics or tools, you may include instructions on their use and interpretation. g. In a relationship summary that is posted on your website or otherwise provided electronically, you must use hyperlinks for any document that is cross-referenced in the relationship summary if the document is available online. See General Instruction 8.a. You may add embedded hyperlinks within the relationship summary in order to supplement required disclosures, for example, links to fee schedules, conflicts disclosures, the firm's narrative brochure required by Part 2A of Form ADV, or other regulatory disclosures.

    2. Plain Language. The items of the relationship summary are designed to promote effective communication between you and retail investors. Write your relationship summary in plain language, taking into consideration retail investors' level of financial experience. The relationship summary should be concise and direct. In drafting the relationship summary: (i) use short sentences; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) avoid legal jargon or highly technical business terms unless you clearly explain them or you believe that reasonable retail investors will understand them; and (v) avoid multiple negatives. You must write the relationship summary as if you are speaking to the retail investor, using “you,” “us,” “our firm,” etc.

    Note: The SEC's Office of Investor Education and Advocacy has published A Plain English Handbook. You may find the handbook helpful in writing your relationship summary. For a copy of this handbook, visit the SEC's website at www.sec.gov/news/extra/handbook.htm or call 1-800-732-0330.

    3. Full and Truthful Disclosure. All information in your relationship summary must be true and may not omit any material facts necessary to make the disclosures required by these Instructions and the applicable item not misleading. If a statement is inapplicable to your business or would be misleading to a reasonable retail investor, you may omit or modify that statement.

    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. Preserving Records. You must maintain a copy of each version of the relationship summary and make it available to the SEC staff upon request. See SEC Advisers Act rule 204-2(a)(14)(i); SEC Exchange Act rule 17a-4.

    5. Initial Filing and Delivery; Transition Provisions.

    a. Initial filing. If you are a registered investment adviser and are required to give a relationship summary to a retail investor, you must complete Form ADV, Part 3 (Form CRS) and file it electronically in a text-searchable format with the Investment Adviser Registration Depository (IARD). If you are a registered broker-dealer and are required to give a relationship summary to a retail investor, you must complete Form CRS and file it electronically in a text-searchable format with the Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”).

    If you do not have any retail investors to whom you must deliver a relationship summary, you are not required to prepare one.

    Note to instruction 5(a): If you are a dual registrant and are required to give a relationship summary to one or more retail investor clients or customers of both your advisory and brokerage businesses, you must prepare only one relationship summary and file it on IARD and EDGAR.

    Information for investment advisers on how to file with IARD is available on the Commission's website at www.sec.gov/iard. Information for broker-dealers on how to file with the Commission on EDGAR is available on the Commission's website at https://www.sec.gov/edgar.

    b. Initial delivery. You must give a relationship summary to each retail investor, if you are an investment adviser, before or at the time you enter into an investment advisory agreement with the retail investor, or if you are a broker-dealer, before or at the time the retail investor first engages your services. See SEC Advisers Act rule 204-5(b)(1) and SEC Exchange Act rule 17a-14(c)(1). You must deliver the relationship summary even if your agreement with the retail investor is oral. A dual registrant should 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. c. Transition provisions for initial filing and delivery after the effective date of the new Form CRS requirements. (i) If you are a broker-dealer, you must file your initial relationship summary with the Commission as required by instruction 5.a, by [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM]. If you are an investment adviser or a dual registrant, you must amend your Form ADV by electronically filing with IARD your initial relationship summary as part of the next annual updating amendment you are required to file after [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM]. (ii) As of the date by which you are first required to electronically file your relationship summary with the Commission, you must begin to deliver your relationship summary to new and prospective clients and customers who are retail investors as required by Instruction 5.b. (iii) Within 30 days after the date by which you are first required to electronically file your relationship summary with the Commission, you must deliver your relationship summary to each of your existing clients and customers who are retail investors.

    6. Updating Relationship Summary.

    a. You must update your relationship summary within 30 days whenever any information in the relationship summary becomes materially inaccurate. b. You must communicate any changes in the 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. You can make the communication by delivering the amended relationship summary or by communicating the information in another way to the retail investor. c. You must file each amended relationship summary electronically with the Commission, on IARD if you are an investment adviser or dual registrant, and on EDGAR if you are a broker-dealer.

    7. Additional Delivery Requirements to Existing Clients and Customers.

    a. You must deliver the relationship summary to a retail investor who is an existing client or customer 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 your relationship with the retail investor. For example, you must deliver a relationship summary before or at the time you recommend that the retail investor transfers from an investment advisory account to a brokerage account, transfers from a brokerage account to an investment 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 relationship summary would depend on the specific facts and circumstances. b. You also must deliver the relationship summary to a retail investor within 30 days upon the retail investor's request.

    8. Electronic Posting and Manner of Delivery.

    a. You must post the current version of the relationship summary prominently on your public website, if you have one, in a location and format that is easily accessible for retail investors. If you do not have a public website, include in your relationship summary a toll-free number that retail investors may call to request documents. b. You may deliver the relationship summary electronically, including updates, consistent with SEC guidance regarding electronic delivery of documents, in particular Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information, which you can find at www.sec.gov/rules/concept/33-7288.txt. c. If the relationship summary is delivered on paper and not as a standalone document, you should ensure that it is the first among any documents that are delivered at that time.

    9. Definitions.

    For purposes of this Form CRS, the following terms have the meanings ascribed to them below:

    a. Affiliate: Any persons directly or indirectly controlling or controlled by you or under common control with you. b. Dual registrant: A firm that is dually registered as a broker-dealer and an investment adviser and offers services to retail investors as both a broker-dealer and an investment adviser. c. Portfolio Manager: An investment adviser that manages investments in a wrap fee program. d. Relationship summary: A written disclosure statement that you must provide to retail investors. See Advisers Act rule 204-5; Exchange Act rule 17a-14; Form CRS. e. Retail investor: A prospective or existing client or customer who is a natural person (an individual). This term includes a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust. f. Standalone investment adviser and standalone broker-dealer: A standalone investment adviser is a registered investment adviser that offers services to retail investors and (i) is not dually registered as a broker-dealer or (ii) is dually registered as a broker-dealer but does not offer services to retail investors as a broker-dealer. A standalone broker-dealer is a registered broker-dealer that offers services to retail investors and (i) is not dually registered as an investment adviser or (ii) is dually registered as an investment adviser but does not offer services to retail investors as an investment adviser. g. Wrap fee program: An advisory program under which a specified fee or fees not based directly upon transactions in a retail investor's account is charged for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and the execution of retail investor transactions. [Form ADV, Part 3:] Form CRS Item 1: Introduction A. State your name, whether you are registered with the Securities and Exchange Commission as a broker-dealer, investment adviser, or both, and the date of the relationship summary. This information should be disclosed prominently on the first page, and can be included in the header or footer. B. Standalone Broker-Dealers: If you are a standalone broker-dealer, include the title “Is a Brokerage Account Right for You?” Include the following introductory paragraphs (emphasis required): “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 are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page [ ].” C. Standalone Investment Advisers: If you are a standalone investment adviser, include the title “Is an Investment Advisory Account Right for You?” Include the following introductory paragraphs (emphasis required): “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 are an investment adviser and provide advisory accounts and services rather than brokerage accounts and services. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page [ ].” D. Dual Registrants: If you are a dual registrant, include the title “Which Type of Account is Right for You - Brokerage, Investment Advisory or Both?” Include the following introductory paragraphs (emphasis required): “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. Depending on your needs and investment objectives, we can provide you with services in a brokerage account, investment advisory account, or both at the same time. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page [ ].” Item 2: Relationships and Services A. Include the heading “[Types of] Relationships and Services.” If you are a standalone broker-dealer or standalone investment adviser, omit the bracketed language. If you are a dual registrant, include the bracketed language in the heading, and include the following after the heading: “Our accounts and services fall into two categories.” B. Brokerage Account Services: If you are a broker-dealer that offers brokerage accounts to retail investors, summarize the principal brokerage services that you provide to retail investors. You must address the following, unless not applicable: 1. Include the following (emphasis required): “If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment.” 2. If you offer accounts in which you offer recommendations to retail investors, state that the retail investor may select investments or you may recommend investments for the retail investor's account, but the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments. If you only offer accounts in which you do not offer recommendations to retail investors (e.g., execution-only brokerage services), state that the retail investor will select the investments and the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments. 3. State if you offer to retail investors additional services, including, for example: (a) assistance with developing or executing the retail investor's investment strategy (e.g., you discuss the retail investor's investment goals or you design with the retail investor a strategy to achieve the retail investor's investment goals), or (b) monitoring the performance of the retail investor's account. Indicate whether these services can be offered as additional services or are part of the standard brokerage account services, and whether a retail investor will pay more for these services. If you offer monitoring (as reflected in (b) above), as part of the standard brokerage account services, indicate how frequently you monitor the performance. Briefly describe any regular communications you have with retail investors, including the frequency and method of the communications. 4. If you significantly limit the types of investments available to retail investors in any accounts, include the following: “We offer a limited selection of investments. Other firms could offer a wider range of choices, some of which might have lower costs.” You significantly limit the types of investments if, for example, you only offer one type of asset (e.g., mutual funds, exchange-traded funds, or variable annuities), you only offer mutual funds or other investments sponsored or managed by you or an affiliate (i.e., proprietary products), or you only offer a small number of investments. If such limits only apply to certain accounts that you offer, identify those accounts. C. Investment Advisory Account Services: If you are an investment adviser that offers investment advisory accounts to retail investors, summarize the principal investment advisory services that you provide to retail investors. You must address the following, unless not applicable: 1. State the type of fee you receive as compensation if the retail investor opens an investment advisory account. For example, state if you charge an on-going asset-based fee based on the value of cash and investments in the advisory account, a fixed fee, or some other fee arrangement. Emphasize the type of fee in bold and italicized font. If you are a standalone adviser, also state how frequently you assess the fee. 2. State that you offer advice on a regular basis, or, if you do not offer advice on a regular basis, state how frequently you offer advice. State the services you offer to retail investors including, for example, (a) assistance with developing the retail investor's investment strategy (e.g., you discuss the retail investor's investment goals or you design with the retail investor a strategy to achieve the retail investor's investment goals); or (b) how frequently you monitor the retail investor's accounts. Briefly describe any regular communications you have with retail investors, including the frequency and method of the communications. 3. State if you offer advisory accounts for which you exercise discretion (i.e., discretionary accounts), accounts where you do not exercise discretion (i.e., non-discretionary accounts), or both. Emphasize the type of account (discretionary and non-discretionary) in bold and italicized font. If you offer a discretionary account, state that it allows you to buy and sell investments in the retail investor's account, without asking the retail investor in advance. If you offer a non-discretionary account, state that you give advice and the retail investor decides what investments to buy and sell. 4. If you significantly limit the types of investments available to retail investors in any accounts, include the following: “Our investment advice will cover a limited selection of investments. Other firms could provide advice on a wider range of choices, some of which might have lower costs.” You significantly limit the types of investments if, for example, you only offer one type of asset (e.g., mutual funds, exchange-traded funds, or variable annuities), you only offer mutual funds or other investments sponsored or managed by you or an affiliate (i.e., proprietary products), or you only offer a small number of investments. If such limits only apply to certain accounts that you offer, identify those accounts. D. Affiliate Services: If you are a standalone investment adviser or standalone broker-dealer and have affiliates that offer to retail investors brokerage or advisory services, respectively, you may state that you provide retail investors with certain brokerage or advisory services of your affiliates, as applicable. Item 3: Standard of Conduct A. Include the heading “Our Obligations to You” and the following language after the heading: “We must abide by certain laws and regulations in our interactions with you.” B. Broker-Dealers: If you are a broker-dealer that offers brokerage accounts to retail investors, include the following: 1. “[We must act in your best interest and not place our interests ahead of yours when we recommend an investment or an investment strategy involving securities.] When we provide any service to you, we must treat you fairly and comply with a number of specific obligations. Unless we agree otherwise, we are not required to monitor your portfolio or investments on an ongoing basis.” Include the bracketed language only if you offer recommendations subject to Exchange Act Rule 15l-1 (“Regulation Best Interest”). 2. “Our interests can conflict with your interests. [When we provide recommendations, we must eliminate these conflicts or tell you about them and in some cases reduce them].” Include the bracketed language only if you offer recommendations subject to Regulation Best Interest. C. Investment Advisers: If you are an investment adviser that offers investment advisory accounts to retail investors, include the following: 1. “We are held to a fiduciary standard that covers our entire investment advisory relationship with you. [For example, we are required to monitor your portfolio, investment strategy and investments on an ongoing basis.]” If you do not provide ongoing advice (for example, if you only provide a one-time financial plan), omit the bracketed sentence. 2. “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.” Item 4: Summary of Fees and Costs A. Include the heading “Fees and Costs” and the following language after the heading: “Fees and costs affect the value of your account over time. Please ask your financial professional to give you personalized information on the fees and costs that you will pay.” B. Brokerage Account Fees and Costs: If you are a broker-dealer that offers brokerage accounts to retail investors, summarize the principal fees and costs that retail investors will incur. 1. If you are a dual registrant include the following (emphasis required): “Transaction-based fees. You will pay us a fee every time you buy or sell an investment. This fee, commonly referred to as a commission, is based on the specific transaction and not the value of your account.” If you are a standalone broker-dealer include the following: “The fee you pay is based on the specific transaction and not the value of your account.” 2. Include the following (emphasis required): (a) “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 “mark-up” or “mark down”). With mutual funds, this fee (typically called a “load”) reduces the value of your investment.” (b) 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 you offer to retail investors (e.g., mutual funds and variable annuities). Also state that a retail investor could be required to pay fees when certain investments are sold (e.g., surrender charges for selling variable annuities). 3. State whether your fees vary and are negotiable, and describe the key factors that you believe would help a reasonable retail investor understand the fee that he or she is likely to pay for your services (e.g., how much the retail investor buys or sells, what type of investment the retail investor buys or sells, and what kind of account the retail investor has with you). 4. State, if applicable, that a retail investor will also pay other fees in addition to the firm's principal fees. List other fees the retail investor will pay, including, but not limited to, custodian fees, account maintenance fees and account inactivity fees. 5. Include the following: “The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions.” 6. If you are a dual registrant include the following: “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.” C. Investment Advisory Account Fees and Costs: If you are an investment adviser that offers investment advisory accounts to retail investors, summarize the principal fees and costs that retail investors will incur. Your determination of the principal fees for investment advisory services should align with the type of fee(s) that you report in response to Form ADV Part 1A, Item 5.E. Include information about each type of fee you report that is responsive to this Item 4.C. 1. If you are a dual registrant include the following if you charge an asset-based fee (emphasis required): “Asset-based fees. You will pay an on-going fee [at the end of each quarter] based on the value of the cash and investments in your advisory account.” Replace the brackets with how frequently you assess the fee. If you charge another type of fee instead of an asset-based fee for your advisory services, briefly describe that fee and how frequently it is assessed. 2. Include the following: “The amount paid to our firm and your financial professional generally does not vary based on the type of investments we select on your behalf. [The asset-based fee reduces the value of your account and will be deducted from your account.]” Include the bracketed language if you charge an ongoing asset-based fee for your advisory accounts. If you charge another type of fee, succinctly describe how it is assessed and the impact it has on the value of the retail investor's account. 3. If you provide advice to retail investors about investing in a wrap fee program (and do not also offer retail investors another type of advisory account), include the following (emphasis required): “We offer advisory accounts called wrap fee programs. In a wrap fee program, the asset-based fee will include most transaction costs and fees to a broker-dealer or bank that will hold your assets (called “custody”), and as a result wrap fees are typically higher than non-wrap advisory fees.” If you offer retail investors a wrap fee program as well as another type of advisory account, include the following (emphasis required): “For some advisory accounts, called wrap fee programs, the asset-based fee will include most transaction costs and custody services, and as a result wrap fees are typically higher than non-wrap advisory fees.” 4. 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 you offer to retail investors (e.g., mutual funds and variable annuities). Also state that a retail investor could be required to pay fees when certain investments are sold (e.g., surrender charges for selling variable annuities). 5. State whether your fees vary and are negotiable, and describe the key factors that you believe would help a reasonable retail investor understand the fee that he or she is likely to pay for your services (e.g., the services your receive and the amount of assets in your account). 6. State, if applicable, that a retail investor will pay transaction-based fees when you buy and sell an investment for the retail investor (e.g., commissions paid to broker-dealers for buying or selling investments) in addition to the firm's principal fee it charges retail investors for the firm's advisory accounts. Also state, if applicable, that a retail investor will pay fees to a broker-dealer or bank that will hold the retail investor's assets and that this is called custody. List other fees the retail investor will pay, including, but not limited to, account maintenance services. 7. If you provide advice to retail investors about investing in a wrap fee program, include the following: “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).” 8. If you charge an ongoing asset-based fee, include the following: “The more assets you have in the advisory account, including cash, the more you will pay us. We therefore have an incentive to increase the assets in your account in order to increase our fees. You pay our fee [insert frequency of fee (e.g., quarterly)] even if you do not buy or sell.” Replace the brackets with the frequency of your fee. 9. If you provide advice to retail investors about investing in a wrap fee program, also include the following: “Paying for a wrap fee program could cost more than separately paying for advice and for transactions if there are infrequent trades in your account.” 10. If you are a dual registrant that charges an ongoing asset-based fee, include the following: “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.” If you provide advice to retail investors about investing in a wrap fee program, also include the following: “You may prefer a wrap fee program if you prefer the certainty of a [insert frequency of the wrap fee (e.g., quarterly)] fee regardless of the number of transactions you have.” Replace the brackets with the frequency of the wrap fee. Item 5: Comparisons to be provided by standalone investment advisers and standalone broker-dealers A. If you are a standalone investment adviser, include the heading “Compare with Typical Brokerage Accounts,” and include the following under the heading (emphasis required): “You could also open a brokerage account with a broker-dealer, where you will pay a transaction-based fee, generally referred to as a commission, when the broker-dealer buys or sells an investment for you.” Include “Features of a typical brokerage account include:” and then include the following statements, each set off by a bullet point (except as specified below), in the following order: 1. “With a broker-dealer, you may select investments or the broker-dealer may recommend investments for your account, but the ultimate decision for your investment strategy and the purchase and sale of investments will be yours.” 2. “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 required to monitor your portfolio or investments on an ongoing basis.” 3. “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.” 4. Include “You can receive advice in either type of account, but you may prefer paying:” and then present the following information in this sub-item in a tabular format, comparing a transaction-based fee and an asset-based fee side-by-side. In one column, include the following (emphasis required): “a transaction-based fee from a cost perspective, if you do not trade often or if you plan to buy and hold investments for longer periods of time.” In the other column, include the following (emphasis required): “an asset-based fee if you want continuing advice or want someone to make investment decisions for you, even though it may cost more than a transaction-based fee.” B. If you are a standalone broker-dealer, include the heading “Compare with Typical Advisory Accounts,” and include the following under the heading (emphasis required): “You could also open an advisory account with an investment adviser, where you will pay an ongoing asset-based fee that is based on the value of the cash and investments in your advisory account.” Include “Features of a typical advisory account include:” and then include the following statements, each set off by a bullet point (except as specified below), in the following order (emphasis required): 1. “Advisers provide advice on a regular basis. They discuss your investment goals, design with you a strategy to achieve your investment goals, and regularly monitor your account.” 2. “You can choose an account that allows the adviser to buy and sell investments in your account without asking you in advance (a “discretionary account”) or the adviser may give you advice and you decide what investments to buy and sell (a “non-discretionary account”).” 3. “Advisers are held to a fiduciary standard that covers the entire investment advisory relationship. For example, advisers are required to monitor your portfolio, investment strategy and investments on an ongoing basis.” 4. “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. You may also choose to work with an investment adviser who provides investment advice for an hourly fee, or provides a financial plan for a one-time fee.” 5. “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.” 6. Include “You can receive advice in either type of account, but you may prefer paying:” and then present the following information in this sub-item in a tabular format, comparing a transaction-based fee and an asset-based fee side-by-side. In one column, include the following (emphasis required): “an asset-based fee if you want continuing advice or want someone to make investment decisions for you, even though it may cost more than a transaction-based fee.” In the other column, include the following (emphasis required): “a transaction-based fee from a cost perspective if you do not trade often or if you plan to buy and hold investments for longer periods of time.” Item 6. Conflicts of Interest A. Include the heading, “Conflicts of Interest.” Standalone broker-dealers must include the following after the heading: “We benefit from our recommendations to you.” Standalone investment advisers must include the following after the heading: “We benefit from the advisory services we provide to you.” Dual registrants must include the following after the heading: “We benefit from the services we provide to you.” B. Briefly describe the following conflicts of interest, as they are applicable to you. If all or a portion of a conflict is inapplicable to your business, omit that conflict or portion thereof. If you are a dual registrant and a conflict only applies to your brokerage accounts or to your investment advisory accounts, only include that conflict in the applicable column. 1. State that you have a financial incentive to offer or recommend the retail investor to invest in certain investments because (a) they are issued, sponsored or managed by you or your affiliates, (b) third parties compensate you when you recommend or sell the investments, or (c) both. Provide examples of such investments. State that your financial professionals receive additional compensation if the retail investor buys these investments. 2. State that you have 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 you revenue it earns on those investments. Provide examples of such investments. 3. State that you can buy investments from a retail investor, and sell investments to a retail investor, from your own accounts (called “acting as principal”). State that you can earn a profit on these trades, and that you have an incentive to encourage the retail investor to trade with you. If this activity is part of your investment advisory business, state that the retail investor's specific approval on each such transaction is required. Item 7. Additional Information. A. Include the heading, “Additional Information” and include the following after the heading: “We encourage you to seek out additional information.” B. Include the following: “We have legal and disciplinary events” if you or one of your financial professionals currently disclose, or are required to disclose, the following information: 1. Disciplinary information in your Form ADV (Item 11 of Part 1A or Item 9 of Part 2A). 2. Legal or disciplinary events in your Form BD (Items 11 A-K) (except to the extent such information is not released to BrokerCheck, pursuant to FINRA Rule 8312). 3. Disclosures for any of your financial professionals in Items 14 A-M on Form U4 (Uniform Application for Securities Industry Registration or Transfer), or in Items 7(a) and 7(c)-(f) of Form U5 (Uniform Termination Notice for Securities Industry Registration) or on Form U6 (Uniform Disciplinary Action Reporting Form) (except to the extent such information is not released to BrokerCheck, pursuant to FINRA Rule 8312). C. Regardless of your response to Item 7.B, you must state the following: “Visit Investor.gov for a free and simple search tool to research our firm and our financial professionals.” D. Include the following: “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, investment account or a financial professional, contact us in writing at [insert your primary business address].” If you are a broker-dealer or dual registrant, include the bracketed language. It is your responsibility to review the current telephone numbers for the SEC and FINRA no less often than annually and update as necessary. E. State where the retail investor can find additional information about your brokerage and investment advisory services. 1. If you are a broker-dealer, state that for additional information about your brokers and services, visit BrokerCheck, your website, and the retail investor's account agreement. Include a link to the portion of your website that provides up-to-date information for retail investors and the following link to BrokerCheck: Brokercheck.Finra.org. If you do not have a public firm website, then you must include a toll-free telephone number where retail investors can request up-to-date information. 2. If you are an investment adviser, state that for additional information on your investment advisory services, see your Form ADV brochure on IAPD on Investor.gov and any brochure supplement a financial professional provides. If you maintain your current Form ADV brochure on your public website, then you must state the website address. If you do not have a public firm website or if you do not maintain your current Form ADV brochure on your public website, then you must include the following link: adviserinfo.sec.gov. If you do not have a public firm website, then you also must include a toll-free telephone number where retail investors can request up-to-date information. Item 8. Key Questions to Ask.

    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 standalone broker-dealer or standalone investment adviser, you should modify the questions below to reflect the type of account you offer to retail investors (e.g., advisory or brokerage account).

    Advisers that provide automated advice or broker-dealers that provide services only online without a particular individual with whom a retail investor can discuss these questions must include a section or page on their website that answers each of the below questions and should provide a hyperlink in the relationship summary to that section or page. If you provide automated advice but make a financial professional available to discuss the existing account with a retail investor, you may wish to consider making the financial professional available to discuss these questions with the retail investor.

    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?

    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.

    Appendix C Hypothetical Relationship Summary for a Dually Registered Investment Adviser and Broker-Dealer Prepared By SEC Staff—For Illustrative Purposes Only Which Type of Account is Right for You—Brokerage, Investment Advisory or Both?

    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.

    Depending on your needs and investment objectives, we can provide you with services in a brokerage account, investment advisory account, or both at the same time. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page 4.

    BILLING CODE 8011-01-P EP09MY18.004 EP09MY18.005 EP09MY18.006 EP09MY18.007 Appendix D Hypothetical Relationship Summary for a Registered Broker-Dealer Prepared By SEC Staff—For Illustrative Purposes Only Is A Brokerage Account 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 are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page 4.

    EP09MY18.008 EP09MY18.009 EP09MY18.010 EP09MY18.011 Appendix E Hypothetical Relationship Summary for a Registered Investment Adviser Prepared By SEC Staff—For Illustrative Purposes Only Is An Investment Advisory Account 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 are an investment adviser and provide advisory accounts and services rather than brokerage accounts and services. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page 3.

    EP09MY18.012 EP09MY18.013 EP09MY18.014 EP09MY18.015 Your Relationship with Your Financial Professional: Feedback on the Relationship Summary

    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:

    • the services the firm offers and the types of fees and costs associated with those services; • the firm's obligations to you; • certain conflicts of interest; • how to find additional information about the firm and its financial professionals and research disciplinary history for the firm or its financial professionals; • how to report a problem with your investments, investment account or a financial professional; and • some questions to ask your financial professional to get more information.

    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 (https://www.sec.gov/rules/proposed/2018/34-83063.pdf).

    Questions 1. Overall, do you find the Relationship Summary useful? If not, how would you change it? 2. How useful is each section of the Relationship Summary? Please consider explaining your responses in the comments. EP09MY18.016 3. Please answer the following questions. Please consider explaining your responses in the comments.

    1 Not applicable for firms that are both an investment adviser and broker-dealer.

    EP09MY18.017 BILLING CODE 8011-01-C 4. Are there topics in the Relationship Summary that are too technical or that could be improved? If so, what topics and how can they be improved? 5. Is there additional information that we should require in the Relationship Summary, such as more specific information about the firm or additional information about fees? Is that because you do not receive the information now, or because you would also like to see it presented in this summary document, or both? Is there any information that should be made more prominent? 6. Is the Relationship Summary an appropriate length? If not, should it be longer or shorter? 7. Do you find the `Key Questions to Ask' useful? Would the questions improve the quality of your discussion with your financial professional? If not, why not? 8. Do you have any additional suggestions to improve the Relationship Summary? Is there anything else you would like to tell us? How to Provide Feedback

    You can send us feedback in the following ways (include the file number S7-08-18 in your response):

    Mail Secretary, Securities and Exchange Commission 100 F Street, NE Washington, DC, 20549-1090 Email [email protected] SEC Website https://www.sec.gov/rules/proposed.shtml

    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.

    Thank you!
    [FR Doc. 2018-08583 Filed 5-8-18; 8:45 am] BILLING CODE 8011-01-P
    83 90 Wednesday, May 9, 2018 Proposed Rules Part IV Securities and Exchange Commission 17 CFR Part 240 Regulation Best Interest; Proposed Rule SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34-83062; File No. S7-07-18] RIN 3235-AM35 Regulation Best Interest AGENCY:

    Securities and Exchange Commission.

    ACTION:

    Proposed rule.

    SUMMARY:

    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.

    DATES:

    Comments should be received on or before August 7, 2018.

    ADDRESSES:

    Comments may be submitted by any of the following methods:

    Electronic Comments

    • Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or

    • Send an email to [email protected]. Please include File Number S7-07-18 on the subject line.

    Paper Comments

    • Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

    All submissions should refer to File Number S7-07-18. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available.

    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 www.sec.gov to receive notifications by email.

    FOR FURTHER INFORMATION CONTACT:

    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.

    SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction A. Background 1. Evaluation of Standards of Conduct Applicable to Investment Advice 2. DOL Rulemaking 3. Statement by Chairman Clayton B. General Objectives of Proposed Approach II. Discussion of Regulation Best Interest A. Overview of Regulation Best Interest B. Best Interest, Generally 1. Consistency With Other Approaches 2. Request for Comment on the Best Interest Obligation C. Key Terms and Scope of Best Interest Obligation 1. Natural Person Who Is an Associated Person 2. When Making a Recommendation, at Time Recommendation is Made 3. Any Securities Transaction or Investment Strategy 4. Retail Customer 5. Request for Comment on Key Terms and Scope of Best Interest Obligation D. Components of Regulation Best Interest 1. Disclosure Obligation 2. Care Obligation 3. Conflict of Interest Obligations E. Recordkeeping and Retention F. Whether the Exercise of Investment Discretion Should Be Viewed as Solely Incidental to the Business of a Broker or Dealer III. Request for Comment A. Generally B. Interactions With Other Standards of Conduct IV. Economic Analysis A. Introduction, Primary Goals of Proposed Regulations and Broad Economic Considerations 1. Introduction and Primary Goals of Proposed Regulation 2. Broad Economic Considerations B. Economic Baseline 1. Market for Advice Services 2. Regulatory Baseline C. Benefits, Costs, and Effects on Efficiency, Competition, and Capital Formation 1. Benefits 2. Costs D. Effects on Efficiency, Competition, and Capital Formation E. Reasonable Alternatives 1. Disclosure-Only Alternative 2. Principles-Based Standard of Conduct Obligation 3. A Fiduciary Standard for Broker-Dealers 4. Enhanced Standards Akin to Conditions of the BIC Exemption F. Request for Comment V. Paperwork Reduction Act Analysis A. Respondents Subject to Proposed Regulation Best Interest and Proposed Amendments to Rule 17a-3(a)(25), Rule 17a-4(e)(5) 1. Broker-Dealers 2. Natural Persons Who Are Associated Persons of Broker-Dealers B. Summary of Collections of Information 1. Conflict of Interest Obligations 2. Disclosure Obligation 3. Care Obligation 4. Record-Making and Recordkeeping Obligations C. Collection of Information Is Mandatory D. Confidentiality E. Request for Comment VI. Small Business Regulatory Enforcement Fairness Act VII. Initial Regulatory Flexibility Act Analysis A. Reasons for and Objectives of the Proposed Action B. Legal Basis C. Small Entities Subject to the Proposed Rule D. Projected Compliance Requirements of the Proposed Rule for Small Entities 1. Conflict of Interest Obligations 2. Disclosure Obligations 3. Obligation To Exercise Reasonable Diligence, Care, Skill and Prudence 4. Record-Making and Recordkeeping Obligations E. Duplicative, Overlapping, or Conflicting Federal Rules F. Significant Alternatives 1. Disclosure-Only Alternative 2. Principles-Based Alternative 3. Enhanced Standards Akin to BIC Exemption G. General Request for Comment VIII. Statutory Authority and Text of Proposed Rule I. Introduction

    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 (i.e., agency) services to retail customers ranging from providing customers with execution-only services (e.g., discount brokerage), which typically does not involve advice, to providing a range of services, including advice, to customers (i.e., full-service brokerage).1 Broker-dealers are typically considered to provide advice when they make recommendations of securities transactions or investment strategies involving securities to customers.2 Broker-dealers also may offer a variety of dealer (i.e., principal) services and investment products to retail customers,3 and may make recommendations to retail customers about such principal services, such as recommending transactions where the broker-dealer is buying securities from or selling securities to retail customers on a principal basis or recommending proprietary products.4 Like many principal-agent relationships, the relationship between a broker-dealer and an investor has inherent conflicts of interest, which may provide an incentive to a broker-dealer to seek to maximize its compensation at the expense of the investor it is advising. As we discuss below, concerns regarding the potential harm to retail customers resulting from broker-dealer conflicts of interest, and in particular the conflicts associated with financial incentives, have existed for some time.

    1 Such “agency” services may include, but are not limited to: Providing transaction-specific recommendations to buy or sell securities for commissions; providing asset allocation services with recommendations about asset classes, specific sectors, or specific securities; providing generalized research, advice, and education; providing custody and trade execution to a customer who has selected an independent investment manager or other money manager; executing trades placed by investment advisers in wrap fee programs; offering margin accounts; and operating a call center (e.g., responding to a customer request for stock quotes, information about an issuer or industry, and then placing a trade at the customer's request). See, e.g., Staff of the U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Jan. 2011) (“913 Study”), at 9-10, available at www.sec.gov/news/studies/2011/913studyfinal.pdf.

    2See 913 Study at 124.

    3 As the Staff noted in the 913 Study, such “dealer” services may include, but are not limited to: Selling securities (such as bonds) out of inventory; buying securities from customers; selling proprietary products (e.g., products such as affiliated mutual funds, structured products, private equity and other alternative investments); selling initial and follow-on public offerings; selling other underwritten offerings; acting as principal in Individual Retirement Accounts (“IRAs”); acting as a market maker; and otherwise acting as a dealer. Broker-dealers may offer solely proprietary products, a limited range of products, or a diverse range of products. Id. at 10.

    4Id. at 13.

    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,5 including a number of obligations that attach when a broker-dealer makes a recommendation to a customer, as well as general and specific requirements aimed at addressing certain conflicts of interest. These obligations have developed in response to and reflect the unique structure and characteristics of the broker-dealer relationship with retail customers—in particular, the compensation and other conflicts presented, the variety in the frequency and level of advice services provided (i.e., one-time, episodic or on a more frequent basis), and the spectrum of services provided to retail customers that may or may not include advice (such as executing unsolicited transactions). While these obligations are extensive, there is no specific obligation under the Exchange Act that broker-dealers make recommendations that are in their customers' best interest.6

    5 Generally, all registered broker-dealers that deal with the public must become members of the Financial Industry Regulatory Authority (“FINRA”), a registered national securities association, and may choose to become exchange members. See Exchange Act Section 15(b)(8) and Exchange Act Rule 15b9-1. FINRA is the sole national securities association registered with the SEC under Section 15A of the Exchange Act. Accordingly, for purposes of discussing a broker-dealer's regulatory requirements when providing advice, we focus on FINRA's regulation, examination and enforcement with respect to member broker-dealers.

    6 As discussed infra note 15, FINRA and a number of cases have interpreted FINRA's suitability rule as requiring a broker-dealer to make recommendations that are “consistent with his customers' best interests” or are not “clearly contrary to the best interest of the customer,” but this is not an explicit requirement of FINRA's suitability rule.

    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-dealers set forth in Regulation Best Interest achieves this goal.

    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.7

    7 As discussed herein, some of the enhancements that Regulation Best Interest would make to existing suitability obligations under the federal securities laws, such as the collection of information requirement related to a customer's investment profile, the inability to disclose away a broker-dealer's suitability obligation, and a requirement to make recommendations that are “consistent with his customers' best interests,” reflect obligations that already exist under the FINRA suitability rule or have been articulated in related FINRA interpretations and case law. See infra Sections II.D and IV.D, and note 15. Unless otherwise indicated, our discussion of how Regulation Best Interest compares with existing suitability obligations focuses on what is currently required under the Exchange Act.

    • 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.8

    8 As discussed in more detail in Section II.D.1 in a separate, concurrent rulemaking, we propose to: (1) Require broker-dealers and investment advisers to deliver to retail investors a short (i.e., four page or equivalent limit if in electronic format) relationship summary; (2) 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” in certain circumstances; and (3) 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 supervised person's relationship with the firm. See Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles, Release No. 34-83063, IA-4888, File No. S7-08-18 (“Relationship Summary Proposal”).

    • 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.

    A. Background

    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,9 which, among other things, requires broker-dealers to make only suitable recommendations to customers 10 and to receive only fair and reasonable compensation.11 Broker-dealers are also subject to general and specific requirements aimed at addressing certain conflicts of interest, including requirements to eliminate,12 mitigate,13 or disclose certain conflicts of interest.14

    9See Report of the Special Study of Securities Markets of the Securities and Exchange Commission, H.R. Doc. No. 88-95, at 238 (1st Sess. 1963); In re Richard N. Cea, et al., Exchange Act Release No. 8662 at 18 (Aug. 6, 1969) (Commission opinion involving excessive trading and recommendations of speculative securities without a reasonable basis); In re Mac Robbins & Co. Inc., Exchange Act Release No. 6846, 41 SEC. 116 (July 11, 1962); see also FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) (requiring a member, in the conduct of its business, to observe high standards of commercial honor and just and equitable principles of trade).

    10See Richard N. Cea, Exchange Act Release No. 8662; F.J. Kaufman and Co., Securities Exchange Act Release No. 27535 (Dec. 13, 1989); FINRA Rule 2111.01 (Suitability) (“Implicit in all member and associated person relationships with customers and others is the fundamental responsibility for fair dealing. Sales efforts must therefore be undertaken only on a basis that can be judged as being within the ethical standards of [FINRA's] Rules, with particular emphasis on the requirement to deal fairly with the public. The suitability rule is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct.”). See also 913 Study at 51-53, 59; A Joint Report of the SEC and the CFTC on Harmonization of Regulation (Oct. 2009), available at http://www.sec.gov/news/press/2009/cftcjointreport101609.pdf, at 61-64.

    11See, e.g., FINRA Rules 2121 (Fair Prices and Commissions), 2122 (Charges for Services Performed), and 2341 (Investment Company Securities). See also Exchange Act Sections 10(b) and 15(c).

    12 For example, FINRA rules establish restrictions on the use of non-cash compensation in connection with the sale and distribution of mutual funds, variable annuities, direct participation program securities, public offerings of debt and equity securities, and real estate investment trust programs. These rules generally limit the manner in which members can pay or accept non-cash compensation and detail the types of non-cash compensation that are permissible. See FINRA Rules 2310, 2320, 2331, and 5110.

    13See, e.g., FINRA Rule 3110(c)(3) (firm must have procedures to prevent the effectiveness of an internal inspection from being compromised due to conflicts of interest); FINRA Rule 3110(b)(6)(C) (supervisory personnel generally cannot supervise their own activities); FINRA Rule 3110(b)(6)(D) (firm must have procedures reasonably designed to prevent the required supervisory system from being compromised due to conflicts of interest). Further, a broker-dealer may recommend a security even when a conflict of interest is present, but that recommendation must be suitable. See FINRA Rule 2111. The antifraud provisions of the federal securities laws and the implied obligation of fair dealing prohibit a broker-dealer from, among other things, making unsuitable recommendations and may impose liability on broker-dealers that do not investigate an issuer before recommending the issuer's securities to a customer. See, e.g., Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969). See also Municipal Securities Disclosure, Exchange Act Release No. 26100, at n. 75 (Sept. 22, 1988). The fair dealing obligation also requires a broker-dealer to reasonably believe that its securities recommendations are suitable for its customer in light of the customer's financial needs, objectives and circumstances (customer-specific suitability). See Richard N. Cea, Exchange Act Release No. 8662, at 18 (involving excessive trading and recommendations of speculative securities without a reasonable basis).

    14 A broker-dealer may be liable if it does not disclose “material adverse facts of which it is aware.” See, e.g., Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1970); SEC v. Hasho, 784 F. Supp. 1059, 1110 (S.D.N.Y. 1992). For example, 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 (as discussed above), without disclosing the fact to the customer. See, e.g., Grandon v. Merrill Lynch & Co., 147 F.3d 184, 189-90 (2d Cir. 1998). See also Exchange Act Rule 10b-10 (requiring a broker-dealer effecting transactions in securities to provide written notice to the customer of certain information specific to the transaction at or before completion of the transaction, including the capacity in which the broker-dealer is acting (i.e., agent or principal) and any third-party remuneration it has received or will receive).

    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.” 15 Like many principal-agent relationships, the relationship between a broker-dealer and a retail customer has certain inherent and unavoidable conflicts of interest.16 For example, as a result of transaction-based compensation structures, broker-dealers often make recommendations to retail customers against a backdrop of potential conflicts that may provide them with an incentive to seek to increase their compensation at the expense of the investors they are advising. In addition, other conflicts of interest arise out of business activities that broker-dealers may choose to engage in (including, among others, receipt of third-party compensation, principal trading, and the sale of proprietary or affiliated products). The Commission believes that material conflicts of interest associated with the broker-dealer relationship need to be well understood by the retail customer and, in some cases, mitigated or eliminated.17

    15 While not an explicit requirement of FINRA's suitability rule, FINRA and a number of cases have interpreted the suitability rule as requiring a broker-dealer to make recommendations that are “consistent with his customers' best interests” or are not “clearly contrary to the best interest of the customer.” See, e.g., In re Application of Raghavan Sathianathan, Exchange Act Release No. 54722 at 21 (Nov. 8, 2006); In re Application of Dane S. Faber, Exchange Act Release No. 49216 at 23-24 (Feb. 10, 2004); In re Powell & McGowan, Inc., Exchange Act Release No. 7302 (Apr. 24, 1964). In interpretive guidance, FINRA has stated that “[t]he suitability requirement that a broker make only those recommendations that are consistent with the customer's best interests prohibits a broker from placing his or her interests ahead of the customer's interests.” See FINRA Regulatory Notice 12-25, Additional Guidance on FINRA's New Suitability Rule (May 2012) (“FINRA Regulatory Notice 12-25”).

    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. See, e.g., United States v. Skelly, 442 F.3d 94, 98 (2d Cir. 2006); United States v. Szur, 289 F.3d 200, 211 (2d Cir. 2002); Associated Randall Bank v. Griffin, Kubik, Stephens & Thompson, Inc., 3 F.3d 208, 212 (7th Cir. 1993); MidAmerica Fed. Savings & Loan Ass'n v. Shearson/American Express Inc., 886 F.2d 1249, 1257 (10th Cir. 1989); Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953-954 (E.D. Mich. 1978), aff'd, 647 F.2d 165 (6th Cir. 1981). Cf. De Kwiatkowski v. Bear, Stearns & Co., Inc., 306 F.3d 1293 (2d Cir. 2002) (finding that absent “special circumstances” (i.e., circumstances that render the client dependent—a client with impaired faculties, or one who has a closer than arms-length relationship with the broker, or one who is so lacking in sophistication that de facto control of the account is deemed to rest in the broker-dealer), a broker-dealer does not have a duty to give on-going advice between transactions in a non-discretionary account, even if he volunteered advice at times; “[I]t is uncontested that a broker ordinarily has no duty to monitor a nondiscretionary account, or to give advice to such a customer on an ongoing basis. The broker's duties ordinarily end after each transaction is done, and thus do not include a duty to offer unsolicited information, advice, or warnings concerning the customer's investments. A nondiscretionary customer by definition keeps control over the account and has full responsibility for trading decisions. On a transaction-by-transaction basis, the broker owes duties of diligence and competence in executing the client's trade orders, and is obliged to give honest and complete information when recommending a purchase or sale. The client may enjoy the broker's advice and recommendations with respect to a given trade, but has no legal claim on the broker's ongoing attention.”) (citations omitted).

    For the staff's discussion of relevant case law see 913 Study, at 54-55. See also A Joint Report of the SEC and the CFTC on Harmonization of Regulation (Oct. 2009), available at http://www.sec.gov/news/press/2009/cftcjointreport101609.pdf, at 8-9 and 67. See also Section II.F. for a discussion and request for comment regarding broker-dealer exercise of discretion and the extent to which such exercise is “solely incidental” to the conduct of its business as a broker-dealer.

    16See infra Section IV.B.1. For instance, in the past, brokerage firms have been fined for placing customers in fee-based brokerage accounts that generated higher fees for the firm, where such accounts were not appropriate for the customer. See, e.g., NASD News Release, NASD Fines Raymond James $750,000 for Fee-Based Account Violations (Apr. 27, 2005), available at http://www.finra.org/newsroom/2005/nasd-fines-raymond-james-750000-fee-based-account-violations (finding that Raymond James violated NASD rules by recommending and opening fee-based brokerage accounts for customers without first determining whether the accounts were appropriate and by allowing those accounts to remain open). See also NYSE Hearing Board Decision 06-133 (July 10, 2006), available at https://www.nyse.com/publicdocs/nyse/markets/nyse/disciplinary-actions/2006/06-133.pdf (finding that A.G. Edwards had wrongfully placed customers into non-managed fee accounts in lieu of commission-based accounts, where non-managed fee-based brokerage accounts were not appropriate for buy-and-hold investors or for investors with few transactions, which resulted in such investors paying substantially more in fees than they would have paid under a commission-based structure); FINRA Press Release, FINRA Fines Robert W. Baird & Co. $500,000 for Fee-Based Account, Breakpoint Violations (Feb. 18, 2009), available at http://www.finra.org/newsroom/2009/finra-fines-robert-w-baird-co-500000-fee-based-account-breakpoint-violations (finding that Robert W. Baird & Co. failed to adequately review customer accounts that were transferred into a fee-based brokerage program, allowing numerous customers to remain in the program despite conducting no trades, where the firm continued to receive substantial fees despite inactivity on customers' accounts).

    17See infra Section II.D.3.

    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.18

    18See, e.g., Letter from Marnie C. Lambert, President, Public Investors Arbitration Bar Association (Aug. 11, 2017) (“PIABA Letter”) (“The Suitability Rule is not sufficient on its own to remove and manage these conflicts and ensure that brokers have acted in their clients' best interests. . . . Any standards adopted by the SEC should acknowledge that conflicts of interest are pervasive throughout the industry and firms will continue to face challenges when trying to balance the interests of their clients with those conflicts. Any standards adopted should require mitigation of conflicts of interest to the extent possible.”); Letter from Kevin R. Keller, Chief Executive Officer, CFP Board, et al., Financial Planning Coalition (Nov. 7, 2017) (“Financial Planning Coalition Letter”) (stating that FINRA's suitability rule “fails to mandate disclosure of actual or potential conflicts of interest, proscribe appropriate mitigation mechanisms, or require that broker-dealers put the client's interests above their own earned commissions”).

    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.19 This apprehension about the potentially harmful effects of conflicts has been reflected over the years in, among other things, our National Examination Program's examination priorities, which have continually included conflicts of interest as an exam focus—either generally or specifically (e.g., the role of conflicts of interest in and suitability of recommendations involving retirement accounts (such as investment or rollover recommendations), complex or structured products, variable annuities, higher yield securities, exchange traded funds, and mutual fund share class selection (i.e., share classes with higher loads or distribution fees))—for many years.20 As our exam staff has noted, “[c]onflicts of interest, when not eliminated or properly mitigated and managed, are a leading indicator and cause of significant regulatory issues for individuals, firms and sometimes the entire market.” 21

    19 These concerns led former Chairman Arthur Levitt to form the Committee on Compensation Practices to review industry compensation practices, identify actual and perceived conflicts of interest, and identify “best practices” to eliminate, reduce, or mitigate these conflicts. See Report of the Committee on Compensation Practices (Apr. 10, 1995) (“Tully Report”). The Tully Report observed that although the commission-based compensation system “works remarkably well for the vast majority of investors,” conflicts of interest persist that can damage the interest of retail customers, and identified various “best practices” for addressing broker-dealer and registered representative compensation-related conflicts, including fee-based brokerage accounts. Id. In 2005, the Commission adopted Rule 202(a)(11)-1 under the Advisers Act, the principal purpose of which was to deem broker-dealers offering “fee-based brokerage accounts” as not being subject to the Advisers Act. See Certain Broker-Dealers Deemed Not To Be Investment Advisers, Exchange Act Release No. 51523 (Apr. 12, 2005) at 8 (“Release 51523”) (adopting rule 202(a)(11)-1 under the Advisers Act). This rule was later vacated by the Court of Appeals for the District of Columbia Circuit. See Fin. Planning Ass'n v. SEC., 482 F.3d 481 (D.C. Cir. 2007).

    20See Office of Compliance Inspections and Examinations (“OCIE”), Examination Priorities for 2013 (Feb. 21, 2013), available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2013.pdf (“2013 Exam Priorities”); OCIE, Examination Priorities for 2014 (Jan. 9, 2014), available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf; OCIE, Examination Priorities for 2015 (Jan. 13, 2015), available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf; OCIE, Examination Priorities for 2016 (Jan. 11, 2016), available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2016.pdf; OCIE, Examination Priorities for 2017 (Jan. 12, 2017), available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2017.pdf. See also OCIE Risk Alert, “Retirement-Targeted Industry Reviews and Examinations Initiative” (June 22, 2015), http://www.sec.gov/about/offices/ocie/retirement-targeted-industry-reviews-and-examinations-initiative.pdf.

    21 2013 Exam Priorities.

    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.22 Most notably, in 2013, FINRA published a report on conflicts of interest in the broker-dealer industry to highlight effective conflicts management practices.23 At the time of publication of the FINRA Conflicts Report, FINRA Chairman and Chief Executive Officer (“CEO”) Richard Ketchum noted that “[w]hile many firms have made progress in improving the way they manage conflicts, our review reveals that firms should do more.” 24 He later observed that “some firms continue to approach conflict management on a haphazard basis, only implementing an effective supervisory process after a failure event involving customer harm occurs,” and suggested the development of a best interest standard that includes, among other things, “a requirement that financial firms establish carefully designed and articulated structures to manage conflicts of interest that arise in their businesses.” 25 In 2015, FINRA launched a targeted exam regarding incentive structures and conflicts of interest in connection with firms' retail brokerage business, which encompassed firms' conflict mitigation processes regarding compensation plans for registered representatives, and firms' approaches to mitigating conflicts of interest that arise through the sale of proprietary or affiliated products, or products for which a firm receives third-party payments (e.g., revenue sharing).26

    22See, e.g., FINRA Regulatory Notice 13-45, Rollovers to Individual Retirement Accounts: FINRA Reminds Firms of Their Responsibilities Concerning IRA Rollovers (Dec. 2013) (“FINRA Regulatory Notice 13-45”), available at http://www.finra.org/sites/default/files/NoticeDocument/p418695.pdf. (noting the economic incentive a financial professional has to encourage an investor to roll plan assets into an IRA that he will represent as either a broker-dealer or an investment adviser representative).

    23See FINRA Report on Conflicts of Interest (Oct. 2013), available at https://www.finra.org/sites/default/files/Industry/p359971.pdf (“FINRA Conflicts Report”).

    24See Statement from Chairman and CEO Richard G. Ketchum on FINRA's Report on Conflicts of Interest (Oct. 14, 2013), available at http://www.finra.org/newsroom/2013/statement-chairman-and-ceo-richard-g-ketchum-finras-report-conflicts-interest.

    25See Richard G. Ketchum, Remarks From the 2015 FINRA Annual Conference (May 27, 2015), available at https://www.finra.org/newsroom/speeches/052715-remarks-2015-finra-annual-conference.

    26See FINRA 2016 Regulatory and Examination Priorities Letter (Jan. 5, 2016), available at http://www.finra.org/sites/default/files/2016-regulatory-and-examination-priorities-letter.pdf. See also Conflicts of Interest Review—Compensation and Oversight (Apr. 2015), available at http://www.finra.org/industry/conflicts-interest-review-compensation-and-oversight.

    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.27

    27See, e.g., Letter from Monique Morrissey, Ph.D., Economist, and Heidi Shierholz, Economist and Director of Policy; Economic Policy Institute (Oct. 5, 2017) (“Economic Policy Institute Letter”); Letter from Americans for Financial Reform (Sept. 22, 2017) (“AFR Letter”); Letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America (“CFA”) (Sept. 14, 2017) (“CFA 2017 Letter”); PIABA Letter (“Conflicted advice causes substantial harm to investors. Just looking at retirement savers, SaveOurRetirement.com estimates that investors lose between $57 million and $117 million every day due to conflicted investment advice, amounting to at least $21 billion annually.”)

    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.28 Commenters assert that any confusion regarding the standards of conduct that apply may only enhance the potential for harm from broker-dealer conflicts of interest, as this confusion results in retail customers mistakenly relying on those recommendations as being in their “best interest.” 29 Commenters have further observed that having differing standards apply to the advice broker-dealers provide, in particular with respect to advice provided to retirement versus non-retirement assets, will create different levels of advice depending on the type of account and will only further this investor confusion.30

    28 In 2006, the SEC retained the RAND Corporation's Institute for Civil Justice (“RAND”) to conduct a survey, which concluded that the distinctions between investment advisers and broker-dealers have become blurred, and that market participants had difficulty determining whether a financial professional was an investment adviser or a broker-dealer and instead believed that investment advisers and broker-dealers offered the same services and were subject to the same duties. RAND noted, however, that generally investors they surveyed as part of the study were satisfied with their financial professional, be it a representative of a broker-dealer or an investment adviser. Angela A. Hung, et al., RAND Institute for Civil Justice, Investor and Industry Perspectives on Investment Advisers and Broker-Dealers (2008) (“RAND Study”). See also Letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America, et al., (Sept. 15, 2010) (submitting the results of a national opinion survey regarding U.S. investors and the fiduciary standard conducted by ORC/Infogroup for the Consumer Federation of America, AARP, the North American Securities Administrators Association, the Certified Financial Planner Board of Standards, Inc., the Investment Adviser Association, the Financial Planning Association and the National Association of Personal Financial Advisors (“CFA 2010 Survey”)).

    29 CFA 2017 Letter.

    30See, e.g., Letter from Kirt A. Walker, President and Chief Operating Officer, Nationwide Financial (Nov. 2, 2017) ((“Nationwide Letter”); Letter from Deneen L. Donnley, Executive Vice President, Chief Legal Officer Corp, USAA (Aug. 31, 2017) (“USAA Letter”); Letter from Dorothy M. Donohue, Acting General Counsel, Investment Company Institute (Aug. 7, 2017) (“ICI August 2017 Letter”).

    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.31 Among other things, the Commission and our staff, commenters and others have recognized the benefits of the broker-dealer model for advice and the access to advice and the choice of products, services and payment options, that the brokerage model provides retail customers.32 Moreover, the Commission is aware that certain conflicts of interest are inherent in other principal-agent relationships.33 The issue at hand, therefore, is how we should address these concerns in a manner that both improves investor protection and preserves these beneficial characteristics—in particular choice regarding access to a variety of products and advice relationships.

    31See, e.g., Letter from Barbara Roper, Director of Investor Protection, CFA to the Department of Labor (Oct. 3, 2017) (acknowledging that some customers are better off in commission accounts); see also Tully Report; 913 Study at 151-54 (discussing potential costs to retail investors, including loss of choice, if the broker-dealer exclusion from the Advisers Act were eliminated).

    32See id. See also Nationwide Letter; Letter from James D. Gallagher, Executive Vice President and General Counsel, John Hancock Life Insurance Company (U.S.A.) (Aug. 25, 2017) (“John Hancock Letter”); Letter from Craig S. Tyle, Executive Vice President and General Counsel, Franklin Templeton Investments (“Franklin Templeton Letter”) (Aug. 7, 2017); ICI August 2017 Letter; USAA Letter.

    33 Conflicts of interest are not unique to the broker-dealer commission-based relationship. A firm may earn more revenue in a fee-based account rather than a commission-based account, and may therefore have an incentive to recommend such a fee-based account even if a commission-based advice relationship would be appropriate and less costly for the customer. Customers with low trading activity or long-term buy-and-hold investors in particular may pay less in a commission-based account. An asset-based fee for advice also creates a conflict because the firm is paid regardless of whether it services the account, creating a disincentive to act. In addition, a firm may have an incentive to recommend that a customer maintain assets in either a fee-based account or a commission-based account, even though it would be more appropriate for the customer to use assets in the account to, for example, pay off an outstanding loan, because the firm could continue to earn either kind of fee while the assets remain in the account.

    1. Evaluation of Standards of Conduct Applicable to Investment Advice

    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.34 At the same time, we acknowledged that the Exchange Act, the rules thereunder, and SRO rules provide substantial protections for broker-dealer customers, and expressed that we did not believe that requiring most or all full-service broker-dealers to treat most or all of their customer accounts as advisory accounts would be an appropriate response to this blurring.35

    34See Release 51523; see also Request, infra note 40.

    35 Release 51523 at 3, 35.

    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.36 One of the staff's primary recommendations was that the Commission engage in rulemaking to adopt and implement a uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. The staff's recommended standard would require firms “to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice.” 37

    36See 913 Study, supra note 1.

    37Id.

    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.38

    38Id.

    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.39

    39See 913 Study at viii, x, 101, 109, 166.

    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.40 The Request sought information on the benefits and costs of the current standards of conduct for broker-dealers and investment advisers, as well as alternative approaches to the standards of conduct, including a uniform fiduciary standard.

    40See Request for Data and Other Information: Duties of Brokers, Dealers and Investment Advisers, Exchange Act Release No. 69013 (Mar. 1, 2013), available at http://www.sec.gov/rules/other/2013/34-69013.pdf; see also SEC Seeks Information to Assess Standards of Conduct and Other Obligations of Broker-Dealers and Investment Advisers (press release), available at http://www.sec.gov/news/press/2013/2013-32.htm.

    The Commission received more than 250 comment letters from industry groups, individual market participants, and other interested persons in response to the Request.41 The vast majority of commenters provided qualitative responses to the specific assumptions contained in the Request, while a few industry commenters submitted surveys and other quantitative data. Most commenters expressed support for a uniform fiduciary standard of conduct requiring firms to “act in the best interest” of the investor although they had different views of what the standard would require and expressed concerns about its implementation.42

    41 Comments submitted in response to the Request are available at https://www.sec.gov/comments/4-606/4-606.shtml.

    42 For example, some commenters supported a new uniform, rules-based fiduciary standard of conduct that is tailored to broker-dealers' business models, but also expressed concern about, among other things, the costs of implementation, the need to preserve investor choice and avoid regulatory duplication or conflict. See, e.g., Letter from Ira D. Hammerman, Senior Managing Director and General Counsel, Securities Industry and Financial Markets Association (“SIFMA”) (July 5, 2013). Others tended to support a uniform fiduciary standard of conduct that is “no less stringent” than the current standard under the Advisers Act (i.e., extending the current standard of conduct to broker-dealers), but were concerned about “watering down” the current Advisers Act standard to accommodate broker-dealers' business models. See, e.g., Letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America (July 5, 2013); Letter from David G. Tittsworth, Executive Director, Investment Adviser Association (July 3, 2013).

    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).43 In the IAC's view, the current regulatory regime for broker-dealers does not offer adequate investor protection when broker-dealers are providing advice, as under the suitability standard, broker-dealers generally remain free to place their own interests ahead of the interest of their customers.44 The IAC also expressed its view that any economic analysis should acknowledge the existence and importance of investor harm that can result from the current suitability standard.45 In considering the optimal regulatory approach to take with respect to imposing a fiduciary duty on broker-dealers, the overarching recommendation from the IAC was that “the Commission should weigh its various options with an eye toward determining which will best ensure an outcome that strengthens investor protections, preserves investor choice with regard to business models and compensation methods, and is workable for broker-dealers and investment advisers alike.” 46 The IAC recommended to the Commission two options for imposing a fiduciary duty on broker-dealers when they are providing personalized advice to retail investors: (1) Narrow the broker-dealer exclusion from the definition of “investment adviser” under the Investment Advisers Act of 1940 (“Advisers Act”) (the IAC's preferred approach); or (2) engage in rulemaking under Section 913 to adopt a principles-based fiduciary duty that is “no weaker” than the standard under the Advisers Act; permit certain sales-related conflicts as long as conflicts are fully disclosed and appropriately managed; and consider whether certain sales practices, conflicts of interest, or compensation schemes should be prohibited or restricted.47

    43 Recommendation of the Investor Advisory Committee: Broker-Dealer Fiduciary Duty (Nov. 2013) (“IAC Recommendation”), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation-2013.pdf. The IAC also recommended that the Commission engage in rulemaking to adopt a uniform, plain English disclosure document that includes certain basic information (e.g., fees and conflicts of interest). Id. We are considering this recommendation separately as part of the Relationship Summary Proposal.

    44Id.

    45Id.

    46Id.

    47Id.

    2. DOL Rulemaking

    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”).48 Commission staff provided DOL staff with technical assistance and expertise on our regulatory regime as DOL developed its rulemaking.49

    48See Definition of the Term “Fiduciary” Conflict of Interest Rule—Retirement Investment Advice, 81 FR 20945, 20958-59 (Apr. 8, 2016) (to be codified at 29 CFR pts. 2509, 2510, 2550) (“DOL Fiduciary Rule Release”). The DOL has authority to issue regulations under ERISA and prohibited transaction provisions under the Code, including authority to define the circumstances in which persons, including broker-dealers and investment advisers, are “fiduciaries” for purposes of ERISA and the Code as a result of providing “investment advice” to plans and IRAs.

    49See id.

    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”).50 On March 15, 2018, the DOL Fiduciary Rule was vacated by the United States Court of Appeals for the Fifth Circuit.51

    50 29 CFR 2510.3-21 (effective June 9, 2017). This rule also applies to the definition of fiduciary in the prohibited transaction provisions under the Code. See 29 CFR 2510.3-21(F). See also DOL Fiduciary Rule Release.

    51Chamber of Commerce of the U.S.A., et al. v. U.S. Dep't of Labor, et. al., No. 17-10238 (5th Cir.) (Mar. 15, 2018).

    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.52 Among other things, these prohibited transactions provisions generally would prohibit such a fiduciary from engaging in self-dealing and receiving compensation from third parties in connection with transactions involving a plan or IRA, and from acting on conflicts of interest, including using their authority to affect or increase their own compensation, in connection with transactions involving a plan or IRA, or from purchasing or selling any property to ERISA plans or IRAs.53 As a result, we understand that—in the absence of an exemption from the DOL—broker-dealers that would be considered to be a “fiduciary” under the DOL Fiduciary Rule would not only be prohibited from engaging in purchases and sales of certain investments for their own account (i.e., engaging in principal transactions), but more significantly, would be prohibited from receiving common forms of broker-dealer compensation (notably, transaction-based compensation), which would effectively eliminate a broker-dealer's ability or willingness to provide investment advice with respect to investors' retirement assets.54

    52See Best Interest Contract Exemption, 81 FR 21002, 21089 (Apr. 8, 2016) (“BIC Exemption Release”), as corrected Best Interest Contract Exemption; Correction (Prohibited Transaction Exemption 2016-01), 81 FR 44773 (July 11, 2016) (“BIC Exemption”). DOL stated in the BIC Exemption Release that it “anticipates that the [DOL Fiduciary Rule] will cover many investment professionals who did not previously consider themselves to be fiduciaries under ERISA or the Code.”

    53See BIC Exemption Release at 21002.

    54See generally BIC Exemption; Principal Transactions Exemption, infra note 55.

    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”).55 The BIC Exemption and the Principal Transactions Exemption would allow persons who are deemed investment advice fiduciaries under the DOL Fiduciary Rule, such as broker-dealers, to receive various forms of compensation (e.g., brokerage commissions) and to engage in certain principal transactions, respectively, that in the absence of an exemption, would be prohibited under ERISA and the Code.56

    55See, e.g., BIC Exemption Release (permitting certain “Financial Institutions” and “Advisers” to receive compensation resulting from a provision of investment advice in connection with securities transactions, including riskless principal transactions); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Prohibited Transaction Exemption 2016-02), 81 FR 21089, 21105-10 (Apr. 8, 2016) (“Principal Transactions Release”); corrected at Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs, 81 FR 44784 (July 11, 2016) (“Principal Transactions Exemption”) (permitting investment advice fiduciaries to sell or purchase certain debt securities and other investments in principal transactions and riskless principal transactions). See also Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 86-128 for Transactions Involving Employee Benefit Plans and Broker-Dealers; Amendment to and Partial Revocation of PTE 75-1, Exemptions from Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks, 81 FR 21181 (Apr. 8, 2016) (permitting broker-dealers exercising investment discretion to receive commissions and other fees for effecting securities transactions as agent for a plan or IRA, under certain conditions, including Impartial Conduct Standards like those applicable under the BIC Exemption); DOL Fiduciary Rule Release, supra note 48, 81 FR at 20991 (describing the new BIC Exemption, Principal Transactions Exemption, and amendments to existing PTEs).

    56See generally BIC Exemption; Principal Transactions Exemption.

    Specifically, the BIC Exemption would provide conditional relief for an “adviser,” as that term is used in the context of the BIC Exemption,57 and the adviser's firm, to receive common forms of “conflicted” compensation, such as commissions and third-party payments (such as revenue sharing), provided that the adviser's firm meets certain conditions.58 Generally, the BIC Exemption would require that the advice must be provided pursuant to a written contract executed between the adviser's firm and the investor (and enforceable against the adviser's firm).59 The contract must include specific language and disclosures, including (among others) provisions: Acknowledging fiduciary status; committing the firm and the adviser to adhere to standards of impartial conduct (i.e., providing advice in the investor's best interest; charging only reasonable compensation; and avoiding misleading statements about fees and conflicts of interest) (“Impartial Conduct Standards”); 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 must also disclose information on the firm's and advisers' conflicts of interest and the cost of their advice and provide certain ongoing web disclosures.60 As noted above, we understand that, as a practical matter, most broker-dealers offering IRA brokerage accounts would need to meet the conditions of the BIC Exemption to advise (i.e., make recommendations to) brokerage customers with IRA accounts and to receive transaction-based and other compensation (including amounts paid from third parties, such as 12b-1 fees) in connection with their securities recommendations.

    57 The DOL explains that by using the term “adviser,” it “does not intend to limit the exemption to investment advisers registered under the Investment Advisers Act of 1940 or under state law,” and that rather, for purposes of the BIC Exemption, an adviser “is an individual who can be a representative of a registered investment adviser, a bank or similar financial institution, an insurance company, or a broker-dealer.” BIC Exemption Release, supra note 52, 81 FR at 21003, n.2.

    58See BIC Exemption Release. ERISA and the Code generally prohibit fiduciaries from receiving payments from third parties and from acting on conflicts of interest, including using their authority to affect or increase their own compensation, in connection with transactions involving a plan or IRA. Certain types of fees and compensation common in the retail market, such as brokerage or insurance commissions, rule 12b-1 fees and revenue sharing payments, may fall within these prohibitions when received by fiduciaries as a result of transactions involving advice to the plan, plan participants and beneficiaries, and IRA owners. Id.

    59See BIC Exemption Release.

    60See BIC Exemption.

    Generally, the Principal Transactions Exemption would (1) permit certain principal transactions involving the purchase of limited securities (i.e., certificates of deposits, interests in unit investment trusts, and certain debt securities) 61 by a plan or an IRA owner and (2) more broadly permit principal transactions involving the sale of “securities or other investment property” by the plan or IRA owner, conditioned on adherence to, among other things, Impartial Conduct Standards,62 as well as a contract requirement and a policies and procedures warranty that mirror the requirements in the BIC Exemption.63 The Principal Transactions Exemption also includes some conditions that are different from those in the BIC Exemption, including credit and liquidity standards for debt securities sold to plans and IRAs pursuant to the exemption and additional disclosure requirements.64

    61 Debt securities are generally registered corporate debt securities, treasury securities, agency securities, and asset-backed securities that are guaranteed by an agency or government sponsored enterprise. See Principal Transactions Exemption.

    62 In the Principal Transactions Exemption, the Impartial Conduct Standards specifically refer to the fiduciary's obligation to seek to obtain the best execution reasonably available under the circumstances with respect to the transaction, rather than to receive no more than “reasonable compensation.” See Principal Transactions Exemption. The Principal Transactions Exemption provides that the adviser may satisfy the obligation under the exemption to obtain best execution reasonably available under the circumstances with respect to the transaction by complying with FINRA rules on fair pricing and best execution (Rules 2121—Fair Prices and Commissions; 5310—Best Execution and Interpositioning). See Principal Transactions Exemption, Section II(c)(2)(i).

    63See Principal Transactions Exemption; 18-Month Extension of Transition Period and Delay of Applicability Dates; Best Interest Contract Exemption (PTE 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (PTE 2016-02); Prohibited Transaction Exemption 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters (PTE 84-24), 82 FR 56545 (Nov. 29, 2017) (“DOL November Extension”), available at https://federalregister.gov/d/2017-25760.

    64See Principal Transactions Exemption; DOL November Extension.

    The revised definition of “fiduciary,” as well as the Impartial Conduct Standards, became effective on June 9, 2017.65 Compliance with the remaining conditions of the BIC Exemption and the Principal Transaction Exemption, such as the general contract requirement, and conditions requiring specific written warranties and disclosures, has been delayed until July 1, 2019.66 During this transition period, “financial institutions” and “advisers,” as defined in the PTEs, are currently only required to comply with the Impartial Conduct Standards to satisfy the conditions of these PTEs.67

    65See Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice; Best Interest Contract Exemption (Prohibited Transaction Exemption 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Prohibited Transaction Exemption 2016-02); Prohibited Transaction Exemptions 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128 Proposed Rule, 82 FR 16902, (Apr. 7, 2017) (“DOL April Extension”), available at https://www.thefederalregister.org/fdsys/pkg/FR-2017-04-07/pdf/2017-06914.pdf. But see Chamber of Commerce of the U.S.A., et. al. v. U.S. Dep't of Labor, et. al., No. 17-10238 (5th Cir.) Mar. 15, 2018).

    66See DOL November Extension.

    67Id.

    3. Statement by Chairman Clayton

    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.68 The public input was intended to provide the Commission with an updated assessment of the current regulatory framework, the current state of the market for retail investment advice, and market trends.69 Chairman Clayton also invited commenters to submit data and other information that may inform the Commission's analysis, including data covering periods since the 2013 solicitation of comment.

    68 Chairman Jay Clayton, Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers (June 1, 2017) (“Chairman Clayton Statement”), available at https://www.sec.gov/news/public-statement/statement-chairman-clayton-2017-05-31.

    69See Chairman Clayton Statement.

    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 70 and offered other options,71 for the most part, commenters support changes to the standards of conduct for investment advice, and in particular the establishment of a fiduciary or best interest standard specific to broker-dealers 72 or, alternatively, a standard of conduct that uniformly applies to investment advisers and broker-dealers.73

    70See, e.g., Letter from Dan Pisenti, Whitehall-Parker Securities, Inc. (July 7, 2017) (“Whitehall Letter”) (arguing that the suitability standard is highly effective and no further government intervention is necessary); Letter from Kevin Dunnigan (July 5, 2017) (stating that the DOL Fiduciary Rule is government overreach and consumers should be able to decide what to purchase).

    71See, e.g., Letter from Herb W. Morgan (June 2, 2017) (stating that a more effective solution would be a simpler one, including increasing penalties and enforcement and requiring full fee disclosure); Letter from Mark D. Moss (June 2, 2017) (supporting SEC involvement in standardizing nomenclature).

    72See, e.g., CFA 2017 Letter (supporting the Commission taking a “more rigorous approach” to interpreting the fiduciary standard by developing a new standard for brokers under the [Securities Exchange Act of 1934] and in enforcing the existing standard under the Advisers Act and stating that the fiduciary duty must include a principles-based, legally enforceable best interest standard); Letter from Gail C. Bernstein, General Counsel, Investment Advisers Association (Aug. 31, 2017) (“IAA Letter”) (recommending the SEC develop a best interest standard for brokers that is as robust as the fiduciary standard under the Advisers Act); ICI August 2017 Letter (supporting the SEC taking the lead in establishing and enforcing a best interest standard of conduct for broker-dealers providing recommendations to retail investors); Letter from Kevin Carroll, Managing Director and Associate General Counsel, SIFMA (July 21, 2017) (“SIFMA Letter”) (suggesting the SEC consider a best interest standard for broker-dealers that encompasses the duty of loyalty, duty of care and enhanced up-front disclosures); Letter from Timothy E. Keehan, Vice President, Senior Counsel, American Bankers Association (Sept. 1, 2017) (“ABA Letter”); Letter from David Kowach, Head of Wells Fargo Advisors, Wells Fargo & Company (Sept. 20, 2017) (“Wells Fargo Letter”) (“[We] recommend the SEC establish and enforce a best interest standard of conduct for broker-dealers when they provide personalized investment advice to retail investors that is aligned with the standard of conduct applicable to registered investment advisors.”); Letter from Marc R. Bryant, Senior Vice President and Deputy General Counsel, Fidelity Investments (Aug. 11, 2017) (“Fidelity Letter”) (“Fidelity believes that the SEC should review and consider an enhanced best interest standard of conduct for broker-dealers that is clearly defined, disclosure and materiality-based, and that applies across all of an investor's brokerage accounts and interactions”); Letter from F. William McNabb, Chairman and Chief Executive Officer, The Vanguard Group, Inc. (Sept. 29, 2017) (“Vanguard Letter”); Letter from Derek B. Dorn, Managing Director, Regulatory Engagement and Policy, TIAA (Sept. 26, 2017) (“TIAA Letter”) (supporting application of a best interest standard of conduct to all personalized investment advice provided to retail investors through raising the broker-dealer standard and maintaining the investment adviser standard); Letter from Robert Grohowski, Vice President, Senior Legal Counsel—Legislative and Regulatory Affairs, T. Rowe Price (Oct. 12, 2017) (“T. Rowe Letter”) (“Given the history, we believe that the SEC's best path forward would be to focus specifically on updating the standard applicable to non-discretionary broker-dealer recommendations, irrespective of account type.”); Letter from Americans for Financial Reform (Sept. 22, 2017) (“AFR Letter”) (proposing extension of a strong fiduciary “best interest” standard to all those who hold themselves out as advisers or offer personalized investment advice to clients and focusing on broker-dealer business model).

    73See, e.g., Letter from David Certner, Legislative Counsel & Legislative Policy Director, Government Affairs, AARP (Sept. 6, 2017) (“AARP Letter”) (“Adoption of a uniform standard that would apply to both broker-dealers and investment advisers when providing personalized investment advice to retail customers, as contemplated by Section 913. . . . is of critical importance and long overdue.”); PIABA Letter (“The lack of a uniform standard of conduct creates a discrepancy between the law and investors' reasonable expectations.”); Letter from Barbara Novick, Vice Chairman, and Nicole Rosser, Vice President, BlackRock, Inc. (Aug. 7, 2017) (“BlackRock Letter”) (supporting a best interest standard that applies to all types of retail accounts); Letter from Ronald J. Kruszewski, Chairman & CEO, Stifel, Nicolaus & Co. (July 25, 2017) (“Stifel Letter”) (supporting a single standard of care applicable to both brokerage and advisory accounts, while recognizing the inherent differences between these relationships); Letter from Christopher Jones, Executive Vice President of Investment Management and Chief Investment Officer, Financial Engines (Oct. 11, 2017) (“Financial Engines Letter”) (recommending harmonization of the standards applicable to broker-dealers and investment advisers to advance “high-quality, unconflicted advice”); Letter from Gretchen Cepek, Senior Vice President and General Counsel and Stewart D. Gregg, Senior Counsel, Allianz Life Insurance Company of North America (Oct. 13, 2017) (“Allianz Letter”) (supporting a uniform “best interest” standard of conduct applicable to both broker-dealers and investment advises providing services to retail investors).

    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 (e.g., eliminating the provision of advice in IRA brokerage accounts and shifting these accounts to asset-based accounts).74 Commenters expressed concerns that retirement investors will be harmed through reduced product choice, increased cost for retirement advice (if shifted to fee-based arrangements that may be more costly for buy-and-hold investors, or if there are increases in account minimums for commission-based accounts), or lost or restricted access to advice (if investors have small account balances or cannot otherwise afford a fee-based arrangement or the increased cost of a commission-based account). 75 Other commenters have noted, however, that such outcomes are not mandated by the DOL Fiduciary Rule, any market disruptions will be addressed by the market, and overall, the adjustment to the DOL Fiduciary Rule has been positive for retirement investors, as the rule has resulted in lower fees, advice in the best interest, and minimized conflicts in advice provided to individuals,76 including, for example, the development of new product offerings such as “clean shares” that do not have any sales loads, charges or other asset-based fee for sales or distribution.77

    74See, e.g., BlackRock Letter; ICI August 2017 Letter.

    75See, e.g., Letter from Kevin Carroll, Managing Director and Associate General Counsel, SIFMA (July 21, 2017) (“SIFMA 2017 Letter”) (stating that the impact of the new DOL Fiduciary Rule has been to significantly shift IRAs from brokerage accounts to advisory accounts, from personal service to call centers or the internet, and to limit the products and fee arrangements available to IRAs); BlackRock Letter (stating that some financial services firms have indicated that they would not offer or would limit IRA brokerage platforms because of the compliance complexities of the BIC Exemption provisions that would go into effect on January 1, 2018 [now delayed until July, 2019], as well as the risk of class action); ICI August 2017 Letter (stating that the DOL Fiduciary Rule and related exemptions is “limiting retirement savers' choices, restricting their access to information they need for retirement planning, and increasing costs, particularly for those savers who can least afford it”); Letter from Dave Paulsen, Executive Vice President and Chief Distribution Officer, Transamerica (Nov. 20, 2017) (“[A]s a result of the DOL Rule, many broker-dealers are no longer selling variable annuities in an IRA, but continue to sell variable annuities to retail investors.”).

    76See, e.g., AARP Letter.

    77See id. See also Letter from AFL-CIO, AFSCME, Alliance for Retired Americans, et al. (Aug. 21, 2017) (“AFL-CIO Letter”); Letter from Aron Szapiro, Director of Policy Research, Morningstar, Inc. (Sept. 11, 2017) (“Morningstar Letter”).

    B. General Objectives of Proposed Approach

    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).78 We also considered the regulatory landscape applicable to broker-dealers under the Exchange Act and SRO rules and the investor protections provided when broker-dealers recommend securities transactions or investment strategies to retail customers, and any differences between those protections provided for broker-dealer services under other regulatory regimes, particularly those that would exist under the DOL Fiduciary Rule and the BIC Exemption.

    78See, e.g., Economic Policy Institute Letter; CFA 2017 Letter; IAC Recommendation.

    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).79 We also recognized the importance of providing, to the extent possible, clear, understandable, and consistent standards for brokerage recommendations across a brokerage relationship (i.e., for both retirement and non-retirement purposes) and better aligning this standard with other advice relationships (e.g., a relationship with an investment adviser).80 We also sought to preserve—to the extent possible—investor choice and access to existing products, services, service providers, and payment options. We sought to avoid a lack of clarity or consistency in the applicable standards and a lack of coordination among regulators, which could ultimately undermine investor choice and access and create legal uncertainty in developing effective compliance programs.

    79Id.

    80See, e.g., Letter from Richard Foster, Senior Vice President and Senior Counsel for Regulatory and Legal Affairs, Financial Services Roundtable (Oct. 17, 2017) (“FSR Letter”) (“FSR strongly believes a single standard for broker-dealers servicing both retirement and non-retirement assets is in the best interest of retail customers, because it would reduce customer confusion and ultimately provide customers a higher-level of service. A single standard also would avoid the cost of developing and implementing compliance and supervisory programs around different standards of conduct.”); Morningstar Letter (“Morningstar believes that investors' confusion about standards of conduct applicable to different kinds of relationships is likely to continue for some time, and disclosures alone will not clarify those standards for many investors. . . . Further, even among experienced investors who hold investments outside of retirement accounts, most investors do not understand the distinctions between broker-dealers and Registered Investment Advisors and the conflicts of interest some financial advisors may have when recommending investments”); TIAA Letter (“Investors should understand the standards of conduct that apply to the financial advisers who give them advice—but today's disparate standards can easily lead to investor confusion.”); IAA Letter (“An equally stringent standard is also necessary to reduce confusion for investors and ensure that they do not bear the burden of having uncertainty about the standard of conduct that applies to the investment professional they choose.”); PIABA Letter.

    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.81 In particular, we sought to preserve the ability of investors to pay for advice in the form of brokerage commissions. Various commenters asserted that the commission-based model may be more appropriate for many investors,82 and we believe that such investors may prefer a commission-based brokerage relationship over a fee-based account.83 We also share concerns raised by commenters about retail customers losing access to advice they receive through recommendations from broker-dealers, or if advice from broker-dealers is effectively eliminated, particularly as not all such customers have the option to move to fee-based accounts.84

    81See, e.g., SIFMA 2017 Letter; BlackRock Letter; ICI August 2017 Letter; Franklin Templeton Letter (“[W]hile asset-based fees are appropriate in many circumstances, for some investors—such as long-term, `buy-and-hold' investors—a transaction-based charge can result in substantial savings. According to the Investment Company Institute, investors who plan to hold fund shares for longer than five years would end up with a higher account balance under a commission-based approach that charges a 2.5 percent front-end fee (plus an ongoing 12b-1 fee) than investors paying a 1 percent per year asset-based fee.”)

    82See, e.g., USAA Letter (“USAA has deep reservations about any standard of conduct that serves to advantage fee-based accounts and serves to disadvantage other types of accounts and product choices. Put simply, a fee-based model may not always be appropriate for lower-balanced accounts. In many cases, these accounts will be better served by straight-forward investments in mutual funds or exchange-traded funds, without such accounts being assessed an ongoing management fee.”); Letter from Stephen McManus, Senior Vice President and General Counsel, State Farm Mutual Automobile Insurance Company (Aug. 21, 2017) (“State Farm Letter”) (“Long a mainstay of the financial services industry, sales commissions are frequently preferred by middle-income consumers whose `buy-and-hold' strategy does not require the continuous investment advice that is more suited to a percentage fee based on assets under management. This preference also reflects the fact that the payment of commission-based compensation—tied as it is to a particular transaction—is easy for consumers to understand and, in e.g., many cases, represents good value for smaller or low-volume accounts.”). See Letter from Sharon Cheever, Senior Vice President and General Counsel, Pacific Life Insurance Company (Oct. 16, 2017) (“Pacific Life Letter”) (“There is a common misconception that a fee-based compensation model is somehow better for the consumer, in part, because it is allegedly cheaper and less likely to lead to conflicts of interest. This unfair discrimination against the commission-based compensation model is truly unfounded. The expense to the client in terms of actual money paid on an on-going basis, and thus, `fee-drag' on their investment return, will often be more with the fee-based compensation model. For example, annuities by nature are long-term investments, and with the fee-based compensation model, the adviser charges a certain percentage (1%) or dollar amount each year for the management of the investment. Compare this to the commission-based compensation model, where there is typically a larger percentage charged upfront (e.g., 5-6%), and you can see that the longer term the investment, the more expensive a fee-based compensation model can be for the client.”); Carl B. Wilkerson, Vice President and Chief Counsel, Securities & Litigation, American Council of Life Insurers (Oct. 3, 2017) (“ACLI Letter”) (“Recurrent annual fees may be ill-suited to individuals with moderate assets needing little annual advice, and may exceed the total value of a commissioned-based adviser.”). See also FINRA Notice to Members 03-68, Fee-Based Compensation (Nov. 2003).

    83See Foy, Michael, “What's at stake for forward-thinking firms,” Fiduciary Roulette, J.D. Power, available at http://www.jdpower.com/resource/wealth-management-fiduciary-roulette (visited January 31, 2018) (finding that 59% of investors who currently pay commissions “`probably would not' or `definitely would not' stay with their current firm if required to switch to a fee-based arrangement”). Irrespective of any real or perceived investor preference, the last 12 years have seen a decline in the number of broker-dealers from over 6,000 in 2005 to less than 4,000 in 2016, alongside a simultaneous increase in the number of Commission-registered investment advisers from approximately 9,000 in 2005 to over 12,000 in 2016. The Commission understands that firms have transitioned to fee-based retail business in an effort to, among other things, provide stability, increase profitability, lower perceived regulatory burden, provide more or better services to retail investors, and reduce or eliminate conflicts of interest. See discussion Section IV.C.1.c, infra.

    84See supra note 74; see also USAA Letter (“It is critical that a uniform standard does not impose excessive legal and compliance burdens on such firms, which would effectively incent firms to curtail or even close services to these investors. A standard that effectively bans or incents firms to abandon certain business models will harm retail investors, especially our men and women in uniform, by raising their costs, reducing their choices, and restricting their access to needed investment advice.”); Franklin Templeton Letter (“At the same time, broker-dealers should not be subject to overly prescriptive requirements or to enforcement through private litigation from the professional plaintiff's bar. This will only lead to additional costs and a decrease in the availability of investment choices and advice to those retail investors who need it most.”).

    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.85 In this way, our proposed best interest obligation should enhance investor protection while generally preserving (to the extent possible) the range of choice and access—both in terms of services and products—that is available to brokerage customers today.

    85See infra Section II.C.4. for further discussion.

    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.86

    86See Section IV.

    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.87 Furthermore, we do not believe proposed Regulation Best Interest would create any new private right of action or right of rescission, nor do we intend such a result.88

    87 For example, any transaction or series of transactions, whether or not subject to the provisions of Regulation Best Interest, remain subject to the antifraud and anti-manipulation provisions of the securities laws, including, without limitation, Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. 77q(a)] and Sections 9, 10(b), and 15(c) of the Exchange Act [15 U.S.C. 78i, 78j(b), and 78o(c)] and the rules thereunder.

    88 Regulation Best Interest is being proposed, in part, pursuant to the authority provided by Section 913(f) of the Dodd-Frank Act and Section 15(l) of the Exchange Act. Neither Section 913(f) nor Section 15(l), by its terms, creates a new private right of action or right of rescission.

    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 SRO requirements to the specific proposed best interest obligation we were seeking to establish. As a result, we recognize that there may be overlapping regulatory requirements applicable to the same activity. We are mindful of potential regulatory conflicts or redundancies and have sought in proposing Regulation Best Interest to avoid such conflicts and minimize redundancies, but consistent with our goal of establishing a best interest obligation for broker-dealers. Overall, we believe that proposed Regulation Best Interest is generally designed to be consistent with and build upon the relevant SRO requirements.89

    89 Generally, when a requirement of proposed Regulation Best Interest is based on a similar SRO standard, we would expect—at least as an initial matter—to take into account the SRO's interpretation and enforcement of its standard when we interpret and enforce our rule. At the same time, we would not be bound by an SRO's interpretation and enforcement of an SRO rule, and our policy objectives and judgments may diverge from those of a particular SRO. Accordingly, we would also expect to take into account such differences in interpreting and enforcing our rules. We have taken the same approach in other rulemakings that include requirements based on a similar SRO standard. See, e.g., Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 29997 (May 13, 2016) (“Business Conduct Standards Adopting Release”).

    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.90

    90See Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, Release No. IA-4889, File No. S7-09-18 (“Fiduciary Duty Interpretive Release”).

    II. Discussion of Regulation Best Interest A. Overview of Regulation Best Interest

    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.91 The best interest obligation, including the specific component obligations, that we are proposing today would address certain conflicted recommendations and set a clear minimum standard for broker-dealer conduct. Specifically, we believe that it would improve investor protection and the regulation of broker-dealer recommendations in four key ways.

    91See, e.g., Letter from David Certner, Legislative Counsel & Legislative Policy Director, Government Affairs, AARP (Sept. 6, 2017) (“AARP”) (“Investors expect financial intermediaries to be required to act in their (the customer's) best interest.”).

    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.92

    92See supra note 7.

    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.93

    93See, e.g., SIFMA 2017 Letter.

    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 result of the DOL Fiduciary Rule and the related PTEs (most notably, the BIC Exemption)—with the goal of both establishing greater consistency in the level of protection provided across registered investment advice relationships (while having the specific regulatory obligations for broker-dealers and investment advisers reflect the structure and characteristics of their relationships with retail customers) and easing compliance with Regulation Best Interest where these other overlapping regulatory regimes are also applicable.

    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 94 and the 913 Study recommendation,95 as well as the DOL's “best interest” Impartial Conduct Standard, even though we are not proposing a uniform fiduciary standard under Section 913(g).96 Our proposed definition differs from the wording of these standards by replacing the phrase “without regard to the financial or other interest” with the phrase “without placing the financial or other interest . . . ahead of the interest of the retail customer.” We are proposing this change as we are concerned that inclusion of the “without regard to” language could be inappropriately construed to require a broker-dealer to eliminate all of its conflicts (i.e., require recommendations that are conflict free), 97 and we believe that our proposed formulation appropriately reflects what we believe is the underlying intent of the “without regard to . . .” formulation.

    94 Pursuant to Section 913(g) of the Dodd-Frank Act, “[t]he Commission may promulgate rules to provide that the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers . . . shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” 15 U.S.C. 80b-11(g)(1); 15 U.S.C. 78o(k)(1). Section 913(g) also provides that “[s]uch rules shall provide that such standard of conduct shall be no less stringent than the standard applicable to investment advisers under Sections 206(1) and 206(2) [of the Advisers Act].” Id.

    95See infra Section II.D.2.d.2 for a further discussion of how proposed Regulation Best Interest compares to the 913 Study recommendations.

    96 As discussed supra note 88, Regulation Best Interest is being proposed, in part, pursuant to the authority provided by Section 913(f) of the Dodd-Frank Act, which provides the Commission discretionary authority to “commence a rulemaking, as necessary or appropriate to the public interest and for the protection of retail customers (and such other customers as the Commission may by rule provide), to address the legal or regulatory standards of care for brokers, dealers . . . [and] persons associated with brokers or dealers . . . for providing personalized investment advice about securities to such retail customers.” In doing so, the Commission is required to consider the findings, conclusions and recommendations of the 913 Study.

    97 Some commenters raised similar concerns of potential confusion and uncertainty regarding the expectations associated with including this phrase in the best interest obligation. See, e.g., SIFMA 2017 Letter; T. Rowe Letter; Letter from Jason Chandler, Group Managing Director, Head of Investment Platforms and Solutions Wealth Management Americas, and Micheal Crowl, Group Managing Director, General Counsel, UBS Group Americas and Wealth Management Americas, UBS AG (July 21, 2017) (“UBS Letter”).

    Other commenters, however, expressed support for a “best interest” obligation that included that the “without regard to phrase.” See, e.g., Letter from Christine L. Owens, Executive Director, National Employyment Law Project (Oct. 20, 2017); PIABA 2017 Letter; Wells Fargo Letter; AARP Letter.

    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.98 Among other things, Dodd-Frank Act Section 913(g) expressly provides that the receipt of commission-based compensation, or other standard compensation, for the sale of securities shall not, in and of itself, violate any uniform fiduciary standard promulgated under that subsection's authority as applied to a broker-dealer.99 Moreover, Section 913(g) does not itself require the imposition of the principal trade provisions of Advisers Act Section 206(3) on broker-dealers.100 In addition, Dodd-Frank Act Section 913 provides that offering only proprietary products by a broker-dealer shall not, in and of itself, violate such a uniform fiduciary standard, but may be subject to disclosure and consent requirements.101 We believe that these provisions make clear that the overall intent of Section 913 was that a “without regard to” standard did not prohibit, mandate or promote particular types of products or business models, and preserved investor choice among such services and products and how to pay for these services and products (e.g., by preserving commission-based accounts, episodic advice, principal trading and the ability to offer only proprietary products to customers).102

    98See discussion infra Section II.D.2.d.2.

    99See Exchange Act Section 15(k)(1) and Advisers Act Section 211(g)(1). See also 913 Study at 113.

    100Id. Advisers Act Section 206(3) prohibits an adviser from engaging in a principal trade with an advisory client, unless it discloses to the client in writing before completion of the transaction the capacity in which the adviser is acting and obtains the consent of the client to the transaction.

    101Id.

    102See 913 Study at 113.

    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 would be required to comply to satisfy its best interest obligation.

    B. Best Interest, Generally

    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.103 As previously noted, one key difference between the Care Obligation imposed by Regulation Best Interest and the suitability obligation derived from the antifraud provisions of the federal securities laws is that the antifraud provisions require an element of fraud or deceit, which would not be required under Regulation Best Interest. More specifically, the Care Obligation could not be satisfied by disclosure. Second, as discussed below, our proposed interpretation of the Care Obligation would make the cost of the security or strategy, and any associated financial incentives, more important factors (of the many factors that should be considered) in understanding and analyzing whether to recommend a security or an investment strategy. Third, beyond the Care Obligation, Regulation Best Interest imposes Disclosure and Conflict of Interest Obligations that are intended to manage the potential impact that broker-dealer conflicts of interest may have on their recommendations.

    103See discussion infra Section II.D.

    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 (e.g., because of higher compensation or other financial incentives for the broker-dealer). Nevertheless, we are sensitive to the potential that, in order to meet their obligations under the proposed Regulation Best Interest, broker-dealers may, for compliance and business reasons, determine to avoid offering certain products or limit recommendations to only certain low-cost and low-risk products that would appear on their face to satisfy the proposed best interest obligation. We emphasize that is not the intent of this proposal, and we request comment on the extent to which proposed Regulation Best Interest would result in broker-dealers limiting access to or eliminating certain products in a manner that could, in and of itself, cause harm to certain retail customers for whom those products are consistent with their investment objectives and in their best interest.

    Specifically, as further clarification, proposed Regulation Best Interest would not per se prohibit a broker-dealer from transactions involving conflicts of interest, such as the following:

    • 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 (e.g., IPO allocations or proprietary research or advice) among different types of customers and between retail customers and the broker-dealer's own account;

    • 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 per se prohibited by Regulation Best Interest, we are also not saying that these practices are per se consistent with Regulation Best Interest or other obligations under the federal securities laws. Rather, these practices, which generally involve conflicts of interest between the broker-dealer and the retail customer, would be permissible under Regulation Best Interest only to the extent that the broker-dealer satisfies the specific requirements of Regulation Best Interest.

    While to satisfy proposed Regulation Best Interest, a broker-dealer would not be required to analyze all possible securities, other products or investment strategies to find the single “best” security or investment strategy for the retail customer, broker-dealers generally should consider reasonably available alternatives offered by the broker-dealer as part of having a reasonable basis for making the recommendation, as required under the Care Obligation. Proposed Regulation Best Interest also would not necessarily obligate a broker-dealer to recommend the “least expensive” or the “least remunerative” security or investment strategy, provided the broker-dealer complies with the Disclosure, Care, and the Conflict of Interest Obligations set forth in the relevant sections below.104

    104 As noted, infra Section II.C.2, Regulation Best Interest is intended to address concerns regarding the impact of material conflicts of interest, and the level of care exercised, when broker-dealers recommend a security or investment strategy involving securities to retail customers. Accordingly, proposed Regulation Best Interest applies only to recommendations, and the care exercised in making a recommendation and addressing the conflicts associated with a recommendation that may impact a broker-dealer's recommendation of a security or investment strategy, but would not apply to the execution of a recommended transaction or the potential conflicts of interest associated with executing a recommended transaction (e.g., payments for order flow), which as discussed below are addressed by existing broker-dealer best execution, as well as other regulatory obligations. Under the antifraud provisions of the federal securities laws and SRO rules, broker-dealers have a legal duty to seek to obtain best execution of customer orders. See Regulation NMS, Exchange Act Release No. 51808 (June 9, 2005) (“Regulation NMS Release”); FINRA Rule 5310 (Best Execution and Interpositioning). A broker-dealer's duty of best execution requires a broker-dealer to seek to execute customers' trades at the most favorable terms reasonably available under the circumstances. See Regulation NMS Release at 160. In addition, Exchange Act Rules 10b-10, 606, and 607 require broker-dealers to disclose information about payment-for-order-flow arrangements to customers at the opening of a new account and, thereafter, on customer trade confirmations and in public quarterly reports. Proposed Regulation Best Interest would be separate from and would not alter these obligations, which apply when a broker-dealer executes a transaction, regardless of whether it was recommended. See infra Section II.D.1.d.2.

    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.105 While cost and financial incentives would generally be important, they may be outweighed by these other factors. Accordingly, we preliminarily believe that a broker-dealer would not satisfy its Care Obligation—and hence Regulation Best Interest—by simply recommending the least expensive or least remunerative security without any further analysis of these other factors and the retail customer's investment profile.

    105See discussion infra Section II.D.1.

    We preliminarily believe that, in order to meet its Care Obligation, when a broker-dealer recommends a more expensive security or investment strategy over another reasonably available alternative offered by the broker-dealer, the broker-dealer would need to have a reasonable basis to believe that the higher cost of the security or strategy is justified (and thus nevertheless in the retail customer's best interest) based on other factors (e.g., 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), in light of the retail customer's investment profile. When a broker-dealer recommends a more remunerative security or investment strategy over another reasonably available alternative offered by the broker-dealer, the broker-dealer would need to have a reasonable basis to believe that—putting aside the broker-dealer's financial incentives—the recommendation was in the best interest of the retail customer based on the factors noted above, in light of the retail customer's investment profile. Nevertheless, this does not mean that a broker-dealer could not recommend the more remunerative of two reasonably available alternatives, if the broker-dealer determines the products are otherwise both in the best interest of—and there is no material difference between them from the perspective of—the retail customer, in light of the retail customer's investment profile.

    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.106 Further, it would be inconsistent with the Care Obligation for the broker-dealer to recommend the more expensive alternative for the customer, even if the broker-dealer had disclosed that the product was higher cost and had policies and procedures in place that were reasonably designed to mitigate the conflict under the Conflict of Interest Obligations, as the broker-dealer would not have complied with its Care Obligation, as the higher cost of the security of would not be justified by the security's other characteristics in comparison to reasonably available alternatives (in contrast to the examples discussed below). By treating cost associated with a recommendation as an important factor in this analysis, the Care Obligation would enhance a broker-dealer's existing suitability obligations under the federal securities laws.

    106 An example of identical securities with different cost structures are mutual funds with different share classes. The Commission has historically charged broker-dealers with violating Sections 17(a)(2) and (3) of the Securities Act for making recommendations of more expensive mutual fund share classes while omitting material facts. See, e.g., In re IFG Network Sec., Inc., Exchange Act Release No. 54127, at * 15 (July 11, 2006) (Commission Decision) (registered representative violated Sections 17(a)(2) and (3) by omitting to disclose to his customers material information concerning his compensation and its effect upon returns that made his recommendation that they purchase Class B shares misleading; “The rate of return of an investment is important to a reasonable investor. In the context of multiple-share-class mutual funds, in which the only bases for the differences in rate of return between classes are the cost structures of investments in the two classes, information about this cost structure would accordingly be important to a reasonable investor.”).

    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 (e.g., self-enrichment, self-dealing, or self-promotion), and not the customer's best interest—in other words, putting aside the broker-dealer's self-interest, the recommendation is not otherwise in the best interest of the retail customer based on other factors, in light of the retail customer's investment profile, and as compared to other reasonably available alternatives offered by the broker-dealer. Examples would include making a recommendation to a retail customer in order to: Maximize the broker-dealer's compensation (e.g., commissions or other fees); further the broker-dealer's business relationships; satisfy firm sales quotas or other targets; or win a firm-sponsored sales contest.107 We discuss possible methods of compliance with the Care Obligation and mitigation requirement in Section II.D. below.

    107See infra note 321 and accompanying text.

    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.

    1. Consistency With Other Approaches a. DOL Fiduciary Rule and Related PTEs

    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.108 By choosing language that draws on similar principles to the principles underlying the DOL's “best interest” Impartial Conduct Standard, which would currently apply to broker-dealers relying on the BIC Exemption and or any of the related PTEs, we believe our proposed best interest standard would result in efficiencies for broker-dealers that have already established infrastructure to comply with the DOL best interest Impartial Conduct Standard. As we believe that at its core, the Best Interest Obligation is intended to achieve the same purpose as the best interest Impartial Conduct Standard, we preliminarily believe broker-dealers would be able to use the established infrastructure to meet any new obligations.

    108 The BIC Exemption's best interest Impartial Conduct Standard would require (as here relevant) that advice be in a retirement investor's best interest, and further defines advice to be in the “best interest” if the person providing the advice acts “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with the such matters would use . . . without regard to the financial or other interests” of the person. BIC Exemption Release, 81 FR at 21007, 21027. BIC Exemption Section II(c)(1); Section VIII(d).

    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.109 As a general example, the DOL explained that under this standard, an adviser (such as a broker-dealer's registered representative), in choosing between two investments, could not select an investment because it is better for the adviser's bottom line even if it is a worse choice for the investor.110

    109Id.

    110Id.

    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.111

    111Id. at 21028.

    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; 112 prohibit a broker-dealer from restricting recommendations in whole or in part to proprietary products and/or products that generate third-party payments 113 or engaging in “riskless principal transactions” 114 or certain transactions on a principal basis; 115 require the identification of the single “best” investment; 116 nor impose an ongoing monitoring obligation, so long as the conditions under the BIC exemption or other applicable PTEs are satisfied.117

    112See, e.g., BIC Exemption Release, 81 FR at 21032.

    113 We understand, however, that the BIC Exemption provides that a broker-dealer that restricts recommendations, in whole or in part, to proprietary products or investments that generate third-party payments, may rely on the exemption provided (among other conditions) the recommendation is prudent, the fees reasonable, the conflicts disclosed (so that the customer can fairly be said to have knowingly assented to the compensation arrangement), and the conflicts are managed through stringent policies and procedures that keep the focus on the customer's best interest, rather than any competing financial interest. See BIC Exemption, Section IV; BIC Exemption Release, 81 FR at 21029, 21052-57.

    114 The BIC Exemption provides exemptive relief (if all applicable conditions are met) for compensation received as part of riskless principal transactions, which are defined as “a transaction in which a Financial Institution, after having received an order from a Retirement Investor to buy or sell an investment product, purchases or sells the same investment product for the Financial Institution's own account to offset the contemporaneous transaction with the Retirement Investor.” See BIC Exemption Release, 81 FR at 21016, 21064. The DOL provided a separate exemption for investment advice fiduciaries to engage in principal transactions involving specified investments, but subject to additional protective conditions. See Principal Transactions Exemption.

    115 Separate from the BIC Exemption, the DOL granted a new exemption for certain principal transactions, which permits ERISA fiduciaries to sell or purchase certain debt securities and other investments in principal transactions and riskless principal transactions with plans and IRAs under certain conditions. See Principal Transactions Exemption. Among other conditions, this exemption requires adherence to Impartial Conduct Standards identical to those in the BIC Exemption, including to provide advice in the “best interest” as defined above, with the exception that the Principal Transactions Exemption specifically refers to the fiduciary's obligation to seek to obtain the best execution reasonably available under the circumstances with respect to the transaction, rather than to receive no more than “reasonable compensation.” See id.

    116 BIC Exemption Release, 81 FR at 21029.

    117Id.

    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.118 In addition, FINRA rules address broker-dealers' communications with the public and specifically require broker-dealer communications to be based on principles of fair dealing and good faith and to be fair and balanced.119 Furthermore, FINRA rules generally require broker-dealer prices for securities and compensation for services to be fair and reasonable taking into consideration all relevant circumstances.120 For these reasons, we do not believe that including these two components of the DOL's Impartial Conduct Standards would add meaningful additional protections for retail customers. In contrast to proposed Regulation Best Interest, which would add enhancements to existing broker-dealer obligations, we believe proposing new rules addressing areas already covered by the federal securities laws and SRO rules—without also enhancing those obligations—may cause confusion about how these new obligations would differ from current requirements.

    118See, e.g., Exchange Act Sections 10(b) and 15(c).

    119See FINRA Rule 2210 (Communications with the Public).

    120See, e.g., FINRA Rules 2121 (Fair Prices and Commissions), 2122 (Charges for Services Performed), and 2341 (Investment Company Securities). See also Exchange Act Sections 10(b) and 15(c).

    b. Recommendations of 913 Study

    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.121 The 913 Study recommended that the Commission consider rulemakings that would apply expressly and uniformly to both broker-dealers and investment advisers, when providing personalized investment advice about securities to retail customers, a fiduciary standard no less stringent than currently applied to investment advisers under Advisers Act Sections 206(1) and (2), which the staff interpreted “to include at a minimum, the duties of loyalty and care as interpreted and developed under Advisers Act Section 206(1) and 206(2).” Specifically, the 913 Study recommended that the Commission should establish a uniform fiduciary standard of conduct requiring broker-dealers and investment advisers, “when providing personalized investment advice about securities to retail customers . . . to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” Further, the 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 (e.g., disclosure and potentially prohibition and mitigation of certain conflicts) and care (e.g., suitability).122

    121 We note that proposed Regulation Best Interest only addresses issues related to the 913 Study's recommendations regarding a standard of conduct for broker-dealers, and does not involve unrelated recommendations of the 913 Study, notably, the recommendations relating to harmonization of the legal frameworks governing broker-dealers and investment advisers more generally. See 913 Study at 129 et seq. In a separate concurrent release, we request comment on whether there should be certain potential enhancements to investment advisers' legal obligations by looking to areas where the current broker-dealer framework provides investor protections that may not have counterparts in the investment adviser context. See Fiduciary Duty Interpretive Release.

    122See generally 913 Study at 110-23.

    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 (e.g., its transaction-based nature, the variety of services the broker-dealer may provide, which may or may not involve advice, and that the broker-dealer may provide services in a principal or agent capacity), rather than to create a new standard out of whole cloth or simply adopt obligations and duties that have developed under a separate regulatory regime to address a different type of advice relationship (e.g., a relationship that exists primarily for the provision of advice about investments, and typically involves portfolio management, often on a discretionary basis 123 ).124

    123 Many investment advisers manage portfolios for retail investors and exercise investment discretion over the accounts, while others provide advice to non-discretionary accounts, provide financial planning, and sponsor or act as portfolio managers in wrap fee programs. See, e.g., 913 Study.

    124See discussion infra Section II.F.

    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.125

    125See Fiduciary Duty Interpretive Release.

    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 (e.g., disclosure and potentially prohibition and mitigation of certain conflicts) and care (e.g., suitability). As discussed in more detail in the relevant sections below, in framing the recommended duties of loyalty and care under the recommended uniform fiduciary standard of conduct, the 913 Study looked to the duties of loyalty and care under the Advisers Act as a baseline for the uniform fiduciary standard—consistent with the “no less stringent” mandate of Section 913(g). For example, in framing the duty of loyalty under the recommended uniform fiduciary standard of conduct, the 913 Study stated that by reference to Advisers Act Section 206(1) and 206(2), the duty of loyalty would require an investment adviser or broker-dealer “to eliminate, or provide full and fair disclosure about its material conflicts of interest.” 126

    126See 913 Study at 112-13.

    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.127 Similarly, in framing the duty of care under the recommended uniform fiduciary standard of conduct, the 913 Study considered the duty of care obligations interpreted under the Advisers Act and current broker-dealer conduct obligations, in recommending that the Commission consider specifying uniform, minimum standards for the duty of care.128 The 913 Study noted that the Commission could articulate such minimum standards by referring to and expanding upon, as appropriate, the explicit minimum standards of conduct relating to the duty of care applicable to broker-dealers (e.g., suitability), and could also take into account Advisers Act principles related to the duty of care (e.g., duty to provide suitable investment advice).129

    127See 913 Study at 113.

    128See 913 Study at 120-21.

    129See 913 Study at 121.

    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 (i.e., suitability); and (2) particularly address the material conflicts of interest resulting from financial incentives. As we discuss in more detail in the relevant sections specifically addressing these obligations, we believe the Disclosure, Care and Conflict of Interest Obligations generally draw from principles underlying the duties of care and loyalty as recommended in the 913 Study,130 while having the specific regulatory obligations reflect the unique structure and characteristics of broker-dealer relationships with retail customers.

    130See infra discussion in Section II.D.1 and 2 comparing the Care and Conflict recommendations of the 913 Study.

    2. Request for Comment on the Best Interest Obligation

    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 per se prohibited by Regulation Best Interest (provided the terms of the proposed rule are satisfied)? Why or why not? Should any of these practices be per se prohibited? Why or why not?

    • 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 manner that could, in and of itself, cause harm to certain retail customers for whom those products are consistent with their investment objectives and in their best interest? If so, what products do commenters think would be limited or eliminated? Would any changes in Regulation Best Interest minimize or avoid these outcomes?

    • 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 (e.g., firm disclosures)? What specific obligations do broker-dealers typically take on if they contract to monitor customer accounts?

    • 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?

    C. Key Terms and Scope of Best Interest Obligation 1. Natural Person Who Is an Associated Person

    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 (e.g., registered representatives) to comply with specified components of Regulation Best Interest when making recommendations, as described below. We have limited the definition only to a “natural person who is an associated person” to avoid the application of Regulation Best Interest to “all associated persons of a broker-dealer,” as the latter definition would capture affiliated entities of the broker-dealer and would extend the application of Regulation Best Interest to entities that are not themselves broker-dealers, which are not our intended focus.

    2. When Making a Recommendation, at Time Recommendation Is Made

    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.” 131 As noted in the 913 Study, Section 913 of the Dodd-Frank Act does not define “personalized investment advice,” and the broker-dealer regulatory regime does not use the term “investment advice” but instead focuses on whether a broker-dealer has made a “recommendation.” 132 The 913 Study recommended that the definition of “personalized investment advice” should at a minimum encompass the making of a “recommendation” as developed under applicable broker-dealer regulation.133 Given that proposed Regulation Best Interest is focused on broker-dealer standards of conduct, and recognizing that the term “personalized investment advice” is not used in the broker-dealer regulatory regime, we propose that, consistent with broker-dealer regulation and in recognition of the 913 Study recommendation, proposed Regulation Best Interest would apply to a “recommendation,” as discussed below.134

    131See Section 913(f) of the Dodd-Frank Act.

    132See 913 Study at 123-24.

    133Id. at 127. The 913 Study also indicated that beyond that, “the term also could include any other actions or communications that would be considered investment advice about securities under the Advisers Act (such as comparisons of securities or asset allocation strategies), except for `impersonal investment advice' as developed under the Advisers Act.” Id. (emphasis in original). As noted below, we are seeking comment on alternative definitions and the scope of the term “recommendation.”

    134See ICI August 2017 Letter (“We note that because we are suggesting a distinct best interest standard of conduct for broker-dealers, and that the FINRA definition of `recommendation' should apply, the term `personalized investment advice,' which the SEC used in its 2013 request for data, would not be applicable, as that term was intended to encompass both `recommendations' under the FINRA rules and `investment advice' under the Advisers Act.”).

    a. Scope of Recommendation

    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.135 In addition, the Commission believes that whether a recommendation has been made should, also consistent with existing broker-dealer regulation, turn on the facts and circumstances of the particular situation, and therefore, whether a recommendation has taken place is not susceptible to a bright line definition.136 We believe that the meaning of the term “recommendation” is well-established and familiar to broker-dealers, and we believe that the same meaning should be ascribed to the term in this context. We are concerned that even providing a principles-based definition, which draws upon the principles underlying existing Commission precedent and guidance, may create unnecessary confusion as to whether the language intentionally or unintentionally diverges from existing precedent. As we are not proposing to make any changes to this existing precedent and guidance regarding when a recommendation is made, we preliminarily believe that it is not necessary or appropriate to define it for purposes of the proposed rule.

    135See, e.g., FINRA Regulatory Notice 12-25 at Q2 and Q3 (regarding the scope of “recommendation”); see also Michael F. Siegel, Exchange Act Release No. 58737, at *21-27 (Oct. 6, 2008) (Commission opinion, sustaining NASD findings) (applying FINRA's guiding principles to determine that a recommendation was made), aff'd in relevant part, Siegel v. SEC, 592 F.3d 147 (D.C. Cir. 2010), cert. denied, 560 U.S. 926 (2010); In re Application of Paul C. Kettler, Exchange Act Release No. 31354 at 5, n.11 (Oct. 26, 1992). Some commenters agreed that the Commission should use FINRA's definition and guidance of recommendation in establishing a standard of conduct for broker-dealers. See AFL-CIO Letter (“Because DOL relied on FINRA guidance with regard to what constitutes a recommendation, the SEC could simply adopt that same definition for its own rulemaking purposes”); Letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America (Sept. 14, 2017) (“CFA”) (“While the determination of whether a recommendation has been made will always be based on the particular facts and circumstances, FINRA guidelines provide a sound basis for such a definition.”). See also Business Conduct Standards Adopting Release.

    136 This approach to whether a “recommendation” has occurred is consistent with the approach the Commission has taken in other contexts. See Business Conduct Standards Adopting Release at 156.

    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.” 137 The more individually tailored the communication to a specific customer or a targeted group of customers about a security or group of securities, the greater the likelihood that the communication may be viewed as a “recommendation.”

    137See FINRA Notice to Members 01-23, Online Suitability (Mar. 19, 2001), and Notice of Filing of Proposed Rule Change to Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability) in the Consolidated FINRA Rulebook, Exchange Act Release No. 62718 (Aug. 13, 2010), 75 FR 51310 (Aug. 19, 2010), as amended, Exchange Act Release No. 62718A (Aug. 20, 2010), 75 FR 52562 (Aug. 26, 2010) (discussing what it means to make a “recommendation”); FINRA Regulatory Notice 11-02, Know Your Customer and Suitability (Jan. 2011) (discussing how to determine the existence of a recommendation), and FINRA Regulatory Notice 12-25 at n.24 (citing FINRA Regulatory Notices discussing principles on determining whether a communication is a “recommendation”). See also Michael F. Siegel, Exchange Act Release No. 58737, at *11 (Oct. 6, 2008) (Commission opinion, sustaining NASD findings) (applying FINRA principles to facts of case to find a recommendation), aff'd in relevant part, Siegel v. SEC, 592 F.3d 147 (D.C. Cir. 2010), cert. denied, 560 U.S. 926 (2010).

    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.” See DOL Fiduciary Rule Release, 81 FR 20945, 20972 (“The Department, however, as described both here and elsewhere in the preamble, has taken an approach to defining “recommendation” that is consistent with and based on FINRA's approach”); U.S. Department of Labor, Employee Benefits Security Administration, Conflict of Interest FAQs, Part II—Rule (Jan. 2017) Q1 (discussing what types of communication constitute a “recommendation”), available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/coi-rules-and-exemptions-part-2.pdf (“DOL FAQs Part II”).

    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. See, e.g., Letter from Lisa Bleier, Managing Director & Associate General Counsel, SIFMA in response to DOL's Request for Information Regarding the Fiduciary Rule and Prohibited Transaction Exemptions (Aug. 9, 2017); Letter from Lisa Bleier, Managing Director & Associate General Counsel, SIFMA, in response to RIN 1210-AB79; Proposed Delay and Reconsideration of DOL Regulation Redefining the Term “Fiduciary” (Apr. 17, 2017) (expressing concerns regarding the breadth of what is considered fiduciary investment advice under the DOL Fiduciary Rulemaking and advocating for an approach that “would build upon, and fit seamlessly within, the existing and long-standing securities regulatory regime for broker-dealers”).

    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 (e.g., a brochure discussing asset allocation strategies) or limited investment analysis tools (e.g., a retirement savings calculator).138

    138See FINRA Rule 2111.03 (excluding the following communications from the coverage of Rule 2111 as long as they do not include (standing alone or in combination with other communications) a recommendation of a particular security or securities: (a) General financial and investment information, including (i) basic investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax deferred investment, (ii) historic differences in the return of asset classes (e.g., equities, bonds, or cash) based on standard market indices, (iii) effects of inflation, (iv) estimates of future retirement income needs, and (v) an assessment of a customer's investment profile; (b) Descriptive information about an employer-sponsored retirement or benefit plan, participation in the plan, the benefits of plan participation, and the investment options available under the plan; (c) Asset allocation models that are (i) based on generally accepted investment theory, (ii) accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor's assessment of the asset allocation model or any report generated by such model, and (iii) in compliance with Rule 2214 (Requirements for the Use of Investment Analysis Tools) if the asset allocation model is an “investment analysis tool” covered by Rule 2214; and (d) Interactive investment materials that incorporate the above. The DOL takes a similar approach, excluding from the term “recommendation,” among other things, general communications and investment education (including plan information, general financial, investment and retirement information, asset allocation models and interactive investment materials). See 29 CFR 2510.3-21(b); DOL Fiduciary Rule Release, 81 FR 20945, 20971; DOL FAQs Part II; Definition of Recommendation.

    Consistent with existing interpretations and guidance of what constitutes a recommendation, the obligation would apply to activity that has been interpreted as “implicit recommendations.” 139 For example, certain transactions that a broker-dealer executes on a retail customer's behalf, even if not separately authorized, have been interpreted as implicit recommendations that can trigger suitability obligations.140 We propose that, consistent with existing interpretations and guidance of what constitutes a recommendation, as well as Exchange Act and SRO rules addressing broker-dealer regulation of discretionary accounts,141 the obligation to act in the customer's best interest should apply consistently to any recommendation, whether through the execution of discretionary transactions (considered to be implicitly recommended) or when making a recommendation to a brokerage customer in a non-discretionary account.142

    139See, e.g., FINRA Regulatory Notice 12-25 at Q3 (regarding the scope of “implicit recommendation”); see also infra Section II. F for further discussion.

    140See, e.g., Rafael Pinchas, 54 SEC. 331, 341 n.22, 1999 SEC LEXIS 1754, at *20 n.22 (1999) (“Transactions that were not specifically authorized by a client but were executed on the client's behalf are considered to have been implicitly recommended within the meaning of [FINRA's suitability rule].”).

    141 The Exchange Act addresses manipulative, deceptive, or fraudulent practices with respect to discretionary accounts. See Exchange Act Rule 15c1-7 (Discretionary Accounts); Exchange Act Section 3(a)(35) (defining when a person exercises “investment discretion” with respect to an account). See also NASD Rule 2510 (Discretionary Accounts) and Incorporated NYSE Rule 408 (Discretionary Power in Customers' Accounts). These rules address the obligations that apply to members that have discretionary power over a customer's account, such as the requirement to obtain customer authorization prior to exercising discretion and to conduct supervisory reviews of discretionary accounts. FINRA has adopted additional rules governing discretionary account requirements for specific products and scenarios. See, e.g., FINRA Rule 5121 (Public Offerings of Securities With Conflicts of Interest) (subpart (c) relating to discretionary accounts); FINRA Rule 4512 (Customer Account Information) (subpart (a)(3) relating to discretionary accounts). These rules are in addition to rules, such as FINRA Rule 2111, that apply to any recommendation. See also Section II.F. for a discussion and request for comment regarding broker-dealer exercise of discretion and the extent to which such exercise is “solely incidental” to the conduct of its business as a broker-dealer.

    142See, e.g., Paul C. Kettler, 51 SEC. 30, 32 n.11, 1992 SEC LEXIS 2750, at *5 n.11 (1992) (stating that transactions a broker effects for a discretionary account are implicitly recommended). A number of commenters focused on addressing the standard that applied to “non-discretionary” recommendations. See, e.g., SIFMA 2017 Letter (noting that “BDs, on the other hand, provide non-discretionary recommendations. BDs generally cannot trade on their client's behalf; clients must authorize any transactions” and suggesting that the definition of the term “recommendation” be limited to “non-discretionary recommendations”); T. Rowe Letter (“Given the history, we believe that the SEC's best path forward would be to focus specifically on updating the standard applicable to non-discretionary broker-dealer recommendations, irrespective of account type.”). But see Letter from Ronald P. Bernardi, President and Chief Executive officer, Bernardi Securities, Inc. (Sept. 11, 2017) (“Bernardi Letter”) (suggesting consideration of a “Best Interest Standard” that “would apply to all non-discretionary (self-directed) and discretionary transaction-based, broker-dealer relationships.”). See also infra Section II.F.

    b. Duration of Obligation and Effect of Contractual Arrangements/Course of Dealing

    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 (i.e., was in compliance with the specific Disclosure, Care, and Conflict of Interest Obligations) at the time of the recommendation. The proposed rule is not intended to change the varied advice relationships that currently exist between a broker-dealer and its retail customers, ranging from one-time, episodic or more frequent advice,143 consistent with the goal of enhancing investor protection while preserving retail customer access to and choice in advice relationships.

    143 To that end, the intent of the proposed rule is to impose a best interest obligation on a broker-dealer when engaging in a very specific activity—the making of a recommendation to a retail customer (as defined below)—and to define the contours of that obligation. The rule is not intended to supersede the body of case law holding 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, or the scope of obligations that attach by virtue of that duty. See, e.g., U.S. v. Skelly, 442 F.3d 94, 98 (2d Cir. 2006) (fiduciary duty found “most commonly” where “a broker has discretionary authority over the customer's account”); United States v. Szur, 289 F.3d 200, 211 (2d Cir. 2002) (“Although it is true that there `is no general fiduciary duty inherent in an ordinary broker/customer relationship,' a relationship of trust and confidence does exist between a broker and a customer with respect to those matters that have been entrusted to the broker.”) (citations omitted); Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953-954 (E.D. Mich. 1978), aff'd, 647 F.2d 165 (6th Cir. 1981) (recognizing that a broker who has de facto control over non-discretionary account generally owes customer duties of a fiduciary nature; looking to customer's sophistication, and the degree of trust and confidence in the relationship, among other things, to determine duties owed); Arleen W. Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948) (Commission Opinion), aff'd sub nom. Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949) (“Release 4048”) (noting that fiduciary requirements generally are not imposed upon broker-dealers who render investment advice as an incident to their brokerage unless they have placed themselves in a position of trust and confidence, and finding that Hughes was in a relationship of trust and confidence with her clients). Such broker-dealers would continue to have such fiduciary duties, subject to liability under the antifraud provisions of the federal securities laws, in addition to the express requirements of the proposed rule.

    See also infra Section II.F. for a discussion and request for comment regarding broker-dealer exercise of discretion and the extent to which such exercise is “solely incidental” to the conduct of its business as a broker-dealer.

    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;144 (2) require the broker-dealer to refuse to accept a customer's order that is contrary to a broker-dealer's recommendations; or (3) apply to self-directed or otherwise unsolicited transactions by a retail customer, who may also receive other recommendations from the broker-dealer.145

    144 Regulation Best Interest would not alter or diminish broker-dealers' current supervisory obligations under the Exchange Act and detailed 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. See Exchange Act Section 15(b)(4)(E); FINRA Rule 3110.

    145 Under existing broker-dealer regulatory obligations, broker-dealers have an obligation to accurately record all recommended transactions as “solicited.” See Exchange Act Rule 17a-3(a)(6)-(7); Exchange Act Rule 17a-25(a)(2). We are not proposing any changes to these compliance requirements.

    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).146 To the extent that the broker-dealer takes on such obligations, Regulation Best Interest would apply to, and a broker-dealer would be liable for not complying with the proposed rule with respect to, any recommendations about securities or investment strategies made to retail customers resulting from such services. However, the best interest obligation does not impose new obligations with respect to the additional services, provided that they do not involve a recommendation to retail customers. Importantly, as noted above, Regulation Best Interest would not alter a broker-dealer's existing obligations under the Exchange Act or any other applicable provisions of the federal securities laws and rules and regulations.147

    146See infra Section II.D.1.

    147See supra Section I.B (discussing a broker-dealer's existing obligations, including fiduciary obligations).

    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.” 148 Consistent with the DOL's interpretation of a fiduciary's monitoring responsibility in the preamble to the DOL Fiduciary Rule,149 the BIC Exemption requires broker-dealers, among others, to disclose whether or not they will monitor an investor's investments and alert the investor to any recommended changes to those investments and, if so, the frequency with which the monitoring will occur and the reasons for which the investor will be alerted.150 The DOL does not require broker-dealers to provide advice on an ongoing, rather than transactional, basis.151 Specifically, “[t]he terms of the contract or disclosure along with other representations, agreements, or understandings between the Adviser, Financial Institution and Retirement Investor, will govern whether the nature of the relationship between the parties is ongoing or not.” 152

    148 BIC Exemption Release, 81 FR at 21032. See also DOL Fiduciary Rule Release, 81 FR at 20987 (“[T]he final rule does not impose on the person an automatic fiduciary obligation to continue to monitor the investment or the advice recipient's activities to ensure the recommendations remain prudent and appropriate for the plan or IRA. Instead, the obligation to monitor the investment on an ongoing basis would be a function of the reasonable expectations, understandings, arrangements, or agreements of the parties”).

    149Id.

    150Id. at 21032.

    151Id.

    152Id.

    3. Any Securities Transaction or Investment Strategy

    The Commission proposes to apply Regulation Best Interest to recommendations of any securities transaction (sale, purchase, and exchange) 153 and investment strategy (including explicit recommendations to hold a security or regarding the manner in which it is to be purchased or sold) to retail customers.154 Securities transactions may also include recommendations to roll over or transfer assets from one type of account to another, such as recommendations to roll over or transfer assets in an ERISA account to an IRA.155

    153 This approach is consistent with existing broker-dealer suitability obligations. Regulation Best Interest applies only to recommendations, and not to the execution of a recommended transaction, which as discussed below is addressed by existing broker-dealer best execution obligations. See, e.g., FINRA Rule 5310 (Best Execution and Interpositioning). Regulation Best Interest is separate from and does not alter these obligations. See generally infra Section II.D.2, for discussion of a broker-dealer's best execution obligations.

    154 FINRA interprets what is an investment strategy broadly. Examples of investment strategies are recommendations to purchase the “Dogs of the Dow,” securities on margin, liquify home mortgages, or explicit recommendations to hold securities. See FINRA Regulatory Notice 12-25 at Q7. Similarly, under antifraud case law, a recommendation can also encompass the manner for purchasing or selling the security. A recommendation to purchase on margin, if unsuitable, may violate antifraud provisions of the Exchange Act in the absence of disclosure. See Troyer v. Karcagi, 476 F. Supp. 1142, 1152 (S.D.N.Y. 1979) (opening an unsuitable margin account, without disclosure of the unsuitability to the customer, renders a broker-dealer primarily liable under section 10(b) and Rule 10b-5 if it acts with scienter); Steven E. Muth and Richard J. Rouse, Exchange Act Release No. 52551, at *19, 58 SEC. 770, 797 (Oct. 3, 2005) (Commission opinion) (finding registered representative's recommendations of risky margin purchases to customers who had relatively modest financial profiles and conservative investment objectives, where he also misled customers regarding adverse impact of margin trading, were unsuitable). See also William J. Murphy and Carl M. Birkelbach, Exchange Act Release No. 69923, at *17 (July 2, 2013) (Commission opinion, sustaining FINRA findings) (“The large margin debit balance in Lowry's account exacerbated the unsuitability of Murphy's already risky trading.”).

    155 A recommendation concerning the type of retirement account in which a customer should hold his retirement investments typically involves a recommended securities transaction, and thus is subject to FINRA suitability obligations. For example, a firm may recommend that an investor sell his plan assets and roll over the cash proceeds into an IRA. Recommendations to sell securities in the plan or to purchase securities for a newly- opened IRA are subject to FINRA suitability obligations. See FINRA Regulatory Notice 13-45. As previously noted, recommendations of unsuitable transactions may also violate the antifraud provisions of Securities Act Section 17(a); Exchange Act Section 10(b) and Rule 10b-5 thereunder.

    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 (e.g., to roll over or transfer assets such as IRA rollovers). Evaluating the appropriateness of an account is an issue that implicates both broker-dealers and investment advisers that are making recommendations of a brokerage account or an advisory account. Accordingly, we are requesting comment below about the obligations that apply to both broker-dealers and investment advisers relating to recommendations of accounts generally, and whether and how we should address those obligations.

    4. Retail Customer

    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.” 156 The definition generally tracks the definition of “retail customer” under Section 913(a) of the Dodd-Frank Act, except as discussed below.

    156 We believe that, pursuant to existing regulations, broker-dealers would generally be required to obtain sufficient facts concerning a retail customer to determine an account's primary purpose for purposes of Regulation Best Interest. For example, FINRA members are required to use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer. See FINRA Rule 2090 (Know Your Customer). Additionally, FINRA members are required to ascertain the customer's investment profile under FINRA suitability obligations. See FINRA Rule 2111 (Suitability).

    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.157 The Commission continues to believe the focus of Regulation Best Interest should remain on investors with these personal goals but we request comment below on whether the definition of “retail customer” should be expanded or harmonized with the proposed definition of “retail investor” in the Relationship Summary Proposal, as defined and described below.

    157See, e.g., 913 Study (focusing on retail investors trying to manage their investments to meet their own and their families' financial goals); RAND Study; Siegel & Gale Study; CFA 2010 Survey. See also IAC Recommendation; Section I.A.

    As noted, this definition differs from the definition of “retail customer” under Section 913 in three relevant aspects. First, for the reasons discussed above,158 the Commission proposes to substitute “recommendation of any securities transaction or investment strategy involving securities” for “personalized investment advice about securities.”

    158See supra Section II.C.2.

    Second, the Commission proposes to extend the Section 913 definition beyond natural persons to any persons, provided the recommendation is primarily for personal, family, or household purposes. This extension would cover non-natural persons that the Commission believes would benefit from the protections of Regulation Best Interest (such as trusts that represent the assets of a natural person).159 As discussed in Section II.E below, in light of this expansion from “natural person” to any person, we are proposing a new, separate recordkeeping requirement, as, among other things, the similar existing recordkeeping requirements refer only to “natural persons.”

    159 This differs from the approach taken under current FINRA suitability obligations, which as discussed below, provide an exemption to broker-dealers from the customer-specific suitability obligation with respect to “institutional accounts,” including very high net worth natural persons, if certain conditions are met. Under the Commission's proposal, to the extent that the recommendation is not primarily used for personal, family, or household purposes, “institutional accounts,” as defined in FINRA Rules, would fall outside the definition of retail customer and be excluded from Regulation Best Interest, and as a consequence recommendations to such accounts would be solely subject to FINRA's suitability rule.

    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.160 In other words, Regulation Best Interest would not apply to the relationship between an investment adviser and its advisory client (or any recommendations made by an investment adviser to an advisory client).161 Accordingly, dual-registrants would be required to comply with Regulation Best Interest only when making a recommendation in their capacity as a broker-dealer.

    160 This approach will facilitate broker-dealers building upon their current compliance infrastructure and will enhance investor protections to retail customers seeking financial services. FINRA's suitability rule applies to a person who is not a broker-dealer who opens a brokerage account at a broker-dealer or who purchases a security for which the broker-dealer receives or will receive, directly or indirectly, compensation even though the security is held at an issuer, the issuer's affiliate or custodial agent, or using another similar arrangement. See FINRA Regulatory Notice 12-55, Guidance on FINRA's Suitability Rule (Dec. 2012) at Q6(a). A broker-dealer customer relationship could also arise if the individual or entity has an informal business relationship related to brokerage services, as long as the individual or entity is not a broker-dealer. See FINRA Regulatory Notice 12-25 at Q6.

    In some instances, a brokerage relationship with a brokerage customer can exist without a formal brokerage account (e.g., as established by an agreement with the broker-dealer). For example, broker-dealers can assist retail customers in purchasing mutual funds or variable insurance products to be held with the mutual fund or variable insurance product issuer, by sending checks and applications directly to the fund or issuer (this is sometimes referred to as “check and application,” “application-way,” “subscription-way” or “direct application” business; we use the term “check and application” for simplicity) even if that retail investor does not have an account with the broker-dealer. The broker-dealer is typically listed as the broker-dealer of record on the retail customer's account application, and generally receives fees or commissions resulting from the retail customer's transactions in the account. See, e.g., FINRA Notice to Members 04-72, Transfers of Mutual Funds and Variable Annuities (Oct. 2004). Regulation Best Interest would apply to recommendations of such transactions even in the absence of a formal account.

    161 In a concurrent release, we are proposing an interpretation that would reaffirm—and in some cases clarify—certain aspects of the fiduciary duty that an investment adviser owes to its clients. See Fiduciary Duty Interpretive Release.

    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.162 This interpretation of the Advisers Act permits a dual-registrant to distinguish its brokerage customers from its advisory clients. We recognize that this determination can leave interpretive and other challenges for dual-registrants with clients that have both brokerage and advisory accounts with the dual-registrant. Our Disclosure Obligation is designed to help address some of these challenges as the Commission believes it will help clarify the capacity in which a dual-registrant is acting.

    162See Release 51523; 2007 Proposing Release.

    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.163 However, we seek comment below on this historical approach and whether particular scenarios involving investors with brokerage and advisory accounts need further clarification.

    163Id.

    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, e.g., accredited investors, qualified clients or qualified purchasers).164 The relationship summary contemplated in the Relationship Summary Proposal, as defined and described below in Section II.D.1., is intended for a broader range of investors, before or at the time they first engage the services of a broker-dealer, to provide important information for them to consider when choosing a firm and a financial professional.165 The Commission does not believe it is inconsistent or inappropriate, but rather beneficial, to require firms to provide a relationship summary to all natural persons to facilitate their understanding of the account choices, regardless of whether the retail customers will receive recommendations primarily for personal, family, or household purposes. Regulation Best Interest and its intended focus, however, is more limited in scope, in order to cover recommendations to “retail customers” who have chosen to engage the services of a broker-dealer after receiving the Relationship Summary required by the Relationship Summary Proposal.166

    164 The definition of “retail investor” would include a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust. See Relationship Summary Proposal, supra Section II.D.1.

    165See Relationship Summary Proposal, supra note 8 and accompanying text.

    166Id.

    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,167 as we do not intend at this time for Regulation Best Interest to apply to all recommendations to any person. Without such a limitation, we are concerned that this rule would apply to recommendations that are primarily for business purposes (such as any recommendations to institutions), which is beyond the intended focus of Regulation Best Interest, as discussed above.

    167See supra notes 157 and 166 and accompanying text.

    5. Request for Comment on Key Terms and Scope of Best Interest Obligation

    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 at a minimum encompass the making of a “recommendation,” and should not include “impersonal investment advice”? 168 What broker-dealer activities would be covered by using this definition that would not be currently covered by limiting the rule to a “recommendation”?

    168See 913 Study at 123-27.

    • 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 that Regulation Best Interest should apply to any discretionary recommendation made by a broker-dealer? 169 Courts have found broker-dealers that exercise discretion or de facto control of an account to be fiduciaries under state law. What additional protections do brokerage customers receive, if any, when their broker-dealers are considered fiduciaries under state law? Does Regulation Best Interest adequately account for these additional protections?

    169See also infra Section II.F. for a discussion and request for comment regarding broker-dealer exercise of discretion and the extent to which such exercise is “solely incidental” to the conduct of its business as a broker-dealer.

    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 (i.e., do certain factors carry more weight than others)?

    • 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).170 Do commenters agree that having differing standards of care for different broker-dealer customers is appropriate? Why or why not? Would differing standards for different customers of broker-dealers confuse retail or other customers? Would differing standards for different customers make it more difficult for broker-dealers to comply with their obligations?

    170 FINRA Rule 2111(b).

    • 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?

    D. Components of Regulation Best Interest

    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 proposing to amend or eliminate existing broker-dealer obligations, and compliance with Regulation Best Interest is not determinative of a broker-dealer's compliance with obligations under the general antifraud provisions of the federal securities laws.171

    171 Any transaction or series of transactions, whether or not effected pursuant to the provisions of Regulation Best Interest, remain subject to the antifraud and anti-manipulation provisions of the securities laws, including, without limitation, Section 17(a) of the Securities Act [15 U.S.C. 77q(a)] and Sections 9, 10(b), and 15(c) of the Exchange Act [15 U.S.C. 78i, 78j(b), and 78o(c)].

    1. Disclosure Obligation

    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.172 Specifically, and as discussed more below, to meet the Disclosure Obligation, we would 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. While these examples are indicative of what the Commission believes would generally be material facts regarding the scope and terms of the relationship, brokers, dealers, and natural persons who are associated persons of a broker or dealer would need to determine what other material facts relate to the scope and terms of the relationship, and reasonably disclose them in writing prior to or at the time of a recommendation. Additionally, this Disclosure Obligation would explicitly require the broker-dealer to, prior to or at the time of such recommendation, reasonably disclose in writing all material conflicts of interest 173 associated with the recommendation.

    172 Several commenters maintained that a disclosure requirement with such information would be an effective approach to addressing consumer confusion. See, e.g., State Farm 2017 Letter (recommending a simplified account opening disclosure that includes: (1) The type of relationship being entered into and specific duties owed to the consumer based on the services performed; (2) the services available as part of the relationship, and information about applicable direct and indirect investment-related fees; and (3) information about material conflicts of interest that apply to these relationships, including material conflicts arising from compensation arrangements or proprietary products); Letter from Paul S. Stevens, President and CEO, Investment Company Institute (Feb. 5, 2018) (“ICI February 2018 Letter”) (recommending a best interest standard requiring broker-dealers to disclose to retail customers certain aspects of their relationship with the retail customer, “such as the type and scope of services provided, the applicable standard of conduct, the types of compensation it or its associated persons receive, and any material conflicts of interest”); Letter from Michelle B. Oroschakoff, LPL Financial, (Feb. 22, 2018) (“LPL Financial”) (recommending a standard of conduct that requires clear and comprehensive disclosure to retail investors explaining material information about their services, including the nature of the services, investment products, compensation, and material conflicts of interest).

    173 Under Regulation Best Interest, as proposed, a broker-dealer's obligation to disclose material conflicts of interest would resemble the duty to disclose material conflicts that has been imposed on broker-dealers found to be acting in a fiduciary capacity. See, e.g., United States v. Szur, 289 F.3d 200, 212 (2d Cir. 2002) (broker's fiduciary relationship with customer gave rise to a duty to disclose commissions to customer, which would have been relevant to customer's decision to purchase stock); Arleen W. Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948) (Commission Opinion), aff'd sub nom. Hughes v. Sec. & Exch. Comm'n, 174 F.2d 969, 976 (D.C. Cir. 1949) (broker acted in the capacity of a fiduciary and, as such, broker was under a duty to make full disclosure of the nature and extent of her adverse interest, “including her cost of the securities and the best price at which the security might be purchased in the open market”).

    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,174 on their firm websites and in their account opening agreements. While broker-dealers are subject to a number of specific disclosure obligations when they effect certain customer transactions,175 and are subject to additional disclosure obligations under the antifraud provisions of the federal securities laws,176 broker-dealers are not currently subject to an explicit and broad disclosure requirement under the Exchange Act.177 To promote broker-dealer recommendations that are in the best interest of retail customers, we believe it is necessary to impose a more explicit disclosure obligation on broker-dealers than what currently exists under the federal securities laws and SRO rules.

    174 The 913 Study noted that, in practice, required disclosures of conflicts have been more limited with broker-dealers than with investment advisers. See 913 Study at 106. In addition, the Tully Report focused on the potential harm to investors due to broker-dealer conflicts of interest and in particular those related to compensation. As a best practice, the Tully Report suggested increased disclosure. See also Tully Report at 16 (finding that full disclosure of the broker-dealer compensation practices could reduce the “potential for conflict and abuse); discussion supra Section I.A.

    175See, e.g., Exchange Act Rule 10b-10, which generally requires a broker-dealer effecting customer transactions in securities (other than U.S. savings bonds or municipal securities) to provide written notification to the customer, at or before completion of the transaction, disclosing information specific to the transaction, including whether the broker-dealer is acting as agent or principal and its compensation, as well as any third-party remuneration it has received or will receive. 17 CFR 240.10b-10. See also Exchange Act Rules 15c1-5 and 15c1-6, which require a broker-dealer to disclose in writing to the customer if it has any control, affiliation, or interest in a security it is offering or the issuer of such security. 17 CFR 240.15c1-5 and 15c1-6. There are also specific, additional obligations that apply, for example, to recommendations by research analysts in research reports and to public appearances under Regulation Analyst Certification (AC). See, e.g., 17 CFR 242.500 et seq. Finally, SRO rules apply to specific situations, such as FINRA Rule 2124 (Net Transactions with Customers); FINRA Rule 2262 (Disclosure of Control Relationship with Issuer), and FINRA Rule 2269 (Disclosure of Participation or Interest in Primary or Secondary Distribution).

    176See, e.g., supra note 87. Broker-dealers are liable under the antifraud provisions for failure to disclose material information to their customers when they have a duty to make such disclosure. See Basic v. Levinson, 485 U.S. 224, 239 n.17 (1988) (“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.”); Chiarella v. U.S., 445 U.S. 222, 228 (1980) (explaining that a failure to disclose material information is only fraudulent if there is a duty to make such disclosure arising out of “a fiduciary or other similar relation of trust and confidence”); SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999) (explaining that defendant is liable under Section 10(b) and Rule 10b-5 for material omissions “as to which he had a duty to speak”).

    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. See, e.g., Conway v. Icahn & Co., Inc., 16 F.3d 504, 510 (2d Cir. 1994) (“A broker, as agent, has a duty to use reasonable efforts to give its principal information relevant to the affairs that have been entrusted to it.”).

    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. See, e.g., Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 536 (2d Cir. 1999). However, courts and the Commission have found that a broker-dealer's duty to disclose material information under the antifraud provisions is broader when the broker-dealer is making a recommendation to its customer. See, e.g., Hanly, 415 F.2d 589, 597 (2d Cir. 1969). When recommending a security, broker-dealers generally are liable under the antifraud provisions if they do not give “honest and complete information” or disclose any material adverse facts or material conflicts of interest, including any economic self-interest. See, e.g., De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 1293, 1302 (2d Cir. 2002); Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1970).

    177 Broker-dealers may be subject to additional disclosure requirements imposed by other regulators. For example, as noted, the BIC Exemption and related PTEs impose detailed disclosure conditions on broker-dealers that rely on those exemptions. Other DOL regulations and exemptions also impose disclosure requirements applicable to broker-dealers providing advisory and other services to ERISA-covered plans and IRAs. See, e.g., 29 CFR 2550.408g-1(b)(7)(G) (regulation under statutory exemption for participant advice requires fiduciary advisers to plans and IRAs seeking relief to deliver certain disclosures and acknowledge fiduciary status); 29 CFR 2550.408b-2(c)(iv)(B) (regulation under statutory exemption for reasonable service arrangements requires certain ERISA plan service providers to disclose certain information in writing including (among other things) a description of the services to be provided, the fees to be paid directly and indirectly by the plan and, if applicable, a statement that the service provider will provide or reasonably expects to provide services as a “fiduciary” as defined by ERISA).

    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.178 Studies have shown that retail investors are confused about the differences among financial service providers, such as broker-dealers, investment advisers, and dual-registrants.179 We have carefully considered these concerns regarding investor confusion, and are committed to facilitating greater clarity for retail investors. In our concurrent rulemaking, we propose to: 180 (1) Require broker-dealers and investment advisers to provide to retail investors 181 a short (i.e., four page or equivalent limit if in electronic format) relationship summary (“Relationship Summary”); 182 (2) 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 (3) 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 (“Regulatory Status Disclosure”).183

    178See Relationship Summary Proposal.

    179See, e.g., Siegel & Gale Study; RAND Study. See also CFA 2010 Survey.

    180See Relationship Summary Proposal.

    181 As described in more detail under the definition of “retail customer” in Section II.C.4, the definition used in this proposed rulemaking differs from the definition of “retail investor” used in the Relationship Summary Proposal.

    182 The customer or client relationship summary is being proposed as “Form CRS.”

    183See Relationship Summary Proposal.

    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.184

    184 We note that the Relationship Summary may be provided after the retail investor has initially decided to meet with the firm or its financial professional, a selection which may have been based on such person's name or title. This highlights the importance of facilitating clarity and accuracy in the use of names and titles, as is intended by the proposed restrictions on titles and the Regulatory Status Disclosure. See Relationship Summary Proposal.

    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.185

    185 For further discussion, see Relationship Summary Proposal.

    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.186

    186 Nevertheless, as discussed below where relevant, in some instances, disclosures made pursuant to the Regulatory Status Disclosure or the Relationship Summary may be sufficient to satisfy some aspects of this Disclosure Obligation.

    a. Disclosure of Material Facts Relating to the Scope and Terms of the Relationship

    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 would also require broker-dealers and natural persons who are associated persons of the broker-dealer to determine, based on the facts and circumstances, whether there are other material facts relating to the scope and terms of the relationship with the retail customer that would need to be disclosed. For example, this would include considering whether it is necessary, and if so how, to build upon the high-level summary disclosures pursuant to the Relationship Summary.

    (1) Capacity

    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 187 so that the retail customer can more easily identify and understand the relationship, scope of services, and standard of conduct that applies to such recommendations. As noted above, the broker-dealer's standard of conduct would be disclosed in plain language in the Relationship Summary.

    187See supra Section II.B.

    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 (e.g., in an account opening agreement or account disclosure) that clearly sets forth when the broker-dealer would act in a broker-dealer capacity and how it will provide notification of any changes in capacity (e.g., “All recommendations will be made in a broker-dealer capacity unless otherwise expressly stated at the time of the recommendation.” or “All recommendations regarding your brokerage account will be made in a broker-dealer capacity, and all recommendations regarding your advisory account will be in an advisory capacity. When we make a recommendation to you, we will expressly tell you which account we are discussing and the capacity in which we are acting.”). So long as the broker-dealer provides this type of disclosure in writing prior to the recommendation, we preliminarily believe that the broker-dealer would not need to provide written disclosure each time it changes capacity or each time it makes a recommendation, provided it makes clear the capacity in which the broker-dealer is acting in accordance with its initial disclosure.188

    188See infra note 216 and accompanying text.

    (2) Fees and Charges

    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,189 but many retail investors are uncertain about the fees they will pay.190 Many commenters have stressed the importance of clear fee disclosure to retail investors.191

    189See Staff of the Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors as required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Aug. 2012), at iv (“With respect to financial intermediaries, investors consider information about fees, disciplinary history, investment strategy, conflicts of interest to be absolutely essential.”), available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf.

    190See Rand Study, supra note 28, at xix (“In fact, focus-group participants with investments acknowledged uncertainty about the fees they pay for their investments, and survey responses also indicate confusion about the fees.”).

    191See, e.g., Wells Fargo 2017 Letter (recommending disclosure of fees and the scope of activities, among other information, as part of a recommended standard of conduct); ACLI Letter (recommending, among other things, full and fair disclosure of the recommended product's features, fees, and charges, and fairly disclosing how and by whom the financial professional is compensated); SIFMA 2017 Letter (recommending a new broker-dealer standard of conduct being accompanied by enhanced up-front disclosure, including information such as the type and scope of services, and the types of compensation the broker-dealer may receive and the customer may pay); UBS 2017 Letter (recommending, in the context of variable compensation received based on a recommendation, an exemption subject to meeting the new standards of conduct and providing a disclosure document (similar to Form ADV) that would include compensation that may be received from clients and from third parties, material conflicts of interest, and the types of compensation for the various products and services available); ICI August 2017 Letter (recommending a best interest standard including, among other provisions, a requirement to disclose certain key aspects of a broker-dealer's relationship with the customer, such as the type and scope of services provided, the applicable standard of conduct, and the types of compensation it or its associated persons receive); State Farm 2017 Letter (recommending a standardized, plain-English disclosure requirement as a part of a standard of conduct, which would include, among other information, the services available and applicable fees); Bernardi Letter (recommending a “standardized, straightforward, and truthful disclosure regime” describing, among other things, all fees and commissions earned (including direct/indirect fees, and pricing discounts received)); Vanguard Letter (recommending a standard including several components such as enhanced disclosure, which would include the nature and scope of the duty owed to clients and the types of direct and indirect compensation to be received, among other things).

    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.192 However, the proposed Relationship Summary would focus on general descriptions regarding types of fees and charges, rather than offer a comprehensive or personalized schedule of fees or other information about the amounts, percentages or ranges of fees and charges. Although we are not proposing to mandate the form, specific content or method for delivering fee disclosure, in furtherance of the goal of layered disclosure, to meet the Disclosure Obligation, we would generally expect broker-dealers to build upon the Relationship Summary, by disclosing additional detail (including quantitative information, such as amounts, percentages or ranges) regarding the types of fees and charges described in the Relationship Summary.193

    192 As discussed above, broker-dealers are also currently subject to a number of specific disclosure obligations when they effect certain customer transactions, and additional disclosure obligations under the antifraud provisions of the federal securities laws. See supra notes 175, 176, 177 and accompanying text. See also Exchange Act Rules 15g-4 and 15g-5 (prior to effecting a penny stock transaction, a broker-dealer generally is required to provide certain disclosures, including the aggregate amount of any compensation received by the broker-dealer in connection with such transaction; and the aggregate amount of cash compensation that any associated person of the broker-dealer has received or will receive from any source in connection with the transaction). Additional fee disclosure requirements are also addressed in SRO guidance. See, e.g., FINRA Regulatory Notice 13-23, Brokerage and Individual Retirement Account Fees (July 2013) (providing guidance on disclosure of fees in communications concerning retail brokerage accounts and IRAs).

    193 Specifically, the Relationship Summary requires high level disclosures (in part, through prescribed statements) concerning broad categories, but not specific amounts, percentages or ranges of transaction-based or other fees (including commissions, mark-ups and mark-downs and sales “loads”), other account fees and expenses (including, for example, custodian, account maintenance and account inactivity fees), and investment fees and expenses for certain products such as mutual funds and variable annuities.

    (3) Type and Scope of Services

    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.194 A broker-dealer that offers different account types, or that offers varying additional services to retail customers may not be able, within the content and space constraints of the Relationship Summary, to provide the “material facts relating to the scope and terms of the relationship” with the retail customer (which may include further detail regarding the specific products and services offered in that retail customer's account,195 any limitations on those products or services, the frequency and duration of those services, and the standards of conduct that apply to those services). Pursuant to the Disclosure Obligation, we would generally expect broker-dealers to disclose these types of material facts concerning the actual services offered as part of the relationship with the retail customer (i.e., specific to the type of account held by the retail customer) in a separate document or documents.196

    194See Relationship Summary Proposal.

    195 Broker-dealers may determine that other services, not included as part of the Relationship Summary, are also “material facts relating to the scope and terms of the relationship,” including, for example, margin, cash management, discretionary authority (consistent with the discussion in Section II.F), access to research, etc.

    196 As noted above, we understand that broker-dealers already typically provide some of these disclosures through various means. See supra notes 175, 176, 177 and accompanying text.

    b. Material Conflicts of Interest

    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.197 However, we developed this proposed interpretation based on the Advisers Act as we believe it is appropriate to interpret the term in accordance with existing and well-established Commission precedent regarding identification of conflicts of interest for which advisers may face antifraud liability under the Advisers Act in the absence of full and fair disclosure.198

    197 In the BIC Exemption, a Material Conflict of Interest exists when an Adviser or Financial Institution has a “financial interest that a reasonable person would conclude could affect the exercise of its best judgment as a fiduciary in rendering advice to a Retirement Investor.” See BIC Exemption.

    198See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-92, 194 (1963), (stating that as part of its fiduciary duty, an adviser must “fully and fairly” disclose to its clients all material information in accordance with Congress's intent “to eliminate, or at least expose, all conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not disinterested”).

    We believe that this obligation to disclose should only apply to “material conflicts of interest,” and not to “any conflicts of interest” that a broker-dealer may have with the retail customer. Limiting the obligation to “material” conflicts is consistent with case law under the antifraud provisions, which limit disclosure obligations to “material facts,” even when a broker-dealer is in a relationship of trust and confidence with its customer.199 Limiting disclosure to material conflicts is designed to provide retail customers with full disclosure of key pieces of information regarding those conflicts that may affect a recommendation to a retail customer.200 We believe that expanding the scope of the obligation more broadly to cover any conflicts a broker-dealer may have would inappropriately require broker-dealers to provide information regarding conflicts that would not ultimately affect a retail customer's decision about a recommended transaction or strategy and might obscure the more important disclosures.

    199See, e.g., Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1970) (“[F]ailure to inform the customer fully of its possible conflict of interest, in that it was a market maker in the securities which it strongly recommended for purchase by [plaintiff], was an omission of material fact in violation of Rule 10b-5.”); United States v. Laurienti, 611 F.3d 530, 541 (9th Cir. 2010) (emphasizing that “even in a trust relationship, a broker is required to disclose only material facts” and that “materiality is defined by the nature of the trust relationship between the clients and the brokers: `This relationship places an affirmative duty on brokers to use reasonable efforts to give the customer information relevant to the affairs that have been entrusted to them.'”) quoting United States v. Szur, 289 F.3d 200, 211 (2d Cir. 2002)).

    200 This interpretation is consistent with the 913 Study recommendation. See 913 Study at 112.

    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,201 products of affiliates, or limited range of products; 202 one share class versus another share class of a mutual fund 203 ; securities underwritten by the firm or a broker-dealer affiliate; 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) 204 ; and allocation of investment opportunities among retail customers (e.g., IPO allocation). A broker-dealer should also consider whether these conflicts arise from financial incentives that need to be mitigated, as discussed in proposed paragraph (a)(2)(iv).

    201See SIFMA 2017 Letter (“Likewise, consistent with our prior written advocacy on this issue, the new standard would not prohibit BDs from offering any of the following, if accompanied by appropriate disclosure, and the product or service is in the best interest of the customer: (1) Proprietary products or services (including those from affiliates); (2) transaction charge-based accounts (e.g., commissions); (3) complex products (e.g., structured products, alternative investments such as hedge funds and private equity funds, etc.); and . . .”).

    202 Broker-dealers may offer a limited range of products, for instance, products sponsored or managed by an affiliate or products with third-party arrangements (e.g., revenue sharing).

    203See, e.g., IFG Network Sec., Inc., Exchange Act Release No. 54127 (July 11, 2006) (Commission Decision).

    204 For example, firms and their registered representatives that recommend an investor roll over plan assets to an IRA may earn commissions or other fees as a result, while a recommendation that a retail customer leave his plan assets with his old employer or roll the assets to a plan sponsored by a new employer likely results in little or no compensation for a firm or a registered representative. See FINRA Regulatory Notice 13-45.

    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.205

    205See Sections 10(b) and 15(c) of the Exchange Act. See, e.g., Exchange Act Rule 10b-10 (Confirmation of Transactions) Preliminary Note (requiring broker-dealers to disclose specified information in writing to customers at or before completion of the transactions). For example, a broker-dealer may be required to disclose revenue sharing payments that it or its affiliates may receive for distributing fund shares from a fund's investment adviser or others. Those payments provide sales incentives that create conflicts between broker-dealers' financial interests and their agency duties to customers. Revenue sharing payments may lead a broker-dealer to use “preferred lists” that explicitly favor the distribution of certain funds. Revenue sharing payments also may lead to favoritism that is less explicit but just as real, such as through broker-dealer practices allowing funds that make revenue sharing payments to have special access to broker-dealer sales personnel, and through other incentives or instructions that a broker-dealer may provide to managers or salespersons. See, e.g., In re Edward D. Jones & Co, Securities Act Release No. 8520 (Dec. 22, 2004) (broker-dealer violated antifraud provisions of Securities Act and Exchange Act by failing to disclose conflicts of interest arising from receipt of revenue sharing, directed brokerage payments and other payments from “preferred” families that were exclusively promoted by broker-dealer); In re Morgan Stanley DW Inc., Securities Act Release No. 8339 (Nov. 17, 2003) (broker-dealer violated antifraud provisions of Securities Act by failing to disclose special promotion of funds from families that paid revenue sharing and portfolio brokerage).

    c. Guidance on Reasonable Disclosure

    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.206 To facilitate compliance with this Disclosure Obligation, the Commission is providing preliminary guidance, as discussed below, on what it believes would be to “reasonably” disclose in accordance with the Disclosure Obligation by setting forth the aspects of effective disclosure, including the form and manner of disclosure and the timing and frequency of disclosure. While the Commission is providing flexibility with regard to the form and manner of disclosure as well as timing and frequency, the adequacy of disclosure will depend on the facts and circumstances.207 In order to “reasonably disclose” in accordance with this Disclosure Obligation, a broker-dealer would need to give sufficient information to enable a retail customer to make an informed decision with regard to the recommendation.208 Disclosures made pursuant to the Disclosure Obligation must be true and may not omit any material facts necessary to make the required disclosures not misleading.209

    206See TIAA Letter; Bernardi Letter; ACLI Letter. But see UBS Letter; Nationwide Letter; FSR Letter (suggesting the SEC require a disclosure document similar to Form ADV).

    207 For example, the Commission has indicated that failure to disclose the nature and extent of a conflict of interest may violate Securities Act Section 17(a)(2). See Edward D. Jones & Co., L.P., Exchange Act Release No. 50910 (Dec. 22, 2004); Morgan Stanley DW, Inc., Exchange Act Release No. 48789 (Nov. 17, 2003). In the context of scalping, it is misleading to disclose that the person making the investment recommendation “may” trade the recommended securities when in fact the person does so. In SEC v. Blavin, for example, the Sixth Circuit held that a newsletter publisher could not avoid liability for scalping under Section 10(b) and Rule 10b-5 of the Exchange Act by disclosing that it “may trade for its own account.” 760 F.2d at 709-11. The court found that this was a material misstatement because in fact it did trade for its own account. See id.; see also SEC v. Gane, 2005 WL 90154 at *14 (S.D. Fla., Jan. 4, 2005) (“By stating that they, their affiliates, officers, directors, or employees `may' buy or sell stock in their Investment Opinions, Southern Financial and Strategic investors failed to provide adequate disclosure”).

    208See, e.g., De Kwiatkowski, 306 F.3d 1293, supra notes 15 (“the broker . . . is obliged to give honest and complete information when recommending a purchase or sale.”) and 176; see also Arleen W. Hughes, Exchange Act Release No. 4048, supra note 143 (finding duty to disclose material facts “in a manner which is clear enough so that a client is fully apprised of the facts and is in a position to give his informed consent”).

    209 As noted, 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. For example, any transaction or series of transactions, whether or not subject to the provisions of Regulation Best Interest, remain subject to the antifraud and anti-manipulation provisions of the securities laws, including, without limitation, Section 17(a) of the Securities Act [15 U.S.C. 77q(a)] and Sections 9, 10(b), and 15(c) of the Exchange Act [15 U.S.C. 78i, 78j(b), and 78o(c)] and the rules thereunder.

    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.210 In taking this position, we are sensitive to the potential that, if we instead proposed an express obligation that broker-dealers “disclose material facts relating to the scope and terms of the relationship with the retail customer and material conflict of interest,” broker-dealers, in an effort to avoid any inadvertent failure to disclose this information as required, could opt to disclose all facts and conflicts (including those that do not meet the materiality threshold). This could result in lengthy disclosures that do not meaningfully convey the material facts and material conflicts of interest and may undermine the Commission's goal of facilitating disclosure to assist retail customers in making informed investment decisions.

    210 While we understand that pursuant to the fiduciary duty under the Advisers Act Section 206(1) and (2), an investment adviser must eliminate, or at least disclose, all conflicts of interest, as this duty is derived from the antifraud provisions, it is not a strict liability standard. See In the Matter of Cranshire Capital Advisors LLC, Investment Advisers Act Release No. 4277 (Nov. 23, 2015); SEC v. Capital Gains Research Bureau, Inc. In particular, scienter is required to establish violations of Section 206(1) of the Advisers Act. SEC v. Steadman, 967 F.2d 636, 641 & n.3 (D.C. Cir. 1992). However, scienter is not required to establish a violation of Section 206(2) of the Advisers Act; a showing of negligence is adequate. See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963); see also SEC v. Steadman, 967 F.2d at 643 & n.5; Steadman v. SEC, 603 F.2d 1126, 1132-34 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981).

    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.

    (1) Form and Manner of Disclosure

    The Commission believes that disclosure should be concise, clear and understandable to promote effective communication between a broker-dealer and retail customer.211 Specifically, broker-dealers generally should apply plain English principles to written disclosures including, among other things, the use of short sentences and active voice, and avoidance of legal jargon, highly technical business terms, or multiple negatives.212 Broker-dealers may also, for example, consider whether the use of graphics could help investors better understand and evaluate these disclosures. Additionally, we believe that any such disclosure must be provided in writing in order to facilitate investor review of the disclosure, promote compliance by firms, facilitate effective supervision, and facilitate more effective regulatory oversight to help ensure and evaluate whether the disclosure complies with the requirements of Regulation Best Interest.213 As with other documents broker-dealers must deliver, broker-dealers would be able to deliver the disclosure required pursuant to Regulation Best Interest consistent with the Commission's guidance regarding electronic delivery of documents.214

    211 Exchange Act Section 15(l)(1) and Advisers Act Section 211(h)(1) provide that the Commission shall “facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with brokers, dealers and investment advisers, including any material conflicts of interest.”

    212See Office of Investor Education and Assistance, U.S. Securities and Exchange Commission, A Plain English Handbook: How to Create Clear SEC Disclosure Documents (Aug. 1998). See also Relationship Summary Proposal.

    213 We recognize that broker-dealers may provide recommendations by telephone. In such instances, we believe that a broker-dealer could meet its obligation to reasonably disclose “in writing,” “prior to or at the time of such recommendation” through a variety of approaches, as described infra in Section II.D.1.c.(2). For example, the broker-dealer may have already provided relevant disclosures prior to the telephone conversation (e.g., in a relationship guide, an account opening agreement or account disclosure). The broker-dealer may also be able to meet the delivery obligation by sending the relevant disclosure electronically (e.g., by email) to the retail customer during the telephone conversation. See also, infra note 216 and accompanying text, where we explain that we would not consider the disclosure of capacity at the time of recommendation to also be subject to the “in writing” requirement (i.e., a broker-dealer could clarify it orally, so long as it had previously provided an initial disclosure setting forth when the broker-dealer is acting in a broker-dealer capacity and the method it will use to clarify the capacity in which it is acting at the time of the recommendation).

    214See generally Use of Electronic Media for Delivery Purposes, Exchange Act Release No. 36345 (Oct. 6, 1995) (“1995 Release”) (providing Commission views on the use of electronic media to deliver information to investors, with a focus on electronic delivery of prospectuses, annual reports to security holders and proxy solicitation materials under the federal securities laws); Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information, Exchange Act Release No. 37182 (May 9, 1996) (“1996 Release”) (providing Commission views on electronic delivery of required information by broker-dealers, transfer agents and investment advisers); Use of Electronic Media, Exchange Act Release No. 42728 (Apr. 28, 2000) (“2000 Release”) (providing updated interpretive guidance on the use of electronic media to deliver documents on matters such as telephonic and global consent; issuer liability for website content; and legal principles that should be considered in conducting online offerings).

    As described above, we are not proposing to specify by rule the form (e.g., narrative v. graphical/tabular, number of pages, etc.) or manner (e.g., relationship guide or other written communications) of disclosure. Given the variety of ways retail customers may communicate with their broker-dealer, as well as the type of compensation and other conflicts presented and the variety in the frequency and level of advice services provided (i.e., one-time, episodic or on a more frequent basis), we believe that some disclosures may be effectively provided in a standardized document at the beginning of the relationship, whereas others may need to be tailored to a particular recommendation. Accordingly, we preliminarily believe that broker-dealers should have the flexibility to make disclosures by various means (e.g., different types of disclosure documents), as opposed to requiring a single standard written document. As noted, however, whether there is sufficient disclosure will depend on the facts and circumstances.

    (2) Timing and Frequency of Disclosure

    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 (e.g., does not sufficiently identify material conflicts presented by a particular recommendation, or overwhelms the retail customer with disclosures related to a number of potential options that the retail customer may not be qualified to pursue). The timing of the required disclosure should also reflect the various ways in which retail customers may receive recommendations and convey orders.215

    215See, e.g., note 160 supra, describing “check and application” arrangements.

    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 (e.g., in a relationship guide, such as or in addition to the Relationship Summary, or in written communications with the retail customer, such as the account opening agreement); (2) on a regular or periodic basis (e.g., on a quarterly or annual basis, when any previously disclosed information becomes materially inaccurate, or when there is new relevant material information); (3) at other points, such as before making a particular recommendation or at the point of sale; and/or (4) at multiple points in the relationship or through a layered approach to disclosure. For example, a broker-dealer may determine that certain disclosures may be most effective if they are made at multiple points in the relationship, or, if pursuant to a layered approach to disclosure, certain material facts are conveyed in a more general manner in an initial written disclosure and followed by more specific information in a subsequent disclosure, which may be at the time of the recommendation 216 or even after the recommendation (i.e., in the trade confirmation). Disclosure after the recommendation, such as in a trade confirmation for a particular recommended transaction would not, by itself, satisfy the Disclosure Obligation, because the disclosure would not be “prior to, or at the time of the recommendation.” However, a broker-dealer could satisfy the Disclosure Obligation, depending on the facts and circumstances, if the initial disclosure, in addition to conveying material facts relating to the scope and terms of the relationship with the retail customer, explains when and how a broker-dealer would provide additional more specific information regarding the material fact or conflict in a subsequent disclosure (e.g., disclosures in a trade confirmation concerning when the broker-dealer effects recommended transactions in a principal capacity).We believe that including in the general disclosure this additional information of when and how more specific information will be provided would help the retail customer understand the general nature of the information provided and alert the retail customer that more detailed information about the fact or conflict would be provided and the timing of such disclosure.217 As noted above, whether there is sufficient disclosure in both the initial disclosure and any subsequent disclosure, will depend on the facts and circumstances.

    216 For example, as discussed above in the discussion of the disclosure of the capacity in which the broker-dealer is acting, a broker-dealer may take this type of approach with respect to meeting its obligation regarding the capacity in which it is acting at the time of the recommendation. As noted above, we preliminarily believe that a broker-dealer would satisfy the Disclosure Obligation expressly by providing written disclosure setting forth when the broker-dealer is acting in a broker-dealer capacity versus an advisory capacity and how the broker-dealer will clarify when it is making a recommendation whether it is doing so in a broker-dealer capacity versus an advisory capacity. However, one important distinction is that the written disclosure requirement would apply to the initial disclosure (i.e., setting forth when the broker-dealer is acting in a broker-dealer capacity and the method it will use to clarify the capacity in which it is acting at the time of the recommendation), but we would not consider the subsequent disclosure of capacity at the time of recommendation to also be subject to the “in writing” requirement (i.e., a broker-dealer could clarify it orally).

    217 The Commission has granted exemptions to certain dual registrants, subject to a number of conditions, from the written disclosure and consent requirements of Advisers Act Section 206(3) (which makes it unlawful for an adviser to engage in a principal trade with an advisory client, unless it discloses to the client in writing before completion of the transaction the capacity in which the adviser is acting and obtains the consent of the client to the transaction). The exemptions are subject to several conditions, including conditions to provide disclosures at multiple points in the relationship, including disclosure that the entity may be acting in a principal capacity in a written confirmation at or before completion of a transaction. See, e.g., In the matter of Merrill Lynch Pierce Fenner & Smith, Incorporated, Investment Advisers Act Release No. 4595; (Dec. 28, 2016); In the matter of Robert W. Baird & Co., Incorporated, Investment Advisers Act Release No. 4596 (Dec. 28, 2016); In the matter of UBS Financial Services, Inc., Investment Advisers Act Release No. 4597 (Dec. 28, 2016); In the matter of Wells Fargo Advisors, LLC, Wells Fargo Advisors Financial Network, LLC, Investment Advisers Act Release No. 4598 (Dec. 28, 2016).

    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 (e.g., a new material conflict of interest has arisen that is not addressed by the standardized disclosure). Because the Disclosure Obligation would apply “prior to or at the time of” the recommendation, if a broker-dealer has previously made the relevant disclosure to the retail customer (and there have been no material changes to the previously disclosed information), it would not be expected to repeat such disclosure at each subsequent recommendation, depending on the facts and circumstances of the prior disclosure. As noted above, we would like to emphasize the importance of determining the appropriate timing and frequency of disclosure. For example, where a significant amount of time passes between the disclosure and a recommendation, the broker-dealer generally should determine whether the retail customer should reasonably be expected to be on notice of the prior disclosure; if not, the broker-dealer generally should not rely on such disclosure.

    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.218

    218 For example, generally, under the antifraud provisions, whether a broker-dealer has a duty to disclose material information to its customer depends upon the scope of the relationship with the customer, which is fact-intensive. See, e.g., Conway v. Icahn & Co., Inc., 16 F.3d 504, 510 (2d Cir. 1994) (“A broker, as agent, has a duty to use reasonable efforts to give its principal information relevant to the affairs that have been entrusted to it.”). Where a broker-dealer processes its customer's orders, but does not recommend securities or solicit customers, then the material information that the broker-dealer is required to disclose to its customer is narrow, encompassing only the information related to the consummation of the transaction. See Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 536 (2d Cir. 1999). In such circumstances, the broker-dealer generally does not have to provide information regarding the security or the broker-dealer's economic self-interest in the security. See, e.g., Carras v. Burns, 516 F.2d 251, 257 (4th Cir. 1975) (broker-dealer not required to volunteer advice where “acting only as a broker”); Canizaro v. Kohlmeyer & Co., 370 F. Supp. 282, 289 (E.D. La. 1974), aff'd, 512 F.2d 484 (5th Cir. 1975) (broker-dealer that “merely received and executed a purchase order, has a minimal duty, if any at all, to investigate the purchase and disclose material facts to a customer”); Walston & Co. v. Miller, 410 P.2d 658, 661 (Ariz. 1966) (“The agency relationship between customer and broker normally terminates with the execution of the order because the broker's duties, unlike those of an investment advisor or those of a manager of a discretionary account, are only to fulfill the mechanical, ministerial requirements of the purchase and sale of the security or future contract on the market.”).

    See also Exchange Act Rule 10b-10 (“Rule 10b-10”). Rule 10b-10 requires a broker-dealer effecting customer transactions in securities (other than U.S. savings bonds or municipal securities) to provide written notification to the customer, at or before completion of the transaction, disclosing information specific to the transaction, including whether the broker-dealer is acting as agent or principal and its compensation, as well as any third-party remuneration it has received or will receive. Exchange Act Rules 15c1-5 and 15c1-6 also require a broker-dealer to disclose in writing to the customer if it has any control, affiliation, or interest in a security it is offering or the issuer of such security. The Commission and the SROs have also adopted rules designed to address conflicts of interest that can arise when security analysts recommend equity securities in research reports and public appearances. See Regulation Analyst Certification, or Regulation AC. Regulation AC requires that broker-dealers include certifications by the research analyst in research reports and disclose whether or not the research analyst received compensation or other payments in connection with his or her specific recommendations or reviews. See also FINRA Rule 2241 (imposing requirements on FINRA members to address conflicts of interest relating to the publication and distribution of equity research reports).

    d. Consistency With Other Approaches

    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.219

    219See BIC Exemption.

    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.220 With respect to disclosure obligations under the Duty of Loyalty, the 913 Study recommended the Commission facilitate the provision of uniform, simple, and clear disclosures to retail customers about the terms of the relationships with broker-dealers and investment advisers, including any material conflicts of interest. The 913 Study also recommended that the Commission consider disclosures that should be provided (a) in a general relationship guide akin to Form ADV Part 2A and (b) more specific disclosures at the time of providing investment advice, as well as consider the utility and feasibility of a summary disclosure document containing key information on a firm's services, fees, and conflicts and the scope of its services. Finally, the 913 Study recommended the Commission 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.221

    220See 913 Study at 112.

    221See 913 Study at 114-18.

    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.

    e. Request for Comment on Proposed Disclosure Obligation

    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 Commission consider a different approach, such as a “good faith” exemption? Why or why not?

    • 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 (e.g., on account statements) and at what time(s)? How do broker-dealers provide disclosures when making recommendations on the phone? Do all broker-dealers provide such disclosures, or only some broker-dealers? If only some, how many and under what circumstances? Are those disclosures written and presented in a manner consistent with the preliminary guidance on disclosure in this release? Please provide examples.

    • 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 (e.g., in the account agreement or other document)? Please provide examples. To what extent do retail customers read and/or understand these disclosures? How effective are these disclosures and how consistent are they with the plain language and other principles of reasonable disclosure described above? How would we ensure that any disclosures are understood by retail investors?

    • 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 (i.e., capacity, fees and services). Do commenters have examples of other information relating to scope and terms of the relationship that should be highlighted by the Commission as likely to be considered material facts that would need to be disclosed? If so, please provide examples. Should the Commission provide further guidance on such additional material facts? Should the Commission articulate these specific material facts (e.g., capacity, fees and services) as required disclosures in the rule text (e.g., by defining “material facts relating to the scope and terms of the relationship”)? Why or why not?

    • 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 (e.g., on account statements?), and when/if they change? Please provide examples.

    • 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 the disclosure to self-directed customers be provided, and what should be the scope of fee information provided?

    • 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?

    2. Care Obligation

    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.222 The Care Obligation is intended to incorporate and enhance existing suitability requirements applicable to broker-dealers under the federal securities laws by, among other things, imposing a “best interest” requirement which we would interpret to require the broker-dealer not put its own interest ahead of the retail customer's interest, when making recommendations.223

    222 Under Regulation Best Interest, as proposed, a broker-dealer's duty to exercise reasonable diligence, care, skill and prudence is designed to be similar to the standard of conduct that has been imposed on broker-dealers found to be acting in a fiduciary capacity. See, e.g., Davis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 906 F.2d 1206, 1215 (8th Cir. 1990) (the district court did not abuse its discretion in instructing the jury that licensed securities brokers were fiduciaries that owed their customers a duty of utmost good faith, integrity and loyalty); see also Paine, Webber, Jackson & Curtis, Inc. v. Adams, 718 P.2d 508, 515-16 (Colo. 1986) (evidence “that a customer has placed trust and confidence in the broker” by giving practical control of account can be “indicative of the existence of a fiduciary relationship”); SEC v. Ridenour, 913 F.2d. 515 (8th Cir. 1990) (bond dealer owed fiduciary duty to customers with whom he had established a relationship of trust and confidence).

    223 In response to Chairman Clayton's Statement, several commenters supporting a best interest standard for broker-dealers suggested that the best interest standard be built upon existing broker-dealer requirements, such as suitability, and include enhancements to those standards as the Commission sees necessary. See, e.g., SIFMA 2017 Letter, John Hancock Letter; Fidelity Letter; Wells Fargo Letter; ICI August 2017 Letter. See also supra Section II.B.

    Although the term “prudence” is not a term frequently used in the federal securities laws,224 the Commission believes that this term conveys the fundamental importance of conducting a proper evaluation of any securities recommendation in accordance with an objective standard of care. However, recognizing that the term “prudence” is generally not used under the federal securities laws, we also seek comment below on whether there is adequate clarity and understanding regarding its usage, or whether other terms are more appropriate in the context of broker-dealer regulation.

    224But see SEC v. Glt Dain Rauscher, Inc., 254 F.3d 852, 853 (9th Cir. 2001) (where, in the context of an underwriter of municipal offerings who allegedly violated several federal securities laws, the court held “that the industry standard of care for an underwriter of municipal offerings is one of reasonable prudence, for which the industry standard is one factor to be considered, but is not the determinative factor”). In addition, under Section 11(c) of the Securities Act [15 U.S.C. 77k(c)], the adequacy of an underwriter's due diligence efforts and, in turn, its ability to establish a due diligence defense is determined by “the standard of reasonableness [that] shall be that required of a prudent man in the management of his own property” (emphasis added).

    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.225 Nor does Regulation Best Interest prohibit, among others, recommendations from a limited range of products, or recommendations of proprietary products, products of affiliates, or principal transactions, provided the Care Obligation is satisfied and the associated conflicts are disclosed (and mitigated, as applicable) or eliminated, as discussed in Sections II.B. and II.D.2.

    225See supra Section II.B.

    a. Understand the Potential Risks and Rewards of the Recommended Transaction or Strategy, and Have a Reasonable Basis To Believe That the Recommendation Could Be in the Best Interest of at Least Some Retail Customers

    Broker-dealers must deal with their customers fairly 226 —and, as part of that obligation, have a reasonable basis for any recommendation.227 This obligation stems from the broker-dealer's “special relationship” to the retail customer, and from the fact that in recommending a security or investment strategy, the broker-dealer represents to the customer “that a reasonable investigation has been made and that [its] recommendation rests on the conclusions based on such investigation.” 228

    226See, e.g., Duker & Duker, Exchange Act Release No. 2350, at *2, 6 SEC. 386, 388 (Dec. 19, 1939) (Commission opinion) (“Inherent in the relationship between a dealer and his customer is the vital representation that the customer be dealt with fairly, and in accordance with the standards of the profession.”). See also Report of the Special Study of Securities Markets of the Securities and Exchange Commission, H. Doc. 95, 88th Cong., 1st Sess., at 238 (1963) (“An obligation of fair dealing, based upon the general antifraud provisions of the Federal securities laws, rests upon the theory that even a dealer at arm's length impliedly represents when he hangs out his shingle that he will deal fairly with the public.”).

    227See Mac Robbins & Co., Exchange Act Release No. 6846, at *3 (“[T]he making of representations to prospective purchasers without a reasonable basis, couched in terms of either opinion or fact and designed to induce purchases, is contrary to the basic obligation of fair dealing borne by those who engage in the sale of securities to the public.”), aff'd sub nom., Berko v. SEC, 316 F.2d 137 (2d Cir. 1963).

    228See Hanly, 415 F.2d 596-97 (“A securities dealer occupies a special relationship to a buyer of securities in that by his position he implicitly represents that he has an adequate and reasonable basis for the opinions he renders.”); In the Matter of Lester Kuznetz, 1986 WL 625417 at *3, Exchange Act Rel. No. 23525 (Aug. 12, 1986) (Commission opinion) (“When a securities salesman recommends securities, he is under a duty to ensure that his representations have a reasonable basis.”); see also FINRA Regulatory Notice 10-22, Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings (Apr. 2010).

    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,” 229 would require a broker-dealer to “exercise reasonable diligence, care, skill, and prudence to . . . [u]nderstand 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.” 230 This obligation would relate to the particular security or strategy recommended, rather than to any particular retail customer.231 Without establishing such a threshold understanding of its particular recommendation, we do not believe that a broker-dealer could, as required by Regulation Best Interest, act in the best interest of a retail customer when making a recommendation.

    229 The courts, the Commission, and FINRA have interpreted the broker-dealer's existing reasonable-basis suitability obligation to impose a broad affirmative duty to have an “adequate and reasonable basis” for any recommendation that they make. See, e.g., Hanly, 415 F.2d 597; see also SEC v. Hasho, 784 F. Supp. 1059, 1107 (S.D.N.Y. 1992) (“By making a recommendation, a securities dealer implicitly represents to a buyer of securities that he has an adequate basis for the recommendation.”); Michael Frederick Siegel, Exchange Act Rel. No. 58737, at *12-13 (Oct. 6, 2008) (Commission opinion) (“The suitability rule . . . requires that . . . a registered representative must first have an `adequate and reasonable basis' for believing that the recommendation could be suitable for at least some customers.”); Terry Wayne White, Exchange Act Rel. No. 27895, at *4, 50 SEC. 211, 212 & n.4 (1990) (Commission opinion) (“It is well established that a broker cannot recommend any security to a customer `unless there is an adequate and reasonable basis for such recommendation. . . .”).

    230 Reasonable-basis suitability “requires that a representative ensure that he or she has an `adequate and reasonable' understanding of an investment before recommending it to customers.” Richard G. Cody, Exchange Act Release No. 64565, at *12 (May 27, 2011) (Commission opinion, sustaining FINRA findings) (citing Hanly, 415 F.2d at 597).

    This understanding must include the “ `potential risks and rewards' and potential consequences of such recommendation.” See Richard G. Cody, Exchange Act Release No. 64565, at *12 (May 27, 2011) (Commission opinion, sustaining FINRA findings) (internal citations omitted), aff'd, Cody v. SEC, 693 F.3d 251 (1st Cir. 2012); F.J. Kaufman and Co. of Virginia and Frederick J. Kaufman, Jr., Exchange Act Release No. 27535, at *3, 50 SEC. 164 (Dec. 13, 1989) (Commission opinion, sustaining NASD findings) (“[A] broker cannot determine whether a recommendation is suitable for a specific customer unless the broker understands the potential risks and rewards inherent in that recommendation.”). See also FINRA Regulatory Notice 11-02 (Jan. 2011).

    231See Michael Frederick Siegel, Exchange Act Release No. 58737, at *12-13 (Oct. 6, 2008) (Commission opinion, sustaining NASD findings), aff'd in relevant part, Siegel v. SEC, 592 F.3d 147 (D.C. Cir. 2010), cert. denied, 560 U.S. 926 (2010).

    To meet this proposed requirement under paragraph (a)(2)(ii)(A), a broker-dealer would need to: (1) Undertake reasonable diligence (i.e., reasonable investigation and inquiry) to understand the potential risks and rewards of the recommended security or strategy (i.e., to understand the security or strategy), and (2) have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers based on that understanding.232 A broker-dealer must adhere to both components to meet its obligation under proposed paragraph (a)(2)(ii)(A).233 Thus, a broker-dealer could violate the obligation if he or she did not understand the potential risks and rewards of the recommended security or investment strategy, even if the security or investment strategy could have been in the best interest for at least some retail customers.234 In addition, if a broker-dealer understands the recommended security or investment strategy, he or she must still have a reasonable basis to believe that the security or investment strategy could be in the best interest of at least some retail customers.235

    232See paragraph (a)(2)(ii)(A) of Proposed Regulation Best Interest; see also Cody v. SEC, 693 F.3d 251, 259 (1st Cir. 2012) (finding that registered representative was responsible for investigating security that he recommended and failed to have sufficient understanding of security); F.J. Kaufman, Exchange Act Release No. 27535, at *3 (“A broker-dealer in his dealings with customers impliedly represents that his opinions and predictions respecting a [security] which he has undertaken to recommend are responsibly made on the basis of actual knowledge and careful consideration . . . .”); see also FINRA Regulatory Notice 12-25 at Q22.

    233See FINRA Rule 2110.05(a). See also FINRA Regulatory Notice 12-25 at Q22 (the “reasonable-basis obligation has two components: A broker must (1) perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and (2) determine whether the recommendation is suitable for at least some investors based on that understanding”). In discussing SRO suitability rules, the Commission has noted that “the `reasonable-basis' test is subsumed within the [NASD's] suitability rule. A broker cannot conclude that a recommendation is suitable for a particular customer unless he has a reasonable basis for believing that the recommendation could be suitable for at least some customers.” Terry Wayne White, Exchange Act Release No. 27895, at *2, 50 SEC. 211, 212-13 (Apr. 11, 1990) (Commission opinion, sustaining NASD findings) (citing F.J. Kaufman, Exchange Act Release No. 27535).

    234See FINRA Regulatory Notice 12-25 at Q22 (noting that the “reasonable-basis obligation is critically important because, in recent years, securities and investment strategies that brokers recommend to customers, including retail investors, have become increasingly complex and, in some cases, risky. Brokers cannot fulfill their suitability responsibilities to customers (including both their reasonable-basis and customer-specific obligations) when they fail to understand the securities and investment strategies they recommend. . . .”). Broker-dealers also have additional specific suitability obligations with respect to certain types of products or transactions, such as variable insurance products and non-traditional products, including structured products and security futures. See, e.g., FINRA Rule 2330, “Members' Responsibilities Regarding Deferred Variable Annuities;” FINRA Rule 2370, “Security Futures;” see also 913 Study at 65-66.

    235See FINRA Regulatory Notice 12-25 at Q22.

    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.236 For example, the cost associated with a recommendation is ordinarily only one of many factors to consider when evaluating the risks and rewards of a subject security or investment strategy involving securities. Other factors may include, but are not limited to, the investment objectives, characteristics (including any special or unusual features), liquidity, risks and potential benefits, volatility, and likely performance of market and economic conditions, the expected return of the security or investment strategy, as well as any financial incentives to recommend the security or investment strategy.

    236See FINRA Rule 2111.05(a).

    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? 237

    237See NASD Notice to Members 05-26, New Products—NASD Recommends Best Practices for Reviewing New Products (Apr. 2005).

    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 some retail customers.238 If a broker-dealer cannot establish such a fundamental understanding of its recommendation (i.e., the risks and rewards associated with the recommendation, or that the recommendation could be in the best interest of at least some retail customers), we do not believe that the broker-dealer could establish that it is acting in a retail customer's best interest when making a recommendation in accordance with proposed paragraph (a)(2)(ii)(B) of Regulation Best Interest.

    238See supra note 233.

    b. Reasonable Basis To Believe the Recommendation Is in the Best Interest of a Particular Retail Customer

    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 particular retail customer based on its understanding of the investment or investment strategy under proposed paragraph (a)(2)(ii)(A), and in light of the retail customer's investment objectives, financial situation, and needs. Accordingly, under proposed paragraph (a)(2)(ii)(B), the second obligation would require a broker-dealer to “exercise reasonable diligence, care, skill, and prudence 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.” Under this standard, a broker-dealer could not have a reasonable basis to believe that the recommendation is in the “best interest” of the retail customer, if the broker-dealer put its interest ahead of the retail customer's interest, as discussed in Section II.B.

    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,” 239 but enhances these obligations by requiring that the broker-dealer have a reasonable basis to believe that the recommendation is in the “best interest” of (rather than “suitable for”) the retail customer. After extensive consideration of these existing customer-specific suitability requirements, we believe that it is appropriate to generally draw and build upon this existing obligation, as noted below, as the contours of the obligation are well-defined, and this approach would promote consistency and clarity in the relevant obligations, and facilitate the development of compliance policies and procedures for broker-dealers while also promoting investor protection.

    239See, e.g., J. Stephen Stout, Exchange Act Release No. 43410, at *11, 54 SEC. 888, 909 (Oct. 4, 2000) (Commission opinion) (“As part of a broker's basic obligation to deal fairly with customers, a broker's recommendation must be suitable for the client in light of the client's investment objectives, as determined by the client's financial situation and needs.”); Richard N. Cea, Exchange Act Release No. 8662, at *7 (Aug. 6, 1969) (Commission opinion) (“It was incumbent on the salesmen in these circumstances, as part of their basic obligation to deal fairly with the investing public, to make only such recommendations as they had reasonable grounds to believe met the customers' expressed needs and objectives.”). Both courts and the Commission have found broker-dealers or their registered representatives liable for making unsuitable recommendations based on violations of the antifraud provisions of the federal securities laws. See Brown v. E.F. Hutton Group, 991 F.2d 1020, 1031 (2d Cir. 1993) (“[a]nalytically, an unsuitability claim is a subset of the ordinary Section 10(b) fraud claim”); O'Connor v. R.F. Lafferty & Co., 965 F.2d 893 (10th Cir. 1992); Clark v. John Lamula Investors, Inc., 583 F.2d 594, 599-600 (2d Cir. 1978); Steven E. Louros v. Kreicas, 367 F. Supp. 2d 572, 585 (S.D.N.Y. 2005); Mauriber v. Shearson/American Express, Inc., 567 F. Supp. 1231 (S.D.N.Y 1983); Steven E. Muth and Richard J. Rouse, Exchange Act Release No. 52551, 58 SEC. 770 (Oct. 3, 2005) (Commission opinion). FINRA's suitability rule also imposes a customer-specific suitability obligation on broker-dealers. See FINRA Rule 2111.05(b) (“The customer-specific obligation requires that a member or associated person have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer's investment profile, as delineated in Rule 2111(a).”).

    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.240 Thus, in forming a reasonable basis to believe that the recommended securities transaction or investment strategy is in the best interest of a particular retail customer, and does not place the financial or other interest of the broker-dealer ahead of the interest of the retail customer, the broker-dealer would generally need to consider these specific product or strategy related factors, as relevant—and in particular the financial and other benefits to the broker-dealer—along with the customer's investment profile (as described below). While the Commission believes these are all important considerations in analyzing any recommendation made by a broker-dealer, they are critical considerations in analyzing whether a recommendation with respect to a particular retail customer's “best interest.”

    240See supra Section II.D.2.a (providing examples of various factors that could be considered when evaluating the risks and rewards of a recommended investment or investment strategy).

    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.241

    241See Gerald M. Greenberg, Exchange Act Release No. 6320, at *3, 40 SEC. 133, 137-38 (July 21, 1960) (Commission opinion, sustaining NASD findings) (holding that a broker-dealer cannot avoid the duty to make suitable recommendations simply by avoiding knowledge of the customer's financial situation). Under FINRA's suitability rule, the broker-dealer has a duty to undertake reasonable diligence to ascertain the customer's investment profile. FINRA Rule 2111(a) (“A customer's investment profile includes, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.”); FINRA Regulatory Notice 12-25 at Q15-Q21 (discussing broker-dealer's information-gathering requirements).

    The Commission also proposes to include this concept of a “customer's investment profile,” consistent with FINRA's suitability rule.242 Specifically, the proposed rule would provide that the “Retail Customer Investment Profile includes, but is not limited to, the retail customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the retail customer may disclose to the broker, dealer, or a natural person who is an associated person of a broker or dealer in connection with a recommendation.” 243 A broker-dealer would be required to exercise “reasonable diligence” to ascertain the retail customer's investment profile as part of satisfying proposed paragraph (a)(2)(i)(B).244 When retail customer information is unavailable despite a broker-dealer's reasonable diligence to obtain such information, a broker-dealer would have to consider whether it has sufficient understanding of the retail customer to properly evaluate whether the recommendation is in the retail customer's best interest.245 A broker-dealer that makes a recommendation to a retail customer for whom it lacks sufficient information to have a reasonable basis to believe that the recommendation is in the best interest of that retail customer based on the retail customer's investment profile would not meet its obligations under the proposed rule.246

    242Id.

    243See paragraph (c)(2) of Proposed Regulation Best Interest.

    244See FINRA Regulatory Notice 12-25 at Q16 (outlining what constitutes “reasonable diligence” in attempting to obtain customer-specific information and that the reasonableness of the effort also will depend on the facts and circumstances). See also FINRA Regulatory Notice 11-25, Know Your Customer and Suitability (May 2011) (“FINRA Regulatory Notice 11-25”).

    245See FINRA Regulatory Notice 11-25 at Q3. While “neglect, refusal, or inability of the retail customer to provide or update any information” would excuse the broker, dealer, or associated person from obtaining the information under proposed Rule 17a-3(a)(25) discussed in Section II.E., it would not relieve a broker-dealer of its obligation to determine whether it has sufficient information to properly evaluate whether a recommendation is in the retail customer's best interest.

    246See FINRA Regulatory Notice 12-25 at Q16 (outlining what constitutes “reasonable diligence” in attempting to obtain customer-specific information and that the reasonableness of the effort also will depend on the facts and circumstances).

    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—i.e., where a broker-dealer knows or has reason to believe that the customer's investment profile has changed.247 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, and the importance of each factor may vary depending on the facts and circumstances of the particular case.248 Generally, however, absent information that would cause a broker-dealer to know or have reason to know that the information contained in a customer's investment profile is inaccurate, a broker-dealer may reasonably rely on the information in an existing customer's investment profile.

    247 We note that, pursuant to Exchange Act rules, a broker-dealer must submit to an existing customer his or her account record or alternative document to explain any terms regarding investment objectives for accounts in which the member, broker or dealer has been required to make a suitability determination within the past 36 months. The account record or alternative document must include or be accompanied by prominent statements on which the customer should mark any corrections and return the account record or alternate document to the broker-dealer, and the customer should notify the broker-dealer of any future changes to information contained in the account record—including the customer's investment objectives. See CFR 240.17a-3(a)-17(i)(A), (B)(i), (B)(iii), (D). The accompanying discussion in the text addresses circumstances where a broker-dealer generally should make reasonable efforts to ascertain a customer's investment profile information prior to this 36-month period.

    248See FINRA Regulatory Notice 12-25 at Q16.

    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 (i.e., does the recommendation comport with the retail customer's investment profile). Furthermore, by applying a consistent definition across existing suitability requirements and proposed Regulation Best Interest, we hope to provide clarity to broker-dealers and maintain efficiencies for broker-dealers that have already established infrastructures to comply with their suitability obligations when making recommendations. Finally, we note that this definition would be consistent with the factors the DOL identified for consideration as part of a best interest recommendation under the BIC Exemption: “the investment objectives, risk tolerance, financial circumstances and needs” of a retirement investor.249

    249See Best Interest Contract Exemption, 81 FR 21002 (Apr. 8, 2016).

    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.250 As such, the level of importance of each factor would depend on the facts and circumstances of a particular recommendation. One or more factors may have more or less relevance—or may not be obtained or analyzed at all—if the broker-dealer has a reasonable basis to believe that the factors are not relevant in light of the facts and circumstances of a particular situation.251 For example, a broker-dealer may conclude that liquidity needs are irrelevant regarding all customers for whom only liquid securities will be recommended.252

    250See FINRA Rule 2111.04.

    251Id.

    252See FINRA Regulatory Notice 11-25 at Q3.

    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.253 Thus, where, for example, a broker-dealer is choosing among identical securities available to the broker-dealer, it would be inconsistent with the Care Obligation to recommend the more expensive alternative for the customer.254 Similarly, we believe it would be inconsistent with the Care Obligation if the broker-dealer made the recommendation to a retail customer in order to: Maximize the broker-dealer's compensation (e.g., commissions or other fees); further the broker-dealer's business relationships; satisfy firm sales quotas or other targets; or win a firm-sponsored sales contest.

    253See discussion supra Section II.D.

    254See supra note 106, and accompanying text.

    We preliminarily believe that, under this prong of the Care Obligation, when a broker-dealer recommends a more expensive security or investment strategy over another reasonably available alternative offered by the broker-dealer, the broker-dealer would need to have a reasonable basis to believe that the higher cost is justified (and thus nevertheless is in the retail customer's best interest) based on other factors (e.g., 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), in light of the retail customer's investment profile. When a broker-dealer recommends a more remunerative security or investment strategy over another reasonably available alternative offered by the broker-dealer, the broker-dealer would need to have a reasonable basis to believe that—putting aside the broker-dealer's financial incentives—the recommendation was in the best interest of the retail customer based on the factors noted above, in light of the retail customer's investment profile. Nevertheless, this does not mean that a broker-dealer could not recommend the more remunerative of two reasonably available alternatives, if the broker-dealer determines the products are otherwise both in the best interest of—and there is no material difference between them from the perspective of—retail customer, in light of the retail customer's investment profile.

    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, we believe it would be inconsistent with the best interest obligation for the broker-dealer to recommend the more expensive alternative for the customer, even if the broker-dealer had disclosed that the product was higher cost and had policies and procedures reasonably designed to mitigate the conflict under the Conflict of Interest Obligations, as the broker-dealer would not have complied with its Care Obligation.255 Such a recommendation, disclosure aside, would still need to be in the best interest of a retail customer, and we do not believe it would be in the best interest of a retail customer to recommend a higher-cost product if all other factors are equal.

    255Id.

    c. Reasonable Basis To Believe a Series of Recommended Transactions Is Not Excessive and Is in the Retail Customer's Best Interest

    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 de facto control over a customer's account, thereby making the obligation consistent with the current requirements for “reasonable basis suitability” and “customer specific suitability.” Accordingly, Regulation Best Interest would include the existing “quantitative suitability” obligation, but without a “control” element.

    Pursuant to the federal securities laws, broker-dealers can violate the federal antifraud provisions by engaging in excessive trading 256 that amounts to churning, switching, or unsuitable recommendations. Churning occurs when a broker-dealer, exercising control over the volume and frequency of trading in a customer account, abuses the customer's confidence for the broker-dealer's personal gain by initiating transactions that are excessive in view of the character of the account and the customer's investment objectives.257 Switching occurs when a broker-dealer induces a customer to liquidate his or her shares in a mutual fund or annuity in order to purchase shares in another mutual fund or annuity, for the purpose of increasing the broker-dealer's compensation, where the benefit to the customer of the switch is not justified by the cost of switching.258 The Commission has also found excessive trading as a suitability violation on the basis that “the frequency of trading must also be suitable.” 259 As noted above, FINRA's suitability rule also includes a similar concept known as quantitative suitability.260

    256 Excessive trading is a level of trading unjustified in light of the customer's investment objectives. See Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 821 (9th Cir. 1980).

    257See Carras v. Burns, 516 F.2d 251, 258 (4th Cir. 1975). The elements of a churning claim brought under the antifraud provisions include: (1)Eexcessive trading in the account that was unjustified in light of the customer's investment objectives; (2) the broker-dealer exercised actual or de facto control over the trading in the account; and (3) the broker-dealer acted with intent to defraud or with willful or reckless disregard for the customer's interests. See Rizek v. SEC, 215 F.3d 157, 162 (1st Cir. 2000). A broker-dealer churning a customer account may be liable under both Exchange Act Section 10(b) and Rule 10b-5 thereunder, and/or Exchange Act Section 15(c), Rules 15c1-2 and/or 15cl-7. See, e.g., McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d 888, n.1 (2d Cir. 1979) (noting that churning is illegal under the Exchange Act Sections 15(c)(1) and 10(b) and Rule 10b-5).

    258See, e.g., Russell L. Irish, 42 SEC. 735, 736-40 (1965), aff'd, Irish v. SEC, 367 F.2d 637 (9th Cir. 1966), cert. denied, 386 U.S. 911 (1967).

    259Edgar B. Alacan, Exchange Act Release No. 49970, at *20, 57 SEC. 715, 736 (July 6, 2004) (Commission opinion) (quoting Sandra K. Simpson and Daphne Ann Pattee, Exchange Act Release No. 45923, at *13, 55 SEC. 766, 793-794 (May 14, 2002) (Commission opinion)). See J. Stephen Stout, Exchange Act Release No. 43410, at *13, 54 SEC. 888, 912 (Oct. 4, 2000) (Commission opinion) (finding turnover in customer account was unsuitable given customers' investment goals and needs).

    260See FINRA Rule 2111.05(c) (“Quantitative suitability requires a member or associated person who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer's investment profile, as delineated in Rule 2111(a).”). Unlike churning, a violation of quantitative suitability does not require a showing of wrongful intent. See Cody v. SEC, 693 F.3d 251, 260 (1st Cir. 2012) (“[W]hile subjective intent is relevant to churning charges under the antifraud regulation of Rule 10b-5, . . . NASD's suitability rule is violated when a representative engages in excessive trading relative to a customer's financial needs . . . regardless of motivation . . . .”).

    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,261 cost-to-equity ratio,262 and use of in-and-out trading 263 in a customer's account. Consideration of turnover rate, cost-to-equity ratio and use of in-and-out trading is consistent with some of the ways the Commission, the courts, and FINRA have historically evaluated whether trading activity is excessive.264 These factors can be indicative of the magnitude of investor harm caused by the accumulation of high trading costs.

    261 The turnover rate, which is the number of times during a given period that securities in an account are replaced by new securities, is a frequently used measure of excessive trading. Turnover rate is calculated by “dividing the aggregate amount of purchases in an account by the average monthly investment. The average monthly investment is the cumulative total of the net investment in the account at the end of each month, exclusive of loans, divided by the number of months under consideration.” Shearson Lehman Hutton Inc., 49 SEC. 1119, 1122 n.10 (1989). Annual turnover rates as low as three may trigger liability for excessive trading. See, e.g., Laurie Jones Canady, 54 SEC. 65, 74 (1999), Exchange Act Release No. 41250 (Apr. 5, 1999) (annual turnover rates ranging from 3.83 to 7.28 times held excessive), petition denied, 230 F.3d 362 (DC Cir. 2000); Donald A. Roche, 53 SEC. 16, 22 (1997) (annual turnover rates of 3.3, 4.6, and 7.2 times held excessive); Gerald E. Donnelly, 52 SEC. 600, Exchange Act Release No. 36690 (Jan. 5, 1996) (annual turnover rates ranging from 3.1 to 3.8 times held excessive); John M. Reynolds, 50 SEC. 805 (1991) (annual turnover rate of 4.81 times held excessive). See also Dep't of Enforcement v. Cody, No. 2005003188901, 2010 FINRA Discip. LEXIS 8 (NAC May 10, 2010) (same), aff'd, Exchange Act Rel. No. 64565, 2011 SEC LEXIS 1862, at *48 (May 27, 2011) (finding turnover rate of three provided support for excessive trading); Dep't of Enforcement v. Stein, No. C07000003, 2001 NASD Discip. LEXIS 38, at *17 (NAC Dec. 3, 2001) (“Turnover rates between three and five have triggered liability for excessive trading”). The Commission has stated that, “[a]lthough no turnover rate is universally recognized as determinative of churning, a rate in excess of 6 is generally presumed to reflect excessive trading,” especially if the customer's objective is conservative. Al Rizek, 54 SEC. 261 (1999), Exchange Act Release No. 41725 (Aug. 11, 1999), aff'd, Rizek v. SEC., 215 F.3d 157 (1st Cir. 2000). See also Craighead v. E.F. Hutton & Co., 899 F.2d 485, 490 (6th Cir. 1990); Arceneaux v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 767 F.2d 1498, 1502 (11th Cir. 1985).

    262 The cost-to-equity ratio represents “the percentage of return on the customer's average net equity needed to pay broker-dealer commissions and other expenses.” Rafael Pinchas, 54 SEC. 331, 340 (1999), 1999 SEC LEXIS 1754, at *18 (Commission review of NASD disciplinary proceeding). Cost-to-equity ratios as low as 8.7 have been considered indicative of excessive trading, and ratios above 12 generally are viewed as very strong evidence of excessive trading. See Cody, 2011 SEC LEXIS 1862, at *49 & *55 (finding cost-to-equity ratio of 8.7 percent excessive); Thomas F. Bandyk, Exchange Act Rel. No. 35415, 1995 SEC LEXIS 481, at *2-3 (Feb. 24, 1995) (“His excessive trading yielded an annualized commission to equity ratio ranging between 12.1% and 18.0%.”).

    263 In-and-out trading refers to the “sale of all or part of a customer's portfolio, with the money reinvested in other securities, followed by the sale of the newly acquired securities.” Costello v. Oppenheimer & Co., 711 F.2d 1361, 1369 n.9 (7th Cir. 1983). A broker's use of in-and-out trading ordinarily is a strong indicator of excessive trading. Id.

    264See also supra notes 256, 257, 259, 261, 262, 263. See, e.g., FINRA Regulatory Notice 12-25 at 14, 28-29.

    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.265 Similarly, FINRA's quantitative suitability rule requires the broker-dealer to have a reasonable basis for believing that a series of recommended transactions is not excessive and unsuitable for the customer when taken together in light of the customer's investment profile.266 The proposed rule, instead, 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 when taken together in light of the retail customer's investment profile. What would constitute a “series” of recommended transactions would depend on the facts and circumstances. Notably, here this would mean a reasonable basis to believe that the series of recommended transactions is in the best interest of the retail customer based on factors other than the broker-dealer's financial incentive to recommend a series of transactions, as discussed above, and in light of the retail customer's investment profile, consistent with (a)(1).267

    265See supra note 259.

    266See supra note 260.

    267See discussion supra Section II.D.

    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 de facto control over a retail customer account. Currently, to prove a churning claim under the antifraud provisions of the Exchange Act, courts and the Commission have interpreted the federal securities laws to require that the broker-dealer exercise actual or de facto control over a customer's account.268 Similarly, FINRA's quantitative suitability rule only applies to a member or associated person who has actual or de facto control over a customer account.269

    268See supra note 257.

    269See supra note 260.

    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 “de facto control” over the retail customer's account. Moreover, it would also take a consistent approach with the other aspects of the proposed Care Obligation, which apply regardless of whether a broker-dealer “controls” or exercises “de facto control” over the retail customer's account. Finally, by removing the control element, the Commission believes the enhanced requirement generally should expand the scope of retail customers that could benefit from the protections of this requirement: specifically, protection from a broker-dealer recommending a level of trading that is so excessive that the resulting cost-to-equity ratio or turnover rate makes a positive return virtually impossible.270 Thus, the fact that a customer may have some knowledge of financial markets or some “control” should not absolve the broker-dealer of its ultimate responsibility to have a reasonable basis for any recommendations that it makes.271 We believe that when a broker-dealer is recommending a series of transactions to the retail customer the broker-dealer must, consistent with paragraph (a)(1), evaluate whether the series of recommendations is placing the broker-dealer's interests ahead of the retail customer's. Thus, even in instances where a broker-dealer would not be considered to “control” or exercise “de facto control” over the retail customer's account, the broker-dealer should be required to comply with proposed paragraph (a)(2)(ii)(C).

    270See, e.g., In re Michael Bresner, et al., 2013 WL 5960690, at *112-115, ID-Rel. No. 517 (Nov. 8, 2013) (finding, inter alia, that some registered representatives did not churn certain customers' accounts because they did not exercise de facto control where one customer had declined recommendations “a handful of times” and another customer had picked stocks “based on information he may have heard on the radio” and made shadow trades of the same stocks that the representative had recommended).

    271See id.

    d. Consistency With Other Approaches (1) DOL Fiduciary Rulemaking

    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.272

    272 The BIC Exemption requires that advice be in a retirement investor's best interest, and further defines advice to be in the “best interest” if the person providing the advice acts “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with the such matters would use . . . without regard to the financial or other interests” of the person. BIC Exemption Section II(c)(1); Section VIII (d). The DOL stated this standard is based on longstanding concepts derived from ERISA and the law of trusts, and to “require[s] fiduciaries to put the interests of trust beneficiaries first, without regard to the fiduciaries' own self-interest.” BIC Exemption Release, 81 FR 21007, 21027.

    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.273 Proof of fraud or misrepresentation is not required, and full disclosure is not a defense to making an imprudent recommendation or favoring one's own interest at the investor's expense.274

    273Id. at 21028.

    274Id.

    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 investments, make recommendations, and exercise sound judgment in the same way that knowledgeable and impartial professionals would.” 275 The fiduciary must adhere to an objective professional standard and is subject to a particularly stringent standard of prudence when they have a conflict of interest.276

    275 BIC Exemption Release, 81 FR at 21028.

    276Id.

    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.277 The proposed Care Obligation incorporates and builds upon existing broker-dealer suitability obligations, as discussed above. Again, while not the only factors or sole determinants, cost and the broker-dealer's financial incentives would be important factors—of many, including the financial and other benefits to the broker-dealer—in determining whether a recommendation is in the best interest.278 We preliminarily believe that, in order to meet its Care Obligation, when a broker-dealer recommends a security or investment strategy over another reasonably available alternative offered by the broker-dealer, the broker-dealer would need to have a reasonable belief that the recommendation was in the best interest of the retail customer based on such other factors, in light of the retail customer's investment profile. Furthermore, as discussed in the Conflict of Interest Obligations below, proposed Regulation Best Interest requires broker-dealers to take steps to eliminate or mitigate material conflicts of interest arising from financial incentives.

    277 Although DOL did not specifically incorporate the suitability obligation as an element of the “best interest” standard, as suggested by FINRA, the DOL stated “that many aspects of suitability are also elements of the Best Interest Standard” and that a “recommendation that is not suitable under the securities laws would not” meet the standard. But, the DOL identified the following concerns with the current FINRA suitability standard: That it does not “reference a best interest standard, clearly require brokers to put their client's interest ahead of their own, expressly prohibit the selection of the least suitable (but most remunerative) of available investments, or require them to take the kind of measures to avoid or mitigate conflicts of interest that are required as conditions of this exemption.” BIC Exemption Release, 81 FR 21007, 21027-28.

    278See discussion infra Section II.D.

    (2) 913 Study

    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.279 With respect to the duty of care, the 913 Study recommended that the Commission should consider specifying uniform standards for the duty of care owed to retail investors, through rulemaking and/or interpretive guidance. The 913 Study noted that minimum baseline professionalism standards could include, for example, specifying what basis a broker-dealer or investment adviser should have in making a recommendation to an investor (i.e., suitability requirements).280 Further, the 913 Study suggested that the Commission could articulate and harmonize any such professionalism standards for broker-dealers and investment advisers, by referring to and expanding upon, as appropriate, the explicit minimum standards of conduct relating to the duty of care currently applicable to broker-dealers (e.g., suitability, best execution, and fair pricing and compensation requirements).281 The 913 Study stated that the standards could also take into account Advisers Act principles related to the duty of care.282

    279See 913 Study at 112.

    280Id. at 123.

    281Id. at 122.

    282Id. at 123. See also Fiduciary Duty Interpretive Release, discussing, among other things, investment advisers' duty of 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,283 broker-dealers currently are subject to explicit standards of conduct relating to best execution 284 and fair and reasonable compensation,285 and preliminarily we do not believe that enhancements to these obligations are required in connection with this proposal.

    283See 913 Study at 121.

    284 Under the antifraud provisions of the federal securities laws and SRO rules, broker-dealers also have a legal duty to seek to obtain best execution of customer orders, which requires broker-dealers to seek to execute customers' trades at the most favorable terms reasonably available under the circumstances. See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-70 (3d Cir.), cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities on Nasdaq, Exchange Act Release No. 40900 (Jan. 11, 1999) (citing Sinclair v. SEC, 444 F.2d 399 (2d. Cir. 1971); Arleen W. Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948) (Commission Opinion), aff'd sub nom. Hughes v. SEC, 174 F.2d 969 (DC Cir. 1949). See also Order Execution Obligations, Exchange Act Release No. 37619A (Sept. 6, 1996) (“Order Handling Rules Release”). See also Regulation NMS, Exchange Act Release No. 51808 (June 9, 2005) (“Regulation NMS Release”); FINRA Rule 5310 (“Best Execution and Interpositioning”).

    285 FINRA Rule 2121 (“Fair Prices and Commissions”).

    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.286 In particular, the Study recognized that “detailed guidance” regarding the duty of care, and particularly the duty to provide suitable investment advice “has not been a traditional focus of the investment adviser regulatory regime.” 287 In a concurrent release, we are providing interpretive guidance that reaffirms—and in some cases clarifies—certain aspects of the fiduciary duty that an investment adviser owes to its clients.288 As the proposed Regulation Best Interest is not based on the Advisers Act and would not apply to investment advisers, but rather is a new standard that would be unique to broker-dealers, taking into consideration the existing requirements of the broker-dealer regulatory regime, the Commission preliminarily does not believe that the Study's recommendations related to these other obligations are relevant here.

    286See 913 Study at 122-23.

    287Id. at 123.

    288See Fiduciary Duty Interpretive Release.

    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.

    e. Request for Comment on Proposed Care Obligation

    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 not excessive and is in the retail customer's best interest. Should the Commission consider requiring only a reasonable basis to believe that a “series of recommended transactions” (or such other term per the preceding question) is not excessive, or in the alternative, only requiring a reasonable basis to believe that a series of recommended transactions (or such other term per the preceding question) is in the retail customer's best interest? If so, why?

    • 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 not excessive and unsuitable for the customer when taken together in light of the customer's investment profile. The Commission's proposed obligation, instead, 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. Should the Commission consider different language, for example, requiring a reasonable basis to believe that a series of recommended transactions is not excessive and not contrary to the retail customer's best interest? Why or why not?

    • The Commission is not proposing to incorporate the element of control or de facto control in the requirement that a broker-dealer form a reasonable basis to believe that a series of recommended transactions, even if in the best interest of the retail customer 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. Should the Commission require “control” or “de facto” control? Why or why not?

    3. Conflict of Interest Obligations

    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 289 to: (1) Establish, maintain, and enforce written policies and procedures reasonably designed to identify, and disclose, or eliminate, all material conflicts of interest that are associated with recommendations covered by Regulation Best Interest; and (2) establish, maintain, and enforce written policies and procedures reasonably designed to identify, and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with such recommendations.

    289 Unlike the Disclosure and Care Obligations, which apply to a broker or dealer and to natural persons who are associated persons of a broker or dealer, the proposed Conflict of Interest Obligations apply solely to the broker or dealer entity, and not to the natural persons who are associated persons of a broker or dealer. For purposes of discussing the Conflict of Interest Obligations, the term “broker-dealer” refers only to the broker-dealer entity, and not to such individuals. While the Conflict of Interest Obligation applies only to the broker-dealer entity, the conflicts of interest that the broker-dealer entity must analyze are between: (i) The broker-dealer entity and the retail customer, (ii) the natural persons who are associated persons and the retail customer, and (iii) the broker-dealer entity and the natural persons who are associated persons (if the retail customer is indirectly impacted).

    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.290 Broker-dealers are already subject both to liability for failure to supervise under Section 15(b)(4)(E) 291 of the Exchange Act and to express supervision requirements under 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.292 As such, we believe that a broker-dealer could comply with the policies and procedures requirement of Regulation Best Interest by adjusting its current systems of supervision and compliance, as opposed to creating new systems.

    290 In the 913 Study, the staff stated that policies and procedures alone are not sufficient to discharge supervisory responsibility; it is also necessary to implement measures to monitor compliance with those policies and procedures. See 913 Study at 74, (citing In re Application of Stuart K. Patrick, Exchange Act Release No. 32314 (May 17, 1993); In re Application of Richard F. Kresge, Exchange Act Release No. 55988 (June 29, 2007) (demonstrating the Commission's approach over the years)).

    291See Section 15(b)(4)(E) of the Exchange Act (authorizing the Commission to impose sanctions on a firm or any associated person that fails reasonably to supervise another person subject to its supervision that commits a violation of the federal securities laws).

    292See FINRA Rule 3110 (Supervision) (requiring firms to establish and maintain systems to supervise the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules).

    a. Material Conflicts of Interest and Material Conflicts of Interest Arising From Financial Incentives Associated With Such Recommendations

    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.293

    293See Section II.D.I.b.

    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 (e.g., quotas, bonuses, sales contests, special awards, differential or variable compensation, incentives tied to appraisals or performance reviews); compensation practices involving third-parties, including both sales compensation and compensation that does not result from sales activity, such as compensation for services provided to third-parties (e.g., sub-accounting or administrative services provided to a mutual fund); receipt of commissions or sales charges, or other fees or financial incentives, or differential or variable compensation, whether paid by the retail customer or a third-party; sales of proprietary products or services, or products of affiliates; and transactions that would be effected by the broker-dealer (or an affiliate thereof) in a principal capacity.

    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 associated with a recommendation. The Commission believes this limitation is appropriate because broker-dealers often provide a range of services as part of any relationship with a retail customer, many of which would not involve a recommendation, and such services already are subject to general antifraud liability and specific requirements to address associated conflicts of interest.294 We are not proposing to change the disclosure obligations associated with these services under the general antifraud provisions of the federal securities laws.

    294See supra notes 87, 175, 176, 177 and accompanying text.

    b. Reasonably Designed Policies and Procedures

    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.295 Use of a risk-based compliance and supervisory system would grant broker-dealers 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 noncompliance with the Conflict of Interest Obligations,296 as well as the greatest risk of potential harm to retail customers through such noncompliance. We believe that this would protect retail customers by focusing the broker-dealer's resources on the areas of greatest risk to both the firm and the retail customer, as opposed to focusing on every aspect of the broker-dealer's business, regardless of the level of risk of noncompliance or harm.

    295 We propose to interpret the term “risk-based” consistent with SRO rules so that broker-dealers can incorporate these new obligations into their current compliance infrastructure. According to FINRA, “the term `risk based' describes the type of methodology a firm may use to identify and prioritize for review those areas that pose the greatest risk of potential securities law and self-regulatory organization (SRO) rule violations. In this regard, a firm is not required to conduct detailed reviews of each transaction if the firm is using a reasonably designed risk-based review system that provides the firm with sufficient information to enable the firm to focus on the areas that pose the greatest numbers of and risks of violation.” See FINRA Regulatory Notice 14-10, Consolidated Supervision Rules (Mar. 2014).

    296 As previously noted, the Commission would expect smaller investment advisers without conflicting business interests to require much simpler policies and procedures than larger firms that, for example, have multiple potential conflicts as a result of their other lines of business or their affiliations with other financial service firms. See, e.g., Compliance Programs of Investment Companies and Investment Advisers, Advisers Act Release No. 2204 (Dec. 17, 2003) (“Advisers Act Release 2204”).

    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 noncompliance to appropriate personnel for remediation; procedures that clearly designate responsibility to business lines personnel for supervision of functions and persons,297 including determination of compensation; 298 processes for escalating conflicts of interest; processes for a periodic review and testing of the adequacy and effectiveness of policies and procedures; 299 and training on the policies and procedures.300

    297See Frequently Asked Questions about Liability of Compliance and Legal Personnel at Broker-Dealers under Sections 15(b)(4) and 15(b)(6) of the Exchange Act, Division of Trading and Markets (Sept. 30, 2013), available at https://www.sec.gov/divisions/marketreg/faq-cco-supervision-093013.htm (providing guidance on the roles and duties of compliance and legal personnel at broker-dealers).

    298 The Commission believes that the ability to control the compensation of registered representatives is a key mechanism by which registered broker-dealers exercise supervisory controls.

    299See Advisers Act Release 2204; see also Staff Questions Advisers Should Ask While Establishing or Reviewing Their Compliance Programs (May 2006), available at https://www.sec.gov/info/cco/adviser_compliance_questions.htm.

    300Id.

    c. Identifying Material Conflicts of Interest

    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 (i.e., material conflicts of both the broker-dealer entity and natural persons who are associated persons of the broker-dealer), and in a way that enables employees to understand and identify conflicts of interest;

    (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 (e.g., based on changes in the broker-dealer's business or organizational structure, changes in compensation incentive structures, and introduction of new products 301 or services) and regular, periodic (e.g., annual) review for the identification of conflicts associated with the broker-dealer's business; and

    301 FINRA Conflicts Report at 3 (“Firms at the forefront of financial innovation are in the best position, and are uniquely obligated, to identify the conflicts of interest that may exist at a product's inception or that develop over time. There are a number of effective practices firms can adopt to address such conflicts. First, firms can use a new product review process—typically through new product review committees—that includes a mandate to identify and mitigate conflicts that a product may present. Second, firms should disclose those conflicts in plain English, with the objective of helping ensure that customers comprehend the conflicts that a firm or registered representative have in recommending a product. These conflicts may be particularly acute where complex financial products are sold to less knowledgeable investors, including retail investors.”)

    (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.

    d. Disclosure, or Elimination, of Material Conflicts of Interest and Disclosure and Mitigation, or Elimination, of Material Conflicts of Interest Arising From Financial Incentives Associated With a Recommendation

    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 (i.e., whether to eliminate or disclose (and mitigate, as required) the material conflict); and setting forth a process to help ensure that material conflicts are effectively addressed as required by the policies and procedures.

    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.302

    302See Section II.D.1.

    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 all material conflicts of interest (outside of the material conflicts arising from financial incentives, which would specifically require mitigation), the proposed Conflict of Interest Obligations would require that a broker-dealer develop policies and procedures reasonably designed to “at a minimum disclose, or eliminate” all material conflicts. As such, a broker-dealer may determine to design its policies and procedures to address material conflicts of interest by both disclosing a conflict and taking other additional steps to mitigate the conflict (outside of the material conflicts arising from financial incentives, which would specifically require mitigation). However, in situations where the broker-dealer determines that disclosure does not reasonably address the conflict, for example, where the disclosure cannot be made in a simple or clear manner, or otherwise does not help the retail customer's understanding of the conflict or capacity for informed decision-making, or where the conflict is such that it may be difficult for the broker-dealer to determine that it is not putting its own interest ahead of the retail customer's interest, under the proposed obligation to have reasonably designed policies and procedures to “at a minimum disclose, or eliminate” all material conflicts the broker-dealer would need to establish policies and procedures reasonably designed to either eliminate the conflict or to both disclose and mitigate the conflict.

    e. Mitigation of Material Conflicts of Interest Arising From Financial Incentives

    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 303 with third parties—create inherent conflicts that may affect the impartiality of a recommendation.304 These financial incentives can create conflicts of interest that may be difficult, if not impossible, to effectively manage through disclosure alone, or to eliminate.305 At the same time, the Commission, like other regulators,306 recognizes that differential compensation may appropriately recognize the time and expertise necessary to understand an investment, and in doing so promote investor choice and access to a range of products, and so elimination of the conflict may not be appropriate or desirable.307

    303 Conflicts of interest may arise from compensation other than sales compensation. For example, in the case of mutual funds, compensation for account servicing, sub-transfer agency, sub-accounting, recordkeeping or other administrative services provides an incentive for a firm to offer the mutual funds from or for which the firm receives such compensation and not offer other funds or products from or for which it does not receive such compensation.

    304See Tully Report. The Commission has historically expressed concerns about the financial incentives that commission-based compensation provides to broker-dealers. In order to address these concerns and preserve the broker-dealer model to promote investor choice, Regulation Best Interest imposes the additional requirement to mitigate conflicts related to financial incentives. See supra Section I.A.

    305 Several commenters in response to Chairman Clayton's Statement expressed similar concerns regarding the limits of disclosure to address broker-dealer conflicts, and supported requiring both disclosure and mitigation of conflicts. See, e.g., Economic Policy Institute Letter; PIABA Letter; Financial Planning Coalition Letter (“The Coalition believes that disclosures alone are insufficient to remedy investor confusion and harm stemming from conflicted advice. Although the Coalition agrees that disclosures can be a useful and important tool for investors, relying solely on disclosures is inconsistent with the SEC's mission of investor protection and contradicts substantial prior research demonstrating that disclosures alone are ineffective. The Coalition opposes a disclosure-only regime and urges consideration of system based on either conflict avoidance or disclosures coupled with proper mitigation.”); Nationwide Letter (“. . . Nationwide is firmly committed to supporting a new best interest standard of care for broker-dealers that focuses on increased transparency and mitigation of conflicts, while at the same time protecting consumers' access to advice, choice, and affordable products.”); LPL Financial Letter (recommending that the Commission consider adopting a standard of conduct that preserves financial institutions' flexibility to avoid or manage conflicts in which they have a competing financial interest, provided they fully and fairly disclose the nature of such conflicts to investors and take such additional steps as may be necessary to ensure such conflicts do not adversely affect the impartiality and prudence of the advice they provide to investors).

    306 For example, the preamble to the BIC Exemption states “The Department has not made the requirements more stringent, as suggested by some commenters, so as to require completely level compensation. Different payments for different classes of investments may be appropriate based on differences in the time and expertise necessary to recommend them” and that under the BIC Exemption “differential compensation is permitted but only if the Financial Institution's policies and procedures, as a whole are reasonably designed to avoid a misalignment of interests between Advisers and Retirement Investors” and that “the payment of differential compensation should be based only on neutral factors.” BIC Exemption Release, FR 21007, 21035-40.

    307See, e.g., Letter from James D. Gallagher, Executive Vice President and General Counsel, John Hancock Life Insurance Company (U.S.A.) (Aug. 25, 2017) (“John Hancock Letter”) (“Customer choice should allow advisers and broker-dealers to direct clients to products that suit their needs, whether or not those products are proprietary.”).

    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.308

    308 This is in line with the 913 Study recommendation that the Commission address how the uniform fiduciary standard of conduct would be fulfilled when engaging in principal trading, which at a minimum should require disclosure but not necessarily require the specific procedures of Advisers Act Section 206(3). See Study at 113.

    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 and mitigate material conflict of interests related to financial incentives, in addition to the proposed requirement to establish, maintain and enforce written policies and procedures reasonably designed to identify and disclose or eliminate general material conflicts of interest in paragraph (a)(2)(iii).

    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.309 This principles-based approach provides broker-dealers the flexibility to establish their supervisory system in a manner that reflects their business models, and based on those models, focus on areas where heightened concern may be warranted.310 The Commission believes that reasonably designed policies and procedures should include mitigation measures that depend on a variety of factors related to a broker-dealer's business model (such as the size of the broker-dealer, retail customer base, the nature and significance of the compensation conflict, and the complexity of the product), some of which may be weighed more heavily than others.311 Depending on a broker-dealer's assessment of these factors as a whole, more or less demanding mitigation measures included in reasonably designed policies and procedures may be appropriate. For example, heightened mitigation measures, including enhanced supervision, may be appropriate in situations where the retail customer displays a less sophisticated understanding of securities investing generally 312 or the conflicts associated with particular products involved,313 where the compensation is less transparent (for example, a payment received from a third-party or built into the price of the product or a transaction versus a straight commission payment), or depending on the complexity of the product.314 A broker-dealer could reasonably determine through its policies and procedures that the same mitigation measures could apply to a particular type of retail customer, type of product or type of compensation conflict across the board; or in some instances a broker-dealer may reasonably determine that some compensation conflicts may be more difficult to mitigate, and are more appropriately avoided in their entirety or for certain categories of retail customers. Policies and procedures may be reasonably designed at the outset, but may later become unreasonable based on subsequent events or information obtained, such that the actual experience of a broker-dealer should be used to revise the broker-dealer's measures as appropriate. Further, what are considered reasonable mitigation measures for a small firm may be different than that for a large firm.315 While many broker-dealers may have programs currently in place to manage conflicts of interest, each broker-dealer will need to carefully consider whether its existing framework complies with the proposed obligations under Regulation Best Interest.

    309 FINRA observed that the appropriate framework for developing a conflicts governance framework depends on the scope and scale of a firm's business. See FINRA Conflicts Report. See also Letter from David T. Bellaire, Esq., Executive Vice President and General Counsel, Financial Services Institute (Oct. 30, 2017) (“FSI Letter”) (recommending the Commission adopt a principles-based approach to allow firms to tailor their policies and procedures designed to identify, manage and mitigate conflicts to their unique business models).

    310See FINRA Rule 3110(b)(1) (Supervision) and Section 15(b)(4)(E) of the Exchange Act.

    311See FINRA Conflicts Report.

    312 We believe that broker-dealers would ordinarily obtain, pursuant to the proposed Care Obligation, sufficient facts concerning a retail customer to determine a retail investor's understanding of securities investing. As part of evaluating a recommendation and whether it is in a retail customer's best interest, the Care Obligation requires a broker-dealer to make a reasonable effort to ascertain information regarding an existing customer's investment profile, including, the retail customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the retail customer may disclose to the broker, dealer, or a natural person who is an associated person of a broker or dealer in connection with a recommendation. See paragraph (c)(2) of Proposed Regulation Best Interest (defining “Retail Customer Investment Profile”).

    313 Currently, FINRA's heightened suitability requirements for options trading accounts require that a registered representative have “a reasonable basis for believing, at the time of making the recommendation, that the customer has such knowledge and experience in financial matters that he may reasonably be expected to be capable of evaluating the risks of the recommended transaction, and is financially able to bear the risks of the recommended position in the complex product.” FINRA Rule 2360(b)(19). FINRA has encouraged member firms to take a similar approach in recommending complex products. FINRA has noted that certain heightened procedures firms have taken include making approval of complex products contingent upon specific limitations or conditions, and prohibiting their sales force from recommending the purchase of some complex products to certain retail investors. See FINRA Regulatory Notice 12-03, Heightened Supervision of Complex Products (Jan. 2012).

    314 In a recent FINRA examination report, FINRA noted that the concerns that FINRA had during the course of examinations with regard to the suitability of certain products and their supervision did not vary materially by firm size, but did occur more frequently in connection with certain product classes, specifically unit investment trusts (“UITs”) and certain multi-share class and complex products, such as leveraged and inverse exchange-traded funds (“ETFs”). See Report on FINRA Examination Findings (Dec. 2017), available at http://www.finra.org/industry/2017-report-exam-findings (“FINRA Exam Report 2017”).

    315 Large firms may address conflicts of interest through enterprise management or operational risk frameworks, and components of such programs, for example, risk and control self-assessments, may provide an opportunity to identify and evaluate possible impacts. By contrast, small firms selling basic products may have a conflicts management framework that relies largely on the tone set by the firm owner coupled with required supervisory controls, particularly related to suitability, and the firm's compensation structure. See FINRA Conflicts Report. An effective practice FINRA observed at a number of firms is implementation of a comprehensive framework to identify and manage conflicts of interest across and within firms' business lines that is scaled to the size and complexity of their business. See FINRA Conflicts Report at 5.

    For example, broker-dealers generally should consider incorporating the following non-exhaustive list of potential practices 316 as relevant into their policies and procedures to promote compliance with (a)(2)(iv) of proposed Regulation Best Interest 317 :

    316See FINRA Conflicts Report at 26.

    317 As noted above, while the Commission believes these practices, if incorporated into written policies and procedures, may reasonably mitigate conflicts of interest arising from financial incentives, whether a recommended securities transaction or investment strategy complies with proposed Regulation Best Interest will turn on the facts and circumstances of the particular recommendation and the particular retail customer, and whether the broker-dealer has complied with the Disclosure Obligation and the Care Obligation.

    • 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 (e.g., the time and complexity of the work involved);

    • eliminating compensation incentives within comparable product lines (e.g., one mutual fund over a comparable fund) by, for example, capping the credit that a registered representative may receive across comparable mutual funds or other comparable products across providers;

    • 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) 318 or from one product class to another 319 ;

    318Id.

    319See FINRA Exam Report 2017. FINRA observed a variety of effective practices in recommending the purchase and sale of certain products, including tailoring supervisory systems to products' features and sources of risk to customers. With respect to UITs, FINRA observed firms that alerted customers to the consequences of selling and reinvesting in a new UIT prior to the initial UIT's maturity using negative or positive consent letters. Some firms implemented surveillance patterns to identify early UIT rollovers under a variety of scenarios. In addition, some firms required registered representatives to enter a rationale into firm systems for each short-term UIT transaction and coupled the entry with documented supervisory review.

    • 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 (e.g., certain products with conflicts of interest associated with complex compensation structures).

    In addition, we believe certain material conflicts of interest arising from financial incentives may be more difficult to mitigate,320 and may be more appropriately avoided in their entirety for retail customers or for certain categories of retail customers (e.g., less sophisticated retail customers). These practices may include the payment or receipt of certain non-cash compensation that presents conflicts of interest for broker-dealers, for example, sales contests, trips, prizes, and other similar bonuses that are based on sales of certain securities or accumulation of assets under management.321 Broker-dealers that make recommendations to retail customers that may involve such compensation practices should carefully assess the broker-dealer's ability to mitigate these financial incentives and whether they can satisfy their best interest obligation.

    320See Tully Report. The Tully Report found the payment of up-front bonuses and accelerated payouts raised concerns not about particular recommendations but about the registered representative-client relationship because registered representatives are incentivized to generate large commissions through churning accounts or switching firms. The Tully Report suggested best practices to encourage long-term relationships through methods including, but not limited to, possible elimination of up-front bonuses or payment of up-front bonuses in the form of forgivable loans over a period of time.

    321 For example, FINRA rules establish restrictions on the use of non-cash compensation in connection with the sale and distribution of mutual funds, variable annuities, direct participation program securities, public offerings of debt and equity securities, and real estate investment trust programs. These rules generally limit the manner in which members can pay for or accept non-cash compensation and detail the types of non-cash compensation that are permissible. See FINRA Rules 2310, 2320, 2331, and 5110. FINRA conducted a retrospective review of the gifts and gratuities and non-cash compensation rules to assess their effectiveness and efficiency. See FINRA Regulatory Notice 14-15, FINRA Requests Comment on the Effectiveness and Efficiency of its Gifts and Gratuities and Non-Cash Compensation Rules (Apr. 2014); FINRA Retrospective Rule Report, Gifts, Gratuities and Non-Cash Compensation (Dec. 2014). In response, SIFMA commented that it supported “restricting the use of sales targets and requiring that eligibility for training events be determined on the basis of total production, not the sale of specific securities” and recommended that “FINRA also consider whether these rules should be applied consistently to all securities products, rather than (as today) just to investment company securities, variable products and public offerings of securities.”). See Letter from Kevin A. Zambrowicz, Associate General Counsel & Managing Director, SIFMA (May 23, 2014).

    f. Consistency With Other Approaches

    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 (i.e., individual representatives) adhere to the Impartial Conduct Standards (e.g., provide best interest advice); (ii) prevent material conflicts of interest from causing violations of the Impartial Conduct Standards, and (iii) prevent the use of compensation or other incentives (e.g., quotas, appraisals, bonuses, contests, special awards, differential compensation or other actions or incentives) that are intended or would reasonably be expected to cause advisers to make recommendations that are not in the best interest of the retirement investor.322

    322See BIC Exemption Release.

    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.323 However, the differential payments must be based on neutral factors, such as the time or complexity and the work involved (and not based on what is more lucrative to the firm), and the DOL noted the importance of employing supervisory oversight structures.324 As an example, the DOL described a commission-based compensation schedule for representatives in which all variation in commissions is eliminated for recommendations of investments within reasonably designed categories, and the entity establishes supervisory mechanisms to protect against conflicts of interest created by the transaction-based model and takes special care to ensure that any differentials that are retained are based on neutral factors (e.g., time or complexity) and do not incentivize based on the amount of compensation the entity would receive.325

    323See BIC Exemption Release at 21033-34. See also U.S. Department of Labor, Employee Benefits Security Administration, Conflict of Interest FAQs, Part I-Exemptions (Oct. 2017), available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/coi-rules-and-exemptions-part-1.pdf (“DOL FAQs Part I”).

    324See BIC Exemption Release at 21035-40. For example, the DOL notes that the touchstone is to always avoid structures that misalign the financial interests of the adviser with the interests of the retirement investor. See DOL FAQs Part I.

    325See BIC Exemption Release 21038-39. See also DOL FAQs at 7-8.

    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) 326 of the Exchange Act and detailed 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,327 for the reasons set forth above, the Commission believes that broker-dealers should be expressly required to establish, maintain, and enforce written policies and procedures to identify and address (through elimination or disclosure, and mitigation in the case of financial incentives) material conflicts of interest .

    326See Section 15(b)(4)(E) of the Exchange Act (authorizing the Commission to impose sanctions on a firm or any associated person that fails reasonably to supervise another person subject to their supervision that commits a violation of the federal securities laws).

    327See FINRA Rule 3110 (Supervision) (requiring firms to establish and maintain systems to supervise the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules).

    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 disclosure about its material conflicts of interest.” 328 In addition, the Study recommended that the Commission 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.” 329 Further, with respect to principal trading, the Study provided that the Commission should address how broker-dealers should fulfill the uniform fiduciary standard when engaging in principal trading.330 The Study noted that under the standard a broker-dealer should be required at a minimum, to disclose its conflicts of interest related to principal transactions, including its capacity as principal, but it would not necessarily be required to follow the specific notice and consent procedures of Advisers Act Section 206(3).331

    328 913 Study at 112-13.

    329See id. at 118.

    330See id. at 118-20.

    331Id.

    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.332 As such, we are not proposing to change or to have any impact on the disclosure obligations associated with these services under the general antifraud provisions of the federal securities laws rather than this more specific obligation.

    332See Section II.D.1.b.

    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.333

    333See supra Section I.A. See also Tully Report.

    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.334 As discussed above, the Disclosure Obligation separately requires that broker-dealers disclose material conflicts of interest associated with the recommendation prior to or at the time of a recommendation. For the reasons set forth above, we believe that requiring broker-dealers to develop reasonably designed policies and procedures to identify and eliminate or disclose (and mitigate, as appropriate or required) material conflicts of interest is critical to compliance with management of conflicts of interest, and provides more flexibility to broker-dealers, and better serves the Commission's goal of facilitating the elimination or disclosure and mitigation (as appropriate or required) of material conflicts of interest, and minimizing additional compliance costs that may be passed on to retail customers.

    334 See 913 Study at 112-13.

    g. Request for Comment on the Conflict of Interest Obligations

    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 frequently and what would be the proper scope?

    • 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? 335 For example, do certain types of conflicts and/or recommendations result in systematically lower net returns or greater degrees of risk in retail customers' portfolios relative to other similarly situated investors in different relationships (e.g., investment adviser, bank and trust company, insurance company accounts)? Are there steps the Commission should take to identify and address these conflicts? Can they be appropriately addressed through disclosure or other means? How would any such steps to address potential conflicts of interest benefit retail customers currently and over time? What costs or other consequences, if any, would retail customers experience as a result of any such steps? For example, would broker-dealers be expected to withdraw from or limit their offerings or services in certain markets or certain products?

    335See Definition of the Term “Fiduciary;” Conflict of Interest Rule—Retirement Investment Advice, 81 FR 20945 (Apr. 8, 2016) (to be codified at 29 CFR pts. 2509, 2510 and 2550) (stating that conflicts of interest with respect to transactions pose “special dangers to the security of retirement, health, and other benefit plans”).

    • 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 (e.g., to provide flexibility to firms on how to address conflicts of interest)? Or are there certain conflicts beyond financial incentives, that should be both disclosed and mitigated (or eliminated)?

    • 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 (e.g., at least annually) and rigorously review their written policies and procedures to make sure that they have supervisory and compliance systems to identify and address all of their material conflicts of interest?

    • 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 (e.g., fixed income products);

    ○ Recommending a limited range of products and/or services;

    ○ Recommending a security underwritten by the firm or a broker-dealer affiliate, including initial public offerings;

    ○ Allocating investment opportunities among retail customers (e.g., IPO allocation);

    ○ Receiving third-party compensation in connection with securities transactions or distributions (e.g., sales loads, ongoing asset-based fees, or revenue sharing); and

    ○ Providing ongoing, episodic or one-time advice.

    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 (e.g., sales contests, trips, prizes, and other bonuses based on sales of certain securities, accumulation of assets under management or any other factor)? Why or why not?

    • 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 (e.g., equities, mutual funds, variable annuities, ETFs) is an appropriate mitigation measure? Why or why not?

    E. Recordkeeping and Retention

    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.” 336 Exchange Act Rules 17a-3 and 17a-4 specify minimum requirements with respect to the records that broker-dealers must make, and how long those records and other documents must be kept, respectively.

    336See Exchange Act Section 17(a).

    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.337 As part of developing a “retail customer's investment profile,” proposed Regulation Best Interest may require broker-dealers to seek to obtain certain retail customer information that is currently not required pursuant to Rule 17a-3(a)(17). In addition, proposed Regulation Best Interest would require broker-dealers to reasonably disclose in writing the material facts relating to the scope and terms of their relationship with the retail customer and all material conflicts of interest that are associated with the investment recommendations provided to the retail customer.

    337See Exchange Act Rule 17a-3(a)(17).

    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.338

    338 Rule 17a-3(a)(17) applies to each account with a natural person as a customer or owner, while proposed Regulation Best Interest would apply to each recommendation of any securities transaction or investment strategy involving securities to a retail customer. Because of this difference, the Commission believes it would be appropriate to locate the record-making requirements related to Regulation Best Interest in a new paragraph of Rule 17a-3 rather than in an amendment to paragraph (a)(17).

    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) 339 for six years.340 We are proposing to amend Exchange Act Rule 17a-4(e)(5) to require broker-dealers to retain any information that the retail customer provides to the broker-dealer or the broker-dealer provides to the retail customer pursuant to Rule 17a-3(a)(25), in addition to the existing requirement to retain information obtained pursuant to Rule 17a-3(a)(17). As a result, broker-dealers would be required to retain all of the information collected from or provided to each retail customer pursuant to Regulation Best Interest for six years.

    339 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. As part of developing a “retail customer's investment profile,” proposed Regulation Best Interest would require broker-dealers to seek to obtain certain retail customer information that is currently not required to be created under Rule 17a-3(a)(17). Because broker-dealers are already required to seek to obtain identical information pursuant to the FINRA suitability rule, we believe that broker-dealers should already be attempting to collect, pursuant to the FINRA suitability rule, or collecting under existing Exchange Act books and records rules, the information that would be required pursuant to Regulation Best Interest. Accordingly, we do not believe that it is necessary to impose any new record-making requirement upon broker-dealers.

    340See Exchange Act Rule 17a-4(e)(5) (account record information required pursuant to Rule 17a-3(a)(17) must be maintained and preserved in an easily accessible place until at least six years after the earlier of the date the account was closed, or the date on which the information was replaced or updated).

    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).341 Rule 17a-4(e)(7) requires broker-dealers to retain compliance, supervisory, and procedures manuals (and any updates, modifications, and revisions thereto) describing the policies and practices of the broker-dealer with respect to compliance with applicable laws and rules, and supervision of the activities of each natural person associated with the broker-dealer, for a specified period of time.

    341 FINRA Rule 3110 requires written supervisory procedures that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. See FINRA Rule 3110(b)(1) (Supervision).

    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?

    F. Whether the Exercise of Investment Discretion Should Be Viewed as Solely Incidental to the Business of a Broker or Dealer

    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 business.342 On the other hand, the limitations of the exclusion show that Congress also recognized certain broker-dealer advisory services belong within the scope of the Advisers Act—namely those for which they receive special compensation and those that are not solely incidental to their regular business as broker-dealers.343

    342Opinion of General Counsel Relating to Section 202(a)(11)(C) of the Investment Advisers Act of 1940, Investment Advisers Act Release No. 2 (Oct. 28, 1940) (“Advisers Act Release No. 2”).

    343 In 1940, when Congress enacted the Advisers Act, broker-dealers were already regulated under the Exchange Act. In the Advisers Act, Congress expressly acknowledged that the broker-dealers it covered could also be subject to other regulation. 15 U.S.C. 80b-8(b). Judicial interpretation of the broker-dealer exclusion also has noted that Congress passed the Advisers Act to provide certain protections to the public when receiving investment advice and that there is nothing in the legislative history of the Advisers Act “to suggest that Congress was particularly concerned about the regulatory burdens on broker-dealers” associated with their being subject to the Advisers Act in addition to Exchange Act. Financial Planning Association v. SEC, 482 F.3d 481(D.C. Cir. 2007) (“Financial Planning Association v. SEC”) (noting additionally that “[j]ust as the text and structure of paragraph 202(a)(11) make it evident that Congress intended to define `investment adviser' broadly and create only a precise exemption for broker-dealers, so does a consideration of the problems Congress sought to address in enacting the IAA” and stating that the Advisers Act sought to address these problems “by establishing a federal fiduciary standard to govern the conduct of investment advisers, broadly defined” and “by requiring full disclosure of all conflicts of interest”).

    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, per se, be considered investment advisers with respect to those accounts.344 While the Commission declined to adopt such an interpretation at that time, it noted that if the business of a broker-dealer consisted almost exclusively of managing accounts on a discretionary basis, the Commission staff would not consider the broker-dealer to be providing investment advice that is solely incidental to its business as a broker-dealer.345 In 2005, the Commission adopted an interpretive rule 346 that, among other things, provided that broker-dealers are not excluded from the Advisers Act for any accounts over which they exercise more than temporary or limited investment discretion.347 The 2005 interpretation regarding investment discretion was part of a rule whose principal purpose was to permit broker-dealers to offer fee-based brokerage accounts (where a customer pays an asset-based fee) without being subject to the Advisers Act with respect to those accounts.348 In 2007, the rule was vacated by the U.S. Court of Appeals for the District of Columbia Circuit on the grounds that the Commission did not have the authority to except broker-dealers offering fee-based brokerage accounts from the definition of “investment adviser.” 349 Though the Court did not specifically address the validity of the provision regarding investment discretion, it vacated the entire rule. After the rule was vacated, the Commission proposed in 2007, though did not adopt, a similar interpretive rule regarding investment discretion.350

    344Final Extension of Temporary Rules, Advisers Act Release No. 626 (Apr. 27, 1978) (“Advisers Act Release No. 626”).

    345Applicability of the Investment Advisers Act to Certain Brokers and Dealers, Investment Advisers Act Release No. 640 (Oct. 5, 1978) [43 FR 47176 (Oct. 13, 1978)] (“Advisers Act Release No. 640”).

    346 Original rule 202(a)(11)-1 under the Advisers Act.

    347See Certain Broker-Dealers Deemed Not to be Investment Advisers, Advisers Act Release No. 2340 (Jan. 6, 2005) (“2005 Proposing Release”); Certain Broker-Dealers Deemed Not to be Investment Advisers, Advisers Act Release No. 2376 (Apr. 12, 2005) (“2005 Adopting Release”).

    348See 2005 Adopting Release, supra note 347. Fee-based brokerage accounts are similar to traditional full-service brokerage accounts, which provide a package of services, including execution, incidental investment advice, and custody. The primary difference between the two types of accounts is that a customer in a fee-based brokerage account pays a fee based upon the amount of assets on account (an asset-based fee) and a customer in a traditional full-service brokerage account pays a commission (or a mark-up or mark-down) for each transaction.

    349See Financial Planning Association v. SEC, supra note 343.

    350Interpretive Rule Under the Advisers Act Affecting Broker-Dealers, Investment Advisers Act Release No. 2652 (Sept. 24, 2007) (“2007 Proposing Release”).

    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.” 351 In particular, the Commission has noted that the exercise of investment discretion is qualitatively distinct from simply providing advice as part of a package of brokerage services, because a broker-dealer with such discretion is not just a source of advice, but has authority to make investment decisions relating to the purchase or sale of securities on behalf of customers.352 The Commission has stated that the quintessentially supervisory or managerial character of investment discretion warrants the protection of the Advisers Act and its attendant fiduciary duty.353 This position aligns with the interpretations of the courts, which have generally found that broker-dealers with investment discretion owe customers a fiduciary duty under state law.354

    351 Advisers Act Release No. 626.

    352See 2005 Proposing Release; see also 2007 Proposing Release.

    353See Amendment and Extension of Temporary Exemption From the Investment Advisers Act for Certain Brokers and Dealers, Investment Advisers Act Release No. 471 (Aug. 20, 1975)(“. . . it is not appropriate to exempt from the Advisers Act for an extended period those brokers and dealers who perform investment supervisory services or other investment management services because of the special trust and confidence inherent in the relationships between such brokers and dealers and their advisory clients.”). See also 2005 Proposing Release; 2005 Adopting Release; and 2007 Proposing Release.

    354See, e.g., United State v. Skelly, 442 F.3d 94 at 98 (2d Cir. 2006) (fiduciary duty found “most commonly” where “a broker has discretionary authority over the customer's account”); United States v. Szur, 289 F.3d 200 at 211 (2d Cir. 2002) (“Although it is true that there `is no general fiduciary duty inherent in an ordinary broker/customer relationship,' a relationship of trust and confidence does exist between a broker and a customer with respect to those matters that have been entrusted to the broker.”) (citations omitted); Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953-54 (E.D. Mich. 1978), aff'd, 647 F.2d 165 (6th Cir. 1981) (stating that courts have held that a broker who has de facto control over a non-discretionary account generally owes customer duties of a fiduciary nature; looking to customer's sophistication, and the degree of trust and confidence in the relationship, among other things, to determine duties owed). See also Arthur B. Laby, Fiduciary Duty of Broker-Dealers and Investment Advisers, 55 VILL. L. REV. 3 (2010) (“most courts and commentators agree that when a broker has discretionary authority, the broker owes fiduciary duties to its customer”); Barbara Black, Brokers and Advisers—What's in a Name?, 11 FORDHAM J. CORP. & FIN. L. 31, 36 (2005) (stating that broker-dealers generally do not owe a fiduciary duty unless operating with discretion).

    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.355 The interpretive provision that we adopted in 2005 and proposed in 2007 would have required broker-dealers to be considered to be investment advisers under the Advisers Act with respect to discretionary accounts, except that broker-dealers would have been permitted to exercise investment discretion on a temporary or limited basis.356

    355 A broker-dealer who exercised discretionary authority over the accounts of some of its customers was generally regarded as providing investment advice incidental to its business as a broker-dealer but a broker-dealer whose business consisted almost exclusively of managing accounts on a discretionary basis was not regarded as providing advice solely incidental to his business as a broker-dealer. See Advisers Act Release No. 626.

    356 The Commission stated that it would view a broker-dealer's discretion to be temporary or limited within the meaning of proposed rule 202(a)(11)-1(d) when the broker-dealer was given discretion: (i) As to the price at which or the time to execute an order given by a customer for the purchase or sale of a definite amount or quantity of a specified security; (ii) on an isolated or infrequent basis, to purchase or sell a security or type of security when a customer is unavailable for a limited period of time not to exceed a few months; (iii) as to cash management, such as to exchange a position in a money market fund for another money market fund or cash equivalent; (iv) to purchase or sell securities to satisfy margin requirements; (v) to sell specific bonds and purchase similar bonds in order to permit a customer to take a tax loss on the original position; (vi) to purchase a bond with a specified credit rating and maturity; and (vii) to purchase or sell a security or type of security limited by specific parameters established by the customer. See 2005 Proposing Release; 2005 Adopting Release; 2007 Proposing Release. In the 2005 Adopting Release, we noted that accounts in which broker-dealers exercised such investment discretion would continue to be subject to the existing Exchange Act and SRO rules concerning broker-dealer exercise of investment discretion. See 2005 Adopting Release.

    Although we did not adopt our 2007 proposal, many commenters were generally supportive of our approach.357 We believe that much of the financial industry has treated broker-dealers as not excluded from the Advisers Act for any accounts over which they exercise more than temporary or limited investment discretion. Most commenters to the Chairman's recent request for comment, including broker-dealers, have indicated that financial firms generally treat discretionary accounts as advisory accounts.358

    357See, e.g., Letter of the Consumer Federation of America and Fund Democracy (Nov. 2, 2007); Letter of the Investment Adviser Association (Nov. 2, 2007); Letter of Charles McKeown (Oct. 30, 2007); and Letter of the Securities Industry and Financial Markets Association (Nov. 2, 2007).

    358See T. Rowe Letter; Stifel Letter (“In simple terms, Brokerage relationships are non-discretionary, commission-based accounts, through which a financial professional provides episodic investment advice incidental to each transaction. By contrast, in an Advisory relationship, a financial professional generally provides ongoing investment advice and monitoring and charges a level fee, generally based on assets.); see ICI August 2017 Letter (“broker-dealers typically do not exercise discretionary authority over customer accounts”); Vanguard Letter (“The investment advisory business model is significantly different from that of a broker-dealer. Advisers generally provide ongoing advice for a fee, take discretion over client accounts, and engage other entities to carry client accounts and handle client trading.”).

    Our staff acknowledged that broker-dealers may provide some discretionary account services in the 913 Study.359 We have also long recognized that a broker-dealer's ability to engage in discretionary activity is circumscribed by existing rules under the federal securities laws.360 In addition, broker-dealers that engage in any discretionary activity are subject to SRO Rules that prohibit and require specific conduct with respect to discretionary accounts.361 Further, broker-dealers vested with discretionary authority or that exercise control over customer assets have been held to a fiduciary standard under state law.362

    359See 913 Study at 9-10.

    360See, e.g., Exchange Act Section 3(a)(35) (defining investment discretion). 17 CFR 240.15c1-7.

    361See NASD Rule 2510 (Discretionary Accounts) and Incorporated NYSE Rule 408 (Discretionary Power in Customers' Accounts). Drawing upon the requirements of these rules and SRO suitability rules, the Commission has found the exercise of discretion over a customer's account may constitute a “recommendation” that additionally subjects a broker-dealer's discretionary activity to SRO suitability requirements. See, e.g., In re Application of Paul C. Kettler, Exchange Act Release No. 31354, 1992 WL 320802, *3, n.11 (1992). See also In re James Harman McNeill, (Case No. 2012030927101, AWC, Mar. 12, 2013), available at http://www.finra.org/sites/default/files/fda_documents/2012030927101_FDA_TP44051.pdf (associated person violated FINRA Rule 2510(b) by exercising discretion in five customers' brokerage accounts without the written authorization of the customers). See also supra note 139 and accompanying text.

    362See supra note 15.

    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 2007.363

    363 IAA Letter; CFA 2017 Letter.

    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.364 Should we define situations in which investment discretion should be viewed as being granted on a temporary or limited basis? For example, should temporary investment discretion last no more than a very limited time (i.e., not as long as two or more months)? Should we restrict a broker-dealer's ability to exercise temporary investment discretion repeatedly? Should limited discretion “to purchase or sell a security or type of security limited by specific parameters established by the customer” be restricted? 365 What are some examples of specific parameters that a customer could establish under this example? Should we expand any of the situations in which investment discretion could be viewed as being granted on a temporary or limited basis? For example, should we explicitly allow brokers to exercise investment discretion granted by the customer to rebalance the customer's account or to invest a limited portion of the account in a particular sector?

    364See supra note 356.

    365Id.

    • 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 discretionary management in brokerage accounts, who are the typical investors in those accounts?

    • Section 3(a)(35) of the Exchange Act defines “investment discretion.” 366 Should we consider a different, narrower definition of discretionary management that would be deemed solely incidental to the brokerage business?

    366 15 U.S.C. 78c(a)(35). Under Exchange Act Section 3(a)(35), a person exercises “investment discretion” with respect to an account if, “directly or indirectly, such person (A) is authorized to determine what securities or other property shall be purchased or sold by or for the account, (B) makes decisions as to what securities or other property shall be purchased or sold by or for the account even through some other person may have responsibility for such investment decisions, or (C) otherwise exercises such influence with respect to the purchase and sale of securities or other property by or for the account as the Commission, by rule, determines, in the public interest or for the protection of investors, should be subject to the operation of the provisions of this title and the rules and regulations thereunder.”

    • 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”? 367

    367 A “related account” is an account where the associated person's discretionary authority stems from his or her serving as executor, conservator, trustee, attorney-in-fact or other agent as a result of a family or personal relationship, and not from employment with the broker-dealer. No-Action Letter Under Investment Advisers Act of 1940—Rule 202(a)(11)-1 (Nov. 17, 2005), available at https://www.sec.gov/divisions/investment/noaction/morganlewis111705.htm.

    • 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?

    III. Request for Comment

    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:

    A. Generally

    • 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 regulations? Why or why not? Should we take a different approach?

    • 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?

    B. Interactions With Other Standards of Conduct

    • 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 (e.g., ERISA and the Code) that should be addressed? If so, how should those interactions or relationships be addressed or clarified?

    • 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?

    IV. Economic Analysis A. Introduction, Primary Goals of Proposed Regulations and Broad Economic Considerations 1. Introduction and Primary Goals of Proposed Regulation

    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.368 Further, when making rules under the Exchange Act, Section 23(a)(2) of the Exchange Act requires the Commission to consider the impact such rules would have on competition.369 Section 23(a)(2) of the Exchange Act also prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.370 The following analysis considers, in detail, the potential economic effects that may result from proposed Regulation Best Interest, including the benefits and costs to retail customers and broker-dealers as well as the broader implications of the proposal for efficiency, competition, and capital formation.

    368See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f).

    369See 15 U.S.C. 78w(a)(2).

    370Id.

    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.

    2. Broad Economic Considerations a. The Principal-Agent Relationship

    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.371 Because the agent and the principal are likely to have different preferences and goals, there is reason to believe that the agent may not always take actions that are in the principal's interest.372 This divergence in interests gives rise to agency problems: Agents take actions that increase their well-being at the expense of principals. 373 Retail customers face agency problems when they seek advice from financial professionals. For example, a retail customer may believe that a broker-dealer will exert a high level of effort on a retail customer's behalf to identify a security that helps the retail customer meet her objectives. But to the extent that effort is costly to the broker-dealer and the benefits of the recommendation accrue solely to the retail customer, the broker-dealer has an incentive to exert a lower level of effort than the retail customer expects.374 In this section, we describe how principals (customers) and agents (broker-dealers and associated persons) ameliorate agency problems in the market for investment advice using contracts and discuss limits to the efficiency of contracting in the market for financial advice.

    371 For example, James A. Brickley, Clifford W. Smith, Jr., Jerold L. Zimmerman, “Managerial Economics and Organizational Architecture” (2004, p. 265), “An agency relationship consists of an agreement under which one party, the principal, engages another party, the agent, to perform some service on the principal's behalf.” See also Michael C. Jensen and William H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics (1976, vol. 3, pp. 305-60).

    372See Michael C. Jensen and William H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics (1976, vol. 3, p. 308).

    373See James A. Brickley, Clifford W. Smith, Jr., Jerold L. Zimmerman, “Managerial Economics and Organizational Architecture” (2004, p. 265).

    374 Other manifestations of the agency conflict between broker-dealers and customers include conflicts that arise when broker-dealers act as principal (e.g., proprietary products, principal trades) or when the broker-dealer opts to enter into relationships with third parties (e.g., revenue sharing) that creates their own conflicts.

    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.375 For example, customers may expect advice that is tailored to their specific investment objectives, financial situation, and needs. Contracts between customers and broker-dealers could include explicit provisions to this effect. However, customers may lack the knowledge required to assess whether a recommendation is appropriate for their needs, given their particular situation. As a result, while such an explicit provision could be included in a contract between a retail customer and a broker-dealer, it would be of limited value in ameliorating the agency conflict between the two.

    375See Frank H. Easterbrook and Daniel R. Fischel, “Contract and Fiduciary Duty,” Journal of Law & Economics (1993, vol. 36, p. 426) (“Contract and Fiduciary Duty”).

    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.376

    376See Frank H. Easterbrook and Daniel R. Fischel, “The Economic Structure of Corporate Law” (1991, p. 90). See also “Contract and Fiduciary Duty.” The authors note that parties to the contract are likely not able to see future possibilities well enough to specify all contingencies ahead of time.

    As an alternative to explicit contracting and monitoring by principals, agents can expend resources (i.e., “bonding costs”) to guarantee their fulfillment of contractual terms or to ensure that the principal will be compensated if the agents fail to meet their obligations.377 As we noted above, customers would like broker-dealers to understand the potential risks and rewards associated with a recommended transaction or strategy. For example, and if consistent with applicable legal limitations, the contract between the customer and broker-dealer could include a provision in which the broker-dealer agrees to compensate the retail customer if the broker-dealer does not have the level of understanding promised under the contract. Unfortunately, factors that limit the effectiveness of explicit contracting and monitoring by principals also tend to limit the effectiveness of explicit contracting and bonding by agents. For example, a broker-dealer's actual level of understanding is difficult to confirm. The difficulty in confirming a broker-dealer's understanding would cause any promise to compensate the customer if the broker-dealer did not understand the potential risks and rewards associated with a recommended transaction or strategy to be of limited value.

    377 For example, agents might bond themselves by purchasing insurance policies that pay the principal in the case of theft. See James A. Brickley, Clifford W. Smith, Jr., Jerold L. Zimmerman, “Managerial Economics and Organizational Architecture” (2004, p. 265). The agent is willing to incur bonding costs to increase the amount paid to the agent by the principal for the agent's services.

    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.378 Under a legal or regulatory standard of conduct, agents are obligated to act in the principal's interest with the standard of conduct defining how that obligation is to be met. For example, as noted above, retail customers would like broker-dealers to understand the potential risks and rewards associated with a recommended transaction or strategy as well as for the broker-dealer to tailor recommendations to the retail customer's specific investment objectives, financial situation, and needs. It would be difficult to stipulate those requirements in an explicit contract between a broker-dealer and a retail customer because such contract would be difficult to monitor and enforce. In particular, under private contracting, deterring broker-dealers from not acting in the retail customer's interest could be difficult. A standard of conduct that requires broker-dealers to act in the retail customer's best interest provides an alternative mechanism that is designed to result in the broker-dealer providing services at a level of quality that better matches the expectations of its retail customers. In particular, broker-dealers would face regulatory liability if they failed to meet their obligation to act in the retail customer's interest under the standard of conduct. Relative to private contracting, a standard of conduct may be more effective in deterring broker-dealers from acting in their own interest rather than the retail customer's interest.

    378 In a world of scarce information and high transactions costs, regulation can promote the efficiency of contracting between parties by prescribing the outcomes the parties themselves would have reached had information been plentiful and negotiations costless. See “Contract and Fiduciary Duty” and R. H. Coase, “The Problem of Social Cost,” Journal of Law & Economics (1960, vol. 3, pp. 1-44).

    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.379 Retail customers who are aware that financial firms are likely to be conflicted may choose not to seek advice even when conflicted advice would make them better off than no advice at all. If the presence of conflicts of interest reduces retail customer trust, retail customers, out of abundance of caution may forgo valuable investment opportunities.380 By contrast, disclosure of conflicts of interest and disclosure of measures taken to mitigate conflicts of interest could have the opposite effect by bolstering investor trust.

    379See Relationship Summary Proposal. See, e.g., Staff of the Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors As Required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Aug. 2012), at iv, v, xiv, 37, 73, 121-23 and 131-32, available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf (“917 Financial Literacy Study”)

    380See Ko, K. Jeremy, “Economics Note: Investor Confidence,” Oct. 2017, available at https://www.sec.gov/files/investor_confidence_noteOct2017.pdf.

    b. Effects of the Best Interest Standard on the Agency Relationship

    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”).381 The difference between the retail customer's willingness to pay and the financial firm's reservation price represents the “gains from trade” associated with the contracting relationship. How these gains from trade are shared between the retail customer and the broker-dealer depends on a variety of factors, including the competitiveness of the market for financial advice, and the ability of broker-dealers to exploit their informational advantage over retail customers.

    381See James A. Brickley, Clifford W. Smith, Jr., Jerold L. Zimmerman, “Managerial Economics and Organizational Architecture” (2004, p. 45).

    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 $5,000.382 The difference between the principal's valuation of the agent's services and the minimum price at which the agent is willing to supply the services represents potential gains from trade to be shared between the two parties. In this case, the gains from trade would be $5,000 (=$10,000−$5,000).383

    382 These numbers are provided only as an illustrative example and are not meant to convey the costs of financial services.

    383See supra note 380.

    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.384 If gains from trade are shared between both parties, both parties have an incentive to ameliorate the agency conflict so as to maximize the potential gains from trade to be shared between the two.

    384 From the example, it should be clear that agency costs can, potentially, rise to such a level that the gains from trade are completely wiped out and trade does not occur.

    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 $500.385 It would be in both parties' interests to use the contract because it would increase the gains from trade to be shared between the two from $2,000 to $3,500 (=$9,000−$5,000−$500).

    385 That is, the sum of the monitoring, bonding, and contract specifications costs is $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 because it would result in a reduction in gains from trade from $3,500 to $3,250 (=$9,500−$5,000−$500−$750).

    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 (e.g., may switch to another, lower-cost broker-dealer) broker-dealers may not be able to reverse the loss in gains from trade through a fee increase. Thus, the degree of competition among broker-dealers may limit the extent to which a broker-dealer can recoup these losses. As a result, if the market for broker-dealer advice is sufficiently competitive, the gains from trade that result from the proposed rule would mostly flow to retail customers.

    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.

    B. Economic Baseline 1. Market for Advice Services 386

    386 In addition to broker-dealers and Commission-registered investment advisers discussed below in the baseline, there are a number of other entities, such as state registered investment advisers, commercial banks, and insurance companies, which also provide financial advice services to retail customers. A number of broker-dealers (see infra note 391) have non-securities businesses, such as insurance or tax services; however, the Commission is unable to estimate the number of other entities that are likely to provide financial advice to retail customers. As of January 2018, there were approximately 17,800 state-registered investment advisers, of which 145 are also registered with the Commission, as reported on Form ADV Item 2.A. The Department of Labor in its Regulatory Impact Analysis identifies approximately 398 life insurance companies that could provide advice to retirement investors. See infra note 453.

    a. Broker-Dealers

    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-5.387 More than two-thirds of all brokerage assets and close to one-third of all customer accounts are held by the 16 largest broker-dealers, as shown in Table 1, Panel A.388 Of the broker-dealers registered with the Commission as of December 2017, 366 broker-dealers were dually-registered as investment advisers; 389 however, these firms hold nearly 90 million (68% of) customer accounts.390 Approximately 546 broker-dealers (14%) reported at least one type of non-brokerage business, including insurance, retirement planning, mergers & acquisitions, and real estate, among others.391 Approximately 74% of registered broker-dealers report retail customer activity.392

    387 Assets are estimated by Total Assets (allowable and non-allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II, available at https://www.sec.gov/files/formx-17a-5_2.pdf) and correspond to balance sheet total assets for the broker-dealer. The Commission does not have an estimate of the total amount of customer assets for broker-dealers. We estimate broker-dealer size from the total balance sheet assets as described above.

    388 Approximately $3.91 trillion of total assets of broker-dealers (98%) are at firms with total assets in excess of $1 billion. Of the 30 dual registrants in the group of broker-dealers with total assets in excess of $1 billion, total assets for these dual registrants are $2.46 trillion (62%) of aggregate broker-dealer assets. Of the remaining 88 firms, 81 have affiliated investment advisers.

    389 Because this number does not include the number of broker-dealers who are also registered as state investment advisers, it undercounts the full number of broker-dealers that operate in both capacities. Further, not all firms that are dually-registered as an investment adviser and a broker-dealer offer both brokerage and advisory accounts to retail investors—for example, some dual registrants offer advisory accounts to retail investors but offer brokerage services, such as underwriting services, only to institutional customers. For purposes of the discussion of the baseline in this economic analysis, a dual registrant is any firm that is dually-registered with the Commission as an investment adviser and a broker-dealer. For the purposes of proposed Regulation Best Interest, however, we propose to define dual registrant as a firm that is dually-registered as a broker-dealer and an investment adviser and offers services to retail investors as both a broker-dealer and investment adviser.

    390 Some broker-dealers may be affiliated with investment advisers without being dually-registered. From Question 10 on Form BD, 2,145 broker-dealers (55.8%) report that directly or indirectly, they either control, are controlled by, or under common control with an entity that is engaged in the securities or investment advisory business. Comparatively, 2,478 (19.57% of) SEC-registered investment advisers report an affiliate that is a broker-dealer in Section 7A of Schedule D of Form ADV, including 1,916 SEC-registered investment advisers that report an affiliate that is a registered broker-dealer. Approximately 75% of total assets under management of investment advisers is managed by these 2,478 investment advisers.

    391 We examined Form BD filings to identify broker-dealers reporting non-securities business. For the 546 broker-dealers reporting such business, staff analyzed the narrative descriptions of these businesses on Form BD, and identified the most common types of businesses: Insurance (208), management/financial/other consulting (101), advisory/retirement planning (80), mergers & acquisitions (71), foreign exchange/swaps/other derivatives (31), real estate/property management (31), tax services (15), and other (141). Note that a broker-dealer may have more than one line of non-securities business.

    392 The value of customer accounts is not available from FOCUS data for broker-dealers. Therefore, to obtain estimates of firm size for broker-dealers, we rely on the value of broker-dealers' total assets as obtained from FOCUS reports. Retail sales activity is identified from Form BR, which categorizes retail activity broadly (by marking the “sales” box) or narrowly (by marking the “retail” or “institutional” boxes as types of sales activity). We use the broad definition of sales as we preliminarily believe that many firms will just mark “sales” if they have both retail and institutional activity. However, we note that this may capture some broker-dealers that do not have retail activity, although we are unable to estimate that frequency. We request comment on whether firms that intermediate both retail and institutional customer activity generally market only “sales” on Form BR.

    Panel B of Table 1 limits the broker-dealers to those that report some retail customer activity. As of December 2017, there were approximately 2,857 broker-dealers that served retail customers, with over $3.6 trillion in assets (90 of total broker-dealer assets) and almost 128 million (96 of) customer accounts.393 Of those broker-dealers serving retail customers, 360 are dually-registered as investment advisers.394

    393 Total assets and customer accounts for broker-dealers that serve retail customers also include institutional accounts. Data available from Form BD and FOCUS data is not sufficiently granular to identify the percentage of retail and institutional accounts at firms.

    394 Of the 36 dual registrants in the group of retail broker-dealers with total assets in excess of $500 million, total assets for these dual registrants are $2.19 trillion (60%) of aggregate retail broker-dealer assets. Of the remaining 72 retail broker-dealers, 67 have affiliated investment advisers.

    395 The data is obtained from FOCUS filings as of December 2017. Note that there may be a double-counting of customer accounts among in particular the larger broker-dealers as they may report introducing broker-dealer accounts as well in their role as clearing broker-dealers.

    396 In addition to the approximately 130 million individual accounts at broker-dealers, there are approximately 293,000 omnibus accounts (0.2% of total accounts at broker-dealers), with total assets of $23.1 billion, across all 3,841 broker-dealers, of which approximately 99% are held at broker-dealers with greater than $1 billion in total assets. See also supra note 388. Omnibus accounts reported in FOCUS data are the accounts of non-carrying broker-dealers with carrying broker-dealers. These accounts may have securities of multiple customers (of the non-carrying firm), or securities that are proprietary assets of the non-carrying broker-dealer. We are unable to determine, from the data available, how many customer accounts non-carrying broker-dealers may have. The data does not allow the Commission to parse the total assets in those accounts to determine to whom such assets belong. Therefore, our estimate may be underinclusive of all customer accounts held at broker-dealers.

    397 “Customer Accounts” includes both broker-dealer and investment adviser accounts for dual registrants.

    Table 1, Panel A—Registered Broker-Dealers as of December 2017 395 Cumulative Broker-Dealer Total Assets and Customer Accounts 396 Size of broker-dealer
  • (total assets)
  • Total number of BDs Number of dual-registered BDs Cumulative total assets (billion) Cumulative number of customer
  • accounts 397
  • > $50 billion 16 10 $2,717 40,969,187 $1 billion to $50 billion 102 20 1,196 81,611,933 $500 million to $1 billion 38 7 26 4,599,330 $100 million to $500 million 118 26 26 1,957,981 $10 million to $100 million 482 94 17 2,970,133 $1 million to $10 million 1,035 141 4 233,946 < $1 million 2,055 68 1 5,588 Total 3,841 366 3,987 132,348,098
    Table 1, Panel B—Registered Retail Broker-Dealers as of December 2017 Cumulative Broker-Dealer Total Assets and Customer Accounts Size of broker-dealer
  • (total assets)
  • Total number of BDs Number of dual-registered BDs Cumulative total assets (billion) Cumulative number of customer
  • accounts
  • > $50 billion 15 10 $2,647 40,964,945 $1 billion to $50 billion 70 19 923 77,667,615 $500 million to $1 billion 23 7 16 4,547,574 $100 million to $500 million 93 25 20 1,957,981 $10 million to $100 million 372 94 14 2,566,203 $1 million to $10 million 815 139 3 216,158 < $1 million 1,469 66 .4 5,588 Total 2,857 360 3,624 127,926,064

    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.398

    398 Form BD requires applicants to identify the types of business engaged in (or to be engaged in) that accounts for 1% or more of the applicant's annual revenue from the securities or investment advisory business. Table 2 provides an overview of the types of businesses listed on Form BD, as well as the frequency of participation in those businesses by registered broker-dealers as of December 2017.

    Table 2—Retail Broker-Dealer Lines of Business as of December 2017 Line of business Total Number of broker-dealers Percent Private Placements of Securities 1,755 61.4 Mutual Fund Retailer 1,549 54.2 Broker or Dealer Retailing: Corporate Equity Securities OTC 1,462 51.2 Corporate Debt Securities 1,331 46.6 Variable Contracts 1,129 39.5 Municipal Debt/Bonds—Broker 1,115 39.0 U.S. Government Securities Broker 1,049 36.7 Put and Call Broker or Dealer or Options Writer 999 35.0 Underwriter or Selling Group Participant—Corporate Securities 857 30.0 Non-Exchange Member Arranging for Transactions in Listed Securities by Exchange Member 797 27.9 Investment Advisory Services 691 24.2 Broker or Dealer Selling Tax Shelters or Limited Partnerships—Primary Market 626 21.9 Trading Securities for Own Account 613 21.5 Municipal Debt/Bonds—Dealer 489 17.1 U.S. Government Securities—Dealer 347 12.1 Solicitor of Time Deposits in a Financial Institution 317 11.1 Underwriter—Mutual Funds 232 8.1 Broker or Dealer Selling Interests in Mortgages or Other Receivables 232 8.1 Broker or Dealer Selling Oil and Gas Interests 207 7.2 Broker or Dealer Making Inter-Dealer Markets in Corporate Securities OTC 205 7.2 Broker or Dealer Involved in Networking, Kiosk, or Similar Arrangements (Banks, Savings Banks, Credit Unions) 202 7.1 Internet and Online Trading Accounts 200 7.0 Exchange Member Engaged in Exchange Commission Business Other than Floor Activities 175 6.1 Broker or Dealer Selling Tax Shelters or Limited Partnerships—Secondary Market 163 5.7 Commodities 159 5.6 Executing Broker 111 3.9 Day Trading Accounts 92 3.2 Broker or Dealer Involved in Networking, Kiosk, or Similar Arrangements (Insurance Company or Agency) 90 3.2 Real Estate Syndicator 89 3.1 Broker or Dealer Selling Securities of Non-Profit Organizations 76 2.7 Exchange Member Engaged in Floor Activities 63 2.2 Broker or Dealer Selling Securities of Only One Issuer or Associate Issuers 47 1.6 Prime Broker 21 0.7 Crowdfunding FINRA Rule 4518(a) 18 0.6 Clearing Broker in a Prime Broker 14 0.5 Funding Portal 8 0.3 Crowdfunding FINRA Rule 4518(b) 3 0.1 Number of Retail-Facing Broker-Dealers 2,857 b. Investment Advisers

    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.399 This section first discusses Commission-registered investment advisers, followed by a discussion of state-registered investment advisers.

    399 In addition to the Commission-registered and state-registered investment advisers, which are the focus of this section, the proposed rule could also affect banks, trust companies, insurance companies, and other providers of investment 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.400

    400 Of the 12,659 SEC-registered investment advisers, 7,979 (64%) report in Item 5.G.(2) of Form ADV that they provide portfolio management services for individuals and/or small businesses. In addition, there are approximately 17,800 state-registered investment advisers, of which 145 are also registered with the Commission. Approximately 13,800 state-registered investment advisers are retail facing (see Item 5.D. of Form ADV).

    Of all SEC-registered investment advisers, 366 identified themselves as dually-registered broker-dealers.401 Further, 2,478 investment advisers (20%) reported an affiliate that is a broker-dealer, including 1,916 investment advisers (15%) that reported an SEC-registered broker-dealer affiliate.402 As shown in Panel A of Table 3 below, in aggregate, investment advisers have over $72 trillion in assets under management (“AUM”). A substantial percentage of AUM at investment advisers is held by institutional clients, such as investment companies, pooled investment vehicles, and pension or profit-sharing plans; therefore, although the dollar value of AUM for investment advisers and of customer assets in broker-dealer accounts is comparable, the total number of accounts for investment advisers is only 27% of the number of customer accounts for broker-dealers.

    401See supra note 389.

    402 Form ADV Item 7.A.1.

    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,403 as shown in Panel B of Table 3.404 In total, these firms have approximately $32 trillion of assets under management.405 Approximately 6,600 registered investment advisers (52%) serve 29 million non-high net worth individual clients and have approximately $5.33 trillion in assets under management, while nearly 7,400 registered investment advisers (58%) serve approximately 4.8 million high net worth individual clients with $6.56 trillion in assets under management.406

    403 We note that the data on individual clients obtained from Form ADV may not be exactly the same as who would be a “retail customer” as defined in proposed Regulation Best Interest because the data obtained from Form ADV is limited to individuals and does not involve any test of use for personal, family, or household purposes.

    404 We use the responses to Items 5(D)(a)(1), 5(D)(a)(3), 5(D)(b)(1), and 5(D)(b)(3) of Part 1A of Form ADV. If at least one of these responses was filled out as greater than 0, the firm is considered as providing business to retail investors. Form ADV Part 1A.

    405 The aggregate AUM reported for these investment advisers that have retail investors includes both retail AUM as well as any institutional AUM also held at these advisers.

    406 Estimates are based on IARD system data as of December 31, 2017. The AUM reported here is specifically that of non-high net worth individual clients. Of the 7,600 investment advisers serving individual clients, 360 are also registered as broker-dealers.

    Table 3, Panel A—Registered Investment Advisers (RIAs) as of December 2017 Cumulative RIA Assets Under Management (AUM) and Accounts Size of investment adviser
  • (AUM)
  • Number of RIAs Number of dual-registered RIAs Cumulative AUM
  • (billion)
  • Cumulative number of
  • accounts
  • > $50 billion 246 15 $48,221 17,392,968 $1 billion to $50 billion 3,238 115 21,766 11,560,805 $500 million to $1 billion 1,554 53 1,090 2,678,084 $100 million to $500 million 5,568 129 1,303 3,942,639 $10 million to $100 million 1,103 24 59 198,659 $1 million to $10 million 172 2 1 5,852 < $1 million 778 28 .02 31,291 Total 12,659 366 72,439 35,810,298
    Table 3, Panel B—Retail Registered Investment Advisers (RIAs) as of December 2017 Cumulative RIA Assets Under Management (AUM) and Accounts Size of investment adviser
  • (AUM)
  • Number of RIAs Number of dual-registered RIAs Cumulative AUM
  • (billion)
  • Cumulative number of
  • accounts
  • > $50 billion 106 15 $22,788 16,638,548 $1 billion to $50 billion 1,427 114 8,472 10,822,275 $500 million to $1 billion 934 52 652 2,602,220 $100 million to $500 million 4,114 126 917 3,814,900 $10 million to $100 million 711 24 40 231,663 $1 million to $10 million 98 1 .4 5,804 < $1 million 198 29 .02 31,271 Total 7,588 361 32,870 34,146,681

    As an alternative to registering with the Commission, smaller investment advisers could register with state regulators.407 As of December 2017, there were 17,635 state registered investment advisers,408 of which 145 are also registered with the Commission. Of the state-registered investment advisers, 236 are dually-registered as broker-dealers, while 5% (920) report a broker-dealer affiliate. In aggregate, state-registered investment advisers have approximately $341 billion in AUM. Eighty-two percent of state-registered investment advisers report that they provide portfolio management services for individuals and small businesses, compared to just 64% for Commission-registered investment advisers.

    407 Pursuant to the Dodd-Frank Act, Item 2.A. of Part 1A of Form ADV requires an investment adviser to register with the SEC if it (i) is a large adviser that has $100 million or more of regulatory assets under management (or $90 million or more if an adviser is filing its most recent annual updating amendment and is already registered with the SEC); (ii) is a mid-sized adviser that does not meet the criteria for state registration or is not subject to examination; (iii) meets the requirements for one or more of the revised exemptive rules under section 203A discussed below; (iv) is an adviser (or subadviser) to a registered investment company; (v) is an adviser to a business development company and has at least $25 million of regulatory assets under management; or (vi) received an order permitting the adviser to register with the Commission. Although the statutory threshold is $100 million, the SEC raised the threshold to $110 million for those investment advisers that do not already file with the SEC.

    408 There are 79 investment advisers with latest reported Regulatory Assets Under Management in excess of $110 million but are not listed as registered with the SEC. For the purposes of this rulemaking, these are considered erroneous submissions.

    Approximately 77% of state-registered investment advisers (13,470) have some portion of their business dedicated to retail investors,409 and in aggregate, these firms have approximately $308 billion in AUM.410 Approximately 12,700 (72%) state-registered advisers serve 616,000 non-high net worth retail clients and have approximately $125 billion in AUM, while over 11,000 (63%) state-registered advisers serve approximately 194,000 high net worth retail clients with $138 billion in AUM.411

    409 We use the responses to Items 5.D.(a)(1), 5.D.(a)(3), 5.D.(b)(1), and 5.D.(b)(3) of Part 1A of Form ADV. If at least one of these responses was filled out as greater than 0, the firm is considered as providing business to retail investors. Form ADV Part 1A.

    410 The aggregate AUM reported for these investment advisers that have retail investors includes both retail AUM as well as any institutional AUM also held at these advisers.

    411 Estimates are based on IARD system data as of December 31, 2017. The AUM reported here is specifically that of non-high net worth investors. Of the 13,471 investment advisers serving retail investors, 144 may also be dually-registered as broker-dealers.

    c. Trends in the Relative Numbers of Providers of Financial Services

    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.

    EP09MY18.000

    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 (i.e., robo-advisers and online trading platforms), product proliferations (e.g., index mutual funds and exchange-traded products), and industry consolidation driven by economic and market conditions, particularly among broker-dealers.412 Commission staff has observed the transition by broker-dealers from traditional brokerage services to providing also investment advisory services (often under an investment adviser registration, whether federal or state), and many firms have been more focused on offering fee-based accounts than accounts that charge commissions.413 Broker-dealers have indicated that the following factors have contributed to this migration: Provision of stability or increase in profitability,414 perceived lower regulatory burden, and provisions of more or better services to retail customers.

    412See Hester Peirce, “Dwindling numbers in the financial industry,” Brookings Center on Markets and Regulation, May 15, 2017 (“Brookings Report”), available at https://www.brookings.edu/research/dwindling-numbers-in-the-financial-industry/ (noting that “SEC restrictions have increased by almost thirty percent [since 2000],” and that regulations post-2010 were driven in large part by the Dodd-Frank Act). Further, the Brookings Report observation of increased regulatory restrictions on broker-dealers only reflects CFTC or SEC regulatory actions, but does not include regulation by FINRA, NFA, the MSRB, or other SROs.

    413 The Brookings Report also discusses the shift from broker-dealer to investment advisory business models for retail investors, in part due to the Department of Labor's fiduciary rule (page 7). See also the RAND Study, supra note 28, which documents a shift from transaction-based to fee-based accounts prior to recent regulatory changes. Declining transaction-based revenue due to declining commission rates and competition from discount brokerage firms has made offering fee-based products and services more attractive. Although discount brokerage firms generally provide execution-only services and do not compete directly in the advice market with full service broker-dealers and investment advisers, entry by discount brokers has contributed to lower commission rates throughout the broker-dealer industry. Further, fee-based activity generates a steady stream of revenue regardless of the customer trading activity, unlike commission-based accounts.

    414 Commission staff examined a sample of recent Form 10-K or Form 10-Q filings of large broker-dealers, many of which are dually-registered as investment advisers, that have a large fraction of retail customer accounts to identify relevant broker-dealers. See, e.g., Edward Jones 9/30/2017 Form 10-Q, available at https://www.sec.gov/Archives/edgar/data/815917/000156459017023050/ck0000815917-10q_20170929.htm; Raymond James 9/30/2017 Form 10-K, available at https://www.sec.gov/Archives/edgar/data/720005/000072000517000089/rjf-20170930x10k.htm; Stifle 12/31/2016 Form 10-K, available at https://www.sec.gov/Archives/edgar/data/720672/000156459017022758/sf-10q_20170930.htm; Wells Fargo 9/30/2017 10-Q, available at https://www.sec.gov/Archives/edgar/data/72971/000007297117000466/wfc-09302017x10q.htm; and Ameriprise 12/31/2016 Form 10-K, available at https://www.sec.gov/Archives/edgar/data/820027/000082002717000007/ameriprisefinancial12312016.htm. We note that discussions in Form 10-K and 10-Q filings of this sample of broker-dealers may not be representative of other large broker-dealers or of small to mid-size broker-dealers. Some firms have also reported record profits as a result of moving clients into fee-based accounts, and cite that it provides “stability and high returns.” See “Morgan Stanley Wealth Management fees climb to all-time high,” Bloomberg, Jan. 18, 2018, available at https://www.bloomberg.com/news/articles/2018-01-18/morgan-stanley-wealth-management-fees-hit-record-on-stock-rally. Morgan Stanley increased the percentage of client assets in fee-based accounts from 37% in 2013 to 44% in 2017, while decreasing the dependence on transaction-based revenues from 30% to 19% over the same time period (Morgan Stanley Strategic Update, Jan. 18, 2018, available at https://www.morganstanley.com/about-us-ir/shareholder/4q2017-strategic-update.pdf). See also Beilfuss, Lisa and Brian Hershberg, “WSJ Wealth Adviser Briefing: The Reinvention of Morgan and Merrill, Adviser Profile,” The Wall Street Journal, Jan. 25, 2018, available at https://blogs.wsj.com/moneybeat/2018/01/25/wsj-wealth-adviser-briefing-the-reinvention-of-morgan-and-merrill-adviser-profile/.

    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.

    EP09MY18.001 d. Registered Representatives of Broker-Dealers, Investment Advisers, and Dually-Registered Firms

    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).415 Similarly, we approximate the number of supervised persons of registered investment advisers through the number of registered investment adviser representatives (or “registered IARs”), who are supervised persons of investment advisers who meet the definition of investment adviser representatives in Advisers Act Rule 203A-3 and are registered with one or more state securities authorities to solicit or communicate with clients.416

    415 The number of associated natural persons of broker-dealers may be different from the number of registered representatives of broker-dealers, because clerical/ministerial employees of broker-dealers are associated persons, but are not required to register. Therefore, using the registered representative number does not include such persons. However, we do not have data on the number of associated natural persons and therefore are not able to provide an estimate of the number of associated natural persons. We believe that the number of registered representatives is an appropriate approximation because they are the individuals at broker-dealers that provide advice and services to customers.

    416See Advisers Act Rule 203A-3. However, we note that the data on numbers of registered IARs may undercount the number of supervised persons of investment advisers who provide investment advice to retail investors because not all supervised persons who provide investment advice on behalf on an investment adviser are required to register as IARs. For example, Commission rules exempt from IAR registration supervised persons who provide advice only to non-individual clients or to individuals who meet the definition of “qualified client,” all of which individuals would fall under the definition of retail investor if they use the assets in advisory accounts for personal, family, or household purposes. See id. In addition, state securities authorities may impose additional criteria for requiring registration as an IAR.

    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.417 We consider only employees at firms who have retail-facing business, as defined previously.418 We observe in Table 5 that approximately 61% of registered financial professionals are employed by dually-registered entities. The percentage varies by the size of the firm. For example, for firms with total assets between $1 billion and $50 billion, 72% of all registered financial professionals in that size category are employed by dually-registered firms. Focusing on dually-registered firms only, approximately 59.7% of total licensed representatives at these firms are dually-registered, approximately 39.9% are only registered representatives; and less than 1% are only registered investment adviser representatives.

    417 We calculate these numbers based on Form U4 filings. Broker-dealers, investment advisers, and issuers of securities must file this form when applying to register persons in certain jurisdictions and with certain SROs. Such firms and representatives generally have an obligation to amend and update information as changes occur. Using the examination information contained in the form, we consider an employee a financial professional if he has an approved, pending, or temporary registration status for either Series 6 or 7 (RR) or is registered as an investment adviser representative in any state or U.S. territory (IAR), although there are representatives that have passed exams other than the Series 7. We limit the firms to only those that do business with retail investors.

    418See supra notes 392 and 404.

    Table 5—Total Licensed Representatives at Broker-Dealers, Investment Advisers, and Dually-Registered Firms With Retail Customers 419 Size of firm (total assets for standalone BDs and
  • dually-registered firms; AUM for standalone IAs)
  • Total number of representatives Percentage of
  • representatives in
  • dually-registered firms
  • Percentage of
  • representatives in standalone BD
  • Percentage
  • representatives in standalone IA
  • >$50 billion 82,668 75 8 18 $1 billion to $50 billion 150,662 72 10 18 $500 million to $1 billion 31,673 67 16 16 $100 million to $500 million 62,539 58 24 18 $10 million to $100 million 116,047 52 47 1 $1 million to $10 million 37,247 34 63 2 <$1 million 13,563 7 87 6 Total Licensed Representatives 494,399 61 27 12

    In Table 6 below, we estimate the number of employees who are registered representatives, investment adviser representatives, or dually-registered representatives.420 Similar to Table 5, we calculate these numbers using Form U4 filings. Here, we also limit the sample to employees at firms that have retail-facing businesses as discussed previously.421

    419 The classification of firms as dually-registered, standalone broker-dealers, and standalone investment advisers comes from Forms BD, FOCUS, and ADV as described earlier. The number of representatives at each firm is obtained from Form U4 filings. Note that all percentages in the table have been rounded to the nearest whole percentage point.

    420 We calculated these numbers based on Form U4 filings.

    421See supra notes 392 and 404.

    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,422 approximately 36% of all registered employees are dually-registered representatives. In contrast, for firms with total assets below $1 million, 15% of all employees are dual-hatted representatives.

    422 Firm size is measured by total firm assets from the balance sheet (source: FOCUS reports) for broker-dealers and dual registrants, and by assets under management for investment advisers (source: Form ADV). We are unable to obtain customer assets for broker-dealers, and for investment advisers, we can only obtain information from Form ADV as to whether the firm assets exceed $1 billion. We recognize that our approach of using firm assets for broker-dealers and customer assets for investment advisers does not allow for direct comparison; however, our objective is to provide measures of firm size and not to make comparisons between broker-dealers and investment advisers based on firm size. Across both broker-dealers and investment advisers, larger firms, regardless of whether we stratify on firm total assets or assets under management, have more customer accounts, are more likely to be dually-registered, and have more representatives or employees per firm, than smaller broker-dealers or investment advisers.

    Table 6—Number of Employees at Retail-Facing Firms who Are Registered Representatives, Investment Adviser Representatives, or Both 423 Size of firm (total assets for standalone BDs and dually-registered firms; AUM for standalone IAs) Total number of employees Percentage of dual-hatted representatives Percentage of RRs only Percentages of IARs only >$50 billion 216,655 18 17 1 $1 billion to $50 billion 292,663 36 11 3 $500 million to $1 billion 50,531 15 40 6 $100 million to $500 million 112,119 23 24 8 $10 million to $100 million 189,318 19 41 1 $1 million to $10 million 61,310 19 39 1 < $1 million 19,619 15 46 3 Total Employees at Retail-Facing Firms 942,215 24 24 3

    Approximately 88% of investment adviser representatives in Table 5 are dually-registered as registered representatives. This percentage is relatively unchanged from 2010. According to information provided in a FINRA comment letter in connection with the 913 Study, 87.6% of registered investment adviser representatives were dually-registered as registered representatives as of mid-October 2010.424 In contrast, approximately 50% of registered representatives were dually-registered as investment adviser representatives at the end of 2017.425

    423See supra notes 391, 403, 420, and 422. Note that all percentages in the table have been rounded to the nearest whole percentage point.

    424 FINRA comment letter to File Number 4-606; Obligations of Brokers, Dealers and Investment Advisers (Nov. 3, 2010), available at https://www.sec.gov/comments/4-606/4606-2836.pdf.

    425 In order to obtain the percentage of IARs that are dually-registered as registered representatives of broker-dealers, we sum the representatives at dually-registered entities and those at investment advisers, across size categories to obtain the aggregate number of representatives in each of the two categories. We then divide the aggregate dually-registered representatives by the sum of the dually-registered representatives and the IARs at investment adviser-only firms. We perform a similar calculation to obtain the percentage of registered representatives of broker-dealers that are dually-registered as IARs.

    e. Financial Incentives of Firms and Financial Professionals

    Commission experience indicates that there is a broad range of financial incentives provided by standalone broker-dealers and dually-registered firms to their representatives.426 While some firms provided a base pay for their financial professionals ranging from approximately $45,000 to $85,000 per year, many firms provided compensation only through a percentage of commissions, plus performance-based awards, such as individual or team bonus based on production. Commission-based payouts to financial professionals ranged from 30% to 95%, although these payouts were generally reduced by various costs and expenses attributable to the financial professional (e.g., clearing costs associated with some securities, SRO or SIPC-related charges, and insurance, among others).

    426 Information on compensation and financial incentives generally relates to 2016 compensation arrangements for a sample of approximately 20 firms, comprised of both standalone broker-dealers and dually-registered firms. We acknowledge that the information provided in this baseline may not be representative of the compensation structures more generally because of the diversity and complexity of services and products offered by standalone broker-dealers and dually-registered firms.

    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 (e.g., rates on certain proprietary mutual funds ranged from 0.75% to 5.75% depending on the share class), but did not provide those payout rates to financial professionals based on product type. Some firms also provided incentives for their financial professionals to recommend proprietary products and services over third-party or non-proprietary products. Commission rates for some firms, however, declined as the dollar amount sold increased and such rates varied across asset classes as well (e.g., within a given share class, rates ranged from 1.50% to 5.75% depending on the dollar amount of the fund sold). With respect to compensation to individual financial professionals, if payout rates for mutual funds were approximately 90% (as discussed above, for example), financial professionals could earn between 0.68% and 5.18%, depending on the type and 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.427 If payout rates range between 30% and 95%, a firm charging a customer $500 could provide compensation to the financial professional between $150 and $475 for each financial plan provided. For fee-based accounts, assuming that a retail customer had an account worth $250,000, the firm would charge fees of $3,750 ($250,000 × 1.5%), and the financial professional could earn between $1,170 and $3,560 annually for each account.

    427 We note that some firms could have higher or lower commission payout rates or asset-based fee percentages than those provided here. For example, based on a review of Form ADV Part 2A (the brochure) of several large dual registrants (not included in the sample above), asset-based fees for low AUM accounts could range as high as 2.0% to 3.0%, with the average fee for high AUM accounts ranging between 0.5% to 1.5%. See also “Average Financial Advisor Fees & Costs, 2017 Report, Understanding Advisory & Investment Management Fees,” AdvisoryHQ, available at http://www.advisoryhq.com/articles/financial-advisor-fees-wealth-managers-planners-and-fee-only-advisors/. The AdvisoryHQ report shows that average asset-based fees range from 1.18% for accounts less than $50,000 to less than 0.60% for accounts in excess of $30 million, while fixed-fees range from $7,500 for accounts less than $500,000 to $55,000 for accounts in excess of $7.5 million. Again, we note that these are charges to clients and are not indicative of the total compensation earned by the financial professional per account.

    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 83% of base compensation. While the majority of firms based at least some portion of their bonuses on production, usually in the form of total gross revenue, other forms of bonus compensation were derived from customer retention, customer experience, and manager assessment of performance. Moreover, some firms used a tiered system within their compensation grids depending on firm experience and production levels. Financial professionals' variable compensation could also increase when they enrolled retail customers in advisory accounts versus other types of accounts, such as brokerage accounts. Some firms also provided transition bonuses for financial professionals with prior work experience based on historical trailing production levels and AUM. Although many firms did not provide any incentive-based contests or programs, some firms awarded non-cash incentives for meeting certain performance, best practices, or customer service goals, including trophies, dinners with senior officers, and travel to annual meetings with other award winners.

    2. Regulatory Baseline

    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.

    a. Suitability Obligations

    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.428 A central aspect of a broker-dealer's duty of fair dealing is the suitability obligation, which has been interpreted as requiring a broker-dealer to make recommendations that are consistent with the best interest of his customer under SRO rules.429 The concept of suitability has been interpreted as an obligation under the antifraud provisions of the federal securities laws and also under specific SRO rules.430 FINRA Rule 2111 (“Suitability”) requires that a broker-dealer or associated person have a reasonable basis to believe that a recommendation or investment strategy is “suitable” for the retail customer.431 The suitability obligation is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of commercial conduct.432

    428See 913 Study at 51; see also Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943), cert. denied, 321 U.S. 786 (1944).

    429See, e.g., In re Application of Raghavan Sathianathan, Exchange Act Release No. 54722 at 21 (Nov. 8, 2006). See also supra note 15.

    430See Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969).

    431See FINRA Rule 2111.

    432See FINRA Rule 2111.01.

    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.433 Second, customer-specific suitability requires that, based on a given customer's investment profile as detailed above, the broker-dealer has a reasonable basis to believe that the recommendation or investment strategy is suitable for that customer.434 Finally, quantitative suitability requires that a broker-dealer must have a reasonable basis to believe that a series of recommended transactions is not excessive or unsuitable for a customer when taken together in light of the customer's investment profile, even if each individual recommendation is suitable in isolation.435 Broker-dealers also have additional specific suitability obligations with respect to certain types of products or transactions, such as variable insurance products and non-traditional products, including structured products and leveraged and exchange-traded funds.436

    433 According to FINRA Rule 2111, reasonable diligence requires that the broker-dealer or the associated person understands the potential risks and rewards of the recommendation or the investment strategy.

    434Id.

    435Id.

    436See, e.g., FINRA Rule 2330, “Members' Responsibilities Regarding Deferred Variable Annuities;” FINRA Rule 2370, “Securities Futures;” see also 913 Study at 65-66.

    b. Existing Broker-Dealer Disclosure Obligations

    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.437 Generally, under the antifraud provisions of the federal securities laws, a broker-dealer's duty to disclose material information to its customers depends on the scope of the relationship with the customer, which is fact intensive.438 When making recommendations, broker-dealers may be held liable if they do not provide honest and complete information or do not disclose material conflicts of interest of which they are aware.439 For example, in making recommendations, courts have found broker-dealers should have disclosed that they were: acting as a market maker for the recommended security; trading as a principal with respect to the recommended security; engaging in revenue sharing with a recommended mutual fund; or “scalping” a recommended security.440

    437See supra notes 175-177 and 205 and accompanying text.

    438See supra note 176.

    439Id.

    440See 913 Study at notes 251-54.

    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.441 As discussed above, in developing proposed Regulation Best Interest, the Commission has drawn from state common law fiduciary principles, among other things, in order to establish greater consistency in the level of retail customer protections and to ease compliance with Regulation Best Interest where other legal regimes—such as state common law—might also apply. For instance, under proposed Regulation Best Interest, a broker-dealer's duty to exercise reasonable diligence, care, skill, and prudence would resemble the standard of conduct that has been imposed on broker-dealers found to be acting in a fiduciary capacity under state common law.442 Similarly, a broker-dealer's Disclosure Obligation (along with the Conflict of Interest Obligations) under proposed Regulation Best Interest would resemble the duty to disclose material conflicts imposed on broker-dealers found to be acting as fiduciaries under state common law.443

    441See supra note 15.

    442See, e.g., Davis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 906 F.2d 1206, 1215 (8th Cir. 1990) (finding that the district court did not abuse its discretion in instructing the jury that licensed securities brokers were fiduciaries that owed their customers a duty of utmost good faith, integrity, and loyalty).

    443See, e.g., United States v. Szur, 289 F.3d 200, 212 (2d Cir. 2002) (broker's fiduciary relationship with customer gave rise to a duty to disclose commissions to customer, which would have been relevant to customer's decision to purchase stock); Arleen W. Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948) (Commission Opinion), aff'd sub nom. Hughes v. SEC, 174 F.2d 969, 976 (D.C. Cir. 1949) (broker-dealer acted in the capacity of a fiduciary and, as such, broker-dealer was under a duty to make full disclosure of the nature and extent of her adverse interest, “including her cost of the securities and the best price at which the security might be purchased in the open market”).

    c. Department of Labor's Fiduciary Rule and Related Federal Securities Laws

    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.444 As noted, in connection with the DOL Fiduciary Rule, DOL amended certain existing PTEs and adopted new PTEs, including in particular the BIC Exemption, which generally permits certain financial institutions including broker-dealers to recommend investment transactions and receive commissions and other compensation resulting from the recommended transactions under certain conditions.445 As discussed above, a broker-dealer that wishes to rely on the BIC Exemption to engage in transactions that would otherwise be prohibited (e.g., providing investment recommendations and receiving “conflicted compensation”)—would have to adhere to the Impartial Conduct Standards (including obligations to provide “best interest” recommendations, receive no more than reasonable compensation, and avoid making statements that are materially misleading at the time they are made). Broker-dealers that seek to rely on the BIC Exemption would have to satisfy additional conditions including (among other things) that, as described above, require broker-dealers to (1) enter into a written contract with each IRA owner enforceable against the broker-dealer that acknowledges fiduciary status, commits to adhere to the Impartial Conduct Standards, and warrants to the adoption of certain policies and procedures, (2) implement policies and procedures reasonably designed to ensure that the firm and its advisers provide best interest advice and minimize the harmful impact of conflicts of interest in conflicts, including a prohibition against differential compensation or other incentives that were intended or expected to cause advisers to provide recommendations that are not in the customer's best interest, and (3) disclose information about fees, compensation and material conflicts of interest associated with recommendations in initial and ongoing disclosures, including website disclosures.446

    444See BIC Exemption Release, 81 FR at 21007 (DOL states that it “anticipates that the [DOL Fiduciary Rule] will cover many investment professionals who did not previously consider themselves to be fiduciaries under ERISA or the Code.”).

    445See BIC Exemption Release. Broker-dealers and their registered representatives are not, however, required to comply with conditions under the BIC Exemption if they adopt a different approach to avoid non-exempt prohibited transactions, including by meeting the conditions of the statutory exemption for the provision of investment advice to participants of individual account plans under ERISA sections 408(b)(14) and 408(g), or by offsetting third-party payments against level fees, see BIC Exemption Release, 81 FR at 21013, at n. 23 and accompanying text.

    446See BIC Exemption Release, 81 FR at 21007. These conditions are discussed in more detail below.

    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,447 while FINRA Rule 2210 specifically addresses communications between broker-dealers and the public and requires that these communications be based on principles of fair dealing and good faith and be fair and balanced.448 Under FINRA rules, prices for securities and broker-dealer compensation are required to be fair and reasonable, taking into consideration all relevant circumstances.449 Although the existing standards and rules identified above prohibit broker-dealers from making misleading statements, address their communications with the public, and require fair and reasonable compensation, the DOL also adopted the Impartial Conduct Standards to address these issues in the BIC Exemption.450

    447See Exchange Act Sections 10(b) and 15(c).

    448See FINRA Rule 2210 (“Communications with the Public”).

    449See e.g., Exchange Act Sections 10(b) and 15(c); FINRA Rules 2121 (“Fair Prices and Commissions”), 2122 (“Charges for Services Performed”), and 2341 (“Investment Company Securities”).

    450See BIC Exemption Release, 81 FR 21007, 21030-32.

    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.451 However, the Commission can broadly estimate the maximum number of broker-dealers that would be subject to the requirements of the PTEs from the number of broker-dealers that have retail customer accounts. Approximately 74.4% (2,857) of registered broker-dealers report sales to retail customers.452 Similarly, approximately 7,600 (60% of) investment advisers serve high net worth and non-high net worth individual clients. The Commission understands that these numbers are an upper bound and likely overestimates the broker-dealers and investment advisers that provide retirement account services.453

    451 In order to perform this analysis, the Commission would need to know which financial firms have retirement-based assets as part of their business model. Under the current reporting regimes for both broker-dealers and investment advisers, they are not required to disclose whether (or what fraction of) their accounts are held by retail investors in retirement-based accounts.

    452 As of December 2017, 3,841 broker-dealers filed Form BD. Retail sales by broker-dealers were obtained from Form BR. See supra note 392.

    453 The Department of Labor Regulatory Impact Analysis (“DOL RIA”) identified approximately 4,000 broker-dealers (FINRA, 2016), of which approximately 2,500 are estimated to have either ERISA accounts or IRA associated with the broker-dealers, similar to the estimates that we provide above. In addition to broker-dealers, the DOL RIA estimates that other providers of ERISA or IRA accounts include: Approximately 10,600 federally registered investment advisers and 17,000 state-registered investment advisers (NASAA 2012/2013 Report), of which approximately 17,000 of federal and state investment advisers that are not dual registered, approximately 6,000 ERISA plan sponsors (2013 Form 5500 Schedule C), and approximately 400 life insurance companies (2014 SNL Financial Data). See The Department of Labor, Regulating Advice Markets: Regulatory Impact Analysis for Final Rule and Exemptions (Apr. 2016), available at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/conflict-of-interest-ria.pdf.

    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.454 The SIFMA Study surveyed 21 SIFMA members and captured 43% of U.S. “financial advisors” (132,000 out of 310,000), 35 million retail retirement accounts,455 and 27% of qualified retirement savings assets ($4.6 trillion out of $16.9 trillion).

    454See The DOL Fiduciary Rule: A study on how financial institutions have responded and the resulting impacts on retirement investors, SIFMA and Deloitte (Aug. 9, 2017), available at https://www.sifma.org/wp-content/uploads/2017/08/Deloitte-White-Paper-on-the-DOL-Fiduciary-Rule-August-2017.pdf (“SIMFA Study”).

    455 The types of retirement accounts serviced by the participants in the SIFMA Study were not defined.

    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 (e.g., 29% eliminated no-load funds, while 67% reduced the number of mutual funds), and 48% reduced annuity product offerings. Moreover, although the DOL Fiduciary Rule applies only in connection with services for retirement accounts, many of the survey participants have implemented the changes to both retirement and non-retirement accounts.456

    456 In July 2017, the American Bankers Association (“ABA”) conducted a survey of 57 banks about their understanding of the Fiduciary Rule on products and the impact of the rule on products and services available to retirement investors. None of the survey respondents added to the retirement products or services available, while 30% eliminated or reduced products or services available to retirement investors in response to the Fiduciary Rule. Nearly 40% of banks further believed that the relationship with their customers has been altered as a result of the Fiduciary Rule applying only to retirement assets “since the bank is unable to provide holistic financial advice to its customers.” available at https://www.aba.com/Advocacy/Issues/Documents/dol-fiduciary-rule-survey-summary-report.pdf. See “Department of Labor Fiduciary Rule: National Survey of Financial Professionals” Financial Services Roundtable/Harper Polling (July 2017), available at http://www.fsroundtable.org/wp-content/uploads/2017/08/17.07-FSR-Presentation-1.pdf. We note that the developments of business models and practices discussed herein reflect changes made voluntarily by firms in response to the DOL Fiduciary Rule, but were not necessarily required by the DOL Fiduciary Rule.

    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).

    C. Benefits, Costs, and Effects on Efficiency, Competition, and Capital Formation

    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.457

    457See supra Section IV.D.2.

    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.

    1. Benefits

    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 de facto control over a customer's account must have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, is not excessive and unsuitable for the customer when taken together in light of the customer's investment profile.

    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 that uncertainty about a broker-dealer's conflicts of interest associated with a recommendation complicates a retail customer's evaluation of the recommendation, the Disclosure Obligation would reduce that uncertainty and, therefore, would help retail customers better evaluate broker-dealer recommendations.

    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.

    a. Disclosure Obligation

    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.458

    458See supra discussion in Section II.D.

    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.459 This information may be useful to the retail customer when evaluating the advice received. For instance, the cost to the retail customer of acting on such advice may depend on whether the advice is tied to the retail customer's brokerage or advisory account.

    459See supra discussion in Section II.C.4.

    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.

    b. Exercise Reasonable Diligence, Care, Skill, and Prudence

    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 element of control, unlike the quantitative suitability prong of FINRA's suitability rule.

    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 de facto control over a retail customer account. This represents a heightened standard relative to obligations under federal securities laws and under FINRA's concept of quantitative suitability in two ways. First, this proposed requirement applies a best interest standard to a series of recommendations, rather than requiring broker-dealers to merely have a reasonable basis for believing that a series of recommendations are not excessive or unsuitable. Second, by removing the control element, the proposed requirement would expand the scope of retail customers that could benefit from existing suitability requirements to those retail customers who, while retaining control over their own accounts, nevertheless accept a series of broker-dealer recommendations.

    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.460

    460 The DOL RIA estimates that due to one source of adviser conflicts, namely that conflict related to underperformance associated with front-end load mutual funds, retirement investors will underperform no-load mutual funds by approximately 0.50% to 1.00%, on average, which translates to aggregate losses of between $95 billion to $189 billion over 10 years. See The Department of Labor, Regulating Advice Markets: Regulatory Impact Analysis for Final Rule and Exemptions (Apr. 2016), available at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/conflict-of-interest-ria.pdf. The Department of Labor further estimates that its Fiduciary Rule and the BIC Exemption will reduce those losses attributed to underperformance of front-end load mutual funds by $33 billion to $36 billion over 10 years. But see Letter from Craig Lewis (Aug. 31, 2017) (offering a critique of the DOL RIA). Generally, although the DOL RIA provides potential estimates of investor harm and gains to investors as a result of that agency's rule, the Commission has not incorporated those estimates into its own economic analysis because of the differences in scope of the intended effects of Regulation Best Interest. Moreover, because of the range of investor risk profiles and the diversity of products offered by broker-dealers outside of the retirement account context, the Commission is unable to apply the DOL's analytical framework—which focuses primarily on the differences between load and no-load mutual funds as well as analyses that compare broker-dealer advised investments to unadvised direct investments—to its own analysis. With respect to the analysis of costs and benefits associated with proposed Regulation Best Interest, the relevant metric is the differences between broker-dealer advised accounts subject to the current legal framework and broker-dealer advised accounts subject to the proposed rule overlaid on the existing legal framework. See also Council of Economic Advisers, The Effects of Conflicted Investment Advice on Retirement Savings, 2015, available at https://obamawhitehouse.archives.gov/sites/default/files/docs/cea_coi_report_final.pdf, (using the same approach as the DOL RIA, estimates annual losses to retirement investors from conflicted advice at $17 billion per year). See also Economic Policy Letter, supra note 27. The Consumer Federation of American estimated annual losses from conflicted investment advice between $20 billion and $40 billion per year, while PIABA estimated annual losses at approximately $21 billion per year. See CFA 2017 Letter; PIABA Letter.

    c. Obligation 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 Associated With a Recommendation

    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 461 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. Conflicts of interest may arise for a number of reasons. For example, a broker-dealer may be in a position to recommend: Proprietary products, products of affiliates, or a limited range of products; one share class versus another share class of a mutual fund; securities underwritten by the firm or a broker-dealer affiliate; the roll over 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); and allocation of investment opportunities among retail customers. This Conflict of Interest Obligation may benefit retail customers to the extent that a broker-dealer establishes, maintains and enforces policies and procedures to disclose, or eliminate, a material conflict of interest that may have a negative impact on its recommendations to retail customers.

    461 The proposed Conflict of Interest Obligations apply solely to the broker or dealer entity, and not to the natural persons who are associated persons of a broker or dealer. For purposes of discussing the Conflict of Interest Obligations, the term “broker-dealer” refers only to the broker-dealer entity, and not to such individuals. However, the policies and procedures a broker-dealer establishes, maintains, and enforces, pursuant to the proposed Conflict of Interest Obligation, would apply to a broker-dealer's registered representative's conflicts of interest.

    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.

    d. Obligation To Establish, Maintain, and Enforce Written Policies and Procedures Reasonably Designed To Identify and Disclose and Mitigate, or Eliminate, Material Conflicts of Interest Arising From Financial Incentives Associated With a Recommendation

    The 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.462 Moreover, in those circumstances where a broker-dealer chooses to address a conflict of interest through elimination because disclosure and mitigation of those conflicts of interest may be too challenging, the broker-dealer would simplify the evaluation of the recommendation by the retail customer.

    462See supra Section IV.B.1.

    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 mitigating, or eliminating, material conflicts of interest arising from financial incentives that allow broker-dealers the flexibility to comply with the Conflict of Interest Obligations based on each firm's circumstances. This approach allows broker-dealers the flexibility to establish policies and procedures reasonably designed to identify and disclose and mitigate, potential conflicts of interest arising from financial incentives and to develop supervisory systems that would help them maintain and enforce their policies and procedures in a manner that reflects their business practices and that focuses on areas of their business practices where heightened concern may be warranted.

    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.

    2. Costs

    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 (e.g., product sponsors). The magnitude of the costs will depend on several factors: (1) How broker-dealers would choose to comply with the best interest obligation, (2) whether broker-dealers would pass on some of the costs of complying with the best interest obligation to the retail customers, and (3) the extent to which broker-dealers are currently acting in a retail customer's best interest when providing advice, and complying with the existing disclosure requirements and liabilities. Regulation Best Interest would impose a best interest obligation on broker-dealers that would incorporate and go beyond existing suitability obligations under the federal securities laws and SRO rules. The overall cost of proposed Regulation Best Interest would depend on the costs that each of its component obligations, namely the Disclosure, the Care, and the Conflict of Interest Obligations, would impose on broker-dealers, retail customers, and other parties such as product sponsors with a stake in the market for financial 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 (e.g., due to the effort that broker-dealers may have to expend to understand the product and which products would best fit the needs of their retail customers). While this proposal is designed to incorporate and go beyond the existing broker-dealer regulatory regime and ameliorate certain conflicts of interest between retail customers and financial firms, it is not intended to restrict broker-dealers from recommending higher cost products or services to retail customers when appropriate to meet a retail customer's needs or goals, so long as these recommendations meet proposed Regulation Best Interest.463

    463 The DOL RIA estimates that the aggregate costs associated with the implementation and compliance with the DOL Fiduciary Rule and the BIC Exemption would be between $10 billion and $31.5 billion over 10 years, with an expected cost of $16.1 billion. But see Letter from Craig Lewis (Aug. 31, 2017) (offering a critique of the DOL RIA). As noted above, because of the differences in the scope of Regulation Best Interest, the Commission is not incorporating these estimates into its own analysis.

    a. Standard of Conduct Defined as Best Interest

    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.

    (1) Operational Costs

    Broker-dealers typically provide training to their employees with respect to relevant legal and regulatory requirements.464 Firms generally prefer face-to-face training where possible, but large firms tend to use computer-based training to reach their dispersed employees.465 The proposed rule would create a best interest standard of conduct for broker-dealers. While incorporating the existing standards of conduct for broker-dealers established by the federal securities laws and SRO rules, this rule would enhance existing standards. Consequently, complying with the best interest standard may require additional training for broker-dealer employees. The cost of this training may depend on whether a broker-dealer and its associated persons are already behaving in a way that is consistent with the best interest standard, and whether broker-dealer employees are trained to behave in this manner. In particular, broker-dealers that currently are not behaving consistent with the best interest standard and that are not training their employees to behave in this manner may incur higher training costs. For example, firms already provide training with respect to FINRA suitability rules. As a result, we believe that the costs associated with providing training with respect to the Care Obligation of the proposed rule would be incremental for broker-dealers that are behaving consistent with the best interest standard, but potentially substantial for those broker-dealers that are not. Similarly, broker-dealers currently provide training on material conflicts of interest.466 However, the Conflict of Interest Obligations of the proposed rule would be different from the existing requirements or liabilities to disclose, and as a result, we believe that the costs associated with providing training with respect to the Conflict of Interest Obligations of the proposed rule could be potentially significant.

    464See FINRA, “Report on Conflicts of Interest,” Oct. 2013.

    465Id. at 15.

    466Id. at 15.

    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.467 Regulation Best Interest would apply consistent regulation to recommendations involving retail customers' retirement and non-retirement accounts. To the extent that there might be a discrepancy between broker-dealer obligations that apply to retirement accounts and those that apply to non-retirement accounts, the proposed rule, through its consistent approach to regulating recommendations involving retail customers' retirement and non-retirement accounts, may reduce any costs associated with such discrepancy. Similarly, to the extent that broker-dealers that do not necessarily service retirement accounts might be subject to and comply with similar overlapping regulations that impose costs on broker-dealers (e.g., state laws that impose fiduciary obligations),468 proposed Regulation Best Interest may reduce any such costs.

    467 As discussed above, the DOL Fiduciary Rule was vacated by the United States Court of Appeals for the Fifth Circuit on March 15, 2018. See supra note 51.

    468See supra note 442.

    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.469 Similarly, broker-dealers that are not necessarily servicing retirement accounts but could be subject to overlapping but not identical regulation may incur additional costs of complying with such regulation. However, since Regulation Best Interest would not change how broker-dealers would comply with the DOL Fiduciary Rule and the BIC Exemption or other current overlapping regulations, broker-dealers may incur the costs of complying with such regulations even absent an explicit best interest obligation.

    469 The disclosure requirements for the BIC Exemption are discussed in the baseline. See Section IV.C.2, and supra note 52.

    (2) Programmatic Costs

    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.470 The Commission is unable to quantify the magnitude of this potential revenue loss because of the difficulty in identifying systematically recommendations that are consistent with FINRA's suitability rule but not with the proposed rule. The reason why such identification is difficult is because a broker-dealer recommendation depends largely, as noted earlier, on the facts and circumstances related to that recommendation and the investment profile of the retail customer receiving that recommendation. Any estimate of the magnitude of the potential revenue loss would depend on assumptions about a recommendation's potential facts and circumstances and the investment profile of the retail customer receiving 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 the potential revenue loss.

    470See Rule 2111, FAQ—Q7.1, available at http://www.finra.org/industry/faq-finra-rule-2111-suitability-faq.

    Broker-dealers may also face increased costs due to enhanced legal exposure as a result of a potential increase in retail customer arbitrations.471 Such costs may also be incurred to the extent broker-dealers believe that such an increase may occur and therefore choose to expend resources to prepare for additional arbitration claims. Most, if not all, brokerage agreements contain clauses that require retail customers to arbitrate disputes with a broker-dealer through FINRA's Office of Dispute Resolution.472 In the event that a brokerage agreement contains no such arbitration clause, Rule 12201 of FINRA's Code of Arbitration Procedure for Customer Disputes (the “FINRA Code”) allows a customer to compel a broker-dealer or person associated with a broker-dealer to arbitrate a dispute.473 The FINRA Code does not require a customer to allege a cause of action when pursuing arbitration against a broker-dealer; rather, a customer need only specify “relevant facts and remedies requested.” 474 Nevertheless, it is unclear whether or to what extent the adoption of Regulation Best Interest would affect the number of retail customer arbitrations, since many retail customer arbitrations are already predicated on facts alleging that a broker-dealer breached a fiduciary duty or breached its suitability obligations.475

    471 Moreover, we note that the proposed rule creates an enhanced standard of conduct for broker-dealers under the Exchange Act. One key difference and enhancement resulting from the obligations imposed by Regulation Best Interest as compared to a broker-dealer's existing obligations under the antifraud provisions of the federal securities laws, is that the antifraud provisions require an element of fraud or deceit, which would not be required under Regulation Best Interest. More specifically, the Care Obligation could not be satisfied by disclosure. To the extent that broker-dealers believe that they may face enhanced legal exposure, they may choose to incur costs in anticipation of any enforcement action.

    472See SEC Investor Bulletin: Broker-Dealer/Customer Arbitration (Dec. 20, 2016), available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_arbitration.html (“[A]ccount opening agreements will almost always contain a provision binding the parties to arbitration in the event of a dispute . . . [FINRA] handles almost all securities industry arbitrations and mediations.”).

    473 See FINRA Rule 12200 (“Parties must arbitrate a dispute under the Code if: Arbitration under the Code is either: (1) Required by a written agreement; or (2) Requested by the customer. . . .”). See also SEC Investor Bulletin: Broker-Dealer/Customer Arbitration (Dec. 20, 2016), available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_arbitration.html.

    474See FINRA Rule 12302.

    475See FINRA Dispute Resolution Statistics, Top 15 Controversy Types in Customer Arbitrations, available at https://www.finra.org/arbitration-and-mediation/dispute-resolution-statistics#top15controversycustomers (of cases served from January through October 2017, 1,529 cases alleged a breach of fiduciary duty; during that same period, 1,279 cases alleged a breach of suitability obligations).

    b. Disclosure Obligation

    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.476 Thus, while standalone broker-dealers that comply with the Relationship Summary rule would not incur additional costs to comply with this requirement of the Disclosure Obligation, dual-registrants would. However, dual-registrants would be given flexibility with respect to the form, timing, or method of satisfying this requirement of the Disclosure Obligation when they make recommendations in the capacity of broker-dealer.

    476 Financial professionals who are dually-registered, but who are affiliated with different standalone broker-dealers and investment advisers would have the same obligation.

    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.477 The proposed Relationship Summary rule would require broker-dealers to disclose general information about the types of fees that retail customers would be expected to pay when receiving services from broker-dealers, but not quantitative fee information. However, in addition to the Relationship Summary, the Disclosure Obligation would foster more detailed fee disclosure, and would require broker-dealers to provide, at the minimum, additional detail about the fees described in the Relationship Summary, such as fee amounts, percentages and ranges. Thus, even for those broker-dealers that comply with the Relationship Summary, the Disclosure Obligation with respect to disclosure of a broker-dealer's fees would impose additional costs on broker-dealers. However, broker-dealers would have flexibility as to the form and timing of how to satisfy this requirement of the Disclosure Obligation.

    477See, e.g., supra note 192.

    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.478 Thus, the Disclosure Obligation of proposed Regulation Best Interest would impose an initial aggregate cost of at least $1,391.07 million and an ongoing aggregate annual cost of at least $460.81 million on broker-dealers.479 In addition, the Commission believes that the record-making obligation of proposed Rule 17a-3(a)(25) and the recordkeeping obligation of the proposed amendment to Rule 17a-4(e)(5) associated with the Disclosure Obligation and the obligations of proposed Regulation Best Interest would impose an initial aggregate burden of 19,678,777 hours and an additional initial aggregate cost of $378,544 as well as an ongoing aggregate annualized burden of 3,173,334 hours on broker-dealers.480 Thus, the record-making obligation of proposed Regulation Best Interest would impose an initial aggregate cost of at least $4,516.56 million and an ongoing aggregate annual cost of at least $1,141.81 million on broker-dealers.481

    478 The estimate of the initial aggregate burden is based on the following calculation: 3,600 hours + 8,020 hours + 41,100 hours + 1,904,000 hours + 4,010 hours + 20,550 hours + 1,904,000 hours + 4,010 hours + 15,413 hours + 1,904,000 hours = 5,808,703 hours. As discussed in more detail in Section V.D., 3,600, 8,020, and 41,100 hours are preliminary estimates of the initial aggregate burden for the preparation of disclosure of capacity, type and scope, for dual registrants, small and large broker-dealers, respectively. 1,904,000 hours is the preliminary estimate of the initial aggregate burden for the delivery of the disclosure of capacity, type and scope to retail customers. 4,010 and 20,550 hours are preliminary estimates of the initial aggregate burden for the preparation of disclosure of fees for small and large broker-dealers, respectively. 1,904,000 hours is the preliminary estimate of the initial aggregate burden for the delivery of the disclosure of fees to retail customers. 4,010 and 15,413 hours are preliminary estimates of the initial aggregate burden for the preparation of disclosure of material conflicts of interest for small and large broker-dealers, respectively. 1,904,000 hours is the preliminary estimate of the initial aggregate burden for the delivery of the disclosure of material conflicts of interest to retail customers. The estimate of the initial aggregate cost is based on the following calculation: $1.70 million + $3.79 million + $14.55 million + $1.89 million + $9.70 million + $1.89 million + $7.27 million = $40.79 million. As discussed in more detail in Section V.D., $1.70 million, $3.79 million, and $14.55 million are preliminary estimates of the initial aggregate cost for the preparation of disclosure of capacity, type and scope, for dual registrants, small and large broker-dealers, respectively. $1.89 million and $9.70 million are preliminary estimates of the initial aggregate cost for the preparation of disclosure of fees for small and large broker-dealers, respectively. $1.89 million and $7.27 million are preliminary estimates of the initial aggregate cost for the preparation of disclosure of material conflicts of interest for small and large broker-dealers, respectively. The estimate of the ongoing aggregate burden is based on the following calculation: 2,520 hours + 3,208 hours + 41,100 hours + 380,800 hours + 1,604 hours + 8,220 hours + 761,600 hours + 802 hours + 4,110 hours + 761,600 hours = 1,965,564 hours. As discussed in more detail in Section V.D., 2,520, 3,208, and 41,100 hours are preliminary estimates of the ongoing aggregate burden for the preparation of disclosure of capacity, type and scope, for dual registrants, small and large broker-dealers, respectively. 380,800 hours is the preliminary estimate of the ongoing aggregate burden for the delivery of the disclosure of capacity, type and scope to retail customers. 1,604 and 8,220 hours are preliminary estimates of the ongoing aggregate burden for the preparation of disclosure of fees for small and large broker-dealers, respectively. 761,600 hours is the preliminary estimate of the ongoing aggregate burden for the delivery of the disclosure of fees to retail customers. 802 and 4,110 hours are preliminary estimates of the ongoing aggregate burden for the preparation of disclosure of material conflicts of interest for small and large broker-dealers, respectively. 761,600 hours is the preliminary estimate of the ongoing aggregate burden for the delivery of the disclosure of material conflicts of interest to retail customers.

    479 These estimates are calculated as follows: (96,703 hours of in-house legal counsel) × ($409.37/hour for in-house counsel) + (5,712,000 hours for delivery for each customer account) × ($229.46/hour for registered representative) + (86,428 hours for outside legal counsel) × ($472/hour for outside legal counsel) = $1,391.07 million, and (35,555 hours of in-house legal counsel) × ($409.37/hour for in-house counsel) + (1,904,000 hours for delivery for each customer account) × ($229.46/hour for registered representative) + (26,009 hours for in-house compliance counsel) × ($359.81/hour for outside legal counsel) = $460.81 million. The hourly wages for in-house legal and compliance counsel and registered representatives are obtained from SIFMA. The hourly rates for outside legal counsel are discussed in Section V.D.

    480 These estimates are based on the Commission's preliminary estimates, discussed in Section V.D, with respect to the initial and ongoing aggregate costs and burdens imposed on broker-dealers by the record-making obligation of proposed Rule 17a-3(a)(25) and the recordkeeping obligation of the proposed amendment to Rule 17a-4(e)(5) associated with all component obligations of the proposed Regulation Best Interest. The estimate of the initial aggregate burden is based on the following calculation: 4,110 hours + 3,808,000 hours + 15,866,667 hours = 19,678,777 hours, where, as discussed in more detail in Section V.D, 4,110 hours is the preliminary estimate of amending the account disclosure agreement by large broker-dealers, 3,808,000 hours is the preliminary estimate of the burden associated with filling out the information disclosed pursuant to Regulation Best Interest in the account disclosure agreement, and 15,866,667 hours is the preliminary estimate of the burden to broker-dealers for adding new documents or modifying existing documents to the broker-dealer's existing retention system. $378,544 is the preliminary estimate of amending the account disclosure agreement by small broker-dealers pursuant to the record-making obligation of proposed Rule 17a-3(a)(25). 3,173,334 hours is the preliminary estimate of the ongoing aggregate annual burden to broker-dealers of complying with the recordkeeping obligation of the proposed amendment to Rule 17a-4(e)(5).

    481 These estimates are calculated as follows: (2,055 hours of in-house legal counsel) × ($409.37/hour for in-house counsel) + (19,674,667 hours for entering and adding new or modifying existing documents in each customer account) × ($229.46/hour for registered representative) + (2,055 hours for in-house compliance counsel) × ($359.81/hour for in-house compliance counsel) + (802 hours for outside legal counsel) × ($472/hour for outside legal counsel) = $4,516.56 million, and (3,173,334 hours for record keeping) × ($229.46/hour for registered representative) = $1,141.81 million. The hourly wages for in-house legal and compliance counsel and registered representatives are obtained from SIFMA. The hourly rates for outside legal counsel are discussed in Section V.D.

    c. Obligation To Exercise Reasonable Diligence, Care, Skill, and Prudence in Making a Recommendation

    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 de facto control over a retail account. As described in Section IV.B above, existing suitability rules require that a broker-dealer or associated person have a reasonable basis to believe that a recommendation or investment strategy is “suitable” for the retail customer.482 Suitability depends, among other things, on information obtained by the broker-dealer or associated person about the retail customer's investment profile (e.g., age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, need for liquidity, and risk tolerance).483 In particular, pursuant to the requirements of FINRA's suitability rule, currently, broker-dealers are expected to make efforts to ascertain the potential risk and rewards associated with a recommendation, given a customer's investment profile, and to determine whether the recommendation could be in suitable for at least some retail customers. Furthermore, broker-dealers are expected to evaluate the information in a retail customer's investment profile and other relevant information when determining whether a recommendation is suitable or whether a series of recommendations is suitable and not excessive.

    482See supra note 431.

    483See supra note 241.

    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.484 We understand that currently broker-dealers collect information relevant to a customer's investment profile at the inception of the relationship with the retail customer through the use of a questionnaire, such as in an account opening agreement, and during the relationship on an “as needed” basis.

    484See FINRA Regulatory Notice 12-25 at Q16.

    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 de facto control over the account of the retail customer. To the extent that the removal of the element of control may cause a potential increase in retail customer arbitrations, the Care Obligation would impose a cost on broker-dealers due to enhanced legal exposure.485

    485See infra note 511.

    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.486 Second, it is unclear whether or to what extent the adoption of Regulation Best Interest would affect the number of retail customer arbitrations, since many retail customer arbitrations are already predicated on facts alleging that a broker-dealer breached a fiduciary duty or breached its suitability obligations.487 Finally, the portion of the 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 Care 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 believes that, with respect to the Care Obligation, the record-making obligation of proposed Rule 17a-3(a)(25) and the recordkeeping obligation of the proposed amendment to Rule 17a-4(e)(5) would involve creating new documents or modifying existing documents to reflect standardized questionnaires seeking customer investment profile information. The costs associated with the record-making and recordkeeping obligations are discussed in Section IV.D.2.b above, and in more detail in Section V.D below.

    486See Rule 2111, FAQ—Q7.1, available at http://www.finra.org/industry/faq-finra-rule-2111-suitability-faq.

    487See supra note 475 and accompanying text.

    d. Obligation 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 Associated With a Recommendation

    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.488 These conflicts may arise for a number of reasons. For example, a broker-dealer may be in a position to recommend: Proprietary products, products of affiliates, or limited range of products; one share class versus another share class of a mutual fund; securities underwritten by the firm or a broker-dealer affiliate; the rollover or transfer of assets from one type of account to another (such as recommendations to roll over or transfer assets in an ERISA account to an IRA, when the recommendation involves a securities transaction); and allocation of investment opportunities among retail customers. Broker-dealers would also need to consider whether these conflicts arise from financial incentives and therefore are subject to the additional Conflict of Interest Obligation to establish, maintain, and enforce written policies and procedures reasonably designed to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with a recommendation that is discussed in more detail below.

    488 As discussed in Section I.B above, 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 the antifraud provisions require an element of fraud or deceit, which would not be required under Regulation Best Interest. More specifically, the Care Obligation could not be satisfied by disclosure.

    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.489 Consequently, in order to comply with the requirement to maintain and enforce the policies and procedures pursuant to the requirement to establish such policies and procedures of the Conflict of Interest Obligation, broker-dealers could adjust their current systems of supervision and compliance, as opposed to creating new systems.

    489See FINRA Rule 3110 (Supervision) (requiring firms to establish and maintain systems to supervise the activities of their associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA 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.490 Furthermore, the Commission preliminarily believes that in order to identify conflicts of interest and determine whether the conflicts are material, broker-dealers would incur an initial aggregate burden of 28,570 hours and an additional initial aggregate cost of approximately $15.43 million as well as an ongoing aggregate annualized burden of 28,570 hours.491 Finally, the Commission preliminarily believes that in order to maintain and enforce written policies pursuant to the obligation to identify and at the minimum disclose, or eliminate, material conflicts of interest broker-dealers would incur an initial aggregate burden of 446,499 hours and an additional initial aggregate cost of approximately $61.71 million as well as an ongoing aggregate annualized burden of 435,071 hours.492 Thus, the Conflict of Interest Obligation of proposed Regulation Best Interest would impose an initial aggregate cost of at least $273.01 million and an ongoing aggregate annual cost of at least $120.92 million on broker-dealers.493

    490 These estimates are based on the following calculations: 123,300 hours + 8,020 hours = 131,320 hours; $9.7 million + $15.1 million = $24.8 million; and 24,660 hours + 4,010 hours = 28,670 hours. As discussed in more detail in Section V.D, 123,300 hours and 8,020 hours are preliminary estimates for the initial aggregate burdens for large and small broker-dealers, respectively, $9.7 million and $15.1 million are preliminary estimates for the initial aggregate costs for large and small broker-dealers, respectively, and 24,660 hours and 4,010 hours are preliminary estimates for the ongoing aggregate burdens for large and small broker-dealers, respectively.

    491 The estimate of the initial aggregate burden is based on the following calculations: 14,285 hours + 14,285 hours = 28,570 hours, where, as discussed in more detail in Section V.D, 14,285 hours and 14,285 hours are preliminary estimates for the initial aggregate burdens for identifying conflicts of interest and determining whether the conflicts are material for all broker-dealers, respectively.

    492 The estimate of the initial aggregate burden is based on the following calculations: 11,428 hours + 435,071 hours = 446,499 hours, where, as discussed in more detail in Section V.D, 11,428 hours and 435,071 hours are preliminary estimates for the initial aggregate burdens of approving training modules and training of registered representatives for all broker-dealers, respectively.

    493 These estimates are calculated as follows: (106,209 hours of in-house legal counsel) × ($409.37/hour for in-house counsel) + (435,071 hours for training) × ($229.46/hour for registered representative) + (27,692.5 hours for in-house compliance counsel) × ($359.81/hour for in-house compliance counsel) + (7,142.5 hours for determining if identified conflicts of interest are material) × ($270.40/hour for senior business analyst) + (30,274 hours for review of policies and procedures) × ($522.49/hour for compliance manager) + (52,630 hours for outside legal counsel) × ($472/hour for outside legal counsel) + (57,140 hours for modifying existing technology) × ($270/hour for outside senior programmer) + (228,560 hours for updating training module) × ($270/hour for systems analyst or programmer) = $273.01 million, and (8,220 hours of in-house legal counsel) × ($409.37/hour for in-house counsel) + (435,071 hours for training) × ($229.46/hour for registered representative) + (26,515 hours for in-house compliance counsel) × ($359.81/hour for in-house compliance counsel) + (25,505 hours for identifying conflicts of interest) × ($226.23/hour for business-line personnel) + (30,274 hours for review of policies and procedures) × ($522.49/hour for compliance manager) + (4,010 hours for outside legal counsel) × ($472/hour for outside legal counsel) + (4,010 hours for outside compliance services) × ($298/hour for outside compliance services) = $120.92 million. The hourly wages for in-house legal and compliance counsel, registered representatives, senior business analyst, compliance manager, and business-line personnel are obtained from SIFMA. The hourly rates for outside legal counsel, outside senior programmer, systems analyst or programmer and outside compliance services are discussed in Section V.D.

    (1) Eliminate Material Conflicts of Interest Associated With a Recommendation

    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.” 494 Dealer activity may include, but is not limited to, selling securities (such as bonds) out of inventory; buying securities from customers; selling proprietary products (e.g., products such as affiliated mutual funds, structured products, private equity and other alternative investments); selling initial and follow-on public offerings; selling other underwritten offerings; acting as principal in Individual Retirement Accounts; acting as a market maker or specialist on an organized exchange or trading system; acting as a de facto market maker or liquidity provider; and otherwise holding oneself out as buying or selling securities on a continuous basis at a regular place of business.

    494 Section 3(a)(5)(A) of the Exchange Act.

    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 (e.g., because a broker-dealer places an order with a third-party market maker rather than its own proprietary trading desk). Further, dealers act as important financial market intermediaries by providing liquidity to retail customers and helping to maintain continuous and smooth price transitions for securities. If broker-dealers determine to eliminate material conflicts of interest, the resulting change to how this critical role is performed could impact market liquidity.

    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.

    (2) At a Minimum Disclose Material Conflicts of Interest Associated With a Recommendation

    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 (i.e., agent or principal).495

    495See Rule 10b-10. Rule 10b-10 requires a broker-dealer effecting customer transactions in securities (other than U.S. savings bonds or municipal securities) to provide written notification to the customer, at or before completion of the transaction, disclosing information specific to the transaction, including whether the broker-dealer is acting as agent or principal and its compensation, as well as any third-party remuneration it has received or will receive. See also NASD Rule 2340 (Customer Account Statements) (broker-dealers must provide customer account statements on at least a quarterly basis).

    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.

    e. Obligation To Establish, Maintain, and Enforce Written Policies and Procedures Reasonably Designed To Identify and Disclose and Mitigate, or Eliminate, Material Conflicts of Interest Arising From Financial Incentives Associated With a Recommendation

    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 (e.g., quotas, bonuses, sales contests, special awards, differential or variable compensation, incentives tied to appraisals or performance reviews); and compensation practices involving third-parties, such as sales compensation and compensation for services provided to third-parties or to retail customers on behalf of third parties (e.g., sub-accounting or administrative services provided to a mutual fund). In particular, financial incentives that create material conflicts of interest from financial incentives may include, for example, differential or variable compensation received by the broker-dealer itself (but not an affiliate), whether paid by the retail customer or a third-party; receipt of fees, commissions or other charges on sales of proprietary products, and transactions on a principal basis.

    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.

    (1) Eliminate Material Conflicts Arising From Financial Incentives Associated With a Recommendation

    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 the compensation it receives from product sponsors when recommending their products to retail customers. Alternatively, the broker-dealer could stop providing recommendations to retail customers on products that are subject to compensation arrangements. In both cases, the broker-dealer would forgo all the revenues tied to compensation paid by product sponsors for distributing their products to retail customers.

    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 (e.g., as discussed earlier, the value of broker-dealer advice 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), the Commission is unable to quantify the magnitude of the cost to retail customers of no longer having access to the 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 (e.g., the portion of commission that they can retain). Currently, the Commission has data only on the former determinant—as described in Section IV.C—and lacks data on the second determinant. Second, the cost to retail customers would depend on determinants such as how retail customers perceive the risks and returns of their portfolios, the likelihood of acting on a recommendation that complies with the best interest obligation, and how those risk and returns change as a result of a decline or change in the supply of broker-dealer recommendations. While a range of estimates for these costs 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 eliminate 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 above and in more detail in Section V.D below.

    (2) Disclose and Mitigate Material Conflicts of Interest Arising From Financial Incentives Associated With a Recommendation

    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 informed decision about the recommendation.

    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.496 For example, some broker-dealers may use “product agnostic” compensation structures (also referred to as “neutral grids”) that reduce a registered representative's incentive to recommend one type of product over another.497 Broker-dealers can also cap the credit a registered representative receives for selling comparable products, thereby reducing the registered representative's incentive to prefer, for example, one mutual fund or variable annuity over another.498 Further, broker-dealers can impose compensation adjustments on registered representatives who do not properly manage material conflicts of interest.499 Another mechanism for mitigating the conflict between registered representatives and customers is for broker-dealers to link surveillance of registered representatives' recommendations, and potential compensation adjustments, to thresholds in a firm's compensation structure to deter recommendations that may be motivated by a desire to receive higher compensation.500 A number of firms also perform specialized supervision and surveillance of recommendations, which could result in compensation adjustments, as a registered representative approaches the end of the period over which performance is measured for receiving bonuses.501 Finally, a number of firms perform additional surveillance which could result in compensation adjustments when a registered representative approaches the threshold necessary for admission to a firm recognition club.502

    496See FINRA Report on Conflicts of Interest (Oct. 2013), at 6, available at http://www.finra.org/sites/default/files/Industry/p359971.pdf.

    497Id.

    498Id.

    499Id.

    500Id.

    501Id.

    502Id.

    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.503 For those firms that currently engage to a larger extent in conflict mitigating activities, we would expect that the costs associated with the Conflict of Interest Obligations of the proposed rule to be lower. However, the Commission is currently unable to quantify the magnitude of the costs to broker-dealers for complying with the Conflict of Interest Obligation to mitigate material conflicts of interest related to financial incentives, as applied to internal compensation structures, for a number of reasons. First, the Commission lacks data that quantifies the costs of firms engaging in conflict mitigating activities. 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 engaging in conflict mitigating activities and how broker-dealers would choose to satisfy the Conflict of Interest Obligation with respect to conflicts of interest arising from internal compensation structures. 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, may not be informative (in a statistical sense) about the magnitude of the costs associated with mitigating conflicts of interest arising from internal compensation structures.

    503Id. The FINRA study notes that its observations are drawn from discussions with large firms. As a result, FINRA notes that the findings of the study will not in all cases be directly applicable to small firms. See FINRA Report on Conflicts of Interest at p. 2.

    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 (e.g., to understand the product and the customer that would best fit the product) in providing recommendations of higher quality. The potential change in the level of effort that registered representatives expend when making recommendations may alter the quality of advice that retail customers receive, which, in turn, may impose a cost on retail customers. Alternatively, some broker-dealers may determine to reduce the set of offered products in each product class by eliminating those products that are the least expensive, or by eliminating both the most and the least expensive. This approach would result in a set of products that would be more homogeneously priced, in order to comply with the mitigation aspect of the Conflict of Interest Obligations. However, like the approach above, this approach may also limit retail customer choice, and, therefore, may impose a cost on retail customers.

    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.504

    504 Mutual fund sponsors may use different combinations of sales and servicing fees to discriminate among investors with different expected holding periods. Investors who redeem impose costs on those who remain in a fund. As a result, long-term investors may be unwilling to invest alongside investors with shorter expected holding periods. Differing sales and servicing fees can induce investors to self-select into different funds based on their expected holding period, thereby solving the long-term investors' problem of investing alongside investors with shorter expected holding periods which may, in turn, induce more investment by long-term investors. See Tarun Chordia, “The structure of mutual fund charges,” Journal of Financial Economics (1996, vol. 41, pp. 3-39). If broker-dealers meet the conflict mitigation requirement of the proposed rule by relying on a single commission schedule, funds would not have the ability to induce investors to self-select into different funds based on expected holding period.

    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 compensation with other funds. Furthermore, to the extent that clean shares would lead to significant changes in how broker-dealers and their associated persons would get compensated, the incentives of broker-dealers when providing advice may change. In particular, if the new compensation arrangement reduces the incentives of broker-dealers to exert effort in providing quality advice, broker-dealer recommendations could end up being of lower quality.

    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,505 and lower quality advice. For instance, if the main determinant of compensation differential across products is the level of effort it takes a broker-dealer to understand the product and the customer that would best fit the product, conflict mitigating measures that either lead to the elimination of some of these products or that render the compensation to be less sensitive to the effort exerted by broker-dealer may reduce the investment choices available to the retail brokerage customer, and, more generally, may reduce the quality of the recommendations that a retail customer obtains from the broker-dealer. In addition, retail customers may bear some of the costs associated with broker-dealers' implementation of conflict mitigating measures.

    505See SIFMA Study.

    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 products that broker-dealers may no longer recommend to retail customers. Second, as noted above, there could be multiple ways in which broker-dealers could satisfy the Conflict of Interest Obligation with respect to conflicts of interest due to compensation arrangements with product sponsors. Finally, any estimate of the magnitude of such funding costs would depend on assumptions about the distribution of products across product sponsors that broker-dealers would no longer recommend to retail customers and how broker-dealers would choose to satisfy the Conflict of Interest Obligation with respect to conflicts of interest due to compensation arrangements with product sponsors. 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 the funding costs to product sponsors.

    D. Effects on Efficiency, Competition, and Capital Formation

    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.506

    506 “Gains from trade” is defined as the difference between the highest price a consumer is willing to pay for a product or service and the lowest price at which the producer is willing to supply the product or service. See Section IV.B.b.

    Competition. By establishing a best interest standard of conduct that would incorporate and expand the current broker-dealer obligations, Regulation Best Interest would ameliorate the principal-agent conflict between retail customers and broker-dealers. However, the proposed rule would impose costs on broker-dealers, retail customers and other parties with a stake in the market for financial advice, and in particular, product sponsors.

    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.507

    507See Fiduciary Duty Interpretive Release.

    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.508

    508 A customer's relationship with an associated person of a broker-dealer or investment adviser may also influence the proposed rule's effect on how customers choose between the two. For example, customers who have relationships with an associated person outside of their professional relationship (e.g., they are members of the same family, they are friends, they are members of the same or similar organizations) may choose the associated person, at least in part, based on those outside relationships. To the extent customers and associated persons have relationships outside of their professional relationships and to the extent those outside relationships are determinative of the customer's choice between a broker-dealer and an investment adviser, the proposed rule would not substantially alter the way customers 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.509 The decline in the supply of these products through broker-dealer recommendations may cause product sponsors to increase the supply of these products through non-broker-dealer entities that offer advice. In turn, this potential increase in supply may offset some of the potential negative effects of the proposed rule on the pricing of these products.

    509See Exchange Act Sections 3(a)(4)(B) and 3(a)(5)(B) and rules thereunder (providing banks exceptions from “broker” and “dealer” status for specified securities activities).

    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.

    Capital Formation and Efficiency. As noted above, to the extent that the proposed rule improves the gains from trade for retail customers, these enhanced gains from trade could, in turn, result in current retail customers being willing to invest more of their savings in securities markets and potential retail customers being willing to invest through broker-dealers for the first time. To the extent that the proposed rule leads to greater investment, it may promote capital formation by supplying more capital to issuers at lower cost.

    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, e.g., expanding the production of a product that is in high demand). To the extent that a retail customer acting on a high-quality broker-dealer recommendation efficiently allocates new capital to an investment opportunity that funds valuable corporate sector projects, Regulation Best Interest, as proposed, could improve the efficiency with which capital in the economy is allocated to the corporate 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.

    E. Reasonable Alternatives

    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.510

    510See BIC Exemption.

    1. Disclosure-Only Alternative

    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: 511 (1) Require broker-dealers and investment advisers to deliver to retail investors a short (i.e., four page or equivalent limit if in electronic format) relationship summary 512 and (2) 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 supervised person's relationship with the firm (“Regulatory Status Disclosure”).513

    511See Relationship Summary Proposal.

    512 The customer or client relationship summary is being proposed as “Form CRS.”

    513See Relationship Summary Proposal.

    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.514 An alternative that only provides disclosure of conflicts of interest could therefore be less effective in increasing retail customer protection in the absence of the best interest requirement, relative to the proposed rule. Further, a disclosure-only alternative puts the burden on the retail customer to understand the disclosure and evaluate the magnitude of the conflict, without the benefit of a best interest standard of conduct of proposed Regulation Best Interest.515 Therefore, the Commission preliminarily believes that a disclosure-only rule would be less effective in providing retail customer protection and reducing potential investor harm than proposed Regulation Best Interest.

    514 The disclosure-only alternative would not provide the Care Obligation required by proposed Regulation Best Interest, as discussed above. However, FINRA Rule 2111 would continue to set a minimum requirement regarding the advice that broker-dealers provide to their customers, and therefore, would continue to address the competency of the advice provided by the broker-dealers.

    515 Relative to the disclosure-only alternative, broker-dealers under proposed Regulation Best Interest would have to act in the best interest of their investors, comply with the Care Obligation, and would have to take actions to eliminate or disclose, and where applicable, mitigate and disclose conflicts of interest.

    2. Principles-Based Standard of Conduct Obligation

    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,516 as in proposed Regulation Best Interest, some firms may not undertake such mitigation techniques, either as they pertain to material conflicts of interest or those related to financial incentives. Therefore, the Commission preliminarily believes that a principles-based standard of conduct approach on its own, would be less effective from a retail customer protection standpoint than the proposed Regulation Best Interest. A principles-based standard of conduct that obligates broker-dealers to act in the best interest of their retail customers, without guidance on what a best interest standard entails, is only one element that is needed to reduce potential investor harm and that investor protection is likely to be enhanced with the Disclosure, Care, and Conflict of Interest Obligations in proposed Regulation Best Interest.

    516 As discussed above, under a principles-based care obligation, broker-dealers would be required to continue to comply with the existing regulatory baseline, including disclosure obligations under the antifraud provisions of the federal securities laws.

    3. A Fiduciary Standard for Broker-Dealers

    As an alternative, the Commission could impose a fiduciary standard on broker-dealers for retail customers.517 Fiduciary standards vary among investment advisers, banks, acting as trustees or fiduciaries, or ERISA plan providers, but fiduciaries are generally required to act with a duty of care and duty of loyalty to their clients.

    517 Retail customers would consist of the same set of investors as in proposed Regulation Best Interest.

    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 (e.g., offering mutual funds with large front-end loads or churning retail customer accounts) would be different from those that arise for many standalone investment advisers (e.g., so-called “reverse churning”) but may be the same as the conflicts faced by advisers when the advisers, affiliates, or third-party broker-dealers with which advisory personnel are associated receive compensation in a broker-dealer capacity.518

    518 As discussed above, nearly 80% of investment adviser representatives are also registered representatives of broker-dealers; thus, those representatives and their firms, depending on the capacity in which the representatives provide advice, could face similar conflicts. Further, nearly 75% of total investment adviser assets under management are associated with investment advisers that have a broker-dealer affiliate. See Section IV.C.1.

    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, lowering the possibility of harm to investors, and potentially reducing retail customer confusion with respect to investment advice. The Commission preliminarily believes such uniformity would likely affect the market for investment advice provided by broker-dealers; retail customer choice; costs of investment advice; and could lead to the potential loss of differentiation between two important business models, each of which can serve a valuable function for retail customers. This alternative also could have economic effects on both retail customers and the industry, particularly if payment choice, account choice, or product choice diminishes as a result. Regardless of the form of a new fiduciary standard for broker-dealers, legal certainty would be an important factor for broker-dealers and other providers of investment 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.519 Moreover, such an alternative would likely undermine efforts to preserve the ability of broker-dealers to employ business models that are distinct from investment advisers', and could thereby limit retail customer choice with respect to investment advice. This differentiated approach to customer protection is more likely to provide more appropriate investor protection commensurate with the risks inherent in each of those business models. The nature of retail investors' relationships with providers of financial advice is likely to differ between broker-dealers and investment advisers (e.g., broker-dealers are more likely to provide advice on an episodic basis), which has led to the emergence of different regulatory regimes, each designed to address conflicts of interest that may arise as a result of a given business model. Therefore, the Commission preliminarily believes that it is appropriate to maintain separate regulatory standards for broker-dealers and investment advisers, while proposing to incorporate and go beyond existing levels of retail customer protection for broker-dealer customers through Regulation Best Interest and Form CRS Relationship Summary Disclosure.

    519 An example of a uniform fiduciary standard is the staff recommendation in the 913 Study. See supra note 38 and accompanying text.

    4. Enhanced Standards Akin to Conditions of the BIC Exemption

    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.520 The key conditions of the BIC Exemption are described in some detail in Section I.A.2. Below, we consider the tradeoffs to retail customers, broker-dealers, and other market participants of an alternative that would mirror the key conditions of the BIC Exemption.521

    520 As discussed supra Section I.A.2., broker-dealers and their associated persons who provide fiduciary investment advice to retirement accounts (including ERISA-covered plans and participants, as well as IRAs) are not required to comply with the BIC Exemption to the extent that they are able to adopt an alternate approach to avoiding non-exempt prohibited transactions.

    521 The DOL also adopted the Impartial Conduct Standards in the Principal Transactions Exemption and certain other PTEs relating to the DOL Fiduciary Rule, see DOL Fiduciary Rule Release, supra note 49, 81 FR at 20991; these other PTEs operate with additional and/or different conditions from the BIC Exemption. This discussion only considers the conditions of the BIC Exemption, because it provides an example of the types of information and detail required under PTEs related to the DOL Fiduciary Rule, and we understand that most broker-dealers providing services to retirement accounts generally would rely on the BIC Exemption. As discussed above, the DOL Fiduciary Rule was vacated by the United States Court of Appeals for the Fifth Circuit on March 15, 2018. See supra note 51.

    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.522 For example, if the costs associated with complying with a set of requirements akin to the full complement of conditions under BIC Exemption are large, broker-dealers could transition away from commission-based brokerage accounts to fee-based advisory accounts. 523 To the extent that such an outcome increases the costs associated with investment advice, some retail customers may determine to exit the market for financial advice.

    522See SIFMA Study. See also the ABA survey and the Financial Services Roundtable survey, supra note 456.

    523 As discussed in the baseline section, the average fees associated with broker-dealers' commission-based accounts are significantly lower than the average fees associated with fee-based accounts of registered investment advisers.

    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,524 and could cause exit or consolidation among both broker-dealers and investment advisers that provide investment advice,525 which could further reduce the overall level of investment advice available to retail customers.526 Further, for those broker-dealers that do not fully exit the market, implementing a set of requirements that are akin to the conditions of the BIC Exemption could lead to some broker-dealers transitioning from a broker-dealer business model to an investment adviser business model. Although this alternative could increase the competition between investment advisers and broker-dealers subject to a fiduciary standard and BIC Exemption-like conditions, any reduction in the costs of investment advice due to a potential increase in the supply of providers would like to be mitigated as the costs to broker-dealers to follow such standards would likely be large and could raise the costs associated with the provision of investment advice.527

    524 Investment advisers, depending on how they are compensated, generally would not have to comply with the full set of obligations of the BIC Exemption, thereby reducing the costs to such firms, and providing incentives for broker-dealers to switch customers from transaction-based accounts to advisory accounts.

    525 In addition to competitive effects for broker-dealers and investment advisers, any change in the competitive environment is likely to have an impact on other providers of financial advice, including banks, and trust companies.

    526 As discussed above in Section IV.D, proposed Regulation Best Interest also could have competitive effects between broker-dealers and investment advisers.

    527 One of the main critiques of the BIC Exemption arises from the increased legal uncertainty and associated increased litigation risk for broker-dealers, as discussed 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 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.

    F. Request for Comment

    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 Commission should consider? If so, please provide additional alternatives and how their costs and benefits would compare to the proposal.

    V. Paperwork Reduction Act Analysis

    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”).528

    528 44 U.S.C. 3501 et seq.

    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.529 The titles for these collections of information are: (1) “Regulation Best Interest;” (2) Rule 17a-3—Records to be Made by Certain Exchange Members, Brokers and Dealers (OMB control number 3235-0033); 530 and (3) Rule 17a-4—Records to be Preserved by Certain Brokers and Dealers (OMB control number 3235-0279).531 OMB has not yet assigned a control number to the collection of information for “Regulation Best Interest.” 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.

    529 44 U.S.C. 3507(d) and 5 CFR 1320.11.

    530See 17 CFR 240.17a-3. The proposed addition of paragraph (a)(25) to Rule 17a-3 would amend the existing PRA for Rule 17a-3.

    531See 17 CFR 240.17a-4. The Proposed Amendment to Rule 17a-4(e)(5) would amend the existing PRA for Rule 17a-4.

    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).

    A. Respondents Subject to Proposed Regulation Best Interest and Proposed Amendments to Rule 17a-3(a)(25), Rule 17a-4(e)(5) 1. Broker-Dealers

    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).532

    532 As of December 31, 2017, 3,841 broker-dealers filed Form BD. Retail sales by broker-dealers were obtained from Form BR.

    2. Natural Persons who are Associated Persons of Broker-Dealers

    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,533 and would therefore likely be subject to proposed Regulation Best Interest, and the proposed amendments to Rules 17a-3(a)(25) and 17a-4(e)(5).534

    533See Section IV.B.1, supra, at Table 5. This estimate is based on the following calculation: (494,399 total licensed representatives (including representatives of investment advisers)) × (12% (the percentage of total licensed representatives who are standalone investment adviser representatives)) = 59,328 representatives at standalone investment advisers. To isolate the number of representatives at standalone broker-dealers and dually-registered firms, we have subtracted 59,328 from 494,399, for a total of 435,071 retail-facing, licensed representatives at standalone broker-dealers or dually-registered firms.

    534 Unless otherwise noted, for purposes of the PRA, we use the term “registered representatives” to refer to associated persons of broker-dealers who are registered, have series 6 or 7 licenses, and are retail-facing, and we use the term “dually-registered representatives of broker-dealers” to refer to registered representatives who are dually-registered and are associated persons of a standalone broker-dealer (who may be associated with an unaffiliated investment adviser) or a dually-registered broker-dealer.

    B. Summary of Collections of Information

    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 associated costs and burdens for broker-dealers subject to the proposed rules.

    The collections of information associated with these proposed rules and proposed rule amendments are described below.

    1. Conflict of Interest Obligations

    Regulation Best Interest would require a broker-dealer entity 535 to establish, maintain, and enforce written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with a recommendation. Second, Regulation Best Interest would require a broker-dealer to establish, maintain, and enforce written policies and procedures reasonably designed to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with a recommendation.

    535 As discussed above in Section II.D.3, the proposed Conflict of Interest Obligation applies solely to the broker or dealer entity, and not to the natural persons who are associated persons of a broker or dealer. For purposes of discussing the Conflict of Interest Obligation, the term “broker-dealer” refers only to the broker-dealer entity, and not to such individuals.

    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.536

    536 Any written policies and procedures developed pursuant to proposed Regulation Best Interest would be required to be retained pursuant to Exchange Act Rule 17a-4(e)(7), which requires broker-dealers to retain compliance, supervisory, and procedures manuals (and any updates, modifications, and revisions thereto) describing the policies and practices of the broker-dealer with respect to compliance with applicable laws and rules, and supervision of the activities of each natural person associated with the broker-dealer, for a specified period of time. The record retention requirements of Rule 17a-4(e)(7) include any written policies and procedures that broker-dealers may produce pursuant to Regulation Best Interest's Conflict of Interest Obligations. The costs and burdens associated with Rule 17a-4(e)(7) will be updated in connection with the next renewal for the PRA.

    Following is a detailed discussion of the estimated costs and burdens associated with broker-dealers' Conflict of Interest Obligations.

    a. Written Policies and Procedures (1) Initial Costs and Burdens

    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.537 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 evaluate and address a greater number of potential conflicts. Based on FOCUS Report data,538 we estimate that, as of December 31, 2017, approximately 802 broker-dealers are small entities under the RFA. Therefore, we estimate that 2,055 broker-dealers would qualify as large broker-dealers for purposes of this analysis.539

    537 Throughout this PRA analysis, the burdens on in-house personnel are measured in terms of burden hours, and external costs are expressed in dollar terms.

    538 FOCUS Reports, or “Financial and Operational Combined Uniform Single” Reports, are monthly, quarterly, and annual reports that broker-dealers are generally required to file with the Commission and/or SROs pursuant to Exchange Act Rule 17a-5. See 17 CFR 240.17a-5.

    539 This calculation was made as follows: (2,857 total retail broker-dealers)−(802 small broker-dealers) = 2,055 large broker-dealers.

    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.540 We additionally estimate a one-time burden of 5 hours for a general counsel at a large broker-dealer and 5 hours for a Chief Compliance Officer to review and approve the updated policies and procedures, for a total of 60 burden hours.541 In addition, we estimate a cost of $4,720 for outside counsel to review the updated policies and procedures on behalf of a large broker-dealer.542 We therefore estimate the aggregate burden for large broker-dealers to be 123,300 burden hours,543 and the aggregate cost for large broker-dealers to be $9.70 million.544

    540 This estimate would be broken down as follows: 40 hours for in-house legal counsel + 10 hours for in-house compliance counsel to update existing policies and procedures = 50 burden hours.

    541 This estimate is based on the following calculation: (50 hours of review for in-house legal and in-house compliance counsel) + (5 hours of review for general counsel) + (5 hours of review for Chief Compliance Officer) = 60 burden hours.

    542 Based on industry sources, Commission staff preliminarily estimates that the average hourly rate for legal services is $472/hour. This cost estimate is therefore based on the following calculation: (10 hours of review) × ($472/hour for outside counsel services) = $4,720 in outside counsel costs.

    543 This estimate is based on the following calculation: (60 burden hours of review per large broker-dealer) × (2,055 large broker-dealers) = 123,300 aggregate burden hours.

    544 This estimate is based on the following calculation: ($4,720 for outside counsel costs per large broker-dealer) × (2,055 large broker-dealers) = $9.70 million in outside counsel costs.

    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 $18,880 545 per small broker-dealer, and an aggregate cost of $15.1 million for all small broker-dealers.546 We additionally believe in-house compliance personnel would require 10 hours to review and approve the updated policies and procedures, for an aggregate burden of 8,020 hours.547

    545 This cost estimate is based on the following calculation: (40 hours of review) × ($472/hour for outside counsel services) = $18,880 in outside counsel costs.

    546 This cost estimate is based on the following calculation: ($18,880 for outside attorney costs per small broker-dealer) × (802 small broker-dealers) = $15.1 million in outside counsel costs.

    547 This estimate is based on the following calculation: (10 burden hours) × (802 small broker-dealers) = 8,020 aggregate burden hours.

    We therefore estimate the total initial aggregate burden to be 131,320 hours,548 and the total initial aggregate cost to be $24.8 million.549

    548 This estimate is based on the following calculation: (123,300 aggregate burden hours for large broker-dealers) + (8,020 aggregate burden hours for small broker-dealers) = 131,320 total aggregate burden hours.

    549 This estimate is based on the following calculation: ($9.70 million in aggregate costs for large broker-dealers) + ($15.1 million in aggregate costs for small broker-dealers) = $24.80 million total aggregate costs.

    (2) Ongoing Costs and Burdens

    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.550 Because we assume that large broker-dealers would rely on internal personnel to update policies and procedures on an ongoing basis, we do not believe large broker-dealers would incur ongoing costs.

    550 This estimate is based on the following calculation: (12 burden hours per large broker-dealer) × (2,055 large broker-dealers) = 24,660 aggregate ongoing burden 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.551 The projected aggregate, annual ongoing cost for outside legal counsel to update policies and procedures for small broker-dealers would be $1.89 million.552 In addition, we expect that small broker-dealers would require five hours of outside compliance services per year to update their policies and procedures, for an ongoing cost of $1,490 per year,553 and an aggregate ongoing cost of $1.19 million.554 The total aggregate, ongoing cost for small broker-dealers is therefore projected at $3.08 million per year.555

    551 This estimate is based on the following calculation: (5 hours per small broker-dealer) × ($472/hour for outside counsel services) = $2,360 in outside counsel costs.

    552 This estimate is based on the following calculation: ($2,360 in outside counsel costs per small broker-dealer) × (802 small broker-dealers) = $1.89 million in aggregate, ongoing outside legal costs.

    553 Based on industry sources, Commission staff preliminarily estimates that the average hourly rate for compliance services in the securities industry is $298/hour. This cost estimate is based on the following calculation: (5 hours of review) × ($298/hour for outside compliance services) = $1,490 in outside compliance service costs.

    554 This estimate is based on the following calculation: ($1,490 in outside compliance costs per small broker-dealer) × (802 small broker-dealers) = $1.19 million in aggregate, ongoing outside compliance costs.

    555 This estimate is based on the following calculation: ($1.89 million for outside legal counsel costs) + ($1.19 million for outside compliance costs) = $3.08 million total aggregate ongoing costs.

    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.556

    556 This estimate is based on the following calculation: (5 hours compliance manager review per small broker-dealer) × (802 small broker-dealers) = 4,010 aggregate ongoing burden hours.

    We therefore estimate the total ongoing aggregate ongoing burden to be 28,670 hours,557 and the total ongoing aggregate cost to be $3.08 million per year.558

    557 This estimate is based on the following calculation: (24,660 aggregate ongoing burden hours for large broker-dealers) + (4,010 aggregate ongoing burden hours for small broker-dealers) = 28,670 total aggregate ongoing burden hours.

    558 This estimate is based on the following calculation: ($3.08 million per year in total aggregate ongoing costs for small broker-dealers) + ($0 projected ongoing costs for large broker-dealers) = $3.08 million per year in total aggregate ongoing costs.

    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.

    b. Identification of Material Conflicts of Interest (1) Initial Costs and Burdens

    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.559 For purposes of this analysis, we understand that most broker-dealers already have an existing technological infrastructure in place, and we assume that such infrastructure would need to be modified to effect compliance with Regulation Best Interest.

    559See supra Section II.D.3.c.

    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 $5,400.560 We additionally project that coordination between the programmer and the broker-dealer's compliance manager would involve five burden hours. The aggregate costs and burdens for the modification of existing technology to identify conflicts of interest would therefore be $15.43 million,561 and 14,285 burden hours.562

    560 Based on industry sources, Commission staff preliminarily estimates that the average hourly rate for technology services in the securities industry is $270. This cost estimate is based on the following calculation: (20 hours of review) × ($270/hour for technology services) = $5,400 in outside programmer costs.

    561 This cost estimate is based on the following calculation: ($5,400 in outside programmer costs per broker-dealer) × (2,857 retail broker-dealers) = $15.43 million in aggregate outside programmer costs.

    562 This burden estimate is based on the following calculation: (5 burden hours) × (2,857 broker-dealers) = 14,285 aggregate burden hours.

    We additionally believe that the determination whether the conflicts of interest, once identified, are material, would require approximately five hours per broker-dealer,563 for an aggregate of 14,285 burden hours for all broker-dealers.564 The total aggregate burden for the identification of material conflicts is 28,570 hours.565

    563 This burden estimate consists of 2.5 hours for review by a senior business analyst, and 2.5 hours for review by in-house compliance manager.

    564 This burden estimate is based on the following calculation: (5 burden hours) × (2,857 broker-dealers) = 14,285 aggregate burden hours.

    565 This burden estimate is based on the following calculation: (14,285 burden hours for modification of technology) + (14,285 burden hours for evaluation of conflict materiality) = 28,570 total aggregate burden hours.

    (2) Ongoing Costs and Burdens

    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. However, for purposes of this analysis, we assume that broker-dealers would, at a minimum, engage in a material conflicts identification process on an annual basis.566 We estimate that a broker-dealer's business line and compliance personnel would jointly spend, on average, 10 hours 567 to perform an annual conflicts review using the modified technology infrastructure. Therefore the aggregate, ongoing burden for an annual conflicts review, based on an estimated 2,857 retail broker-dealers, would be approximately 28,570 burden hours.568 Because we assume that broker-dealers would use in-house personnel to identify and evaluate new, potential conflicts, we do not believe they would incur additional ongoing costs.

    566 Analogously, FINRA rules set an annual supervisory review as a minimum threshold for broker-dealers. See, e.g., FINRA Rules 3110 (requiring an annual review of the businesses in which the broker-dealer engages); 3120 (requiring an annual report detailing a broker-dealer's system of supervisory controls, including compliance efforts in the areas of antifraud and sales practices); and 3130 (requiring each broker-dealer's CEO or equivalent officer to certify annually to the reasonable design of the policies and procedures for compliance with relevant regulatory requirements).

    567 This burden estimate consists of 5 hours for review by a senior business analyst, and 5 hours for review by an in-house compliance counsel or compliance manager.

    568 This estimate is based on the following calculation: (10 hours of labor per retail broker-dealer) × (2,857 retail broker-dealers) = 28,570 aggregate burden hours.

    c. Training

    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.

    (1) Initial Costs and Burdens

    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 $21,600,569 for an aggregate initial cost of $61.7 million.570

    569 This estimate is based on the following calculation: ((20 hours of labor for a systems analyst) × ($270/hour)) + ((40 hours of labor for a programmer) × ($270/hour)) + ((20 hours of labor for a programmer analyst) × ($270/hour)) = $21,600 in external technology service costs per broker-dealer. As noted above, the $270 estimated average hourly rate for technology services is based on industry sources.

    570 This estimate is based on the following calculation: (2,857 broker-dealers) × ($21,600 cost per broker-dealer) = $61.7 million in aggregate costs for technology services.

    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.571

    571 This estimate is based on the following calculation: (2,857 broker-dealers) × (4 burden hours per broker-dealer) = 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.572 The total aggregate burden to approve the training module and implement the training program would be 446,699 burden hours.573

    572 This estimate is based on the following calculation: (1 burden hour) × (435,071 registered representatives at standalone or dually-registered broker-dealers) = 435,071 aggregate burden hours. Conversely, (435,071 aggregate burden hours)/(2,857 retail broker-dealers) = 152.3 initial burden hours per broker-dealer.

    573 This estimate is based on the following calculation: (435,071 burden hours for training of registered representatives) + (11,428 burden hours to approve training program) = 446,699 total aggregate burden hours.

    (2) Ongoing Costs and Burdens

    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.574

    574 This estimate is based on the following calculation: (1 burden hour) × (435,071 registered representatives at standalone or dually-registered broker-dealers) = 435,071 burden hours. Conversely, (435,071 aggregate burden hours)/(2,857 retail broker-dealers) = 152.3 initial burden hours per broker-dealer.

    2. Disclosure Obligation

    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.

    a. 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

    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.

    (1) Disclosure of Capacity

    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 the retail customer with the Relationship Summary in the manner prescribed by the rules and guidance in the Relationship Summary Proposal.575

    575See Relationship Summary Proposal.

    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.

    (2) Disclosure of Fees, Charges, and Types/Scope of Services

    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.

    b. Obligation To Reasonably Disclose in Writing All Material Conflicts of Interest That Are Associated With the Recommendation

    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.576

    576 The costs and burdens arising from the obligation to identify all material conflicts of interest that are associated with the recommendation are addressed above, in the context of the Conflict of Interest Obligation, in Section V.B.1.

    c. Estimated Costs and Burdens (1) Disclosure of Capacity, Type and Scope of Services

    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.

    i. Initial 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 577 to draft language regarding capacity for inclusion in the standardized account disclosure that is delivered to the retail customer.578

    577 The 10 hour estimate includes 5 hours for in-house counsel to draft and review the standardized language, and 5 hours for consultation and review of compliance personnel.

    578 As discussed above, the following estimates include the burdens and costs that broker-dealers would incur in drafting standardized account disclosure language related to capacity, scope and terms of the relationship on behalf of their dually-registered representatives. For purposes of this analysis, the Commission assumes that broker-dealers would undertake these tasks on behalf of their registered representatives.

    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.579 For the estimated 360 dually-registered firms with retail business,580 we project an aggregate initial burden of 3,600 hours,581 and $1.7 million in aggregate initial costs.582

    579 This estimate is based on the following calculation: (10 hours for outside counsel review/drafting) × ($472/hour for outside counsel services) = $4,720 in initial outside counsel costs.

    580See supra Section IV.B.1.a, at Table 1, Panel B.

    581 This estimate is based on the following calculation: (360 dually-registered retail firms) × (10 hours) = 3,600 initial aggregate burden hours.

    582 This estimate is based on the following calculation: (360 dually-registered retail firms) × ($4,720 in external cost per firm) = $1.7 million in aggregate initial costs.

    Similarly, to comply with proposed Regulation Best Interest, standalone broker-dealers would likely draft standardized language for inclusion in the account disclosure to provide the retail customer with more specific information regarding the types and scope of services that they provide. We expect that the associated costs and burdens would differ between small and large broker-dealers, as large broker-dealers generally offer more products and services and therefore would need to potentially evaluate a larger number of products and services.

    Given these assumptions, we estimate that a small broker-dealer would incur an internal initial burden of 10 hours for in-house counsel and in-house compliance personnel to draft this standardized language.583 In addition, a small broker-dealer would incur an estimated external cost of $4,720 for the assistance of outside counsel in the preparation and review of this standardized language.584 For the estimated 802 small broker-dealers,585 we project an aggregate initial burden of 8,020 hours,586 and aggregate initial costs of $3.79 million.587

    583 The 10 hour estimate includes 5 hours for in-house counsel to draft and review the standardized language, and 5 hours for consultation and review of compliance personnel.

    584 This estimate is based on the following calculation: (10 hours for outside counsel review/drafting) × ($472/hour for outside counsel services) = $4,720 in initial outside counsel costs.

    585See supra note 538 and accompanying text.

    586 This estimate is based on the following calculation: (802 small broker-dealers) × (10 hours per small broker-dealer) = 8,020 aggregate burden hours.

    587 This estimate is based on the following calculation: (802 small broker-dealers) × ($4,720 in external cost per small retail firm) = $3.79 million in aggregate initial costs.

    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.588 A large broker-dealer would also incur an estimated cost of $7,080 for the assistance of outside counsel in the preparation and review of this standardized language.589 For the estimated 2,055 large retail broker-dealers, we estimate an aggregate initial burden of 41,100 hours,590 and $14.55 million in aggregate initial costs.591

    588 The 20 hour estimate includes 10 hours for in-house counsel to draft and review the standardized language, and 10 hours for consultation and review of compliance personnel.

    589 This estimate is based on the following calculation: (15 hours for outside counsel review/drafting) × ($472/hour for outside counsel services) = $7,080 in initial outside counsel costs.

    590 This estimate is based on the following calculation: (2,055 large broker-dealers) × (20 burden hours) = 41,100 aggregate initial burden hours.

    591 This estimate is based on the following calculation: (2,055 large broker-dealers) × ($7,080 initial outside counsel costs) = $14.55 million in aggregate initial costs.

    We estimate that all broker-dealers would each incur approximately 0.02 burden hour 592 for delivery of the account disclosure document.593 Based on FOCUS data, we estimate that the 2,857 broker-dealers that report retail activity have approximately 128 million customer accounts, and that approximately 74.4%, or 95.2 million, of those accounts belong to retail customers.594 We therefore estimate that broker-dealers would have an aggregate initial burden of 1,904,000 hours, or approximately 666 hours 595 per broker-dealer for the first year after the rule is in effect.596

    592 This is the same estimate the Commission makes in the Relationship Summary Proposing Release. It is also the same estimate the Commission made in the Amendments to Form ADV Adopting Release, and for which we received no comment. See Amendments to Form ADV, 17 CFR parts 275 and 279 at 49259. We expect that delivery requirements will be performed by a general clerk. The general clerk's time is included in the initial burden estimate.

    593 As noted above, for new retail customers, we expect delivery to occur at the inception of the relationship; for existing customers, we expect delivery to occur prior to or at the time of a recommendation.

    594 The 2,857 broker-dealers (including dual registrants) with retail customers report 128 million customer accounts. See Section IV.B.1.a, Table 1, Panel B. Assuming the amount of retail customer accounts is proportionate to the percentage of broker-dealers that have retail customers, or 74.4% of broker-dealers, then the number of retail customer accounts would be 74.4% of 128 million accounts = 95.2 million retail customer accounts. This number likely overstates the number of deliveries to be made due to the double-counting of deliveries to be made by dual registrants to a certain extent, and the fact that one customer may own more than one account.

    595 These estimates are based on the following calculations: (0.02 hours per customer account × (95.2 million retail customer accounts) = 1,904,000 aggregate burden hours. Conversely, (1,904,000 hours)/(2,857 broker-dealers) = approximately 666 burden hours per broker-dealer.

    596 We estimate that broker-dealers will not incur any incremental postage costs because we assume that they will make such deliveries with another mailing the broker-dealer was already delivering to retail customers.

    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.597 We estimate a total initial aggregate cost of $20.04 million.598

    597 This estimate is based on the following calculation: (3,600 aggregate initial burden hours for dual registrants) + (8,020 aggregate initial burden hours for small broker-dealers) + (41,000 burden hours for large broker-dealers) + (1,904,000 aggregate initial burden hours for all broker-dealers to deliver the account disclosures) = 1,956,620 total aggregate initial burden hours.

    598 This estimate is based on the following calculation: ($1.7 million in initial aggregate costs for dual registrants) + ($3.79 in initial aggregate costs for small broker-dealers) + ($14.55 million in initial aggregate costs for large broker-dealers) = $20.04 million in total initial aggregate costs.

    ii. Ongoing Burdens

    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.599

    599 This estimate is based on the following calculation: (7 burden hours per dually-registered firm per year) × (360 dually-registered broker-dealers) = 2,520 ongoing aggregate burden 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.600

    600 This estimate is based on the following calculation: (4 burden hours per broker-dealer per year) × (802 small broker-dealers) = 3,208 ongoing aggregate burden hours.

    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.601

    601 This estimate is based on the following calculation: (20 burden hours per broker-dealer per year) × (2,055 large broker-dealers) = 41,100 ongoing aggregate burden hours.

    With respect to delivery of the amended account agreements in the event of material changes to the capacity disclosure or disclosure related to types and scope of services, we estimate that this would take place among 20% of a broker-dealer's retail customer accounts annually. We therefore estimate broker-dealers to incur a total annual aggregate burden of 380,800 hours, or 133 hours per broker-dealer.602

    602 (20%) × (95.2 million retail customer accounts) × (.02 hours for delivery to each customer account) = 380,800 aggregate burden hours. Conversely, 380,800 aggregate burden hours/2,857 broker-dealers = 133 burden hours per broker-dealer.

    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.603

    603 This estimate is based on the following calculation: (2,520 ongoing aggregate burden hours for dually-registered broker-dealers) + (3,280 ongoing aggregate burden hours for small broker-dealers) + (41,100 ongoing aggregate burden hours for large broker-dealers) + (380,800 ongoing aggregate burden hours for delivery of amended account disclosures) = 427,700 total ongoing aggregate burden hours.

    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.

    (2) Disclosure of Fees

    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.

    i. Initial Costs/Burdens

    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 604 and $4,720 for larger broker-dealers for outside counsel to review the fee schedule.605 We therefore estimate the initial aggregate burden for small broker-dealers to be 4,010 burden hours,606 and the initial aggregate cost to be $1.89 million.607 We estimate the aggregate burden for large broker-dealers to be 20,550 burden hours,608 and the aggregate cost to be $9.7 million.609

    604 This cost estimate is based on the following calculation: (5 hours of review) × ($472/hour for outside counsel services) = $2,360 outside counsel costs.

    605 This cost estimate is based on the following calculation: (10 hours of review) × ($472/hour for outside counsel services) = $4,720 outside counsel costs.

    606 This estimate is based on the following calculation: (5 burden hours of review per small broker-dealer) × (802 small broker-dealers) = 4,010 aggregate initial burden hours.

    607 This estimate is based on the following calculation: ($2,360 for outside counsel costs per small broker-dealer) × (802 small broker-dealers) = $1.89 million in aggregate initial outside costs.

    608 This estimate is based on the following calculation: (10 burden hours of review per large broker-dealer) × (2,055 large broker-dealers) = 20,550 aggregate initial burden hours.

    609 This estimate is based on the following calculation: ($4,720 for outside counsel costs per large broker-dealer) × (2,055 large broker-dealers) = $9.70 million in aggregate initial costs.

    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.610 As stated above, we estimate that the 2,857 broker-dealers that report retail activity have approximately 128 million customer accounts, and that approximately 74.4%, or 95.2 million, of those accounts belong to retail customers.611 We therefore estimate that a broker-dealer will have an aggregate initial burden of 380,800 hours, or approximately 133 hours per broker-dealer for the first year after the rule is in effect.612

    610See supra note 592.

    611See supra note 593.

    612 This estimate is based on the following calculation: (20%) × (95.2 million retail customer accounts) × (.02 hours for delivery to each customer account) = 380,800 aggregate burden hours. Conversely, (380,800 aggregate burden hours)/(2,857 broker-dealers) = 133 burden hours per broker-dealer.

    The total aggregate initial burden for broker-dealers is therefore estimated at 405,360 613 hours, and the total aggregate initial cost is estimated at $11.59 million.614

    613 This estimate is based on the following calculations: (4,010 aggregate burden hours for small broker-dealers) + (20,550 burden hours for large broker-dealers) + (380,800 burden hours for delivery) = 405,360 total aggregate initial burden hours.

    614 This estimate is based on the following calculation: ($1.89 million for small broker-dealer costs) + ($9.7 million large broker-dealer costs) = $11.59 million in total aggregate costs.

    ii. Ongoing Costs/Burdens

    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 615 and 8,220 hours for large broker-dealers.616 We do not anticipate that small or large broker-dealers would incur outside legal, compliance, or consulting fees in connection with updating their standardized fee schedule since in-house personnel would be more knowledgeable about these facts, and we therefore do not expect external costs associated with updating the fee schedule.

    615 This estimate is based on the following calculation: (2 burden hours per broker-dealer) × (802 small broker-dealers) = 1,604 aggregate burden hours.

    616 This estimate is based on the following calculation: (4 burden hours per broker-dealer) × (2,055 large broker-dealers) = 8,220 aggregate burden hours.

    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.617

    617 This estimate is based on the following calculation: (40% of 95.2 million retail customer accounts) × (.02 hours) = 761,600 aggregate burden hours. Conversely, (761,600 aggregate burden hours)/(2,857 broker-dealers) = 267 burden 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.

    (3) Disclosure of Material Conflicts of Interest

    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.

    i. Initial Costs and Burdens

    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.618 We also assume for purposes of this PRA analysis that broker-dealers would update and deliver the standardized conflict disclosure document yearly on an ongoing basis, following the broker-dealer's annual conflicts review process.619

    618 As noted above, we assume that delivery for new customers would occur at the inception of the relationship, and that delivery for existing customers would occur prior to or at the time a recommendation is made.

    619 However, as discussed above, we recognize that broker-dealers might choose to disclose material conflicts of interest on an as-needed basis, and might take a layered approach to disclosure, as opposed to a standardized conflict disclosure document. We request comment on whether broker-dealers may choose to take a layered approach to disclosure and the associated costs of burdens.

    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.620 We additionally estimate an initial cost of $2,360 per small broker-dealer,621 and an aggregate initial cost of $1.89 million for all small broker-dealers.622

    620 This estimate is based on the following calculation: (5 hours) × (802 small broker-dealers) = 4,010 aggregate burden hours.

    621 This estimate is based on the following calculation: ($472/hour) × (5 hours) = $2,360 in initial costs.

    622 This estimate is based on the following calculation: ($472/hour × 5 hours) × (802 broker-dealers) = $1.89 million in aggregate initial costs.

    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.623 We additionally estimate initial costs of $3,540 per broker-dealer,624 and an aggregate cost for large broker-dealers of approximately $7.27 million.625

    623 This estimate is based on the following calculation: (7.5 hours × 2,055 large broker-dealers) = 15,413 burden hours.

    624 This estimate is based on the following calculation: ($472/hour) × (7.5 hours) = $3,540 in initial costs.

    625 This estimate is based on the following calculation: ($472/hour) × (7.5 hours × 2,055 large broker-dealers) = $7.27 million in aggregate costs.

    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.626 We therefore estimate that broker-dealers would incur an aggregate initial burden of 1,904,000 hours, or approximately 666 hours per broker-dealer for delivery of the standardized conflict disclosure document the first year after the rule is in effect.627

    626See supra note 592. For purposes of this PRA analysis, we have assumed any initial disclosures made by the broker-dealer related to material conflicts of interest would be delivered together.

    627 These estimates are based on the following calculations: (0.02 hours per customer account × 95.2 million retail customer accounts) = 1,904,000 aggregate burden hours. Conversely, (1,904,000 hours)/(2,857 broker-dealers) = 666 burden hours per broker-dealer.

    ii. Ongoing Costs and Burdens

    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.628 For large broker-dealers, we estimate that the ongoing, annual burden would be 2 hours for each broker-dealer: 1 hour for compliance personnel and 1 hour for legal personnel. We therefore estimate the ongoing, aggregate burden for large broker-dealers to be approximately 4,110 burden hours.629 We do not anticipate that small or large broker-dealers would incur outside legal, compliance, or consulting fees in connection with updating their standardized conflict disclosure document, since in-house personnel would presumably be more knowledgeable about conflicts of interest.

    628 This estimate is based on the following calculation: (1 hour per broker-dealer) × (802 small broker-dealers) = 802 aggregate burden hours.

    629 This estimate is based on the following calculation: (2 hours per broker-dealer) × (2,055 large broker-dealers) = 4,110 aggregate burden 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.630 We therefore estimate that broker-dealers would incur an aggregate ongoing burden of 761,600 hours, or 267 burden hours per broker-dealer.631

    630 The Commission estimates that broker-dealers would update fees and material conflicts of interest disclosure more frequently than disclosure related to capacity or type and scope of services.

    631 This estimate is based on the following calculation: (40% of 95.2 million retail customer accounts) × (.02 hours) = 761,600 aggregate burden hours. Conversely, (761,600 aggregate burden hours)/(2,857 broker-dealers) = 267 hours per broker-dealer.

    3. Care Obligation

    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).

    4. Record-Making and Recordkeeping Obligations

    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.

    a. Record-Making

    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.632

    632 The PRA burdens and costs arising from the requirement that a record be made of all information provided to the retail customer are accounted for in proposed Regulation Best Interest and the Relationship Summary Proposal. With respect to the requirement that a record be made of all information from the retail customer, we believe that proposed Rule 17a-3(a)(25) would not impose any new substantive burdens on broker-dealers. As discussed above, we believe that the obligation to exercise reasonable diligence, care, skill and prudence would not require a broker-dealer to collect additional information from the retail customer beyond that currently collected in the ordinary course of business even though a broker-dealer's analysis of that information and any resulting recommendation would need to adhere to the enhanced best interest standard of Regulation Best Interest. See supra Section II.D.2.

    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.

    (1) Initial Costs and Burdens

    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 $378,544.633 For broker-dealers that are not small entities, we estimate that the initial burden would be 2 hours for each broker-dealer: 1 hour for compliance personnel and 1 hour for legal personnel. We therefore believe the initial aggregate burden for broker-dealers that are not small entities would be approximately 4,110 burden hours.634 Finally, we estimate it would require an additional 0.04 hours for the registered representative responsible for the information (or other clerical personnel) to fill out that information in the account disclosure document, for an approximate total aggregate initial burden of 3,808,000 hours, or approximately 1,333 hours per broker-dealer for the first year after the rule is in effect.635 Because we have already included the costs and burdens associated with the delivery of the amended account disclosure document above, we need not include them in this section of the analysis.

    633 This estimate is based on the following calculation: (1 hour per small broker-dealer) × (802 small broker-dealers) × ($472/hour) = $378,544 in aggregate costs.

    634 This estimate is based on the following calculation: (2 burden hours per broker-dealer) × (2,055 large broker-dealers) = 4,110 aggregate burden hours.

    635 These estimates are based on the following calculations: (0.04 hours per customer account) × (95.2 million retail customer accounts) = 3,808,000 aggregate burden hours. Conversely, (3,808,000 burden hours)/(2,857 broker-dealers) = 1,333 hours per broker-dealer.

    (2) Ongoing Costs and Burdens

    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).

    b. Recordkeeping Obligations

    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.

    (1) Initial Costs and Burdens

    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, broker-dealers are already required to maintain documents such as account blotters and ledgers for six years.

    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.636 We do not believe there would be additional internal or external costs relating to the uploading or filing of the documents, nevertheless, we request comment on this assumption and whether the new requirements would pose additional costs, for example, relating to storage space for paper or relating to additional electronic database storage space. In addition, because we have already included the costs and burdens associated with the delivery of the amended account opening agreement and other documents above, we do not include them in this section of the analysis.

    636 This estimate is based on the following calculation: (5 documents per customer account) × (95.2 million retail customer accounts) × (2 minutes per document)/60 minutes = 15,866,667 aggregate burden hours.

    (2) Ongoing Costs and Burdens

    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.637 We do not believe that the ongoing costs associated with ensuring compliance with the retention schedule would change from the current costs of ensuring compliance with existing Rule 17a-4 and as outlined above. However, we request comment regarding both the frequency with which a broker-dealer would need to collect, provide, replace, or update the records made pursuant to the proposed amendment to Rule 17a-3(a)(25), and also on whether there would be additional costs relating to ensuring compliance with record retention and retention schedules pursuant to Rule 17a-4.

    637 This estimate is based on the percentage of account records we expect would be updated each year as described in Section V.B.2, supra, and the following calculation: (40% of fee schedules × 95.2 million retail customer accounts) × (2 minutes per document) + (40% of conflict disclosure forms × 95.2 million retail customer accounts) × (2 minutes per document) + (20% of account opening documents × 95.2 million retail customer accounts) × (2 minutes per document) = 3,173,334 aggregate ongoing burden hours.

    C. Collection of Information Is Mandatory

    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.

    D. Confidentiality

    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.

    E. Request for Comment

    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.

    VI. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or “SBREFA,” 638 the Commission must advise the OMB as to whether the proposed regulation constitutes a “major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results or is likely to result in:

    638 Public Law 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601).

    • 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.

    VII. Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (“RFA”) 639 requires federal agencies, in promulgating rules, to consider the impact of those rules on small entities. Section 603(a) 640 of the Administrative Procedure Act,641 as amended by the RFA, generally requires the Commission to undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to determine the impact of such rulemaking on “small entities.” 642 Under Section 605(b) of the RFA, a federal agency need not undertake a regulatory flexibility analysis of proposed rules where, if adopted, they would not have a significant economic impact on a substantial number of small entities.643

    639 5 U.S.C. 601 et seq.

    640 5 U.S.C. 603(a).

    641 5 U.S.C. 551 et seq.

    642 Although Section 601(b) of the RFA defines the term “small entity,” the statute permits agencies to formulate their own definitions. The Commission has adopted definitions for the term small entity for the purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this proposed rulemaking, are set forth in Rule 0-10 under the Exchange Act, 17 CFR 240.0-10.

    643See 5 U.S.C. 605(b).

    A. Reasons for and Objectives of the Proposed Action

    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,644 and further establishing obligations under the Exchange Act that require mitigation, and not just disclosure, of conflicts of interest arising from financial incentives, and thus helps to reduce the potential harm resulting from such conflicts; (2) help retail customers evaluate recommendations received from broker-dealers, as well as address confusion regarding the broker-dealer relationship structure, by improving the disclosure of information regarding broker-dealer conflicts of interest and the material facts relating to scope and terms of the relationship with the retail customer; (3) facilitate more consistent regulation of substantially similar activity, particularly across retirement and non-retirement assets held at broker-dealers, and in this manner help to reduce investor confusion; (4) better align the legal obligations of broker-dealers with investors' reasonable expectations; and (5) help preserve investor choice and access to affordable investment advice and products that investors currently use. Each of these objectives is discussed in more detail in Section I.B., supra.

    644See supra note 7.

    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,645 while the Proposed Amendment to Rule 17a-4(e)(5) would impose new record retention obligations on broker-dealers subject to Regulation Best Interest.646

    645 As described in Section II.E. supra, the Commission is 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.

    646 As described in Section II.E. supra, the Commission is proposing to amend Exchange Act Rule 17a-4(e)(5) to require broker-dealers to retain a record of all information collected from and provided to the retail customer pursuant to Rule 17a-3(a)(25), in addition to the existing requirement to retain information obtained pursuant to Rule 17a-3(a)(17). As a result, broker-dealers would be required to retain all of the information collected from or provided to each retail customer pursuant to Regulation Best Interest for six years.

    B. Legal Basis

    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 § 240.15l-1, to amend § 240.17a-3 by adding new paragraph (a)(25), and to revise § 240.17a-4(e)(5) of Title 17 of the Code of Federal Regulations.

    C. Small Entities Subject to the Proposed Rule

    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,647 or, if not required to file such statements, had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small business or small organization.648

    647See 17 CFR 240.17a-5(d).

    648See 17 CFR 240.0-10(c).

    As discussed in Section V, supra, the Commission estimates that approximately 2,857 retail broker-dealers would be subject to Regulation Best Interest and the proposed amendment to Rules 17a-3 and 17a-4. Based on FOCUS Report data,649 the Commission estimates that as of December 31, 2017, approximately 802 of those retail broker-dealers might be deemed small entities for purposes of this analysis.650 For purposes of this RFA analysis, we refer to broker-dealers that might be deemed small entities under the RFA as “small entities,” and we continue to use the term “broker-dealers” to refer to broker-dealers generally, as the term is used elsewhere in this release.651

    649See note 538, supra.

    650 According to the FOCUS data, there are 1,040 broker-dealers that might be deemed small entities, but only 77% of those small entities (802 firms) have retail business and would be subject to Regulation Best Interest and the proposed amendments to Rules 17a-3 and 17a-4.

    651 Consistent with the PRA, unless otherwise noted, we use the terms “registered representative” and “dually registered representative of a broker-dealer” herein. See supra note 534.

    D. Projected Compliance Requirements of the Proposed Rule for Small Entities

    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.

    1. Conflict of Interest Obligations

    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.652

    652 For a discussion of additional costs and burdens, as well as monetized burdens, related to the Conflict of Interest Obligation, see supra Section IV.C.2.d.

    a. Written Policies and Procedures

    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.653 We additionally believe in-house legal counsel would require 10 hours to review and approve the updated policies and procedures, for an aggregate burden of 8,020 hours.654 We preliminarily believe that the related ongoing costs for small entities (relating to reviewing and updating policies and procedures on a periodic basis outside) would be $3,850 655 annually for each small entity, and the projected ongoing, aggregate annualized cost for small entities (relating to outside legal counsel and outside compliance consulting services) would be $3.08 million.656 In addition, we believe that small entities would incur approximately five hours internal burden for in-house compliance manager to review and approve the updated policies and procedures per year, for an aggregate annual burden of 4,010 hours for all small entities.657

    653See supra notes 545 and 546.

    654See supra note 547.

    655 This estimate is based on the following calculation: ($2,360 for five hours of outside legal counsel review) + ($1,490 for five hours of outside compliance consulting services) = $3,850. See supra notes 551 and 553, and accompanying text.

    656See supra note 555.

    657See supra note 556.

    b. Identification of Material Conflicts of Interest

    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.658 Acknowledging that costs and burdens may vary greatly according to the size of the small entity, we expect that the modification of a small entity'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 small entity of $5,400.659 We additionally project that coordination between the senior programmer and the small entity's compliance manager would involve five burden hours. The aggregate costs and burdens on small entities for the modification of existing technology to identify conflicts of interest would therefore be $4.33 million,660 and 4,010 burden hours.661

    658See supra Section V.B.1.b.(1).

    659See supra note 560.

    660 This cost estimate is based on the following calculation: (20 hours of review) × ($270/hour for technology services) × (802 small entities) = $4.33 million.

    661 This burden estimate is based on the following calculation: (5 burden hours) × (802 small entities) = 4,010 burden hours.

    We additionally believe that the determination whether the conflicts of interest, once identified, are material, would require approximately five hours per small entity,662 for an aggregate total of 4,010 burden hours for small entities.663

    662See supra note 563.

    663 This burden estimate is based on the following calculation: (5 burden hours) × (802 small entities) = 4,010 burden hours.

    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 664 to perform an annual conflicts review using the modified technology infrastructure. Therefore the aggregate, ongoing burden for an annual conflicts review, based on an estimated 802 small entities, would be approximately 8,020 burden hours.665

    664See supra note 567.

    665 This estimate is based on the following calculation: (10 hours of labor per retail broker-dealer) × 802 small entities = 8,020 burden hours. The Commission recognizes that the types of services and product offerings vary greatly by broker-dealer. See supra Section V.D.1.b(2).

    c. Training

    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.666 The total cost for a small entity to develop the training module would be approximately $21,600,667 for an aggregate cost of $17.32 million.668

    666See supra Section V.B.1.c.(1).

    667See supra note 569.

    668 This estimate is based on the following calculation: (802 small entities) × ($21,600 cost per broker-dealer) = $17.32 million.

    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.669 The aggregate burden for small entities would be estimated at 3,208 burden hours.670

    669See supra Section V.B.1.c.(1).

    670 This estimate is based on the following calculation: (802 small entities) × (4 burden hours per small entity) = 3,208 burden hours.

    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.671

    671 This estimate is based on the following calculation: (1 burden hour) × (4,236 registered representatives at small entities) = 4,236 burden hours. See supra note 572.

    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.672

    672 This estimate is based on the following calculation: (1 burden hour) × (4,236 registered representatives at small entities) = 4,236 burden hours.

    2. Disclosure Obligations

    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.673

    673 For a discussion of additional costs and burdens, as well as monetized burdens, related to the Disclosure Obligation, see supra Section IV.C.2.b.

    a. Disclosure of Capacity, Type and Scope of Services

    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.674 In addition, dual-registrants would incur an estimated external cost of $4,720 for the assistance of outside counsel in the preparation and review of this standardized language.675 For the estimated 41 dually-registered small entities with retail business,676 we project an aggregate initial burden of 410 hours,677 and $193,520 in initial external costs.678

    674See supra note 577 and 578.

    675See supra note 579.

    676 This estimate is based on FOCUS data. See supra note 538.

    677 This estimate is based on the following calculation: (41 dually-registered small entities) × (10 burden hours) = 410 aggregate burden hours.

    678 This estimate is based on the following calculation: (41 dually-registered small entities) × ($4,720 in costs per small entity) = $193,520 in aggregate initial costs.

    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.679 In addition, small entities would incur an estimated external cost of $4,720 for the assistance of outside counsel in the preparation and review of this standardized language.680 For the estimated 802 small entities, we project an aggregate initial burden of 8,020 hours,681 and an initial aggregate $3.79 million in costs.682

    679See supra note 583.

    680See supra note 584.

    681See supra note 586.

    682See supra note 587.

    We estimate that small entities would each incur approximately 0.02 burden hour for delivery of the account disclosure document.683 Based on FOCUS data, we believe that the 802 small entities that report retail activity have a total of 10,545 customer accounts, and that approximately 74.4%, or 7,845, of those accounts belong to retail customers.684 We therefore estimate that small entities would incur an aggregate initial burden of 156.9 hours, 685 with each small entity incurring an initial burden of 0.2 hour for the first year after the rule is in effect.

    683See supra note 593.

    684See supra note 594. Assuming the percentage of retail customer accounts at small broker-dealers is consistent with the percentage of retail customer accounts at all broker-dealers, then the number of retail customer accounts would be 74.4% of 10,545 accounts = 7,845 accounts. This number might overstate the number of deliveries to be made due to the double-counting of deliveries to be made by dual registrants to a certain extent, and the fact that one customer may own more than one account.

    685 This estimate is based on the following calculation: (.02 hour) × (7,845 retail customer accounts) = 156.9 hours (aggregate)/802 small entities = 0.2 hour per small entity. We estimate that small entities will not incur any incremental postage costs because we assume that they will make such deliveries with another mailing the broker-dealer was already delivering to customers.

    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.686

    686 This estimate is based on the following calculation: (7 hours per small entity per year) × (41 dually-registered small entities) = 287 hours.

    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 entities for types and scope of services.687

    687See supra note 600.

    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,688 or .39 hours per small entity.689

    688 This estimate is based on the following calculation: (20%) × (7,845 total small entity retail customer accounts) × (.02 hours) = 313.8 hours.

    689 This estimate is based on the following calculation: (313.8 hours aggregate)/802 small entity broker-dealers = 0.39 hour.

    b. Disclosure of Fees

    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.690 We therefore estimate the initial aggregate burden for small entities to be 4,010 burden hours,691 and the aggregate cost to be $1.89 million.692

    690See supra note 604.

    691See supra note 606.

    692See supra note 607.

    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.693 As stated above, we estimate that the 802 small entities that report retail activity have approximately 7,845 retail customer accounts. We estimate that small entities will have an aggregate initial burden of 156.9 hours,694 or a burden of approximately 0.19 hour per small entity for the first year after the rule is in effect.695

    693See supra note 592.

    694 This estimate is based on the following calculation: (.02 hour per account) × (7,845 total small entity retail customer accounts) = 156.9 hours.

    695 These estimates are based on the following calculations: (156.9 aggregate hours)/802 small broker-dealers = 0.19 hours per small broker-dealer.

    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.696 We do not anticipate that small entities would incur outside legal, compliance, or consulting fees in connection with updating their standardized fee schedule since in-house personnel would be more knowledgeable about these facts, and therefore do not expect external costs associated with updating the fee schedule.

    696See supra note 615.

    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.697

    697 40% of 7,845 retail customer accounts × .02 hours = 62.76 aggregate hours. (62.76 hours)/(802 broker-dealers) = 0.07 hour per broker-dealer.

    c. Disclosure of Material Conflicts of Interest

    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.698 The initial external cost for a small entity is estimated at $2,360 per small entity.699 The aggregate, initial external cost for the development of a standardized conflict disclosure document, based on an estimated 802 small entities, would be approximately $1.89 million.700

    698 This estimate is based on the following calculation: (5 hours) × (802 small entities) = 4,010 aggregate burden hours.

    699 This estimate is based on the following calculation: ($472/hour) × (5 hours) = $2,360 in costs.

    700 This estimate is based on the following calculation: ($472/hour × 5 hours) × (802 small entities) = $1.89 million in aggregate costs.

    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.701 We therefore estimate that small entities would incur an aggregate initial burden of 156.9 hours 702 for delivery of the standardized conflict disclosure document, or 0.19 hour per small entity.

    701See supra note 592. We have assumed any initial disclosures made by the small entity related to material conflicts of interest would be delivered together, and therefore have not included delivery costs for initial delivery.

    702 This estimate is based on the following calculation: (0.02 hour) × (7,845 retail customer accounts at small entities) = 156.9 aggregate burden hours. Conversely, (156.9 burden hours)/(802 small entities) = 0.19 burden hour per small entity.

    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 703 to update the standardized conflict disclosure document.

    703 This estimate is based on the following calculation: (1 hour per small entity) × (802 small entities) = 802 aggregate burden hours.

    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.704 We therefore estimate that small entities would incur an annual aggregate burden of 62.76 burden hours, or 0.07 burden hour per small entity.705

    704 The Commission estimates that small entities would update disclosures regarding fees and material conflicts of interest more frequently than the disclosure related to capacity or type and scope of services.

    705 This estimate is based on the following calculation: (40% of 7,845 retail customer accounts at small entities) × (0.02 hours) = 62.76 burden hours. Conversely, (62.76 burden hours)/(802 small entities) = 0.07 hour per small entity.

    3. Obligation To Exercise Reasonable Diligence, Care, Skill and Prudence

    As discussed above in Section V.B.3., we believe that the obligation to exercise reasonable diligence, care, skill and prudence in making a recommendation would not impose additional costs or burdens on small entities.706

    706 For a discussion of additional costs and burdens, as well as monetized burdens, related to the Care Obligation, see supra Section IV.C.2.c.

    4. Record-Making and Recordkeeping Obligations

    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.707

    707 For a discussion of additional costs and burdens, as well as monetized burdens, related to Record-making and Recordkeeping, see supra Section IV.C.2.c.

    a. Record-Making Obligations

    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.708

    708 As discussed above, we believe that the obligation to exercise reasonable diligence, care, skill and prudence would not require a small entity to collect additional information from the retail customer beyond that currently collected in the ordinary course of business, although a small entity's analysis of that information and any resulting recommendation would need to adhere to the enhanced best interest standard of Regulation Best Interest. See supra Section II.D.2.

    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 $378,544.709 Finally, we estimate it would require an additional 0.04 hour for the registered representative responsible for the account (or other clerical personnel) to fill out that information in the account disclosure document, for an estimated total aggregate initial burden of 313.8 hours, or approximately 0.39 hour per small entity for the first year after the rule is in effect.710 Because we have already included the costs and burdens associated with the delivery of the account disclosure document above, we need not include them in this section of the analysis.

    709 This estimate is based on the following calculation: (1 hour per small entity) × (802 small entities) × ($472/hour) = $378,544 in aggregate costs.

    710 These estimates are based on the following calculations: (0.04 hour per customer account) × (7,845 customer accounts) = 313.8 aggregate burden hours. Conversely, (313.8 aggregate burden hours)/(802 small entities) = approximately 0.39 hour per small entity.

    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).

    b. Recordkeeping Obligations

    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.711 We do not believe there would be initial costs relating to the uploading or filing of the documents.712

    711 This estimate is based on the following calculation: (5 documents per retail customer account) × (7,845 retail customer accounts at small entities) × (2 minute per document) = 78,450 minutes/60 minutes = 1,307.5 burden hours. See supra note 636.

    712 As noted above, we request comment on this assumption and whether the new requirements would pose additional costs.

    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.713 As explained above, we do not believe the ongoing costs associated with the proposed amendment to Rule 17a-4(e)(5) would change from small entities' current costs of compliance with existing Rule 17a-4.714

    713 This estimate is derived from the percentage of records that we expect to be updated annually, as described in Section V.B.2. above, and based on the following calculation: (40% of fee schedules × 7,845 retail customer accounts) × (2 minutes per document) + (40% of conflict disclosures × 7,845 retail customer accounts) × (2 minutes per document) + (20% of account opening documents × 7,845 retail customer accounts) × (2 minutes per document) = 7,845 minutes/60 minutes = 261.5 burden hours.

    714 As noted above, we request comment regarding both the frequency with which a broker-dealer would need to collect, provide, replace or update the records made pursuant to the proposed amendment to Rule 17a-3(a)(25), and also whether there would be additional costs relating to ensuring compliance with the record retention and retention schedules pursuant to Rule 17a-4.

    E. Duplicative, Overlapping, or Conflicting Federal Rules

    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.715 However, we believe that the principles underlying Regulation Best Interest would not conflict with and are generally consistent with the principles underlying the DOL's approach under the DOL Fiduciary Rule and the related PTEs, specifically the BIC Exemption and the Principal Transactions Exemption.

    715See, e.g., supra Sections I.A.2, II.B.1.a.

    F. Significant Alternatives

    An RFA analysis requires a discussion of alternatives to the proposed rule that would minimize the impact on small entities while accomplishing the stated objectives of the applicable statutes. The analysis should include: (1) The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance and reporting requirements under the rule for such small entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of the rule, or any part thereof, for such small entities.

    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.716

    716See, e.g., PIABA Letter (“Firms overcharge investors, recommend higher fee share classes, recommend replacements of existing mutual funds and annuities, and recommend complex products with opaque fee structures. This conduct is not limited to one sector of the brokerage industry—it occurs in firms both large and small. Note further that the violations carry across the broad spectrum of investment types.”).

    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 (i.e., whether for retirement or non-retirement purposes) and better aligned with other advice relationships (e.g., a relationship with an investment adviser).717 Further, as discussed above, broker-dealers are subject to regulation under the Exchange Act and the rules of each SRO of which the broker-dealer is a member, including a number of obligations that attach when a broker-dealer makes a recommendation to a customer, as well as general and specific requirements aimed at addressing certain conflicts of interest. We note that these existing requirements do not generally distinguish between small entities and other broker-dealers.

    717See supra note 80 and accompanying text.

    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.718 Similarly, by not mandating the form, specific timing, or method for delivering disclosure pursuant to the Disclosure Obligation, we aim to provide broker-dealers flexibility in determining how to satisfy the Disclosure Obligation depending on each broker-dealer's business practices, consistent with the principles set forth supra Section II.D.1.c, 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.719 We believe that this flexibility reflects a general performance-based approach, rather than design-based approach in the proposal.

    718See Compliance Programs of Investment Companies and Investment Advisers, Advisers Act Release No. 2204 (Dec. 17, 2003), available at https://www.sec.gov/divisions/investment/advoverview.htm. See also RAND Study (reporting that the more numerous smaller firms tended to provide a more limited and focused range of either investment advisory or brokerage services, and the larger firms tended to engage in a much broader range of products and services, offering both investment advisory and brokerage services).

    719See supra note 206.

    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., supra.

    1. Disclosure-Only Alternative

    As an alternative, the Commission could have only the Disclosure Obligation, whereby broker-dealers would be obligated to disclose all material facts and conflicts.720 Under this alternative, the overall costs to small entities to comply with the requirements of the rule would be larger than those associated with currently required disclosure for broker-dealers in general, and such entities; however, the costs to comply would likely be lower relative to proposed Regulation Best Interest.

    720 As described more fully in Section IV.E., supra, 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.

    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.721

    721See supra Section IV.E.

    2. Principles-Based Alternative

    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.722 A principles-based standard of conduct would provide increased flexibility for small entities to tailor their recommendations to retail customers and could impose lower compliance costs on broker-dealers, including small entities, relative to the requirements of the proposed rule. This approach would also reflect an approach that is even more performance-based than the current proposal, as it would be less prescriptive.

    722 As discussed above, under a principles-based care obligation, broker-dealers would be required to continue to comply with the existing regulatory baseline, including disclosure obligations under the antifraud provisions of federal securities laws.

    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.723 Further, we preliminarily believe that a principles-based approach could increase liability costs for broker-dealers, including small entities, as a result of lack of clarity in the standard.

    723See supra Section IV.E.

    3. Enhanced Standards Akin to BIC Exemption

    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.724

    724Id.

    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.725

    725See, e.g., note 75 supra, and accompanying text. But see, notes 76-77, and accompanying text.

    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.726

    726Id.

    G. General Request for Comment

    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.

    VIII. Statutory Authority and Text of Proposed Rule

    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 § 240.15l-1, to amend § 240.17a-3 by adding new paragraph (a)(25), and to revise § 240.17a-4(e)(5) of Title 17 of the Code of Federal Regulations in the manner set forth below.

    List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

    Text of the Proposed Rules

    In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows:

    PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 1. The general authority citation for part 240 continues to read as follows and sectional authorities for section 240.15l-1 are added to read as follows: Authority:

    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 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.

    Section 240.15l-1 is also issued under Pub. L. 111-203, sec. 913, 124 Stat. 1376, 1827 (2010).

    2. Add § 240.15l-1 to read as follows:
    § 240.15l-1 Regulation Best Interest.

    (a) Best Interest Obligation. (1) A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer, shall 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 a broker or dealer making the recommendation ahead of the interest of the retail customer.

    (2) The best interest obligation in paragraph (a)(1) shall be satisfied if:

    (i) Disclosure Obligation. The broker, dealer, or natural person who is an associated person of a broker or dealer, prior to 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 with the retail customer, including all material conflicts of interest that are associated with the recommendation.

    (ii) Care 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:

    (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 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.

    (iii) Conflict of Interest Obligations.

    (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) Definitions. Unless otherwise provided, all terms used in this rule shall have the same meaning as in the [Securities Exchange Act of 1934]. In addition, the following definitions shall apply:

    (1) Retail Customer means a person, or the legal representative of such person, who: (A) 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

    (B) Uses the recommendation primarily for personal, family, or household purposes.

    (2) Retail Customer Investment Profile includes, but is not limited to, the retail customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the retail customer may disclose to the broker, dealer, or a natural person who is an associated person of a broker or dealer in connection with a recommendation.

    3. Amend § 240.17a-3 by adding new paragraph (a)(25) to read as follows:
    § 240.17a-3 Records to be made by certain exchange members, brokers and dealers.

    (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 § 240.15l-1, as well as the identity of each natural person who is an associated person, if any, responsible for the account.

    (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.

    4. Amend § 240.17a-4 by revising paragraph (e)(5) to read as follows:
    § 240.17a-4 Records to be preserved by certain exchange members, brokers and dealers.

    (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.

    Dated: April 18, 2018. Brent J. Fields, Secretary.
    [FR Doc. 2018-08582 Filed 5-8-18; 8:45 am] BILLING CODE 8011-01-P
    83 90 Wednesday, May 9, 2018 Proposed Rules Part V Department of Transportation Office of the Secretary 14 CFR Chapter II Aviation Economic Regulation Amendments; Proposed Rule DEPARTMENT OF TRANSPORTATION Office of the Secretary 14 CFR Chapter II [Docket No. DOT-OST-2014-0140] RIN 2105-AD86 Aviation Economic Regulation Amendments AGENCY:

    Office of the Secretary (OST), U.S. Department of Transportation (DOT).

    ACTION:

    Notice of Proposed Rulemaking (NPRM).

    SUMMARY:

    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.

    DATES:

    Comments must be received on or before July 9, 2018. Comments received after this date will be considered to the extent practicable.

    ADDRESSES:

    You may file comments identified by docket number DOT-OST-2014-0140 by any of the following methods:

    Federal eRulemaking Portal: Go to http://www.regulations.gov and follow the online instructions for submitting comments.

    Mail: Docket Operations Office, U.S. Department of Transportation, 1200 New Jersey Avenue SE, Room W12-140, Washington, DC 20590-0001.

    Hand Delivery or Courier: West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC, between 9 a.m. and 5 p.m., ET, Monday through Friday, except Federal Holidays.

    Fax: (202) 493-2251.

    Instructions: All submissions must include the agency name and docket number for this document at the beginning of the comment. To avoid duplication, please use only one of these four methods. All comments received will be posted without change to http://www.regulations.gov and will include any personal information you provide. All comments received will be posted without change to the Federal Docket Management System (FDMS), including any personal information.

    Privacy: In accordance with 5 U.S.C. 553(c), DOT solicits comments from the public to better inform its rulemaking process. DOT posts these comments, without edit, to www.regulations.gov, as described in the system of records notice, DOT/ALL-14 FDMS, accessible through www.dot.gov/privacy. In order to facilitate comment tracking and response, we encourage commenters to provide their name, or the name of their organization; however, submission of names is completely optional. Whether or not commenters identify themselves, all timely comments will be fully considered. If you wish to provide comments containing proprietary or confidential information, please contact the agency for alternate submission instructions.

    Docket: For internet access to the docket to read background documents or comments go to http://www.regulations.gov, or to the street address listed above. Follow the online instructions for accessing the dockets.

    FOR FURTHER INFORMATION CONTACT:

    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: [email protected] or [email protected].

    SUPPLEMENTARY INFORMATION:

    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 rule proposes to update part 223 by removing references to specific sections of the “Act” such as “under section 408 of the Act.” Additionally, in section 223.1, the term “handicapped passenger” is used to describe a person with a disability. However, under the Americans with Disabilities Act (ADA), the current practice is to use “person-first” terminology (e.g., changes “handicapped person” to “person with a disability”). Where applicable, as the Department reviews its regulations, the term “handicapped” would be replaced with the person-first terminology in alignment with the ADA. This rule proposes to remove the term “Handicapped passenger” and would replace it with the term “passenger with a disability.”

    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 time in the Office of Aviation Analysis. This rule proposes to expand the Director's authority to issue quarterly fuel rate adjustments to Alaskan bush and mainline mail rates and to issue certain procedural orders in antitrust immunity cases processed under 49 U.S.C. 41308 and 41309. This rule also proposes to remove paragraphs (f), (h), and (i) of section 385.12, as these requirements would be placed under the authority of the Director of the Office of International Aviation in section 385.13. Accordingly, subsections (g)-(k) would be re-designated.

    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 1 agreements under section 41309; this would be in addition to the Director's existing authority to approve or disapprove such agreements. This rule also proposes adding new subsections (z)-(dd) that would: (1) Authorize the Director to issue orders and notices adjusting the Standard Foreign Fare Level; (2) authorize the Director to issue notices updating the list of country-pair markets in tariff-filing categories under part 293 of this chapter; (3) give the Director assigned authority as to certain matters processed by the Office of International Aviation's U.S. Air Carrier Licensing/Special Authorities Division; and (4) add requirements moved from 385.12(f), 385.12(h), and 385.12(i).

    1 International Air Transport Association.

    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.

    Regulatory Analyses and Notices A. Executive Order 12866 and DOT Regulatory Policies and Procedures

    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.

    B. Executive Order 13771 (Reducing Regulation and Controlling Regulatory Costs)

    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.

    C. Regulatory Flexibility Act

    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.

    D. Executive Order 13132 (Federalism)

    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.

    E. Executive Order 13175

    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.

    F. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.) requires that DOT consider the impact of paperwork and other information collection burdens imposed on the public and, under the provisions of PRA section 3507(d), obtain approval from the Office of Management and Budget (OMB) for each collection of information it conducts, sponsors, or requires through regulations. The DOT has determined there are no new information collection requirements associated with this NPRM.

    G. National Environmental Policy Act

    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 et seq.) and has determined that it is categorically excluded pursuant to DOT Order 5610.1C, Procedures for Considering Environmental Impacts (44 FR 56420, Oct. 1, 1979). Categorical exclusions are actions identified in an agency's NEPA implementing procedures that do not normally have a significant impact on the environment and therefore do not require either an environmental assessment (EA) or environmental impact statement (EIS). The purpose of this rulemaking is to make editorial corrections, remove obsolete references, and update outdated provisions in the Department's aviation economic regulations. The agency does not anticipate any environmental impacts, and there are no extraordinary circumstances present in connection with this rulemaking.

    List of Subjects 14 CFR Part 200

    Air transportation.

    14 CFR Part 201

    Air carriers, Reporting and recordkeeping requirements.

    14 CFR Part 203

    Air carriers, Air transportation, Foreign relations, Insurance, Reporting and recordkeeping requirements.

    14 CFR Part 204

    Air carriers, Reporting and recordkeeping requirements.

    14 CFR Part 205

    Air carriers, Freight, Insurance, Reporting and recordkeeping requirements.

    14 CFR Part 207

    Air carriers, Charter flights.

    14 CFR Part 208

    Air carriers, Charter flights.

    14 CFR Part 211

    Administrative practice and procedure, Air carriers, Pacific Islands Trust Territory, Reporting and recordkeeping requirements.

    14 CFR Part 212

    Charter flights, Confidential business information, Reporting and recordkeeping requirements, Surety bonds.

    14 CFR Part 214

    Air carriers, Charter flights.

    14 CFR Part 215

    Air carriers, Reporting and recordkeeping requirements, Trade names.

    14 CFR Part 216

    Air carriers.

    14 CFR Part 217

    Air carriers, Reporting and recordkeeping requirements.

    14 CFR Part 218

    Air carriers, Aircraft, Airmen.

    14 CFR Part 221

    Air rates and fares, Freight, Reporting and recordkeeping requirements.

    14 CFR Part 222

    Air carriers, Freight, Intermodal transportation, Reporting and recordkeeping requirements.

    14 CFR Part 223

    Air rates and fares, Government employees, Reporting and recordkeeping requirements.

    14 CFR Part 232

    Administrative practice and procedure, Air carriers, Postal Service.

    14 CFR Part 234

    Air carriers, Consumer protection, Reporting and recordkeeping requirements.

    14 CFR Part 240

    Air carriers, Uniform System of Accounts.

    14 CFR Part 241

    Air carriers, Reporting and recordkeeping requirements, Uniform System of Accounts.

    14 CFR Part 243

    Air carriers, Aircraft, Charter flights, Reporting and recordkeeping requirements.

    14 CFR Part 247

    Air carriers, Airports.

    14 CFR Part 248

    Air carriers, Reporting and recordkeeping requirements, Uniform System of Accounts.

    14 CFR Part 249

    Air carriers, Reporting and recordkeeping requirements, Truth in lending, Uniform System of Accounts.

    14 CFR Part 253

    Air carriers, Consumer protection.

    14 CFR Part 257

    Air carriers, Air rates and fares, Consumer protection, Reporting and recordkeeping requirements.

    14 CFR Part 258

    Air carriers, Consumer protection, Reporting and recordkeeping requirements.

    14 CFR Part 271

    Air carriers, Grant programs—transportation.

    14 CFR Part 272

    Air carriers, Grant programs—transportation, Pacific Islands Trust Territory.

    14 CFR Part 291

    Administrative practice and procedure, Air carriers, Freight, Reporting and recordkeeping requirements.

    14 CFR Part 294

    Air taxis, Canada, Charter flights, Reporting and recordkeeping requirements.

    14 CFR Part 296

    Air carriers, Freight forwarders, Research.

    14 CFR Part 297

    Air carriers, Freight forwarders.

    14 CFR Part 298

    Air taxis, Reporting and recordkeeping requirements.

    14 CFR Part 300

    Administrative practice and procedure, Conflict of interests.

    14 CFR Part 302

    Administrative practice and procedure, Air carriers, Airports, Postal Service.

    14 CFR Part 303

    Administrative practice and procedure, Air carriers, Antitrust, Reporting and recordkeeping requirements.

    14 CFR Part 305

    Administrative practice and procedure, Air carriers, Investigations.

    14 CFR Part 323

    Administrative practice and procedure, Air carriers, Reporting and recordkeeping requirements

    14 CFR Part 325

    Administrative practice and procedure, Air transportation, Intergovernmental relations, Reporting and recordkeeping requirements.

    14 CFR Part 330

    Administrative practice and procedure, Air carriers, Grant programs—transportation, Reporting and recordkeeping requirements.

    14 CFR Part 372

    Charter flights, Military air transportation, Reporting and recordkeeping requirements, Surety bonds.

    14 CFR Part 374

    Air carriers, Consumer protection, Credit.

    14 CFR Part 374a

    Air carriers, Credit, Political candidates, Reporting and recordkeeping requirements.

    14 CFR Part 375

    Administrative practice and procedure, Aircraft, Foreign relations, Reporting and recordkeeping requirements.

    14 CFR Part 377

    Administrative practice and procedure, Air carriers.

    14 CFR Part 380

    Charter flights, Reporting and recordkeeping requirements, Surety bonds.

    14 CFR Part 385

    Organization and functions (Government agencies).

    14 CFR Part 389

    Administrative practice and procedure, Reporting and recordkeeping requirements.

    14 CFR Part 398

    Air transportation.

    14 CFR Part 399

    Administrative practice and procedure, Air carriers, Air rates and fares, Air taxis, Consumer protection, Small businesses.

    The Amendment

    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:

    PART 200—DEFINITIONS AND INSTRUCTIONS 1. The authority citation for part 200 continues to read as follows: Authority:

    49 U.S.C. Chapters 401, 411, 413, 415, 417, and 461.

    2. Section 200.1 is revised to read as follows:
    § 200.1 Terms and definitions.

    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) Department or DOT means the Department of Transportation.

    (b) Predecessor means the Civil Aeronautics Board (CAB).

    (c) Section refers to a section of Subtitle VII of Title 49 of the United States Code (Transportation) or a section of the regulations in this chapter, as indicated by the context. The terms in this section, pursuant to this section, in accordance with the provisions of this section, and words of similar import when used in this chapter refer to the section of the subchapter in which such terms appear.

    (d) Rule, regulation, and order refer to the rules, regulations, and orders prescribed by the Department pursuant to the 49 U.S.C. Subtitle VII or its predecessor's rules, regulations, and orders that are, by law, still in effect.

    (e) FAA means the Federal Aviation Administration, U.S. Department of Transportation.

    (f) OST-R means the Office of the Assistant Secretary for Research and Technology, U.S. Department of Transportation.

    (g) Secretary means the Secretary of Transportation, U.S. Department of Transportation.

    PART 201—AIR CARRIER AUTHORITY UNDER SUBTITLE VII OF TITLE 49 OF THE UNITED STATES CODE 3. The authority citation for part 201 continues to read as follows: Authority:

    5 U.S.C. 1008; 49 U.S.C. Chapters 401, 411, 413, 415, and 417.

    § 201.1 [Amended]
    4. In § 201.1, in paragraph (b), remove the words “DOT Dockets, 1200 New Jersey Avenue SE., Washington, DC 20590-0002” and add, in their place, the words “Docket Operations Office, U.S. Department of Transportation, Room W12-140, 1200 New Jersey Avenue SE, Washington, DC 20590-0001”.
    § 201.7 [Amended]
    5. In § 201.7, in paragraph (e), remove the words “Office of Aviation Analysis” and add, in their place, the words “Office of International Aviation”. PART 203—WAIVER OF WARSAW CONVENTION LIABILITY LIMITS AND DEFENSES 6. The authority citation for part 203 continues to read as follows: Authority:

    49 U.S.C. Chapters 401, 411, 413, 415, and 417.

    7. Section 203.3 is revised to read as follows:
    § 203.3 Filing requirements for adherence to Montreal Convention.

    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.

    § 203.4 [Amended]
    8. In § 203.4: a. In paragraph (a), remove the words “Tariffs Division” and add, in their place, the words “Pricing and Multilateral Affairs Division”. b. In paragraph (b), remove the reference “§ 221.175” and add, in its place, the reference “§ 221.105”. PART 204—DATA TO SUPPORT FITNESS DETERMINATIONS 9. The authority citation for part 204 continues to read as follows: Authority:

    49 U.S.C. Chapters 401, 411, and 417.

    10. In § 204.2, paragraphs (b) and (e) are revised to read as follows:
    § 204.2 Definitions.

    (b) Certificate authority means authority to provide air transportation granted by the Secretary of Transportation in the form of a certificate of public convenience and necessity under 49 U.S.C. 41102 or an all-cargo air transportation certificate to perform all-cargo air transportation under 49 U.S.C. 41103. Certificated carriers are those that hold certificate authority, including those carriers operating by law under the regulatory provisions under the Department's predecessor.

    (e) Eligible place means a place in the United States that meets the specified criteria outlined in Chapter 417 of 49 U.S.C.

    § 204.4 [REMOVED AND RESERVED]
    11. Section 204.4 is removed and reserved.
    § 204.5 [Amended]
    12. Amend § 204.5 as follows: a. In § 204.5, in paragraph (c), at the end of the sentence, remove the words “Washington, DC 20590, or by electronic submission at http://dms.dot.gov.” and add, in their place, the words “1200 New Jersey Avenue SE, Washington, DC 20590, or by electronic submission at http://www.regulations.gov.” b. In § 204.5, in paragraph (d), at the end of the sentence, remove the words “Washington, DC 20590.” and add, in their place, the words “1200 New Jersey Avenue SE, Washington, DC 20590.”
    § 204.7 [Amended]
    13. In § 204.7, in paragraph (b), in the second sentence, remove the words “Documentary Services Division, Department of Transportation” and add, in their place, the words “Docket Operations Office, U.S. Department of Transportation.” PART 205—AIRCRAFT ACCIDENT LIABILITY INSURANCE 14. The authority citation for part 205 continues to read as follows: Authority:

    49 U.S.C. Chapters 401, 411, 413, and 417.

    § 205.4 [Amended]
    15. In § 205.4, in paragraph (a), remove the reference “http://ostpxweb.dot.gov” and add, in its place, “https://www.transportation.gov/policy/aviation-policy/licensing/US-carriers”.
    § 205.6 [Amended]
    16. In § 205.6, revise the section heading and paragraph (b)(2) to read as follows:
    § 205.6 Prohibited exclusion of coverage.

    (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.

    PART 207—[REMOVED] 17. Part 207 is removed. PART 208—[REMOVED] 18. Part 208 is removed. PART 211—APPLICATIONS FOR PERMITS TO FOREIGN AIR CARRIERS 19. The authority citation for part 211 continues to read as follows: Authority:

    49 U.S.C. 40101, 40102, 41101, 41301, and 41703.

    § 211.2 [Amended]
    20. In § 211.2, paragraph (b), remove the words “subpart F” and add, in their place, the words “subpart E”.
    § 211.20 [Amended]
    21. In § 211.20, in paragraph (c)(2)(i), at the end of the sentence, remove the colon and add, in its place, a semicolon.
    § 211.31 [Amended]
    22. In § 211.31, in paragraph (d), at the end of the sentence, remove the word “required.” and add, in its place, the words “required; and”.
    § 211.32 [Amended]
    23. In § 211.32, remove the words “section 801(a) of the Federal Aviation Act” and add, in their place, the words “49 U.S.C. 41307”. PART 212—CHARTER RULES FOR U.S. AND FOREIGN DIRECT AIR CARRIERS 24. The authority citation for part 212 continues to read as follows: Authority:

    49 U.S.C. 40101, 40102, 40109, 40113, 41101, 41103, 41702, 41708, 41712, and 46101.

    § 212.3 [Amended]
    25. In § 212.3, paragraph (c)(i) is redesignated as “paragraph(c)(1)”.
    § 212.10 [Amended]
    26. In § 212.10, in paragraph (e)(1), in the first sentence, remove the words “part in interest” and add, in their place, the word “person”.
    § 212.11 [Amended]
    27. In § 212.11, in paragraph (b)(1), remove the words “authority sought to covered” and add, in their place, the words “authority sought is covered”. PART 214—TERMS, CONDITIONS, AND LIMITATIONS OF FOREIGN AIR CARRIER PERMITS AUTHORIZING CHARTER TRANSPORTATION ONLY 28. Part 214 is amended by adding an authority citation to read as follows: Authority:

    49 U.S.C. 40101, 40102, 40109, 40113, 41504, 41708, 41712, and 46101.

    PART 215—USE AND CHANGE OF NAMES OF AIR CARRIERS, FOREIGN AIR CARRIERS AND COMMUTER AIR CARRIERS 29. The authority citation for part 215 continues to read as follows: Authority:

    49 U.S.C. Chapters 401, 411, 413, 417.

    30. Section 215.1 is revised to read as follows:
    § 215.1 Applicability.

    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.

    § 215.4 [Amended]
    31. In § 215.4: a. In paragraph (a), in the last sentence, remove the words “Licensing Division” and add, in their place, the words “Foreign Air Carrier Licensing Division”. b. In paragraph (b), remove the words “Docket 17325.” and add, in their place, the words “Docket DOT-OST-1995-236.” PART 216—COMMINGLING OF BLIND SECTOR TRAFFIC BY FOREIGN AIR CARRIERS 32. The authority citation for part 216 continues to read as follows: Authority:

    49 U.S.C. Chapters 401, 413, and 417.

    33. Throughout part 216, remove the words “Board” and “Board's” wherever they appear, and add, in their place, the words “Department” and “Department's”.
    § 216.1 [Amended]
    34. In § 216.1, in paragraph (a), remove the word “Act” from the list of definitions; in paragraph (b), remove the words “section 101 of the Act” and add, in their place, the words “49.U.S.C. 40102”.
    § 216.3 [Amended]
    35. In § 216.3, remove the words “section 402 of the Act” and add, in their place, the words “49 U.S.C. 41301”.
    § 216.4 [Amended]
    36. In § 216.4, in paragraph (a), remove the words “Director, Bureau of International Aviation.” and add, in their place, the words “Director, Office of International Aviation.” PART 217—REPORTING TRAFFIC STATISTICS BY FOREIGN AIR CARRIERS IN CIVILIAN SCHEDULED, CHARTER, AND NONSCHEDULED SERVICES 37. The authority citation for part 217 is revised to read as follows: Authority:

    49 U.S.C. 329, 41102, 41301, 41708, and 41709.

    § 217.10 [Amended]
    38. In the Appendix to Section 217.10, remove paragraphs (a)(5), (a)(6), and (a)(7).
    § 217.11 [Amended]
    39. In § 217.11, paragraph (b), remove the words “subject to a maximum fine of $10,000 or imprisonment for not more than 5 years, or both,”. PART 218—LEASE BY FOREIGN AIR CARRIER OR OTHER FOREIGN PERSON OF AIRCRAFT WITH CREW 40. The authority citation for part 218 is revised to read as follows: Authority:

    49 U.S.C. 40113, and 41301.

    § 218.2 [Amended]
    41. In § 218.2, remove the words “section 402 of the Act” and add, in their place, the words “49 U.S.C. 41301”.
    § 218.3 [Amended]
    42. Amend § 218.3 as follows: (a) In paragraph (a)(1), remove the words “section 402 of the Act” and add, in their place, the words “section 41301 of 49 U.S.C.”. (b) In paragraph (a)(2), remove the words “section 416 of the Act” and add, in their place, the words “section 40109 of 49 U.S.C.”. (c) In paragraphs (a)(2) and (a)(3), remove the word “Board” and add, in its place, the word “Department”.
    § 218.5 [Amended]
    43. In § 218.5, remove the word “Board” each place it appears, and add, in its place, the word “Department”.
    § 218.6 [Amended]
    44. In § 218.6, remove the word “Board” and add, in its place, the word “Department”. PART 221—TARIFFS 45. The authority citation for part 221 continues to read as follows: Authority:

    49 U.S.C. 40101, 40109, 40113, 46101, 46102, chapter 411, chapter 413, chapter 415 and chapter 417, subchapter I.

    46. § 221.105 is revised to read as follows:
    § 221.105 Special notice of limited liability under international treaty.

    (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:

    Advice to International Passengers on Limitations of Liability

    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.

    § 221.106 [REMOVED AND RESERVED]
    47. § 221.106 is removed and reserved. PART 222—INTERMODAL CARGO SERVICES BY FOREIGN AIR CARRIERS 48. The authority citation for part 222 is revised to read as follows: Authority:

    49 U.S.C. 40113 and 41301.

    § 222.2 [Amended]
    49. In § 222.2, in paragraphs (a) and (d), remove the word “Board” each place it appears, and add, in its place, the word “Department”. 50. In § 222.3, paragraphs (a) and (b) are revised to read as follows:
    § 222.3 Application for Statement of Authorization.

    (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 of the filing date of the application. The Department will list the names and nationalities of all persons applying for Statements of Authorization in its Weekly Summary of Filings.

    § 222.4 [Amended]
    51. In § 222.4, in paragraphs (a), remove the word “Board” and add, in its place, the word “Department”; in paragraph (a)(1) remove the words “CAB Form 222” and add, in their place, the words “OST Form 4500”, and remove the words “Form 222” and add, in their place, the words “Form 4500”; in paragraph (b), remove the word “Board's” and add, in its place, the word “Department's”.
    § 222.5 [Amended]
    52. In § 222.5, remove the word “Board” each place it appears, and add, in its place, the word “Department”. PART 222—APPENDIX [REMOVED] 53. Appendix A to Part 222-CAB Form 222 is removed. PART 223—FREE AND REDUCED-RATE TRANSPORTATION 54. The authority citation for part 223 is revised to read as follows: Authority:

    49 U.S.C. 40113, 40114, and 41711.

    55. Section 223.1 is revised to read as follows:
    § 223.1 Definitions.

    As used in this part, unless the context otherwise requires:

    An affiliate of a carrier means a person:

    (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.

    Air carrier means the holder of a certificate of public convenience and necessity issued by the Department under 49 U.S.C. 41102 authorizing the carriage of persons. This definition is applicable to a holder of a certificate issued by the Civil Aeronautics Board before its sunset in 1984.

    Attendant means any person required by a passenger with a disability in order to travel, whether or not that person's services are required while the passenger with a disability is in an aircraft.

    Carrier means:

    (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.

    Delivery flight means a flight from a point in the United States where a carrier has taken delivery of a newly manufactured aircraft to any point or points on its route system.

    Foreign air carrier means the holder of a permit issued by the Department under 49 U.S.C. 41302 authorizing the carriage of persons. This definition is applicable to a holder of a certificate issued by the Civil Aeronautics Board before its sunset in 1984.

    Free transportation means the carriage by an air carrier or foreign air carrier of any person or property (other than property owned by that carrier) in air transportation without compensation therefore.

    Inaugural flight means a flight on an aircraft type being introduced by a carrier for the first time on a route, even if that aircraft type has been used by that carrier on other routes or on that route by other carriers.

    Passenger with a disability means any person who has a physical or mental impairment (other than drug addiction or alcoholism), that substantially limits one or more major life activities.

    Pass means a written authorization, other than actual ticket stock, issued by a carrier for free or reduced-rate transportation of persons or property.

    Reduced-rate transportation means the carriage by an air carrier or foreign air carrier of any person or property (other than property owned by such carrier) in air transportation for a compensation less than that specified in the tariffs of that carrier on file with the Department and otherwise applicable to such carriage.

    Retired means:

    (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.

    § 223.2 [Amended]
    56. In § 223.2, in paragraph (a), remove the words “section 401 of the Act” and add, in their place, the words “section 41102 of 49 U.S.C.”.
    § 223.6 [Amended]
    57. In § 223.6, in paragraph (c), remove the word “Board” and add, in its place, the word “Department”.
    § 223.21 [Amended]
    58. In § 223.21, in paragraph (a), remove the words “section 403(b) of the Act” and add, in their place, the words “section 41511 of 49 U.S.C.”.
    § 223.22 [Amended]
    59. In § 223.22, in the introductory text, remove the words “sections 403 and 404(b) of the Act” and add, in their place, the words “sections 41510 and 41310(b) of 49 U.S.C.”; in paragraphs (b) and (b)(1), remove the word “Board” and add, in its place, the word “Department”.
    § 223.23 [Amended]
    60. In § 223.23, in paragraph (a) remove the word “Board” and add, in its place, the word “Department”.
    § 223.25 [Amended]
    61. § 223.25, in paragraph (c), remove the word “Board” and add, in its place, the word “Department”. PART 232 [REMOVED] 62. Part 232 is removed. PART 234—AIRLINE SERVICE QUALITY PERFORMANCE REPORTS 63. The authority citation for part 234 is revised to read as follows: Authority:

    49 U.S.C. 329, 41708, and 41709.

    PART 240—INSPECTION OF ACCOUNTS AND PROPERTY 64. The authority citation for part 240 is added to read as follows: Authority:

    49 U.S.C. 40113, 40114, 41711, 41708, and 41709.

    65. Section 240.1 is revised to read as follows:
    § 240.1 Interpretation.

    (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, equipment, accounts, records, memorandums, papers or correspondence shall include the authority to make such notes and copies thereof as he or she deems appropriate.

    (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 UNITED STATES OF AMERICA, DEPARTMENT OF TRANSPORTATION, OFFICE OF THE SECRETARY OF TRANSPORTATION [photo] [number] [expiration date] IS APPOINTED [title]

    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.

    BY DIRECTION OF THE SECRETARY
    § 240.2 [Amended]
    66. In § 240.2, remove the word “Board” and add, in its place, the word “Department”; remove the word “him” and add, in its place, the words “him or her”; remove the word “he” and add, in its place, the words “he or she”. PART 241—UNIFORM SYSTEM OF ACCOUNTS AND REPORTS FOR LARGE CERTIFICATED AIR CARRIERS 67. The authority citation for part 241 is revised to read as follows: Authority:

    49 U.S.C. 329, 41101, 41708, and 41709.

    Section 01 [Removed and Reserved] 68. In part 241, section 01 is removed and reserved. 69. In part 241, Section 03, remove the definition “Act” from where it appears in the section; the definitions for “Air transportation, charter” and “Route, certificated” are revised to read as follows: Section 03 Definitions for Purposes of This System of Accounts and Reports

    Air transportation, charter. Air transportation authorized pursuant to 49 U.S.C. 41102.

    Route, certificated. The route(s) over which an air carrier is authorized to provide air transportation by a Certificate of Public Convenience and Necessity issued by the Department of Transportation pursuant to 49 U.S.C. 41102. This definition is applicable to an air carrier issued a Certificate of Public Convenience by the Civil Aeronautics Board before its sunset in 1984.

    Section 04 [AMENDED] 70. In part 241, Section 04, in paragraph (b), in the third sentence, remove the words “The Office of Airline Statistics” and add, in their place, “The Office of Airline Information”. Section 12 [AMENDED] 71. In part 241, Section 12-77, in the last sentence of paragraph (b), remove the words “, in the absence of such action by the Civil Aeronautics Board,”. Section 19 [AMENDED] 72. In part 241, Sec. 19-6(b)(2), in the first sentence, remove the words “Department under Title IV of the Federal Aviation Act of 1958, as amended,” and add, in their place, the words “Department under 49 U.S.C. Subtitle VII,”. 73. In part 241, Sec. 19-7(a), in the last sentence, remove the word “K-25” and add, in its place, the word “RTS-42”. 74. In Appendix A to part 241 Sec. 19-7, subsection I.B. Narrative Description, in the first paragraph, remove the last sentence and add, in its place, the sentence “The authority for these instructions is found in 14 CFR part 241, section 19-7.” Section 21 [AMENDED] 75. In part 241, Section 21(a), remove the words “subject to the Federal Aviation Act of 1958, as amended,”; remove the words “Civil Aeronautics Board” and add, in their place, the word “BTS”. Section 22 [AMENDED] 76. In part 241, Section 22, General Reporting Instructions, in the List of Schedules in the BTS Form 41 Report, for Schedule No. P-2, in the title, remove the word “RSPA” and add, in its place, the word “BTS”; in paragraphs (c) and (j), remove the word “Board” each place it appears, and add, in its place, the word “BTS”. Section 24 [AMENDED] 77. In part 241, Section 24, Schedule P-5.1, in paragraph (e), in the fourth sentence, remove the words “Board's Information Management Division” and add, in their place, the words “Office of Airline Information, RTS-42”. PART 243—PASSENGER MANIFEST INFORMATION 78. The authority citation for part 243 continues to read as follows: Authority:

    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).

    § 243.11 [Amended]
    79. In § 243.11, in paragraph (c), remove the words “Family Support Services” and add, in their place, the words “Transportation Disaster Assistance”.
    § 243.13 [Amended]
    80. In § 243.13, in paragraph (c), remove the words “Dockets Facility (SVC-121.30)” and add, in their place, the words “Dockets Management Facility (M-90)”; also remove the words “by July 1, 1998, or, for covered airlines beginning operations after July 1, 1998,”.. PART 247—DIRECT AIRPORT-TO-AIRPORT MILEAGE RECORDS 81. The authority citation for part 247 continues to read as follows: Authority:

    49 U.S.C. chapter 401.

    § 247.1 [Amended]
    82. In § 247.1, remove the words “Titles IV and X of the Federal Aviation Act of 1958, as amended” and add, in their place, the words “Subtitle VII of Title 49 of the United States Code (Transportation)”. PART 248—SUBMISSION OF AUDIT REPORTS 83. The authority citation for part 248 is revised to read as follows: Authority:

    49 U.S.C. 329, 41102, 41708, and 41709.

    § 248.2 [Amended]
    84. In § 248.2, in paragraph (b), remove the words “Board's Office of the Comptroller” and add, in their place, the words “BTS' Office of Airline Information”. PART 249—PRESERVATION OF AIR CARRIER RECORDS 85. The authority citation for part 249 continues to read as follows: Authority:

    49 U.S.C. 329 and chapters 401, 411, 413, and 417.

    § 249.7 [Amended]
    86. In § 249.7, in paragraph (b), remove the word “Board” and add, in its place, the word “Department”. PART 253—NOTICE OF TERMS OF CONTRACT OF CARRIAGE 87. The authority citation for part 253 is revised to read as follows: Authority:

    49 U.S.C. 40113, 40114, 41501, 41504, 41506, 41509, 41510, 41511, 41702, and 41711.

    § 253.7 [Amended]
    88. In § 253.7, remove the reference “§ 399.87” and add, in its place, the reference “§ 399.88”. PART 257—DISCLOSURE OF CODE-SHARING ARRANGEMENTS AND LONG-TERM WET LEASES 89. The authority citation for part 257 continues to read as follows: Authority:

    49 U.S.C. 40113(a), and 41712.

    § 257.3 [Amended]
    90. In § 257.3, remove the word “(g)”; remove the reference “49 U.S.C. 40102(40)” and add, in its place, the reference “49 U.S.C. 40102(45)”; the definition of “Designator code” is revised to read as follows:
    § 257.3 Definitions

    Designator code means the airline designations originally allotted, administered, and prescribed by the Department of Transportation (DOT), by operation of law, pursuant to 49 U.S.C. Subtitle VII or its predecessor's statutory provisions still in effect by law.

    PART 258—DISCLOSURE OF CHANGE-OF-GAUGE SERVICES 91. The authority citation for part 258 continues to read as follows: Authority:

    49 U.S.C. 40113(a) and 41712.

    § 258.3 [Amended]
    92. In § 258.3, in paragraph (d), at the end of the sentence, delete the reference “40102(40)” and add, in its place, the reference “40102(a)(45)”. PART 271—GUIDELINES FOR SUBSIDIZING AIR CARRIERS PROVIDING ESSENTIAL AIR TRANSPORTATION 93. The authority citation for part 271 continues to read as follows: Authority:

    49 U.S.C. Chapters 401 and 417.

    94. In § 271.2, in the Definitions, the term “Eligible place” is revised to read as follows:
    § 271.2 [Amended]

    Eligible place means a place in the United States that meets the specified criteria outlined in Chapter 417 of 49 U.S.C.

    PART 272 [REMOVED AND RESERVED] 95. Part 272 is removed and reserved. PART 291—CARGO OPERATIONS IN INTERSTATE AIR TRANSPORTATION 96. The authority citation for part 291 is revised to read as follows: Authority:

    49 U.S.C. 329, 41103, 41708, and 41709.

    § 291.45 [Amended]
    97. In § 291.45, in the Appendix to 291.45, paragraph (c), remove the organizational code “K-14” and add, in its place “RTS-42”.
    § 291.60 [Amended]
    98. In § 291.60, in paragraph (b)(2), in the first sentence, remove the words “Title IV of the Federal Aviation Act of 1958, as amended” and add, in their place, the words “Subtitle VII of Title 49 of the United States Code (Transportation)”. PART 294—CANADIAN CHARTER AIR TAXI OPERATORS 99. The authority citation for part 294 continues to read as follows: Authority:

    49 U.S.C. Chapters 401 and 417.

    100. Throughout part 294, remove the words “Special Authorities Division” and add, in their place, the words “U.S. Air Carrier Licensing/Special Authorities Division”.
    § 294.10 [Amended]
    101. In § 294.10, add a period at the end of paragraph (d).
    § 294.30 [Amended]
    102. In § 294.30, in paragraph (c), in the first sentence, remove the words “exemption under section 41701” and add, in their place, the words “exemption under 49 U.S.C. 40109”. PART 296—INDIRECT AIR TRANSPORTATION OF PROPERTY 103. The authority citation for part 296 continues to read as follows Authority:

    49 U.S.C. Chapters 401 and 417.

    § 296.3 [Amended]
    104. In § 296.3, at the end of the paragraph, remove the words “the Civil Aeronautics Board” and add, in their place, the words “its predecessor to the extent that those actions, by law, are still in effect”. PART 297—FOREIGN AIR FREIGHT FORWARDERS AND FOREIGN COOPERATIVE SHIPPERS ASSOCIATIONS 105. The authority citation for part 297 continues to read as follows: Authority:

    49 U.S.C. Chapters 401 and 417.

    106. Throughout part 297, remove the words “Aviation Analysis” and add, in their place, the words “International Aviation”. 107. Throughout part 297, remove the words “Special Authorities Division” and add, in their place, the words “U.S. Air Carrier Licensing/Special Authorities Division”.
    § 297.3 [Amended]
    108. In § 297.3, in paragraph (b), remove the words “bona fide asociation” and add, in their place, the words “bona fide association”. PART 298—EXEMPTIONS FOR AIR TAXI AND COMMUTER AIR CARRIER OPERATIONS 109. The authority citation for part 298 is revised to read as follows: Authority:

    49 U.S.C. 329, 41102, 41708, and 41709.

    110. In § 298.2, in the list of definitions, the term “Eligible place” is revised to read as follows:
    § 298.2 Definitions.

    Eligible place means a place in the United States that meets the specified criteria outlined in Chapter 417 of 49 U.S.C.

    § 298.21 [Amended]
    111. In § 298.21: a. In paragraph (a), remove the words “Program Management Branch” and add, in their place, the words “Technical Programs Branch”. b. In paragraph (c)(1), remove the words “Program Management Branch, Federal Aviation Administration, AFS-260, or on the World Wide Web at http://www.faa.gov/avr/afs/afs200/afs260/Part298.cfm” and add, in their place, the words “Technical Programs Branch, Federal Aviation Administration, AFS-260 at (202) 267-8166, or on the internet at https://www.faa.gov/about/office_org/headquarters_offices/avs/offices/afx/afs/afs200/afs260/exemptions/”. c. In paragraph (d), in the first sentence, remove the words “Program Management Branch (AFS-260), 800 Independence Avenue SW, Washington, DC 20591” and add, in their place, the words “Technical Programs Branch (AFS-260), 800 Independence Avenue SW, Room 831, Washington, DC 20591”.
    § 298.23 [Amended]
    112. In § 298.23, in paragraph (b), in the first sentence, remove the words “Program Management Branch (AFS-260), 800 Independence Avenue SW, Washington, DC 20591” and add, in their place, the words “Technical Programs Branch (AFS-260), 800 Independence Avenue SW, Room 831, Washington, DC 20591”; in the second sentence, remove the words “Alaskan Region Headquarters (AAL-230), 222 West 7th Avenue, Box 14, Anchorage, Alaska 99513” and add, in their place, the words “Alaskan Region Headquarters Technical Standards Branch, (AAL-231), 222 West 7th Avenue, Box 14, Anchorage, Alaska 99513”.
    § 298.50 [Amended]
    113. In § 298.50, in paragraph (a)(3), remove the words “A $670 filing fee in the form of a check, draft, or postal money order payable to the Department of Transportation” and add, in their place, the words “A $670 filing fee submitted in accordance with the provisions of § 389.21”; in paragraph (b), remove the words “Department of Transportation Dockets,” and add, in their place, the words “Docket Operations Office, U.S. Department of Transportation,”. 114. In § 298.60, revise paragraph (a) to read as follows:
    § 298.60 General reporting instruction.

    (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.

    § 298.61 [Amended]
    115. In § 298.61 paragraph (a), remove the words “AU.S. Air Carrier Traffic and Capacity Data by Nonstop Segment and On-Flight Market.” ”, and add, in their place, the words “ “U.S. Air Carrier Traffic and Capacity Data by Nonstop Segment and On-Flight Market.” ”; in paragraph (b), remove the words “Schedule T-100 shall be filed monthly as set forth in “298.60.”, and add, in their place, the words “ “Schedule T-100 shall be filed monthly as set forth in § 298.60” ”; and in paragraph (e)(2), remove the organizational code “K-14” and add, in its place “RTS-42”.
    § 298.70 [Amended]
    116. In § 298.70, in paragraph (d)(2), remove the words “Title IV of the Federal Aviation Act of 1958, as amended” and add, in their place, the words “Subtitle VII of Title 49 of the United States Code (Transportation)”. PART 300—RULES OF CONDUCT IN DOT PROCEEDINGS UNDER THIS CHAPTER 117. The authority citation for part 300 continues to read as follows: Authority:

    49 U.S.C. subtitle I and chapters 401, 411, 413, 415, 417, 419, 421, 449, 461, 463, and 465.

    § § 300.0a, 300.8, 300.9, 300.10, 300.10a, 300.11, 300.12, 300.13, 300.14, and 300.16 [REMOVED]
    § § 300.17 through 300.20 [REDESIGNATED AS §§ 300.9 through 300.12]
    118. Remove §§ 300.0a, 300.8, 300.9, 300.10, 300.10a, 300.11, 300.12, 300.13, 300.14, and 300.16 and redesignate §§ 300.17 through 300.20 as §§ 300.9 through 300.12, respectively.
    § 300.3 [Amended]
    119. In § 300.3: a. In paragraph (b)(1), remove the word “(DMS)” and add, in its place, the words “(http://www.regulations.gov)”; also remove the words “and Media Management.” b. In paragraph (b)(3), remove the words “http://dms.dot.gov” and add, in their place, the words “www.regulations.gov”. c. In paragraph (c)(1), remove the words “and Media Management.”
    § 300.4 [Amended]
    120. In § 300.4, in paragraph (c), remove the reference “paragraph (a)”, and, in its place, add the reference “paragraph (b)”; revise paragraph (d) to read as follows:
    § 300.4 Separation of functions in hearing cases.

    (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.

    § 300.8 [Removed and Reserved]
    121. Remove and reserve § 300.8.
    § 300.15 [REDESIGNATED AS § 300.8 AND AMENDED]
    122. Redesignate § 300.15 as § 300.8; remove the word “(a)”; and remove paragraph (b) from the newly redesignated § 300.8. PART 302—RULES OF PRACTICE IN PROCEEDINGS 123. The authority citation for part 302 is revised to read as follows: Authority:

    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.

    § 302.3 [Amended]
    124. In § 302.3: a. In paragraph (a)(1), in the second sentence, remove the words “the DOT Dockets Management System (DMS) internet website” and add, in their place, the words “http://www.regulations.gov”. b. In paragraph (c), in the third sentence, remove the words “the specified DOT DMS internet website” and add, in their place, the words “http://www.regulations.gov”. c. In paragraph (d)(1)(ii), in the first sentence, remove the words “the DOT DMS internet website” and add, in their place, the words “http://www.regulations.gov”.
    § 302.4 [Amended]
    125. In § 302.4, remove the words “the DOT DMS internet website” each place they appear, and add, in their place, the words “http://www.regulations.gov”.
    § 302.7 [Amended]
    126. In § 302.7, remove the word “§ 302.4(a)(2)(iv)” each place it appears, and add, in its place, the word “§ 302.4(a)(2)(i)(D)”. 127. In § 302.24, paragraphs (g)(1)(iii) through (vi), (g)(1)(viii), (g)(1)(ix), (g)(1)(xiv) through (xx), and (g)(2) and (3) are revised to read as follows:
    § 302.24 Evidence.

    (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.

    128. Throughout Subpart D, remove the word “Deputy” wherever it appears.
    § 302.401 [Amended]
    129. In § 302.401, remove the words “Subtitle VII of”. 130. In § 302.603, paragraph (b) is revised to read as follows:
    § 302.603 Contents of complaint or request for determination.

    (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.

    PART 303— REVIEW OF AIR CARRIER AGREEMENTS 131. The authority citation for part 303 continues to read as follows: Authority:

    49 U.S.C. chapters 401, 413, and 417.

    132. The introductory text to § 303.01 is revised to read as follows:
    § 303.01 Purpose.

    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.

    133. Section 303.02 is revised to read as follows:
    § 303.02 Definitions.

    (a) The term Assistant Secretary means the Assistant Secretary for Aviation and International Affairs, or as delegated. As provided in 49 CFR 1.21, the Secretary or Deputy Secretary may exercise any authority in lieu of the Assistant Secretary under the provisions of this part.

    (b) The term documents means (1) all written, recorded, transcribed or graphic matter including letters, telegrams, memoranda, reports, studies, forecasts, lists, directives, tabulations, logs, or minutes and records of meetings, conferences, telephone or other conversations or communications; and (2) all information contained in data processing equipment or materials. The term does not include daily or weekly statistical reports in whose place an annual or monthly summary is submitted.

    (c) The term hearing means either a show-cause proceeding as provided in § 303.44 of this part or a full evidentiary hearing as provided in § 303.45 of this part, whichever is determined by the Assistant Secretary to be appropriate.

    (d)-(g) [Reserved]

    (h) The term Section 41309 transaction means any contract, agreement or discussion of a cooperative working arrangement within the scope of 49 U.S.C. 41309.

    (i) [Reserved]

    134. Section 303.3 is revised to read as follows:
    § 303.03 Requirement to file application.

    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 Avenue SE, Washington, DC 20590, or by electronic submission at http://www.regulations.gov. The application must conform to the requirements set forth in §§ 303.04 and 303.05 of this part.

    135. Section 303.04(i) is revised to read as follows:
    § 303.04 General rules governing application content, procedure and conditions of approval.

    (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.

    136. Section 303.05(a) is revised to read as follows:
    § 303.05 Applications requesting antitrust immunity.

    (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.

    137. Section 303.06 is revised to read as follows:
    § 303.06 Review of antitrust immunity.

    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.

    138. Section 303.07 is revised to read as follows:
    § 303.07 Transitional rule.

    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.

    139. The title of Subpart D is revised to read as follows: Subpart D—Section 41309 Applications 140. In § 303.30 the introductory text and paragraph (c) are revised to read as follows:
    § 303.30 General provisions concerning contents of applications.

    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.

    141. Section 303.31 is revised to read as follows:
    § 303.31 Justification for the application.

    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.

    § 303.32 [Amended]
    142. In § 303.32(a), in the first sentence, remove the words “412 application” and add, in their place, the words “41309 application”. 143. In § 303.42, paragraph (a) is revised to read as follow:
    § 303.42 Comments on application.

    (a) Unless a different comment period is specified by notice or order, or in a notice of filing published in the Federal Register, any person may file comments, responses to the application, and/or a request for a hearing, within 21 days of the filing of an application.

    § 303.43 [Amended]
    144. In § 303.43(b), remove the words “412 application” each place they appear, and add, in their place, the words “41309 application”. PART 305—RULES OF PRACTICE IN INFORMAL NONPUBLIC INVESTIGATIONS 145. The authority citation for part 305 continues to read as follows: Authority:

    49 U.S.C. chapters 401, 417, 461; 5 U.S.C. 555, 556.

    146. Throughout the part 305, remove the word “Deputy” wherever it appears.
    § 305.1 [Amended]
    147. In § 305.1, remove the words “Title IV or sections 101(3), 1002, 1003, or 1108(b) of the Act” and add, in their place, the words “49 U.S.C. Subtitle VII, Chapter 411 or 49 U.S.C. 40102(2), 41502, 41507, 41508, 41509, 41702, 41703, or 46101”. 148. § 305.7(b) is revised to read as follows:
    § 305.7 Issuance of investigation subpenas.

    (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).

    § 305.11 [Amended]
    149. In § 305.11, remove the word “Deputy” each place it appears; and in the first sentence, remove the words “, and any documentary evidence obtained in the investigation will be returned to the persons who produced it”. PART 323—TERMINATIONS, SUSPENSIONS, AND REDUCTIONS OF SERVICE 150. The authority citation for part 323 continues to read as follows: Authority:

    49 U.S.C. Chapters 401, 411, and 417.

    § 323.2 [Amended]
    151. In § 323.2, the terms “Certificated carrier” and “Eligible place” are revised to read as follows:
    § 323.2 Definitions.

    Certificated carrier means a direct air carrier holding authority to provide air transportation granted by the Department of Transportation (“DOT”) in the form of a certificate of public convenience and necessity under section 41102 of the Title 49 of the United States Code (Transportation) or an all-cargo air transportation certificate to perform all-cargo air transportation under 49 U.S.C. 41103.

    Eligible place means a place in the United States that meets the specified criteria outlined in Chapter 417 of 49 U.S.C.

    PART 325—ESSENTIAL AIR SERVICE PROCEDURES 152. The authority citation for part 325 continues to read as follows: Authority:

    49 U.S.C. Chapters 401 and 417.

    § 325.1 [Amended]
    153. In § 325.1, remove the words “under section 419 of the Act” and add, in their place, the words “under 49 U.S.C. 41732”. 154. Section 325.2 is revised to read as follows:
    § 325.2 Applicability.

    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.

    155. Section 352.3 is revised to read as follows:
    § 325.3 Definitions.

    As used in this part, eligible place means a place in the United States that meets the specified criteria outlined in Chapter 417 of 49 U.S.C.

    § 325.4 [Amended]
    156. Amend § 325.4 as follows: a. In § 325.4, in paragraph (a), remove the words “as an eligible point under section 419(b) of the Act” and add, in their place, the words “as an eligible place under 49 U.S.C. 41731”. b. In paragraph (a)(1), remove the words “section 401 certificate” each place it appears, and add, in their place, the words “section 41102 certificate”. c. In paragraph (a)(3), remove the words “eligible point” and add, in their place, the words “eligible place”. d. In paragraph (b), remove the words “Documentary Services Division” and add, in their place, the words “Docket Operations Office”; remove the words “section 419(f) of the Act” and add, in their place, the words “49 U.S.C. 41737”. e. In paragraph (c), remove the words “eligible point” and add, in their place, the words “eligible place”; remove the words “Documentary Services Division” and add, in their place, the words “Docket Operations Office”. 157. Section 325.5 is revised to read as follows:
    § 325.5 Determinations and designations.

    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.

    § 325.6 [Amended]
    158. Amend § 325.6 as follows: a. In paragraph (a), remove the words “eligible points” each place it appears, and add, in their place, the words “eligible places”. b. In paragraph (c), remove the words “under section 419(b) of a community as an eligible point to determine whether that point continues” and add, in their place, the words “under 49 U.S.C. 41733 to determine whether the community designated as an eligible place continues”. PART 330 [REMOVED and RESERVED] 159. Part 330 is removed and reserved. PART 372—OVERSEAS MILITARY PERSONNEL CHARTERS 160. The authority citation for part 372 continues to read as follows: Authority:

    49 U.S.C. Chapters 401, 411, 413, and 417.

    § 372.30 [Amended]
    161. In § 372.30, in paragraph (a), remove the words “Office of Aviation Analysis,” and add, in their place, the words “Office of International Aviation”; in paragraph (a)(9), remove the word “applicant” and add, in its place, the word “applicants”. 162. Revise Appendix A to Part 372 to read as follows: Appendix A to Part 372—Overseas Military Personnel Charter Operator's Surety Bond Under Part 372 of the Regulations of the Department of Transportation (14 CFR Part 372)

    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: 1

    1 These data may be supplied in an addendum attached to the bond.

    Surety company's bond No. Date of flight departure Place of flight departure

    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__.

    PRINCIPAL Name By: Signature and title Witness SURETY Name By: Signature and title Witness

    Only corporations may qualify to act as surety and they must meet the requirements set forth in § 372.24(c) of Part 372.

    PART 374—[AMENDED] 163. The authority citation for part 374 is revised to read as follows: Authority:

    15 U.S.C. 1601-1693r; 49 U.S.C., Subtitle VIII; and 12 CFR 202 and 1026.

    § 374.3 [Amended]
    164. In § 374.3, in paragraph (b), in the first sentence, remove the words “12 CFR part 202” and add, in their place, the words “12 CFR part 1002”; in the first sentence, remove the words “12 CFR part 226” and add, in their place, the words “12 CFR part 1026”. PART 374a—EXTENSION OF CREDIT BY AIRLINES TO FEDERAL POLITICAL CANDIDATES 165. The authority citation for part 374a continues to read as follows: Authority:

    49 U.S.C. chapters 401, 411, 415, and 417.

    166. Section 374a.1 is revised to read as follows:
    § 374a.1 Purpose.

    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.

    § 374a.3 [Amended]
    167. In § 374a.3, in the term “Air carrier” remove the words “section 401 of the Federal Aviation Act of 1958, as amended” and add, in their place, the words “49 U.S.C. 41102”. 168. Section 374a.5 is revised to read as follows:
    § 374a.5 Exemption authority.

    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.

    PART 375—NAVIGATION OF FOREIGN CIVIL AIRCRAFT WITHIN THE UNITED STATES 169. The authority citation for part 375 continues to read as follows: Authority:

    49 U.S.C. 40102, 40103, and 41703.

    § 375.1 [Amended]
    170. In § 375.1, remove the term “Act”; in the term “Air transportation” remove the words “(see section 101 (10) and (23) of the Federal Aviation Act, 49 U.S.C. 1301)” and add, in their place, the words “(see 49 U.S.C. 40102 (a)(5) and (a)(24))”; in the term “Exemption” remove the words “under section 416(b) of the Act” and add, in their place, the words “under 49 U.S.C. 40109”; in the term “Foreign air carrier permit” remove the words “section 402 of the Act” and add, in their place, the words “49 U.S.C. 41301”; in the term “Foreign aircraft permit” remove the words “section 1108(b) of the Act” and add, in their place, the words “49 U.S.C. 41703”.
    § 375.19 [Amended]
    171. In § 375.19, remove the words “section 1108(b) of the Act” each place it appears, and add, in their place, the words “49 U.S.C. 41703”.
    § 375.33 [Amended]
    172. In § 375.33, in the last sentence, remove the word “safey” and add, in its place, the word “safety”.
    § 375.35 [Amended]
    173. In § 375.35, in paragraph (a)(2), remove the words “section 402 permit” and add, in their place, the words “section 41301 permit”.
    § 375.43 [Amended]
    174. In § 375.43, in paragraph (e)(1), remove the words “Aviation Operations” and add, in their place, the words “International Aviation”; in § 375.43, paragraph (a) is revised to read as follows:
    § 375.43 Application for foreign aircraft permit.

    (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 www.transportation.gov/policy/aviation-policy/licensing/foreign-carriers.

    § 375.50 [Amended]
    175. Amend § 375.50 as follows: a. In paragraph (b), in the first sentence, remove the words “Chief, Discrete Operations Branch, Licensing Division, P-45, Office of Aviation Operations” and add, in their place, the words “Chief, Foreign Air Carrier Licensing Division, X-45, Office of International Aviation”. b. In paragraph (e), remove the words “section 1108(b) of the Act” and add, in their place, the words “section 41703 of 49 U.S.C.”. c. In paragraph (h), in the first sentence, remove the words “Federal Aviation Act” and add, in their place, the words “49 U.S.C. Subtitle VII”; in the fourth sentence, remove the words “section 402 or 416(b) of the Act” and add, in their place, the words “section 41301 or 41709 of 49 U.S.C.”.
    § 375.60 [Amended]
    176. Section 375.60 is revised to read as follows:
    § 375.60 Penalties.

    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.

    PART 377—CONTINUANCE OF EXPIRED AUTHORIZATIONS BY OPERATION OF LAW PENDING FINAL DETERMINATION OF APPLICATIONS FOR RENEWAL THEREOF 177. The authority citation for part 377 continues to read as follows: Authority:

    49 U.S.C. Chapters 401 and 461; 5 U.S.C. 558 and 559.

    § 377.1 [Amended]
    178. In § 377.1, in the term “Authorization” remove the words “sections 101(3), 401, 402, 408, 409, 412 and 416 of the Federal Aviation Act of 1958, as amended” and add, in their place, the words “49 U.S.C. 40102, 41102, 41302, 41309, and 41708”.
    § § 377.2, 377.3, 377.4, 377.5, 377.10 and 377.11 [Amended]
    179. In §§ 377.2, 377.3, 377.4, 377.5, 377.10, and 377.11, remove the word “Board” each place it appears, and add, in its place, the word “Department”.
    § § 377.3, 377.4, and 377.10 [Amended]
    180. In §§ 377.3, 377.4, and 377.10, remove the words “section 401 of the Act” and add, in their place, the words “49 U.S.C. 41102”.
    § 377.10 [Amended]
    181. In paragraph(c)(3), remove the words “section 402 of the Act and exemptions issued under section 416 ” and add, in their place, the words “section 41301 of 49 U.S.C. and exemptions issued under section 41708 of 49 U.S.C.”. PART 380—PUBLIC CHARTERS 182. The authority citation for part 380 continues to read as follows: Authority:

    49 U.S.C. 40101, 40102, 40109, 40113, 41101, 41103, 41301, 41504, 41702, 41708, 41712, and 46101.

    183. Throughout part 380, remove the words “Office of Aviation Analysis” and add, in their place, the words “Office of International Aviation”. 184. Throughout part 380, remove the words “Special Authorities Division” and add, in their place, the words “U.S. Air Carrier Licensing/Special Authorities Division”.
    § 380.1 [Amended]
    185. In § 380.1, remove the words “, formerly Title IV of the Federal Aviation Act of 1958, as amended”.
    § 380.2 [Amended]
    186. In § 380.2, in the list of definitions, the term “Foreign Public Charter opertor” is revised to read “Foreign Public Charter operator”.
    § 380.3 [Amended]
    187. In § 380.3, in paragraph (b), remove the word “and” and add, in its place, the word “through”.
    § 380.14 [Amended]
    188. In § 380.14, at the beginning of the paragraph, remove the word “Noting” and add, in its place, the word “Nothing”.
    § 380.15 [Amended]
    189. In § 380.15, remove the word “Subsititues” and add, in its place, the word “Substitutes”.
    § 380.32 [Amended]
    190. Amend § 380.32 as follows: a. In paragraph (j), remove the words “That is a charter” and add, in their place, the words “That if a charter”. b. In paragraph (q), remove the words “That is the operator” and add, in their place, the words “That if the operator”. c. In paragraph (t), remove the words “That the participants” and add, in their place, the words “That the participant's”. d. In paragraph (v), in the second sentence, remove the words “date or arrival” and add, in their place, the words “date of arrival”.
    § 380.34 [Amended]
    191. In § 380.34, in paragraph (b)(2)(i), at the end of the paragraph, remove the words “credit cared” and add, in their place, the words “credit card”. PART 380—APPENDIX A AND B [AMENDED] 192. Revise Appendix A and B to part 380 to read as follows: Appendix A to Part 380—Public Charter Operator's Surety Bond Under Part 380 of the Regulations of the Department of Transportation (14 CFR Part 380)

    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 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 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 1

    1 These data may be supplied in an addendum attached to the bond.

    Surety company's bond No. Date of flight departure Place of flight departure

    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__.

    PRINCIPAL Name By: Signature and title Witness

    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.

    Appendix B to Part 380—Public Charter Operator's Surety Trust Agreement

    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; Provided, however, that the liability of the trust to any Beneficiary shall not exceed the charter price (as defined in Part 380 of the Department's regulations) paid by or on behalf of any such Beneficiary; Provided, further, that there shall be no obligation of the trust to any Beneficiary if Operator shall pay or cause to be paid to any Beneficiary any sum or sums for which Operator may be held legally liable by reasons of its failure faithfully to perform, fulfill, and carry out all contracts, agreements, and arrangements made by Operator in its capacity as Public Charter 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 provided still further, that the liability of the trust as administered by Trustee 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 $__. Notwithstanding anything herein to the contrary, in no event shall the obligation of the trust or Trustee hereunder exceed the aggregate amount of $__.

    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 the trust with respect to participants in a charter shall automatically terminate sixty days after the termination date of each particular charter covered by this trust except for claims made in the time provided herein.

    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.

    Operator ______ (signature) Date Name ______ (typed or printed) Title Trustee ______ (signature) Date Name ______ (typed or printed) Title
    PART 385—STAFF ASSIGNMENTS AND REVIEW OF ACTION UNDER ASSIGNMENTS 193. The authority citation for part 385 is revised to read as follows: Authority:

    49 U.S.C. 329, 40101, 41101, 41301, and 41701.

    § 385.1 [Amended]
    194. In § 385.1: a. In the term “Precedent” remove the words “by the Board” and add, in their place, the words “by its predecessor”. b. In the term “Reviewing Official” remove the word “Deputy”.
    § 385.2 [Amended]
    195. In § 385.2, remove the words “and the Director, Bureau of Transportation Statistics (BTS)”.
    § 385.7 [Amended]
    196. In § 385.7, remove the word “Deputy”.
    § 385.12 [Amended]
    197. In § 385.12, paragraphs (f), (h), and (i) are removed; paragraphs (g), (j), and (k) are re-designated as paragraphs (f), (g), and (h), respectively; and the newly redesignated paragraphs (f), (g) and (h) are revised to read as follows:
    § 385.12 Authority of the Director, Office of Aviation Analysis

    (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.

    § 385.13 [Amended]
    198. Amend § 385.13 by: a. Removing paragraph (b)(4). b. Redesignating paragraphs (b)(2) and (3) as (b)(3) and (4), respectively. c. Adding new paragraphs (b)(2), (5) and (6). d. Removing the words “pursuant to Civil Aeronautics Board Order E-9305 of June 15, 1955” and adding in its place the words “agreements filed pursuant to previous statutory authority of the Department's predecessor” in paragraph (r) introductory text. e. Revising paragraph (r)(1). f. Adding new paragraphs (z)-(dd) to read as follows:
    § 385.13 Authority of the Director, Office of International Aviation.

    (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.

    199. Revise § 385.14 as follows:
    § 385.14 Authority of the General Counsel

    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 et seq., with the concurrence of the staff offices primarily responsible for the parts or sections involved: Provided, that any final regulation so issued shall have an effective date not less than 20 days after its date of publication in the Federal Register, and shall include a brief reference to the review procedures established in subpart C of this part.

    (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 et seq. through issuance of an appropriate order, letter, or other transmittal.

    (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).

    § 385.15 [Removed and Reserved]
    200. Remove and reserve § 385.15.
    § 385.18 [Amended]
    201. In § 385.18, remove the words “Chief, Coordination Section, Documentary Services Division” and add in its place the words “Docket Officer, Docket Operations Office”.
    § 385.19 [Amended]
    202. In § 385.19, remove the words “Office of Aviation Information” wherever they appear, and add in their place the words “Office of Airline Information”. PART 389—FEES AND CHARGES FOR SPECIAL SERVICES 203. Part 389 is revised to read as follows: PART 389—FEES AND CHARGES FOR SPECIAL SERVICES Subpart A—General Provisions Sec. 389.1 Policy and scope. Subpart B—Fees for Special Services 389.10 Applicability of subpart. 389.11 Available services and resources. 389.12 Payment of fees and charges. 389.13 Fees for services. Subpart C—Filing and Processing License Fees 389.20 Applicability of subpart. 389.21 Payment of fees. 389.22 Failure to make proper payment. 389.23 Application for waiver or modification of fees. 389.24 Foreign air carriers. 389.25 Schedule of processing fees. 389.26 Special rules for tariff page filings. 389.27 Refund of fee. Authority:

    49 U.S.C. 40113, 40114, 41711; 31 U.S.C. 9701; and 5 U.S.C. 552.

    Subpart A—General Provisions
    § 389.1 Policy and scope.

    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.

    Subpart B—Fees for Special Services
    § 389.10 Applicability of subpart.

    This subpart describes certain services and resources made available by the Department and prescribes the fees and charges for those services and resources.

    § 389.11 Available 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.

    § 389.12 Payment of fees and charges.

    The fees charged for services and resources shall be paid for electronically at http://www.pay.gov, a secure government-wide collection portal, except for charges for reporting services that are performed under competitive bid contracts with non-Government firms. Fees for reporting are payable to the firms providing the services. Payments to pay.gov can be made directly from a bank account or by credit/debit card.

    § 389.13 Fees for services.

    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.

    Subpart C—Filing and Processing License Fees
    § 389.20 Applicability of subpart.

    (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 subpart R of 14 CFR part 221, and contains a set of information that describes one (1) tariff fare, or a set of information that describes one (1) related element associated with such tariff fare.

    § 389.21 Payment of fees.

    (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 http://www.pay.gov, a secure government-wide collection portal, unless a waiver or modification of the filing fee has been requested and approved. Payments can be made directly from a bank account or by credit/debit card.

    (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.

    § 389.22 Failure to make proper payment.

    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.

    § 389.23 Application for waiver or modification of 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.

    § 389.24 Foreign air carriers.

    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.

    § 389.25 Schedule of processing fees.

    (a) Document-filing fees.

    Code Document Interstate Air Transportation Certificate of Public Convenience and Necessity (49 U.S.C. Chapter 411) 1 Application for Certificate of Public Convenience and Necessity Interstate Air Transportation—Charter Authority Only 850 2 Application for Certificate of Public Convenience and Necessity Interstate Air Transportation—Scheduled Service 850 3 Dormant Authority 290 4 Application for Certificate of Public Convenience and Necessity Interstate Air Transportation—Cargo Authority Only 670 5 Application to transfer Certificate of Public Convenience and Necessity Interstate Air Transportation 290 6 Air Taxi Registration 8 7 Application for Commuter Air Carrier Authorization 670 8 Change of Name (registration of trade name or reissuance of certificate) 56 9 Exemption Request—General (49 U.S.C. Chapter 401) 10 Request for an Exemption from 49 U.S.C. Chapter 415 53 11 Request for an Exemption from 49 U.S.C Chapter 411 280 12 Request for an Exemption from 49 U.S.C Chapter 417 120 13 Request for a Service Mail Rate Petition 49 U.S.C. Chapter 419 420 Foreign Air Transportation—U.S. Carriers (49 U.S.C. Chapter 411) 14 Application for Certificate of Public Convenience and Necessity Foreign Air Transportation—Scheduled Service 900 15 Amendment to Application for Certificate of Public Convenience and Necessity Foreign Air Transportation—Scheduled Service 425 16 Application for Certificate of Public Convenience and Necessity Foreign Air Transportation—Charter Service 600 17 Amendment to Application for Certificate of Public Convenience and Necessity Foreign Air Transportation—Charter Service 200 18 Transfer of Certificate of Public Convenience and Necessity Foreign Air Transportation—Scheduled or Charter Service 255 19 Change of Name (registration of trade name or reissuance of certificate) 56 Foreign Air Carrier Permit (49 U.S.C. Chapter 413) 20 Foreign Air Carrier Permit—Initial Application 760 21 Foreign Air Carrier Permit—Amendment/Renewal of permit 475 22 Foreign Air Carrier Permit—Amendment to application for a permit 215 Exemption (49 U.S.C. Chapter 401) 23 Request for an Exemption from 49 U.S.C. Chapter 415 53 24 Request for an Exemption from 49 U.S.C. Chapters 411/413 (10 or fewer flights) 77 25 Request for an Exemption from 49 U.S.C. Chapters 411/413 (More than 10 flights) 360 26 Request for an Exemption from 49 U.S.C. Chapters 411/413 (Filed less than 10 days before effective date requested) 1 17 27 Other (U.S. and foreign air carriers) 360 28 Emergency cabotage (49 U.S.C. Chapter 401) 360 29 Relief for U.S. and foreign indirect air carriers (49 U.S.C. Chapter 401) 370 Undocketed Items 30 Canadian Charter Air Taxi Registration 30 31 Foreign Freight Forwarder Registration 11 32 Foreign Tour Operator Registration 10 33 Foreign Aircraft Permit (14 CFR part 375) 25 34 Special Authorization (14 CFR part 375) 12 35 Charter Statement of Authorization 8 36 Intermodal Statement of Authorization 10 37 Special Authority (14 CFR part 216) 37 38 Fee for filing items 33-37 if filed less than time required before effective date 111 39 IATA resolutions 61 Other (U.S. and Foreign Air Carriers) Charters: 40 Public Charter Prospectus 39 41 OMPC Operation Authorization 665 42 Waiver of Charter Regulations 39 Tariffs: 43 Pages 2 44 Special Tariff Permission 12 45 Waiver of Tariff Regulations 12 46 Exemption request 371 Agreements filed under 49 U.S.C. Chapter 413: 47 Prior Approval (docketed) 1080 48 Routine (non-docketed) 64 49 Application for free and reduced-rate transportation 16 1 Additional.

    (b) Electronic Tariff Filing Fees. The filing fee for one (1) or more transactions proposed in any existing record, or for any new or canceled records, shall be 5 cents per record; Provided: That no fee shall be assessed for those records submitted to the Department pursuant to 14 CFR 221.500(b).

    § 389.26 Special rules for tariff page filings.

    (a) Tariffs issued by carriers. The filing fee for tariff pages filed by U.S. air carriers will be charged even if the tariff includes matters involving participating foreign air carriers. It will also be charged if the tariff is issued by a foreign air carrier and includes matters involving participating U.S. air carriers, unless the foreign air carrier has obtained a waiver under § 389.24. The fee will not be charged for a blank looseleaf page unless it cancels matter in the preceding issue of the page.

    (b) Tariffs issued by publishing agents.

    (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.

    § 389.27 Refund of fee.

    Any fee charged under this part may be refunded in full or in part upon request if the document for which it is charged is withdrawn before final action is taken. Such requests shall be filed in accordance with § 389.23.

    PART 398—GUIDELINES FOR INDIVIDUAL DETERMINATIONS OF BASIC ESSENTIAL AIR SERVICE 204. The authority citation for part 399 continues to read as follows: Authority:

    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).

    § 398.11 [Removed]
    205. Section 398.11 is removed. PART 399—STATEMENTS OF GENERAL POLICY 206. The authority citation for part 399 continues to read as follows: Authority:

    49 U.S.C. 41712.

    207. Throughout the part, remove the word “Board” wherever it appears, and add, in its place, the word “Department”. 208. Throughout the part, remove the word “Board's” wherever it appears, and add, in its place, the word “Department's”.
    § § 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 [Removed]
    209. Sections 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 are removed.
    § 399.2 [Amended]
    210. In § 399.2, in paragraph (c), remove the words “section 102 of the Act” and add, in its place, the words “section 40101 of 49 U.S.C.”.
    § 399.4 [Amended]
    211. In § 399.4, in the third sentence, remove the word “the Act” and add, in its place, the words “49 U.S.C.”.
    § 399.35 [Amended]
    212. Section 399.35 is revised to read as follows:
    § 399.35 Special tariff permission.

    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.

    § 399.60 [Amended]
    213. In § 399.60, in paragraph (a), remove the words “applications under section 408 of the Act for approval of consolidations or acquisitions of control;”.
    § 399.80 [Amended]
    214. In § 399.80, in the first paragraph, remove the word “(m)” and add, in its place, the word “(n)”.
    § 399.81 [Amended]
    215. In § 399.81, in paragraph (c)(1), remove the words “This section” and add, in their place, the words “Paragraph (c)”; in paragraph (c)(2), remove the words “this section” and add, in their place, the words “paragraph (c)”; in paragraph (c)(3), remove the words “this paragraph” and add, in their place, the words “paragraph (c)”.
    § 399.82 [Amended]
    216. In § 399.82, remove paragraphs (b)(2) and (3), and redesignate paragraphs (b)(4) and (5) as (b)(2) and (3).
    § 399.83 [Amended]
    217. In § 399.83, remove the words “section 411 of the Act,” and add, in their place, the words “49 U.S.C. 41712”.
    § 399.91 [Amended]
    218. Section 399.91 is revised to read as follows:
    § 399.91 Air carrier participation in programs of technical assistance to airlines of less developed countries.

    (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.

    § 399.120 [Amended]
    219. In § 399.120, remove the words “section 401(d)(8) of the Federal Aviation Act” and add, in their place, the words “sections 41102 and 41110 of 49 U.S.C.”. Issued in Washington, DC, on April 17, 2018. Elaine L. Chao, Secretary of Transportation.
    [FR Doc. 2018-08683 Filed 5-8-18; 8:45 am] BILLING CODE 4910-9X-P
    CategoryRegulatory Information
    CollectionFederal Register
    sudoc ClassAE 2.7:
    GS 4.107:
    AE 2.106:
    PublisherOffice of the Federal Register, National Archives and Records Administration

    2024 Federal Register | Disclaimer | Privacy Policy
    USC | CFR | eCFR