Reg AC Supporting Statement FY 2014 DGL REVISED

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Regulation AC

A.

Justification

1.

Necessity of Information Collection

In 1999, the Commission and Congress closely examined research analysts' conflicts of
interest. There was particular concern that many investors who rely on analysts'
recommendations may not know, among other things, that favorable research coverage could be
used to market the investment banking services provided by an analyst's firm, and that an
analyst's compensation may be based significantly on generating investment banking business.
Moreover, news reports stated that some analysts had issued reports that did not reflect their true
beliefs and communicated to institutional investors views that differed materially from those
expressed in their research reports.
Regulation AC is intended to address these issues. It complements other rules governing
conflicts of interest disclosure by research analysts, including NYSE Rule 472, NASD Rule
2711, and the anti-fraud provisions of the federal securities law.
Regulation AC requires that research reports published, circulated, or provided by a
broker or dealer or covered person contain a statement attesting that the views expressed in each
research report accurately reflect the analyst's personal views and whether or not the research
analyst received or will receive any compensation in connection with the views or
recommendations expressed in the research report. Regulation AC also requires broker-dealers
to, on a quarterly basis, maintain records of research analyst statements regarding whether the
views expressed in public appearances accurately reflected the analyst's personal views, and
whether any part of the analyst's compensation is related to the specific recommendations or
views expressed in the public appearance. Regulation AC also requires that research prepared by
foreign persons be presented to U.S. persons pursuant to Securities Exchange Act Rule 15a-6 and
that broker-dealers notify associated persons if they would be covered by the regulation.
Regulation AC excludes the news media from its coverage.
2.

Purpose and Use of the Information Collection

Regulation AC focuses on core issues of analysts' integrity, their beliefs in their
recommendations and the influence of compensation on their recommendations. It is important
for an investor to know whether an analyst may be biased with respect to securities or issuers
that are the subject of a research report. Further, in evaluating a research report, it is reasonable
for an investor to want to know about an analyst's compensation. The information collections of
Regulation AC further these purposes by making disclosures of these issues to investors.
Without the information collection, the purposes of Regulation AC could not be met.

3.

Consideration Given to Information Technology

The Commission is not aware of any technical obstacles to reducing the burden through the
use of improved information technology.
4.

Duplication

The information required by Regulation AC does not duplicate that required by any other
federal regulation.
5.

Effects on Small Entities

Regulation AC’s requirements are closely related to information, procedures, and
disclosures required by existing SRO rules, which apply to both large and small broker-dealers that
publish or circulate research reports. The Commission believes that the requirements of Regulation
AC are not unduly burdensome on small entities.
6.

Consequences of Not Conducting Collection

Failing to collect this information would deprive investors of important information
regarding whether an analyst potentially is biased with respect to securities or issuers that are the
subject of each research report or public appearance, as well as information regarding an analyst's
compensation with respect to recommendations or views expressed in each research report or public
appearance. Regulation AC is reasonably designed to prevent acts and practices that are fraudulent,
deceptive, or manipulative.
7.

Inconsistencies With Guidelines in 5 CFR 1320.8(d)

The collection of information requested in the rules described herein is conducted in a
manner consistent with the guidelines in 5 C.F.R.1320.5(d)(2).
8.

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments on
this collection of information was published. No public comments were received.
9.

Payment or Gift
Not applicable.

10.

Confidentiality
No assurance of confidentiality is provided.

11.

Sensitive Questions

No questions of a sensitive nature are asked. The information collection does not collect
any Personally Identifiable Information (PII).
12.

Burden of Information Collection
a.

Certifications of Research Reports

The Commission believes that the average amount of time it takes a broker-dealer to
include the required certifications and disclosures in each research report is one minute per
report. The Commission estimates that broker-dealers publish approximately 657,000 research
reports per year. Therefore, the Commission estimates that the total annual burden in hours for
all broker-dealers to comply with the research report certification and disclosure requirements is
approximately 10,950 hours per year [(1 minute x 657,000 reports) / 60 minutes]. The
Commission estimates that the hourly pay rate for a research analyst in 2013 was approximately
$452 per hour. 1 Therefore, the Commission estimates that the total annual internal cost of
compliance for broker-dealers to comply with the research report certification and disclosure
requirements is approximately $4,949,400 per year [10,950 hours x $452].
Rule 501 of Regulation AC, which applies to research reports, may also impose
requirements on certain entities if they are associated with a broker-dealer and meet the
definition of “covered person.” The Commission estimates that approximately 2,383 SEC
registered investment advisers are associated with a broker-dealer. The Commission believes
that not all of these entities write research reports, and that those who do write research reports
write relatively few. Of those investment advisers that are associated with a broker-dealer and
that write research reports, we do not believe that all of them will meet the definition of a
“covered person.” As a conservative estimate, however, if all SEC registered investment
advisers are covered persons and on average publish as many research reports per year as the
average broker-dealer (250 research reports), the estimated total number of research reports
published by SEC registered investment advisers who are associated with a broker-dealer is
approximately 595,750 [250 x 2,383]. Therefore, the Commission estimates that the total annual
analyst certification burden in hours for these investment advisers is approximately 9,929 hours
[(1 minute x 595,750 research reports) / 60 minutes]. The Commission estimates that the annual
internal cost of complying with the research report certification and disclosure requirements for
SEC registered investment advisers is approximately $4,487,908 per year [9,929 hours x $452].
Therefore, the total annual number of responses for the research report certification and
disclosure requirements is approximately 1,252,750 [657,000 research reports per year published
by broker-dealers + 595,750 research reports per year published by SEC registered investment
advisers who are associated with a broker-dealer]. The total annual burden in hours of
complying with the research report certification and disclosure requirements is 20,879 hours
1

The $452/hour figure for a research analyst is from SIFMA’s Management & Professional Earnings in the
Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year and multiplied by
5.35 to account for bonuses, firm size, employee benefits and overhead.

[10,950 hours for broker-dealer compliance + 9,929 hours for “covered person” compliance].
This burden is a reporting burden. The total annual internal cost of complying with the research
report certification and disclosure requirements is $9,437,308 [$4,949,400 for broker-dealer
compliance + $4,487,908 for “covered person” compliance].
b.

Quarterly Statements on Public Appearances

The Commission estimates that the average amount of time it takes a research analyst to
prepare the quarterly statements regarding public appearances is ten minutes per analyst. The
Commission believes that, on average, approximately 519 public appearances by research
analysts occur per quarter, or about 2,076 appearances per year. Therefore, the Commission
believes that the total annual burden in hours of complying with the quarterly statements on
public appearances requirement is approximately 346 hours per year [(10 minutes x 2,076
appearances) / 60 minutes]. This is a recordkeeping burden. The Commission estimates that the
total annual internal cost of complying with the quarterly statements on public appearances
requirement is approximately $156,392 [346 hours x $452].
c.

Notifications of Associated Persons

Rule 504 of Regulation AC requires a broker-dealer to notify its associated persons that
issue research reports as to whether associated persons would meet the definition of “covered
persons” under Regulation AC, and therefore, be subject to the rule. For PRA purposes, the
below calculations represent the Commission’s estimates of the amount of time that would be
required for broker-dealers to comply with Rule 504. The Commission estimates that there are
approximately 2,383 investment advisers that are associated with at least one broker-dealer. The
Commission estimates that it takes approximately one hour per year for each of the
approximately 2,383 broker-dealers to determine whether it maintains and enforces written
policies and procedures reasonably designed to prevent the broker or dealer or any of its
controlling persons, officers, or employees from influencing the activities of research analysts
and the content of research reports prepared by associated persons. The Commission estimates
that it takes approximately thirty minutes per year for each broker-dealer to determine whether
its associated persons have any officers or employees in common with the broker or dealer who
can influence the activities of research analysts or the content of research reports and, if so, the
identity of those persons. The Commission estimates that it takes fifteen minutes per year for
each broker-dealer to draft and provide the required notification to its associated persons.
Therefore, the Commission estimates that the annual burden for broker-dealers of complying
with the notifications of associated persons requirement is approximately 4,170 hours [(2,383 x
105 minutes) / 60]. This is a third-party disclosure burden. The Commission expects that a
compliance officer will likely be the employee primarily charged with making the necessary
determinations, and drafting and providing the required notification. The Commission estimates
that the hourly pay rate for a compliance officer in 2013 was approximately $485 per hour.2 The
Commission estimates that the annual internal cost of complying with the notifications of
2

The $485/hour figure for a compliance officer is from SIFMA’s Management & Professional Earnings in the
Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year and multiplied by
5.35 to account for bonuses, firm size, employee benefits and overhead.

associated persons requirement in dollars would be approximately $2,022,450 [4,170 hours x
$485].
d.

Total Reporting Burden

The Commission estimates that the total annual number of respondents is approximately
5,186 [estimated number of research analysts employed in the U.S.]. 3 The Commission
estimates that the total annual number of responses is approximately 1,257,209 [1,252,750
responses for the research report certification and disclosure requirements + 2,076 responses for
the quarterly statements on public appearances requirement + 2, 383 responses for the
notifications of associated persons requirement].
The Commission estimates that the regulation results in a total annual burden of
approximately 25,395 hours [20,879 hours for the certifications of research reports requirements
+ 346 hours for the quarterly statements on public appearances requirement + 4,170 hours for the
notifications of associated persons requirement]. Therefore, the Commission estimates that the
regulation results in a total annual internal cost of compliance in dollars of approximately
$11,616,150 [$9,437,308 for the certifications of research reports requirements + $156,392 for the
quarterly statements on public appearances requirement + $2,022,450 for the notifications of
associated persons requirement].
13.

Costs to Respondents

Not applicable; (a) it is not anticipated that respondents will have to incur any capital and
start-up cost to comply with Regulation AC; (b) it is not anticipated that the respondents will
have to incur any additional operational or maintenance cost (other than provided for in Item no.
12 above) to comply with the rule.
14.

Costs to Federal Government

The government does not experience significant costs based on the recordkeeping required
pursuant to Regulation AC. The information collected by the respondents may be reviewed only
pursuant to an investigation, not as a matter of routine.
15.

Changes in Burden

The change in time burden is due to a change in the Commission’s estimate of the number
of investment advisors that are associated with broker-dealers.
16.

3

Information Collection Planned for Statistical Purposes

The Commission has used the total number of research analysts employed in the U.S. to estimate the total number
of respondents under the rules. This figure serves as the best indicator of the total number of respondents since the
event triggering Regulation AC responsibilities, the creation of research reports, is performed by research analysts.

Not applicable. The information collection is not used for statistical purposes.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to not display the expiration date for OMB
approval.
18.

Exceptions to Certification
This collection complies with the requirements in 5 CFR 1320.9.

B.

Collecting Information Employing Statistical Methods
This collection does not involve statistical methods.