Supporting Statement for Form ADV 2015 Rulemaking Proposal

SUPPORTING STATEMENT FOR PAPERWORK REDUCTION ACT SUBMISSION
PROPOSAL TO AMEND FORM ADV
UNDER THE INVESTMENT ADVISERS ACT OF 1940
(17 CFR 279.1)

A.

JUSTIFICATION
1.

Necessity for the Information Collection

On May 20, 2015, the Securities and Exchange Commission (the “Commission”
or “SEC”) issued a release proposing amendments to Part 1A of Form ADV 1, and related
rules under the Investment Advisers Act of 1940 )the “Advisers Act” or “Act”), that are
designed to provide additional information about investment advisers and their clients,
including clients in separately managed accounts, provide for umbrella registration for
private fund advisers and clarify and address technical and other issues in certain Form
ADV items and instructions. 2
Form ADV is the two-part investment adviser registration form. Part 1 of Form
ADV contains information used primarily by Commissionstaff, and Part 2 is the client
brochure. Rule 203-1 3 under the Advisers Act requires every person applying for
investment adviser registration with the Commission to file Form ADV. Rule 204-4 4
under the Advisers Act requires certain investment advisers exempt from registration
with the Commission to file reports with the Commission by completing a limited
number of items on Form ADV (“exempt reporting advisers”). Rule 204-1 5 under the

1

17 CFR 279.1.

2

The proposing release is attached as Appendix A.

3

17 CFR 275.203-1.

4

17 CFR 275.204-4.

5

17 CFR 275.204-1.

Advisers Act requires any adviser that is required to complete Form ADV to update the
form at least annually, including exempt reporting advisers that report to the Commission
pursuant to rule 204-4 and requires advisers to submit electronic filings through the
Investment Adviser Registration Depository (“IARD”). The paperwork burdens
associated with rules 203-1 and 204-1 are included in the approved annual burden
associated with Form ADV and thus do not entail a separate collection of information.
The paperwork burdens associated with rule 204-4 are also included in the approved
annual burden associated with Form ADV and likewise do not entail a separate collection
of information.
Form ADV contains “collection of information” requirements within the meaning
of the Paperwork Reduction Act of 1995. 6 Part 1A of Form ADV contains collections of
information for which the annual aggregate burden will likely be affected as a result of
the proposed amendments. The collections are necessary to provide advisory clients,
prospective clients, and the Commission with information about the adviser, and its
business, conflicts of interest and personnel. Responses are not kept confidential.
The title of this collection of information is: “Form ADV under the Investment
Advisers Act of 1940” and the Commission previously submitted this collection to the
Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. OMB approved, and subsequently extended, this collection
under control number 3235-0049 (expiring on February 28, 2018). 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. This collection of information
is codified at 17 CFR 279.1, 17 CFR 275.203-1, 17 CFR 275.204-1 and 17 CFR 275.2046

44 U.S.C. 3501 to 3520.

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4 and is mandatory. The respondents are investment advisers registered with the
Commission or applying for registration with the Commission or exempt reporting
advisers.
2.

Purpose of the Information Collection

The purpose of this collection of information is to provide advisory clients,
prospective clients, and the Commission with information about an adviser, and its
business, conflicts of interest and personnel. We use the information to determine
eligibility for registration with us and to manage our regulatory, examination, and
enforcement programs. Clients use certain of the information to determine whether to
hire an adviser and, if hired, how to manage that relationship.
This collection of information is found at 17 CFR 275.203-1, 275.204-1, 275.2044, and 275.279.1, and it is mandatory. Responses are not kept confidential. The majority
of the respondents to the Form ADV collection of information are investment advisers
registered with the Commission or applying for registration with the Commission while
the additional respondents to the Form ADV collection of information are exempt
reporting advisers. The information collected takes the form of disclosures to
respondents’ clients, potential clients, and the Commission.
3.

Role of Improved Information Technology

The information collected pursuant to Form ADV takes the form of disclosures
made by investment advisers to their clients and potential clients and reporting to the
Commission. Investment advisers currently file their Form ADV electronically on the
IARD system. This method of collecting information reduces the regulatory burden upon
investment advisers by permitting them to file applications for registration, and

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amendments thereto, at one central location, rather than filing Form ADV separately with
the Commission and the states for notice filing purposes.
Exempt reporting advisers are subject to reporting, but not registration,
requirements and must submit their reports through the IARD using the same process as
registered investment advisers. Because exempt reporting advisers may be required to
register on Form ADV with one or more state securities authorities, use of the existing
form and filing system permits these advisers to satisfy both state and Commission
requirements with a single electronic filing. Our approach permits an adviser to
transition from filing reports with us to applying for registration under the Act by simply
amending its Form ADV; the adviser would check the box to indicate it is filing an initial
application for registration, complete the items it did not have to answer as an exempt
reporting adviser, and update the pre-populated items that it already has on file.
4.

Efforts to Identify Duplication

The collection of information requirements of the form, including the proposed
amendments to the form, are not duplicated elsewhere.
5.

Effect on Small Entities

The requirements of Form ADV, including the proposed amendments, are the
same for all investment advisers registered with the Commission, and they are the same
for all exempt reporting advisers, including (in both cases) those advisers that are small
entities. Investment advisers with less than $100 million in assets under management
generally are not permitted to register with the Commission and must register with state
securities authorities.
6.

Consequences of Less Frequent Collection

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The collection of information required by the form is necessary to protect
investors by providing clients and potential clients, as well as the Commission, with
information about the adviser, and its business, conflicts of interest and personnel. The
consequences of not collecting this information would be that clients and prospective clients
may not have the information they need in order to evaluate the adviser’s business practices
and to determine whether to hire an adviser and, if hired, how to manage that relationship.
In addition, if the information is either not collected or is collected less frequently, the
Commission’s ability to protect investors would be reduced.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

Not applicable.
8.

Consultation Outside the Agency

In the release proposing amendments to Form ADV and related rules, the
Commission requested public comment on the effect of information collections under
these amendments. In addition, the Commission and the staff of the Division of
Investment Management participate in an ongoing dialogue with representatives of the
investment adviser industry through public conferences, meetings and informal
exchanges. These various forums provide the Commission and the staff with a means of
ascertaining and acting upon paperwork burdens confronting the industry.
9.

Payment or Gift to Respondents

None.
10.

Assurance of Confidentiality

The information collected pursuant to Form ADV is through filings with the
Commission. These disclosures are not kept confidential.

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11.

Sensitive Questions

Form ADV collects Personally Identifiable Information (PII). Form ADV
requires filers to provide names, dates of birth and social security numbers (the social
security numbers are screened from public view). The IARD system contains an
embedded check which prevents individuals from providing social security numbers. All
individuals (and entities other than trusts) are required to obtain CRD numbers, which do
not constitute PII. Such collection and usage is necessary for verification purposes.
Commission staff uses this information for positive verification of individuals and
entities. Alternative identifies are used for all individuals and entities other than trusts
because a social security number is the only identifier available to them. The
Commission complies with section 7 of the Privacy Act of 1974 because the Advisers
Act authorizes the Commission to collect this information on Form ADV from advisers. 7
Filing Form ADV is mandatory. A System of Records Notice has been published in the
Federal Register at 66 FR 7820. It, along with instructions on how to obtain the
applicable Privacy Impact Assessment, can be found at
http://www.sec.gov/about/privacy/secprivacyoffice.htm.
12.

Estimates of Hour Burden

The currently approved total annual burden estimate for all advisers of
completing, amending and filing Form ADV (Part 1 and Part 2) with the Commission is
154,402 hours. This burden is based on an average total hour burden of 40.74 hours per
Commission-registered adviser for the first year that an adviser completes Form ADV but

7

See 15 U.S.C. §§ 80b-3 and 80b-4.

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excluding private fund reporting. 8 We estimate that, as a result of the proposed
amendments to Form ADV Part 1A, other than those applicable to private fund reporting,
the average total collection of information burden per registered advisers would increase
3 hours to 43.74 hours. Based on IARD system data as of April 2015, approximately
11,600 investment advisers are registered with the Commission. Not including private
fund reporting, the estimated aggregate annual burden applicable to current registered
advisers would be 507,384 hours (34,800 of it attributable to the proposed amendments).
We believe that most of the paperwork burden would be incurred in the registered
adviser’s initial submission of Form ADV. Thus, we have amortized the paperwork
burdens of the revised form over a three-year period. Amortizing the burden imposed by
Form ADV over a three-year period to reflect the anticipated period of time that advisers
would use the revised Form would result in an average annual burden of an estimated
169,128 hours per year 9 (11,600 hours per year of it attributable to the proposed
amendments), 10 or 14.58 hours per year for each adviser currently registered with the
Commission.11
Respondents under this collection of information would be advisers currently
registered with the Commission as well as new applicants for investment adviser
registration with the Commission. Based on IARD system data, we estimate that there

8

The currently approved one-time initial cost burden for outside legal and compliance
consulting fees in connection with initial preparation of Part 2 of Form ADV is
$3,600,000. We are not proposing any amendments to Part 2 of Form ADV and therefore
we are not modifying this estimate.

9

507,384 hours/3 = 169.128 hours.

10

34,800 hours/3 = 11,600 hours.

11

169,128 hours/11,600 advisers = 14.58 hours.

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will be approximately 1,000 new SEC registered investment advisers filing Form ADV
annually. Based on the estimated average collection of information burden of 43.74
hours including the proposed amendments, we estimate that the total annual burden
applicable to these SEC registered advisers for the first year that they complete Form
ADV but excluding private fund reporting requirements is 43,740. 12 Amortizing the
burden imposed by Form ADV for new registrants over a three-year period to reflect the
anticipated period of time that advisers would use the revised Form would result in an
average annual burden of an estimated 14,580 hours per year 13 (1,000 of it attributable to
the proposed amendments). 14 We therefore estimate the total hour burden to be 183,708
hours per year. 15
Not including private fund reporting, the currently approved estimate of the
average total collection of information burden per exempt reporting adviser for the first
year that an exempt reporting adviser completes Form ADV (limited subset of Part 1
only) is 2 hours. We do not anticipate that the proposed amendments to Form ADV
would affect the per exempt reporting adviser burden estimate. Based on IARD system
data, we estimate that there are currently 2,914 exempt reporting advisers filing Form
ADV and there will be 500 new exempt reporting advisers filing Form ADV annually.
Therefore, we estimate that the total annual burden applicable to these exempt reporting

12

43.74 hours x 1000 SEC registered advisers = 43,740 hours.

13

43,740 hours/3 = 14,580 hours.

14

3,000 hours/3 = 1,000 hours.

15

14,580 hours for new registrants + 169,128 hours for existing registrants = 183,708
hours.

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advisers excluding private fund reporting requirements is 6,828 hours per year. 16
Amortizing this total burden over three years as we did for registered advisers results in
an average annual burden of an estimated 2,276 hours per year. 17
The currently approved estimate for private fund advisers, regardless of whether
they are SEC registered advisers or exempt reporting advisers, is that they will spend, on
average, 1 hour per private fund completing Item 7.B and Section 7.B of Schedule D on
Form ADV. We do not anticipate that our proposed amendments to Form ADV would
affect the per private fund burden of completing Item 7.B and Section 7.B of Schedule D
for either registered advisers to private funds or exempt reporting advisers. Based on
IARD system data, we estimate that, approximately 4,364 registered advisers advise a
total of 28,532 private funds, and, on average, 300 SEC registered advisers making their
initial filing will report approximately 1,100 funds resulting in a total annual burden of
29,632 hours. 18 Amortizing this burden over three years results in an average estimated
burden of 9,877 hours per year. 19 Based on IARD system data, we also estimate that, on
average, 2,914 current exempt reporting advisers report 9,896 private funds and a
projected 500 new exempt reporting advisers making their initial filing will report
approximately 1,000 private funds, resulting in a total annual burden of 10,896 hours. 20
Amortizing this total burden over three years results in an average estimated burden of

16

2 hours x (2,914 current exempt reporting advisers + 500 new exempt reporting advisers)
= 6,828 hours.

17

6,828 hours / 3 = 2,276 hours.

18

1 hour x 28,532 private funds = 28,532 hours. 1 hour x 1,100 private funds = 1,100
hours. 28,532 + 1,100 = 29,632.

19

29,632 hours / 3 = 9,877 hours.

20

9,896 private funds + 1,000 private funds = 10,986 private funds. 10,986 x 1 hour =
10,986 hours.

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3,632 hours per year. 21 As a result, we estimate that the annual private fund reporting
requirement applicable to advisers (both SEC registered advisers and exempt reporting
advisers) will be 13,509 hours. 22
We also proposed a new Schedule R to Form ADV for umbrella filing for
registered advisers to private funds submitting a single Form ADV on behalf of
themselves and their relying advisers. Of the SEC-registered advisers, we estimate based
on current Form ADV filings that approximately 750 registered advisers currently make a
single filing for themselves and approximately 2,500 relying advisers. 23 Taking into
account the scope of information we proposed to request and our understanding that
much of the information is readily available and is already reported by advisers, we
estimate that advisers to private funds that elect to rely on umbrella registration will
spend 1 hour per filing adviser completing new Schedule R. As a result, we estimate that
umbrella registration would add 750 24 hours to the annual burden applicable to registered
advisers. We estimate that, on average, 65 SEC registered advisers annually would make
their initial filing with us as filing advisers, increasing the overall annual burden for
advisers to private funds an additional 65 hours, or 815 hours in total. Amortizing these
hours for a three year period as with the rest of the burdens associated with Form ADV,
results in 272 additional hours per year. 25

21

10,896 hours / 3 years = 3,632 hours per year.

22

9,877 hours attributable to SEC registered investment advisers + 3,632 hours attributable
to exempt reporting advisers = 13,509 hours.

23

Based on IARD data as of April 1, 2015.

24

750 filing advisers x 1 hour per completing Schedule R = 750 hours.

25

815 hours/3 = 271.66 hours.

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Based on IARD data, we continue to estimate that each SEC registered
investment adviser filing Form ADV through the IARD system will amend its form two
times per year. On average, these consist of one interim updating amendment, which we
continue to estimate 0.5 hours per amendment, 26 and one annual updating amendment,
which we have increased by 1 hour to 7 hours per amendment because of the proposal, 27
each year. Therefore we estimate the total annual burden for SEC registered advisers
attributable to Form ADV amendments is 87,000 hours. 28 In addition, we continue to
estimate that each SEC registered investment adviser will, on average, spend 1 hour per
year making interim amendments to brochure supplements 29 and an additional 1 hour per
year to prepare new brochure supplements as required by Part 2. 30 We also continue to
expect advisers to spend an average of 1.3 hours annually to meet obligations to deliver
codes of ethics to clients. 31 Therefore we estimate the total annual burden for SEC
registered advisers attributable to amendments, brochure supplements and obligations to
deliver codes of ethics to be 125,280 hours. 32
Based on IARD data, we continue to estimate that each exempt reporting adviser
filing Form ADV through the IARD system will amend its form 2 times per year. On
average, these consist of one interim updating amendment (at an estimated 0.5 hours per

26

11,600 SEC registered investment advisers x 0.5 hours = 5,800 hours.

27

11,600 SEC registered investment advisers x 7 hours = 81,200 hours.

28

5,800 hours + 81,200 hours = 87,000 hours.

29

11,600 SEC registered investment advisers x 1 hour = 11,600 hours.

30

11,600 SEC registered investment advisers x 1 hour = 11,600hours.

31

11,600SEC registered investment advisers x 1.3 hours = 15,080 hours.

32

87,000 hours + 11,600 hours + 11,600 hours + 15,080 hours = 125,280 hours.

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amendment) 33 and one annual updating amendment (at an estimated 1 hour per
amendment) 34 each year. In addition, we anticipate 200 final filings by exempt reporting
advisers annually (at an estimated 0.1 hours per filing). 35 We do not anticipate that our
proposed amendments to Form ADV would affect the per exempt reporting adviser
burden. The total annual burden associated with exempt reporting advisers filing
amendments and final filings is 4,391 hours. 36
Based on the proposed amendments, the revised total annual collection of
information burden for SEC registered advisers to file and complete the revised Form
ADV (Parts 1 and 2), including private fund reporting, plus the burden associated with
amendments to the form, preparing brochure supplements and delivering codes of ethics
to clients is estimated to be approximately 319,137 hours per year, 37 for a monetized total
of $79,784,000. 38 The total annual collection of information burden for exempt reporting
advisers to file and complete the required Items of Part 1A of Form ADV, including the

33

2,914 exempt reporting advisers x .5 hours = 1,457 hours.

34

2,914 exempt reporting advisers x 1 hour = 2,914 hours.

35

200 exempt reporting advisers x 0.1 hours = 20 hours.

36

1,457 hours + 2,914 hours + 20 hours = 4,391.

37

183,708 hours per year attributable to initial preparation of Form ADV + 9,877 hours per
year attributable to initial private fund reporting requirements + 272 hours attributable to
initial umbrella registration + 125,280 hours per year attributable to amendments,
brochure supplements and obligations to deliver codes of ethics = 319,137 hours.

38

We expect that the performance of this function would most likely be equally allocated
between a senior compliance examiner and a compliance manager, or persons performing
similar functions. Data from the SIFMA Management and Professional Earnings Report
2013, 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, suggest that costs for these
positions are $217 and $283 per hour, respectively. (159,568 hours x $217) + (159,568
hours x 283) = $79,784,000. For a SEC registered adviser that does not already have a
senior compliance examiner or a compliance manager, we expect that a person
performing a similar function would have similar hourly costs.

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burden associated with amendments to the form, is estimated to be 10,299, 39 for a
monetized total of $2,574,500. 40
We estimate that if the proposed amendments to Form ADV are adopted, the total
annual hour burden for the form would be 329,436 hours and a monetized total of
$82,358,500. 41 This is an increase of 175,034 hours from the currently approved burden
estimates, 42 which is attributable primarily to the currently approved burden estimates not
considering the amortized annual burden of Form ADV on existing registered advisers
and exempt reporting advisers. The resulting blended average per adviser burden for
Form ADV is 22.69 hours (for a monetized total of $5,674.42), 43 which consists of an
average annual burden of 27.51 hours 44 for each of the estimated 11,600 SEC registered
advisers, and 3.53 hours 45 for each of the estimated 2,914 exempt reporting advisers.
13.

Estimate of Total Annual Cost Burden

39

2,276 hours per year attributable to initial preparation of Form ADV + 3,632 hours
attributable to initial private fund reporting requirements + 4,391 hours per year for
amendments and final filings = 10,299 hours.

40

We expect that the performance of this function would most likely be equally allocated
between a senior compliance examiner and a compliance manager, or persons performing
similar functions. Data from the SIFMA Management and Professional Earnings Report
2013, 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, suggest that costs for these
positions are $217 and $283 per hour, respectively. (5,149 x $217) + (5,149 x $283) =
$2,574,500. For an exempt reporting adviser that does not already have a senior
compliance examiner or a compliance manager, we expect that a person performing a
similar function would have similar hourly costs.

41

319,137 hours + 10,299 hours = 329,436 hours. $79,784,000 + $2,574,500 =
$82,358,500.

42

329,436 hours - 154,402 hours = 175,034 hours.

43

329,436 hours / (11,600 registered advisers + 2,914 exempt reporting advisers) = 22.69
hours. $82,358,500 / (11,600 registered advisers + 2,914 exempt reporting advisers) =
$5,674.42.

44

319,137 hours / 11,600 registered advisers = 27.51 hours.

45

10,299 hours / 2,914 exempt reporting advisers = 3.53 hours.

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The currently approved total annual collection of information burden estimate for
Form ADV has a one-time initial cost for outside legal and compliance consulting fees in
connection with the initial preparation of Part 2 of Form ADV. We do not anticipate that
the amendments we are proposing to Form ADV will affect the per adviser cost burden
estimates for outside legal and compliance consulting fees. In addition to the estimated
legal and compliance consulting fees, investment advisers of private funds incur costs
with respect to the requirement for investment advisers to report the fair value of private
fund assets.
We expect that 1,000 new advisers will register annually with the Commission.
We estimate that the initial cost related to preparation of Part 2 of Form ADV would be
$4,400 for legal services and $5,000 for compliance consulting services, in each case, for
those advisers who engaged legal counsel or consultants. We anticipate that a quarter of
these advisers would seek the help of outside legal services and half would seek the help
of compliance consulting services. Accordingly, we estimate that 250 of these advisers
would use outside legal services, for a total cost burden of $1,100,000, 46 and 500 advisers
would use outside compliance consulting services, for a total cost burden of
$2,500,000, 47 resulting in a total cost burden among all respondents of $3,600,000 for
outside legal and compliance consulting fees related to drafting narrative brochures. 48
We estimate that 3% of registered advisers have at least one private fund client
that may not be audited. These advisers therefore may incur costs to fair value their
46

25% x 1000 SEC registered advisers = approximately 250 advisers. $4,400 for legal
services x 250 advisers = $ 1,100,000.

47

50% x 1000 SEC registered advisers = 500 advisers. $5,000 for consulting services x
500 advisers = $2,500,000.

48

$1,100,000 + $2,500,000 = $3,600,000.

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private fund assets. Based on current IARD data, 4,364 registered advisers currently
advise private funds. We therefore estimate that approximately 131 registered advisers
may incur costs of $37,625 each on an annual basis, for an aggregate annual total cost of
$4,928,875. 49
Together, we estimate that the total cost burden among all registered advisers for
outside legal and compliance consulting fees related to third party or outside valuation
services and for drafting outside legal and compliance consulting fees to be $8,528,875, 50
an increase of $4,928,875 from the current approved cost burden estimate of $3,600,000.
The increase in annual cost burden is attributable to the currently approved burden not
considering the cost to advisers to fair value private fund assets.
14.

Estimate of Cost to the Federal Government

There are no costs to the government directly attributable to Form ADV.
15.

Explanation of Changes in Burden

We estimate that if the proposed amendments to Form ADV are adopted, the total
annual hour burden for the form would be 329,436 hours. 51 This is an increase of
175,034 hours from the currently approved burden estimates, 52 which is attributable
primarily to the currently approved burden estimates not considering the amortized
annual burden of Form ADV on existing registered advisers and exempt reporting
advisers. The resulting blended average per adviser burden for Form ADV is 22.70

49

131 advisers x $37,625 = $4,928,875.

50

$3,600,000 + $4,928,875 = $8,528,875.

51

319,137 hours + 10,299 hours = 329,436 hours.

52

329,436 hours - 154,402 hours = 175,034 hours.

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hours. 53 The blended average consists of an average annual burden of 27.51 hours 54 for
each of the estimated 11,600 SEC registered advisers and 3.53 hours 55 for each of the
estimated 2,914 exempt reporting advisers.
Registered investment advisers are also expected to incur an annual cost burden of
$8,528,875, an increase of $4,928,875 from the current approved cost burden estimate of
$3,600,000. The increase in annual cost burden is attributable to the currently approved
burden not considering the cost to advisers to fair value private fund assets. We do not
anticipate that the amendments we are proposing to Form ADV will affect the per adviser
cost burden estimates.

16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to not Display Expiration Date

We request authorization to omit the expiration date on the electronic version of
the form, although the OMB control number will be displayed. Including the expiration
date on the electronic version of this form will result in increased costs, because the need
to make changes to the form may not follow the application’s scheduled version release
dates.
18.

Exceptions to Certification Statement

Not applicable.

53

329,436 / 14,514 = 22.70.

54

319,137 hours / 11,600 advisers = 27.51.

55

10,299 hours / 2,914 = 3.53 hours.

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B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL

METHODS
Not applicable.

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