Rule_206(4)-2_Supporting_Statement 2018

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 206(4)-2
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) [15 U.S.C.
80b-6(4)] prohibits any investment adviser from engaging in any act, practice or course of business
which is fraudulent, deceptive or manipulative and gives the Commission the power, by rules and
regulations, to define and prescribe means reasonably designed to prevent such acts, practices and
courses of business.
Rule 206(4)-2 under the Advisers Act requires advisers to protect the assets that their
clients have entrusted to their custody. 1 The rule contains several “collection of information”
requirements within the meaning of the Paperwork Reduction Act of 1995 [44 U.S.C. 3510 to
3520]. The title for the collection of information is “Rule 206(4)-2 under the Investment Advisers
Act of 1940 -- Custody of Funds or Securities of Clients by Investment Advisers.” The collection
of information is currently approved under OMB control number 3235-0241. The Commission is
submitting this Paperwork Reduction Act submission for an extension and a revision to the currently
approved collection of information requirements.
Rule 206(4)-2 requires each registered investment adviser that has custody of client funds
or securities to maintain those client funds or securities with a broker-dealer, bank or other
“qualified custodian.” 2 This requirement is necessary to safeguard the client assets over which the
adviser has control or access. The rule requires the adviser to promptly notify clients as to the

1

17 CFR 275.206(4)-2.

2
place and manner of custody after opening an account for the client and following any changes. 3 If
an adviser sends account statements to its clients, it must insert a legend in the notice and in
subsequent account statements sent to those clients urging them to compare the account statements
from the custodian with those from the adviser. 4 The adviser also must have a reasonable basis,
after due inquiry, for believing that the qualified custodian maintaining client funds and securities
sends account statements directly to the advisory clients, and undergo an annual surprise
examination by an independent public accountant to verify client assets pursuant to a written
agreement with the accountant that specifies certain duties. 5 Unless client assets are maintained by
an independent custodian (i.e., a custodian that is not the adviser itself or a related person), the
adviser also is required to obtain or receive a report of the internal controls relating to the custody of
those assets from an independent public accountant that is registered with and subject to regular
inspection by the Public Company Accounting Oversight Board (“PCAOB”). 6
Advisers to limited partnerships, limited liability companies and other pooled investment
vehicles are excepted from the account statement delivery requirement and are deemed to comply
with the annual surprise examination requirement if the limited partnerships, limited liability
companies or pooled investment vehicles are subject to annual audit by an independent public
accountant registered with, and subject to regular inspection by the PCAOB, and the audited

2

Rule 206(4)-2(a)(1).

3

Rule 206(4)-2(a)(2).

4

Rule 206(4)-2(a)(2).

5

Rule 206(4)-2(a)(3), (4).

6

Rule 206(4)-2(a)(6).

3
financial statements are distributed to investors in the pools. 7 The rule also provides an exception to
the surprise examination requirement for advisers that have custody solely because they have
authority to deduct advisory fees from client accounts and advisers that have custody solely
because a related person holds the adviser’s client assets and the related person is operationally
independent of the adviser. 8
These collection of information requirements are found at 17 CFR 275.206(4)-2 and are
mandatory. As discussed, advisory clients use this information to confirm proper handling of their
accounts. The Commission’s staff uses the information obtained through the collection in its
enforcement, regulatory and examination programs. The respondents to this information collection
are those investment advisers that are registered with the Commission and have custody of client
funds or securities.
2.

Purpose and Use of the Information Collection

As discussed above, the Commission uses the information required by rule 206(4)-2 in
connection with its investment adviser enforcement, regulatory, and examination programs.
Advisory clients use the information required by rule 206(4)-2 to monitor their advisers’ handling of
their accounts. Without the information collected under the rule, the Commission would be less
efficient and effective in its programs and advisory clients would not have information they need to
monitor the adviser’s handling of their accounts.

3.

7

Consideration Given to Information Technology

Rule 206(4)-2(b)(4).

4
The collection of information requirements under rule 206(4)-2 take the form of (1) annual
surprise examinations conducted by independent public accountants, (2) mailing of audited financial
statements to investors in a fund, (3) mailing of notices to clients about new custodial accounts, and
(4) internal control reports by independent public accountants registered with, and subject to regular
inspection by, the PCAOB. Accordingly, the Commission’s use of computer technology may have
little effect. The Commission currently permits advisers to provide to clients the information
required by rule 206(4)-2 electronically. 9
4.

Duplication

The requirements of rule 206(4)-2 are not duplicated elsewhere for those investment
advisers that must comply with the rule.
5.

Effect on Small Entities

The requirements of rule 206(4)-2 apply equally to all investment advisers that are
registered with the Commission and have custody of funds or securities of their clients, including
those advisers that are small entities. It would defeat the purpose of the rule to exempt small
entities from these requirements.
6.

Consequences of Not Conducting Collection

If the information required by rule 206(4)-2 is either not collected or is collected less
frequently, both the Commission's ability to protect investors and the ability of clients to monitor the
handling of their accounts would be reduced.
8

Rule 206(4)-2(b)(3), (b)(6).

9

See 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, Investment
Advisers Act Release 1562, (May 9, 1996).

5
7.

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

Investment advisers registered with the Commission may be required to maintain and
preserve certain information required under rule 206(4)-2 for more than three years. The long-term
retention of these records is necessary for the Commission's inspection program to ascertain
compliance with the Investment Advisers Act.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information requirements in
rule 206(4)-2 before it submitted this request for extension and approval to the Office of
Management and Budget. The Commission received no comments in response to its request.
The Commission and the staff of the Division of Investment Management also 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

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

Not applicable.
12.

Burden of Information Collection

Currently approved burdens. The current annual collection of information burden
approved by OMB for rule 206(4)-2 is 816,285 hours. This burden includes 74,646 hours relating to
the requirement to obtain a surprise examination, 379 hours to enter into a written agreement with

6
an independent public accountant engaged to conduct the surprise examination, 653,536 hours to
distribute audited financial statements to investors in pools managed by the adviser, and 55,047
hours to add a legend in notifications and account statements.
We now estimate the total information collection hours to be 246,532 hours. 10 The primary
cause of the change is the result of removing an outlier from the Form ADV data set that
significantly skewed the average number of investors per pooled investment vehicle. 11
Annual surprise examination. Rule 206(4)-2 requires each registered investment adviser
that has custody of client funds or securities to undergo an annual surprise examination by an
independent public accountant to verify client assets pursuant to a written agreement with the
accountant that specifies certain duties. 12 The current approved annual burden for rule 206(4)-2
includes 74,646 hours that relate to the requirement to obtain a surprise examination. We estimated
that 1,514 advisers registered with the Commission would be subject to the surprise examination.
We now estimate that 1,713 advisers are subject to the surprise examination requirement under rule
206(4)-2. 13

10

See infra note 37.

11

See supra note 31.

12

Rule 206(4)-2(a)(4).

13

Based on data from the Investment Adviser Registration Depository (“IARD”) as of
September 30, 2018 (unless indicated otherwise, all data we use in this Supporting Statement
were as of September 30, 2018, 7,216 advisers answered “yes” to Form ADV, Part 1A
Items 9.A. or 9.B. (indicating that they or a related person has custody of client assets,
excluding advisers that have custody solely because they have authority to deduct fees from
clients’ accounts) or answered “yes” to another question in Part 1A Item 9.C. Of these
advisers, 1,713 advisers indicated in response to Item 9.C.(3) that an independent public
accountant conducts an annual surprise examination of client funds and securities.

7
For purposes of estimating the collection of information burden, we have divided the
estimated 1,713 advisers into three subgroups. First, we estimate that 444 advisers have custody
because they serve as qualified custodians for their clients, or they have a related person that
serves as qualified custodian for clients in connection with advisory services the adviser provides to
the clients. 14 We estimate that these advisers are subject to an annual surprise examination with
respect to 100 percent of their clients (or 7,541 clients per adviser) based on the assumption that all
of their clients maintain custodial accounts with the adviser or related person. 15 We estimate that
each adviser will spend an average of 0.02 hours for each client to create a client contact list for
the independent public accountant. The estimated total annual aggregate burden with respect to the
surprise examination requirement for this group of advisers is 66,964 hours. 16
The second group of advisers, estimated at 1,132, are those that have custody because they
have broad authority to access client assets held at an independent qualified custodian, such as
through a power of attorney or acting as a trustee for a client’s trust. 17 Based on our staff’s
14

Based on IARD data, 432 advisers indicated that an independent public accountant prepares
an internal control report because the adviser or its affiliate acts as a qualified custodian (in
response to Item 9.C.(4)). Similarly, 88 advisers indicated that they act as a qualified
custodian (in response to Item 9.D.(1)), and 367 advisers that indicated that their related
person(s) act as qualified custodian(s) (in response to Item 9.D.(2)). 88 + 367 = 455.

15

We base our estimate on IARD data of the average number of clients of all the advisers
that will be subject to the surprise examination under the rule. To derive our estimate, we
utilized the winsorization method, by setting all values for advisers within the 99th percentile
of number of clients at the number of clients at the 99th percentile. The method lessens the
effect of outliers on client estimates.

16

444 advisers x 7,541 (average number of clients subject to the surprise examination
requirement) x 0.02 hour = 66,964 hours.

17

This estimate is based on the total number of advisers subject to surprise examinations less
those described above in the first group (custody as a result of serving as, or having a
related person serving as qualified custodian) less those described below in the third group
(custody as a result of solely managing private funds). 1,713 – 444 – 137= 1,132.

8
experience, advisers that have access to client assets through a power of attorney, acting as trustee,
or similar legal authority typically do not have access to all of their client accounts, but rather only to
a small percentage of their client accounts pursuant to these special arrangements. We estimate
that these advisers will be subject to an annual surprise examination with respect to 5 percent of
their clients (or 377 clients per adviser) who have these types of arrangements with the adviser. 18
We estimate that each adviser will spend an average of 0.02 hours for each client to create a client
contact list for the independent public accountant. The estimated total annual aggregate burden
with respect to the surprise examination requirement for this group of advisers is 8,535 hours. 19
A third group of advisers provide advice to pooled investment vehicles that are not
undergoing an annual audit and therefore would undergo the surprise examination with respect to
those pooled investment vehicle clients. Based on current IARD data, we estimate that 10 advisers
provide advice exclusively to pooled investment vehicles and undergo the surprise examination with
respect to all of their pooled investment vehicle clients. 20 We estimate that 71 advisers that provide
advice exclusively to pooled investment vehicles are subject to an annual surprise examination
because some of the pooled investment vehicles they advise do not undergo an annual audit. 21 We
18

Based on the IARD data, we estimate that the average number of clients of advisers
subject to the surprise examination requirement is 7,541. 7,541 x 0.05 = 377.

19

1,132 advisers x 377 clients x 0.02 hours = 8,535 hours.

20

Based on IARD data, we estimate that 578 advisers manage private funds and undergo a
surprise examination (responses to Items 7.B. and 9.C.(3)). Of these advisers, 10 solely
manage pooled investment vehicles, undergo a surprise examination, and do not undergo an
annual audit of the pooled investment vehicles they manage (responses to Item 5.D.(1)(f)
and Item 9.C.).

21

Based on IARD data, we estimate that 81 advisers that provide services exclusively to
pooled investment vehicles undergo an annual audit and obtain an annual surprise
examination because some of the pooled investment vehicles they advise do not undergo an
annual audit (responses to Items 5.D.(1)(f), 7.B., and 9.C.(3)).

9
further estimate that 46 advisers that provide advice not exclusively to pooled investment vehicles
are subject to an annual surprise examination because some of the pooled investment vehicles they
advise do not undergo an annual audit. 22 We estimate that each adviser providing advisory services
exclusively to pooled investment vehicles will have 21 funds and 752 investors, and each adviser not
providing advisory services exclusively to pooled investment vehicles will have 15 funds and 794
investors. 23 We estimate that advisers to these pooled investment vehicles will spend 1 hour for the
pool and 0.02 hours for each investor in the pool to create a contact list for the independent public
accountant, for an estimated total annual burden with respect to the surprise examination
requirement for these advisers of 4,339 hours. 24
These estimates bring the total annual aggregate burden with respect to the surprise
examination requirement for all three groups of advisers to 79,838. 25 This estimate does not include
the collection of information discussed below relating to the written agreement required by
paragraph (a)(4) of the rule.
Written agreement with accountant. Rule 206(4)-2 requires that an adviser subject to the
surprise examination requirement must enter into a written agreement with the independent public
22

We estimate, based on staff experience, that ten percent of the 464 advisers that provide
services not exclusively to pooled investment vehicles obtain an annual surprise examination
because some of the pooled investment vehicles they advise do not undergo an annual audit
(responses to Items 5.D.(1), 7.B. and 9.C.(3)).

23

The number of funds and investors per adviser is estimated based on the information we
collected from Schedule D of Form ADV filed by advisers that indicated that they undergo
a surprise examination and provide advisory services to pooled investment vehicles.

24

[((21 funds x 1 hour) + (752 investors x 0.02 hours)) x (81 advisers] + [((15 funds x 1 hour)
+ (794 investors x 0.02 hours)) x 46 advisers] = [36.04 hours x 81 advisers] + [30.88 hours
x 46 advisers] = 2,919 hours + 1,420 hours = 4,339 hours.

25

66,964 hours + 8,535 hours + 4,339 hours = 79,838 hours.

10
accountant engaged to conduct the surprise examination and specify certain duties to be performed
by the independent public accountant. 26 We estimate that each adviser will spend 0.25 hour to add
the required provisions to the written agreement, with an aggregate of approximately 428 hours for
all advisers that undergo surprise examinations. 27 Therefore the total annual burden in connection
with the surprise examination is estimated at 80,266 hours under the rule. 28
Audited pooled investment vehicles. The rule excepts advisers to pooled investment
vehicles from having a qualified custodian send quarterly account statements to the investors in a
pool if it is audited annually by an independent public accountant and the audited financial
statements are distributed to the investors in the pool. 29 The rule also requires that an adviser to a
pooled investment vehicle that is relying on the annual audit provision must have the pool audited
and distribute the audited financial statements to the investors in the pool promptly after completion
of the audit if the fund liquidates at a time other than its fiscal year-end. 30
The currently approved annual burden in connection with the required distribution of audited
financial statements in connection with the annual audit and liquidation audit requirements is 653,536
hours. We estimate that the average burden for advisers to mail audited financial statements to
investors in the pool is 1 minute per investor. Under our revised estimate of the number of advisers
to audited pooled investment vehicles, the number of pooled investment vehicles and the number of
investors, we estimate that the aggregate annual hour burden in connection with the distribution of
26

Rule 206(4)-2(a)(4).

27

1,713 advisers required to obtain a surprise examination x 0.25 = 428.

28

79,838 exam hours + 428 written agreement hours = 80,266 hours.

29

Rule 206(4)-2(b)(4).

30

Id.

11
annual audited financial statements is 28,132 hours. 31 We estimate that 5 percent of pooled
investment vehicles are liquidated annually at a time other than their fiscal year-end, which results in
an additional burden of 1,407 hours per year.32 As a result, the total annual hour burden to
distribute audited financial statements in connection with the annual audit and liquidation audit
requirements under the rule is estimated to be 29,539 hours. 33
Notice to clients. The rule also requires each adviser, if the adviser sends account
statements in addition to those sent by the custodian, to add a legend in its notification to clients
upon opening a custodial account on their behalf, and in any subsequent account statements it sends
to those clients, urging them to compare the account statements from the qualified custodian to

31

Based on IARD data, we estimate that 4,380 advisers have custody of client assets and
provide advisory services to pooled investment vehicles. Of these advisers, we estimate
that 4,254 advisers will have their pooled investment vehicles audited and distribute audited
financial statements to investors in the pool. [4,380 advisers to pooled investment vehicles –
137 advisers that undergo a surprise examination = 4,243 advisers that undergo an audit]
We estimate that the 4,243 advisers provide advice to 34,032 pooled investment vehicles
that have a total of 1,654,806 investors. 1,654,806 investors x 0.017 hour = 28,132 total
burden hours to distribute annual audited financials.
The significant decrease in the total burden hours from the currently approved annual
burden in connection with the required distribution of audited financial statements in
connection with the annual audit and liquidation audit requirements is the result of removing
an outlier from the Form ADV data set that significantly skewed the average number of
investors per pooled investment vehicle.

32

28,132 (total burden hours relating to distribution of annual audited financials) x 0.05 = 1,407
hours.

33

28,132 (total burden hours relating to distribution of annual audited financials) + 1,407 (total
burden hours relating to distribution of liquidation audited financials) = 29,539 hours.
The decrease in total burden hours is a result of removing an outlier from the Form ADV
data set that significantly skewed the average number of investors per pooled investment
vehicle. See supra note 31.

12
those from the adviser. 34 The legend is placed in a notification that is otherwise required to be sent
to clients at specified times, so the collection of information burden is negligible. We estimate that
4,062 advisers will be subject to this collection of information,35 and that each adviser will on
average open a new custodial account for 5% of its clients per year, either because the adviser has
new clients that request that the adviser open an account on their behalf, or because the adviser
selects a new custodian and moves its existing clients’ accounts to that custodian. We further
estimate that the adviser will spend 10 minutes per client drafting and sending the notice. The total
hour burden relating to this requirement is estimated at 136,727 hours per year. 36
Based on the above estimates, we anticipate that the estimated total information collection
burden under rule 206(4)-2 would be 246,532 hours. 37 This represents an decrease from the
currently approved burden, primarily due to a decrease in the burden related to the distribution of

34

Rule 206(4)-2(a)(2).

35

Based on IARD data, 7,020 advisers reported that they have custody (this excludes advisers
having custody solely because of deducting fees, which we understand do not typically open
custodial accounts on behalf of their clients). Of those advisers, 2,002 are advisers
exclusively to audited pooled investment vehicles. Since we estimate that 97% of advisers
to audited pooled investment vehicles obtain an annual audit (see supra note 31), the notice
requirement does not apply to 1,942 advisers, leaving 5,078 advisers that may be subject to
this information collection. [7,020 advisers with custody – (2,002 advisers to pooled
investment vehicles x 0.97) = 7,020 – 1,942 = 5,078 advisers] Based on our staff’s
observation, we estimate that clients of 80% of these advisers will receive account
statements from their advisers in addition to the account statements from the qualified
custodian. 0.8 x 5,078 = 4,062.

36

37

[4,062 x 3,960 (average number of clients for the advisers with custody of client assets) x
0.05] x 0.17 hours = 136,727 hours.
80,266 (surprise examination) + 29,539 (distribution of audited financial statements) +
136,727 (notice to clients) = 246,532.

13
audited financial statements, as discussed above. The total costs due to this information collection
hour burden is estimated at $16,616,512. 38
The estimate of average burden hours is made solely for the purposes of the Paperwork
Reduction Act. The estimate is not derived from a comprehensive or even representative survey or
study of Commission rules.

38

[428 (hours spent on written agreement) x $298 (average hour rate for compliance
managers)] + [246,104 (hours spent on complying with other provisions of the rule) x $67
(average rate for compliance clerks)] = $127,544 + $16,488,968 = $16,616,512. Data from
the Securities Industry and Financial Markets Association’s Office Salaries in the
Securities Industry 2013, modified by Commission staff to account for an 1800-hour workyear and inflation and multiplied by 2.93 to account for bonuses, firm size, employee benefits
and overhead, suggest that cost for a compliance clerk is $67 per hour, and data from the
Securities Industry and Financial Markets Association’s Management & Professional
Earnings in the Securities Industry 2013, modified by Commission staff to account for an
1800-hour work-year and inflation and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead (“SIFMA Management & Professional Earnings”), suggest
that the cost for a compliance manager position is $298 per hour.

14
Table 1: Summary of Revised Annual Responses, Burden Hours, and Burden
Hour Costs Estimates for Each Rule 206(4)-2 Information Collection (“IC”) Hour
Costs
IC

Rule 206(4)-2 IC Description

IC1
IC1

Annual Surprise Examination
Investment Adviser or Related Person
Serves as Qualified Custodian
Investment Adviser has Broad Authority to
Access Client Assets Held at an Independent
Custodian
Investment Adviser Provides Advice
Exclusively to Pooled Investment Vehicles
and Undergo Surprise Examination With
Respect to All Pooled Investment Vehicle
Clients
Investment Adviser that Provides Advice
Exclusively to Pooled Investment Vehicles
and Subject to Surprise Examination Because
Some of the Pooled Investment Vehicles do
not Undergo an Annual Audit
Investment Advisers that Provide Advice Not
Exclusively to Pooled Investment Vehicles
and Subject to Surprise Examination Because
Some of the Pooled Investment Vehicles do
not Undergo an Annual Audit
Totals for IC1
79,838

IC1
IC1

IC1

IC1

IC1
IC2

Burden
Hours

Burden
Hour Costs

Responses
3,872,312
3,348,204
426,764
7,520

53,392

36,432

$5,349,146

7,744,624

428

$127,544

1,713

IC3

Written Agreement with Independent Public
Accountant
Distribution of Audited Financial Statements

29,539

$1,979,113

1,654,806

IC4

Notice to Clients

136,727

$9,160,709

16,085,520

Totals for all ICs

246,532

$16,616,512

21,614,351

15
13.

Cost to Respondents

The currently approved collection of information for the custody rule includes an aggregate
accounting fee estimate of $147,440,000. We now estimate a total annual aggregate accounting fee
of $163,610,000. 39 The increase in estimated aggregated cost is attributable to an increase in the
number of small sized advisers that will be subject to the surprise examination requirement with
respect to 5% of their clients as well as inflation adjustments. .
We estimate that of the 1,713 advisers subject to the surprise examination requirement,
approximately 310 advisers will be subject to the surprise examination with respect to 100 percent
of their clients and will each spend an average of approximately $146,000 annually,40 71 mediumsized advisers will be subject to the surprise examination requirement with respect to 5% of their
clients and will each spend an average of approximately $23,000 annually, and 1,332 small sized
advisers will be subject to the surprise examination requirement with respect to 5% of their clients

39

See infra note 45 and accompanying text.

40

We estimate, based on IARD data, there are 310 advisers that do not currently use an
independent qualified custodian and will be subject to the surprise examination with respect
to 100% of their clients (they indicated on Form ADV, Part 1A, Items 9.C.(3) and 9.C.(4)
that they are subject to examination and have internal control reports because the adviser
or its related person is a qualified custodian).
We note that the costs of reporting to the Commission (i) regarding “material discrepancy”
pursuant to rule 206(4)-2(a)(4)(ii) and (ii) upon termination of engagement pursuant to rule
206(4)-2(a)(4)(iii) are included in the estimated accounting fees.

16
and will each spend an average of approximately $12,000 annually,41 with an aggregate annual
accounting fee of $62,877,000 for all advisers subject to the surprise examination. 42
We understand that the cost to prepare an internal control report relating to custody will
vary based on the size and services offered by the qualified custodian. We estimate that, on
average, an internal control report would cost approximately $292,000 per year for each adviser
subject to the requirement. We estimate that under rule 206(4)-2, 345 advisers will be subject to the
requirement of obtaining or receiving an internal control report. 43 Therefore the total cost

41

Based on responses to Item 5.C. of Form ADV, we estimate that the average number of
clients for the 1,403 advisers that indicated they do not have internal control reports is 2,884.
We determined, for purposes of this analysis, that an adviser with clients more than this
average number is a medium size adviser (71) and an adviser with clients less than this
average number is a small adviser (1,332).

42

(310 x $146,000) + (71 (medium advisers) x $23,000) + (1,332 (small advisers) x $12,000) =
$45,260,000 + $1,633,000+ $15,984,000 = $62,877,000.
We note that the estimated costs in this calculation have been adjusted for inflation from
prior estimates, rounded to the nearest $1,000.

43

We estimate that 444 advisers obtain an internal control report (see supra note 14 for this
estimate). Of the 310 advisers that will be subject to both the surprise examination and
internal control report requirement (see supra note 40 for this estimate), we further
estimate, based on consultation with several accounting firms, that 10% of these advisers
already obtain an internal control report for purposes other than the custody rule. In
addition, we believe that some related persons may serve as the qualified custodian for more
than one affiliated adviser. We estimate that this will reduce the number of required internal
control reports by an additional 15%. 444 – (310 x 10%) – (455 x 15%) = 444 – 31 – 68 =
345.

17
attributable to this requirement will be $100,740,000. 44 The total estimated accounting fee under the
rule 206(4)-2 is therefore estimated at $163,617,000. 45
14.

Cost to the Federal Government

There are no additional costs to the federal government.
15.

Changes in Burden

The current annual burden approved by OMB for rule 206(4)-2 is 816,285 hours. We now
estimate that the total information collection hours is 246,532 hours. The primary cause of the
decrease is the result of removing an outlier from the Form ADV data set that significantly skewed
the average number of investors per pooled investment vehicle. 46 The currently approved annual
burden under rule 206(4)-2 includes an aggregate cost estimate of $147,440,000. We now estimate
that the annual cost burden under the rule would increase to $163,617,000, which is caused by an
increase in the number of small sized advisers that will be subject to the surprise examination
requirement with respect to 5% of their clients as well as inflation adjustments.
16.

Information Collection Planned for Statistical Purposes

Not applicable.

44

$292,000 x 345 = $100,740,000
We note that the estimated costs in this calculation have been adjusted for inflation from
prior estimates, rounded to the nearest $1,000.

45

$62,877,000 (accounting fee for surprise examination) + $100,740,000 (accounting fee for
internal control report) = $163,617,000.

46

See supra note 31.

18
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exception to Certification Statement for Paperwork Reduction Act

Submission
Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS

Not applicable.