UPDATED Rule 204-3 Supporting Statement (2019 Extension) 20191016

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 204-3
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 204-3, the “brochure rule,” requires an investment adviser to deliver its
brochure and brochure supplements to its new clients or prospective clients before or at
the start of the advisory relationship and to deliver annually thereafter the full updated
brochure or a summary of material changes to its brochure. The rule also requires that
advisers deliver an amended brochure or brochure supplement (or just a statement
describing the amendment) to clients only when disciplinary information in the brochure
or supplement becomes materially inaccurate.

The brochure assists the client in

determining whether to retain, or continue employing, the adviser. Advisers registered with
the Commission are required to prepare and electronically file firm brochures through the
Investment Adviser Registration Depository (“IARD”).
Rule 204-3 contains a collection of information titled “Rule 204-3 under the
Investment Advisers Act of 1940,” found at 17 CFR 275.204-3, which is mandatory. Its
currently approved OMB control number is 3235-0047. An agency may not sponsor, and a
person is not required to respond to, a collection of information unless it displays a currently
valid OMB control number. The likely respondents to this information collection are
investment advisers registered with the Commission.
The collection of information the brochure rule requires is necessary for several
reasons. It enables the client or prospective client to evaluate the adviser’s background
and qualifications, and to determine whether the adviser’s services and practices are

appropriate for that client. It informs the client of the nature of the adviser’s business,
which may inform or limit the client’s rights under the advisory contract. It apprises the
client of situations in which the interests of the adviser may potentially be adverse to or in
conflict with those of the client. Under some circumstances, it enables the client to
consider the financial condition of the adviser in deciding whether to entrust funds or
securities to the custody of the adviser or whether to pay large advisory fees in advance.
The information that rule 204-3 requires to be contained in the brochure is also used by
the Commission and staff in its enforcement, regulatory, and examination programs.
Responses are not kept confidential.
2.

Purposes and Use of the Information Collection

Investors need accurate information about an investment adviser and its practices
in order to determine whether to retain, or to continue to employ, that adviser. The
Commission and staff need the information in its enforcement, regulatory, and
examination programs.
3.

Consideration Given to Information Technology

The Commission’s use of computer technology in connection with this
information collection, which has been previously approved by OMB, has not changed.
The Commission currently permits advisers to satisfy their obligations under this
collection of information by delivering Part 2 of Form ADV electronically with client
consent. 1

1

See Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for
Delivery of Information, Investment Advisers Act Release No. 1562 (May 9, 1996) (61 FR 24644
(May 15, 1996)) (publishing Commission interpretive guidance with respect to use of electronic
media to fulfill investment advisers’ disclosure delivery obligations).

2

4.

Duplication

The collection of information requirements of rule 204-3 are not duplicated
elsewhere.
5.

Effect on Small Entities

The requirements of rule 204-3 are the same for all investment advisers registered
with the Commission, including those that are small entities.2 To some extent small
advisers may have lesser burdens under rule 204-3. This is because small advisers
usually have less complicated business practices, fewer employees, and fewer clients, and
therefore their brochures and brochure supplements would be shorter, and would be
delivered to fewer clients.
6.

Consequences of Not Conducting Collection

The collection of information required by the rule is necessary to protect investors
by providing clients and potential clients with information about the adviser, its business,
and its conflicts of interest. 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 select or retain that
adviser.
7.

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

The collection of information imposes no additional requirements regarding record
retention.
2

Under Advisers Act rule 0-7, for purposes of the Regulatory Flexibility Act an investment adviser
generally is a small entity if it: (i) has assets under management of less than $25 million; (ii) did
not have total assets of $5 million or more on the last day of its most recent fiscal year; and (iii)
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.

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8.

Consultation Outside the Agency

The Commission and the staff of the Division of Investment Management
participate in an ongoing dialogue with representatives of the investment adviser profession
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 facing the industry.
The Commission requested public comment on the collection of information
requirements in rule 204-3 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.
9.

Payment or Gift

None.
10.

Confidentiality

The information collected pursuant to rule 204-3 is by delivery of brochures and
brochure supplements to advisory clients and prospective clients. These disclosures are
not kept confidential.
11.

Sensitive Questions

No PII collected/Not applicable.
12.

Burden of Information Collection

Rule 204-3, the “brochure rule,” requires an investment adviser to deliver its
brochure and brochure supplements to its new clients or prospective clients before or at
the start of the advisory relationship and to deliver annually thereafter the full updated
brochure or a summary of material changes to the brochure. The rule also requires that

4

advisers deliver an amended brochure or brochure supplement (or just a statement
describing the amendment) to clients only when disciplinary information in the brochure
or supplement becomes materially inaccurate.
The total annual burden currently approved by OMB for rule 204-3 is 466,145
hours. This currently approved burden is based on 11,956 investment advisers registered
with the Commission having, on average, an estimated 1,494 clients each. 3 We now
estimate that 13,173 advisers are registered with the Commission and have a median
estimated 78 clients each. 4

We are updating and revising the total collection of

information burden based upon updated data. 5
We expect that advisers will send their brochure or summary of material changes
annually in a “bulk mailing” to clients that may include clients’ account statements,

3

The average number of clients was based on advisers’ responses to Form ADV, Part 1A, Item
5.C.(1) as of January 4, 2016, excluding the three advisers that reported the largest number of
clients. Those advisers provided advisory services primarily over the Internet and met their
brochure obligations electronically, thus essentially eliminating for those advisers any burden
associated with delivery under this rule. Therefore, we believed that it was appropriate to exclude
those firms from our calculations.

4

The number of investment advisers registered with the Commission is based on advisers’
responses to Form ADV, Part 1A, Items 2.A.(1) through (13) as of March 31, 2019. The median
number of clients is based on advisers’ responses to Form ADV, Part 1A, Item 5.D.(a)(1) as of
March 31, 2019. In re-evaluating the burdens of rule 204-3, we have made two changes to how
we estimate the number of clients. First, instead of using advisers’ responses to Form ADV, Part
1A, Item 5.C.(1) for the data, we are using Item 5.D.(a)(1) of the same Form and Part. We have
made this change because Form ADV was amended so that the equivalent data from Item 5.C.(1)
is now in Item 5.D.(a)(1). See Form ADV and Investment Advisers Act Rules, Investment
Advisers Act Release No. 4509 (August 25, 2016) (81 FR 60418 (September 1, 2016)). Second,
instead of using the average number of clients, while excluding certain advisers, we have
determined to use the median number of clients. We believe that using the median number of
clients excludes outliers more appropriately than the average we used for the currently approved
burden. For reference, as of March 31, 2019, we estimate that the advisers that are registered with
the Commission have, on average, an estimated 2,533 clients each. This average number of
clients is based on data from Form ADV, Part 1A, Item 5.D.(a)(1), excluding the three advisers
who provided advisory services primarily over the Internet to the largest number of clients. See
supra note 3 (discussing the methodology for determining the average number of clients for the
currently approved burden).

5

These estimates are based on the Form ADVs filed through the IARD system as of March 31,
2019.

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periodic reports, or other important documents. We continue to estimate that, with a bulk
mailing, an adviser will require no more than 0.02 hours to send the adviser’s brochure or
summary of material changes to each client, or an annual burden of 1.56 hours per
adviser. 6 Thus, we estimate the total burden hours for 13,173 advisers to distribute their
firm brochure to clients annually to be approximately 20,550 hours per year. 7
Advisers are also required to distribute interim updates disclosing new or revised
disciplinary information in their brochure or supplements. We anticipate that in any
given year, the number of such interim updates that advisers will be required to deliver is
approximately 659. 8 We further estimate that an adviser will require no more than 0.1
hours per client for delivery of each such update. 9 This represents about 7.8 hours per
interim update. 10 Thus, the aggregate annual hour burden for affected advisers to deliver

6

(0.02 hours per client x 78 clients per adviser based on IARD data as of March 31, 2019) =
approximately 1.56 hours per adviser. We note that the burden for preparing brochures is already
incorporated into a separate burden estimate for Form ADV. We expect that most advisers will
make their annual delivery as part of a mailing of an account statement or other periodic report
they already make to clients; therefore, we estimate that the additional burden will be adding a few
pages to the mailing.

7

(0.02 hours per client x 78 clients per adviser) x 13,173 advisers based on IARD data as of March
31, 2019 = approximately 20,550 hours.

8

Of the advisers registered with the Commission, 13.33% report disciplinary events on their Form
ADVs (as of March 31, 2019, only 1,756 of all 13,173 registered advisers indicated at least one
“yes” answer to a question related to disciplinary events in Form ADV, Part 1A, Item 11). Thus,
we anticipate that a correspondingly small number of advisers will be required to disclose new or
updated disciplinary information. The Commission staff estimates that in any given year, 5% of
advisers will be required to deliver a single interim update to each of their clients, resulting in a
total of approximately 659 interim updates per year. 0.05 x 13,173 x 1 update = 659 updates.

9

This burden estimate relates only to the amount of time it will take advisers to deliver interim
updates to clients, as required by the rule amendments. The burden for preparing interim updates
is already incorporated into a separate burden estimate for Form ADV. This mailing may not be
included with a mailing of a statement or other periodic report; therefore, we estimate that it will
take slightly more time to deliver interim updates than to deliver the annual brochure or summary
of material changes.

10

0.1 hours per client x 78 clients per adviser = approximately 7.8 hours per interim update.

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interim updates to their brochures or supplements will be approximately 5,140 hours per
year. 11
We estimate that large advisers will need to design and implement systems to
track changes in supervised persons providing investment advice to particular clients.
We do not expect that such systems will be necessary for small advisers or medium
advisers. 12 We estimate that on average each of the 117 large advisers will spend 200
hours per year designing and implementing such systems, for a total of 23,400 hours per
year. 13 Thus, rule 204-3 now results in a total collection of information burden of 49,090
hours per year, or approximately 3.7 hours per adviser. 14 This includes estimated time
for large advisers to design and implement systems to track that the right supplements are
delivered to the right clients as personnel providing investment advice to those clients
change.

This represents a decrease of 417,055 hours from the currently approved

burden. 15 This decrease in the hourly burden is primarily due to (i) changing how we
estimate the number of clients of each adviser by using the median number of clients
rather than an average number of clients and (ii) new information on the number of SECregistered investment advisers that we obtained from Form ADVs filed through the IARD as

11

659 updates x 7.8 hours = 5,140 hours.

12

For purposes of the estimates in this section, we have categorized small advisers as those with 10
or fewer employees, medium-sized advisers as those with between 11 and 1,000 employees, and
large advisers as those with over 1,000 employees. According to IARD data, only 1.60% of
medium advisers report in response to Form ADV, Part 1A, Item 5.B.(1) that more than 250
employees perform investment advisory functions.

13

117 large advisers x 200 hours per year per large adviser = 23,400 hours per year.

14

20,550 hours (initial and annual delivery) + 5,140 hours (interim delivery of updates to disciplinary
information) + 23,400 (supplement tracking systems) = 49,090 hours. 49,090 hours / 13,173 advisers
= approximately 3.7 hours per adviser.

15

49,090 hours – 466,145 hours = -417,055 hours.

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of March 31, 2019. 16 With the initial, annual, and interim delivery requirements, we
estimate that the 13,173 advisers will deliver approximately 1.05 times a year, resulting
in approximately 13,832 responses. 17 This represents an increase of 1,278 responses
from the currently approved burden of 12,554 responses. 18 We estimate the burden
associated with delivery of brochures, supplements, and the summary of material changes
would represent an annual monetized cost of $3,043,580. 19
Table 1: Summary of the Number of Registered Investment Advisers and the
Number of Clients of Each Registered Investment Adviser
Description

Requested

Number of Registered Investment
Advisers
Number of Clients of Each
Registered Investment Adviser 20

Previously
Approved

Change

13,173

11,956

1,217

78

1,494

-1,416

16

See supra note 4, and accompanying text (explaining why we changed how we estimated the
number of clients of each adviser as well as the source of the updated data).

17

1 response for initial and annual delivery + 0.05 response for annual interim delivery = 1.05
annual responses. 1.05 responses x 13,173 advisers = 13,832 responses. See supra note 8.
(discussing that the Commission staff estimates that in any given year, 5% of advisers will be
required to deliver a single interim update to each of their clients.)

18

13,832 requested responses - 12,554 currently approved responses = 1,278 responses.

19

Based on 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 1,800-hour workyear and inflation, and multiplied by 2.93 to account for bonuses, firm size, employee benefits and
overhead, we expect that delivery requirements of rule 204-3 will most likely be performed by a
clerk at an estimated cost for a general clerk of $62 per hour. 49,090 hours x $62 = $3,043,580.
We estimate that advisers will not incur any incremental postage costs in these mailings because
we assume that advisers will mail annual summary of material changes with another mailing the
adviser was already delivering to clients and that advisers were already delivering to clients
disclosure of new material disciplinary events on an interim basis under rule 204-3.

20

See supra note 4 (discussing the revised methodology for determining the estimated number of
clients of each registered investment adviser).

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Table 2: Summary of the Aggregate Annual Time Burden (Hours)
Description

Requested

Initial and Annual Delivery

Previously
Approved

Change

20,550

357,245

-336,695

Interim Delivery of Updates to
Disciplinary Information

5,140

89,700

-84,560

Supplement Tracking Systems

23,400

19,200

4,200

Total

49,090

466,145

-417,055

Table 3: Summary of the Aggregate Annual Number of Registered Investment
Advisers, Number of Responses, Time Burden, and Monetized Time Burden
Description

Requested

Previously
Approved

Change

Number of Registered Investment
Advisers

13,173

11,956

1,217

Number of Responses

13,832

12,554

1,278

Time Burden (Hours)

49,090

466,145

-417,055

$3,043,580

$26,570,265

-$23,526,685

Monetized Time Burden
(Dollars) 21
13.

Cost to Respondents

$0.
14.

Cost to the Federal Government

There are no costs to the government directly attributable to rule 204-3.
15.

Changes in Burden

The estimated total burden hours has decreased from 466,145 to 49,090 hours per
year in aggregate, representing a decrease of 417,055 hours per year from the currently
approved burden. This revised estimate is primarily due to (i) changing how we estimate
the number of clients of each adviser by using the median number of clients rather than
21

See supra note 19.

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an average number of clients and (ii) new information on the number of SEC-registered
investment advisers that we obtained from Form ADVs filed through the IARD as of March
31, 2019. The estimated number of annual responses has increased from approximately
12,554 to 13,382, representing an increase of 1,278 responses from the currently approved
number of responses. This revised estimate is primarily due to new information on the
number of SEC-registered investment advisers that we obtained from Form ADVs filed
through the IARD as of March 31, 2019.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exception to Certification Statement for Paperwork Reduction Act
Submissions

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS

Not applicable.

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