Rule 3a-4 (2022) Supporting Statement

OMB CONTROL NUMBER: 3235-0459
SUPPORTING STATEMENT
For the Paperwork Reduction Act I nformation Collection Submission for
RULE 3a-4
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 3a-4 (17 CFR 270.3a-4) under the Investment Company Act of 1940 (15 U.S.C. 80a)
(“Investment Company Act” or “Act”) provides a nonexclusive safe harbor from the definition of
investment company under the Act for certain investment advisory programs. These programs,
which include “wrap fee” programs, generally are designed to provide professional portfolio
management services on a discretionary basis to clients who are investing less than the minimum
investments for individual accounts usually required by the investment adviser but more than the
minimum account size of most mutual funds. Under wrap fee and similar programs, a client’s
account is typically managed on a discretionary basis according to pre-selected investment
objectives. Clients with similar investment objectives often receive the same investment advice
and may hold the same or substantially similar securities in their accounts. Because of this
similarity of management, some of these investment advisory programs may meet the definition of
investment company under the Act.
In 1997, the Commission adopted rule 3a-4, which clarifies that programs organized and
operated in accordance with the rule are not required to register under the Investment Company
Act or comply with the Act's requirements. 1 These programs differ from investment companies
because, among other things, they provide individualized investment advice to the client. The

1

Status of Investment Advisory Programs Under the Investment Company Act of 1940, Investment Company
Act Rel. No. 22579 (Mar. 24, 1997) [62 FR 15098 (Mar. 31,1997)] (“Adopting Release”). In addition, there
are no registration requirements under section 5 of the Securities Act of 1933 for programs that meet the
requirements of rule 3a-4. See 17 CFR 270.3a-4, introductory note.

rule’s provisions have the effect of ensuring that clients in a program relying on the rule receive
advice tailored to the client’s needs.
For a program to be eligible for the rule’s safe harbor, each client’s account must be
managed on the basis of the client’s financial situation and investment objectives and in
accordance with any reasonable restrictions the client imposes on managing the account. When an
account is opened, the sponsor 2 (or its designee) must obtain information from each client
regarding the client’s financial situation and investment objectives, and must allow the client an
opportunity to impose reasonable restrictions on managing the account. 3 In addition, the sponsor
(or its designee) must contact the client annually to determine whether the client’s financial
situation or investment objectives have changed and whether the client wishes to impose any
reasonable restrictions on the management of the account or reasonably modify existing
restrictions. The sponsor (or its designee) must also notify the client quarterly, in writing, to
contact the sponsor (or its designee) regarding changes to the client’s financial situation,
investment objectives, or restrictions on the account’s management. 4
Additionally, the sponsor (or its designee) must provide each client with a quarterly
statement describing all activity in the client's account during the previous quarter. The sponsor
and personnel of the client’s account manager who know about the client’s account and its
management must be reasonably available to consult with the client. Each client also must retain
certain indicia of ownership of all securities and funds in the account.

2

For purposes of rule 3a-4, the term “sponsor” refers to any person who receives compensation for
sponsoring, organizing or administering the program, or for selecting, or providing advice to clients
regarding the selection of, persons responsible for managing the client’s account in the program.

3

Clients specifically must be allowed to designate securities that should not be purchased for the account or
that should be sold if held in the account. The rule does not require that a client be able to require particular
securities be purchased for the account.

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2.

Purpose and Use of the Information Collection

The requirement that the sponsor (or its designee) obtain information about each new
client’s financial situation and investment objectives when their account is opened is designed to
ensure that the investment adviser has sufficient information regarding the client’s unique needs
and goals to enable the portfolio manager to provide individualized investment advice. The
sponsor is required to contact clients annually and provide them with quarterly notices to ensure
that the sponsor has current information about the client’s financial status, investment objectives,
and restrictions on management of the account. Maintaining current information enables the
portfolio manager to evaluate each client’s portfolio in light of the client’s changing needs and
circumstances. The requirement that clients be provided with quarterly statements of account
activity is designed to ensure each client receives an individualized report, which the Commission
believes is a key element of individualized advisory services.
3.

Consideration Given to Information Technology

Quarterly statements to clients are generally in paper form and are mailed to clients, and
quarterly notices must be provided in writing. However, rule 3a-4 gives sponsors flexibility in the
manner in which they comply with the requirements for the initial information collection or
annual client contact. The Adopting Release specifically notes that the initial information
collection and annual client contact can be done in-person, by telephone or through
questionnaires. 5
4.

Duplication

The Commission periodically evaluates rule-based reporting and recordkeeping
4

The sponsor also must provide a means by which clients can contact the sponsor (or its designee).

5

See Adopting Release, supra note 1, at n.33 and text following n.36.

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requirements for duplication, and reevaluates them whenever it proposes a rule or a change in a
rule. Rule 3a-4 does not require duplicative reporting or recordkeeping.
5.

Effect on Small Entities

The Commission does not believe that compliance with rule 3a-4 is unduly burdensome
for large or small entities. The rule’s requirements are consistent with providing individualized
investment advice. 6 Moreover, sponsors that find the requirements of the rule to be overly
burdensome are not required to operate their investment advisory programs in reliance on the safe
harbor provided by the rule. Failure to operate an investment advisory program in accordance with
rule 3a-4 does not necessarily indicate that the program is an investment company.
6.

Consequences of Not Conducting Collection

Rule 3a-4’s requirement for sponsors to obtain information regarding each new client’s
financial situation and investment goals is a one-time obligation incurred when a new client opens
an account. The requirements for annual and quarterly client contact reflect the view that without
regular contact with clients, portfolio managers are unlikely to have current information regarding
each client’s financial situation and investment objectives, which the managers need in order to
provide individualized investment advice. The requirement for quarterly account activity
statements also enables the portfolio manager to be familiar with the client’s account and its
management. This requirement also provides current information to clients about their accounts,
which might prompt them to update the sponsor regarding changing financial situations or goals.

6

Rule 3a-4 is also consistent with a series of no-action letters the Commission’s staff issued before the rule
was adopted. Compliance with the rule generally should not be burdensome to those sponsors that operated
their programs in a manner consistent with these previously issued no-action positions. In addition, sponsors
typically already provide quarterly statements to clients, so the burden of the quarterly activity report is likely
limited.

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7.

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

None.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information requirements
in rule 3a-4 before it submitted this request for extension and approval to OMB. The Commission
received no comments in response to this request.
The Commission and staff of the Division of Investment Management also participate in
an ongoing dialogue with representatives of the investment company industry through public
conferences, meetings, and informal exchanges. These forums provide the Commission and the
staff useful means to identify and address paperwork burdens that may confront the industry.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

No information of a sensitive nature will be required under this collection of information.
The information collection collects basic Personally Identifiable Information (“PII”) that may
include financial accounts and financial transactions. However, the agency has determined that the
information collection does not constitute a system of record for purposes of the Privacy Act.
Information is not retrieved by a personal identifier. A System of Records Notice has been
published in the Federal Register at (SEC-69) 83 FR 6892 and can also be found at
https://www.sec.gov/about/privacy/secprivacyoffice.htm.

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12.

Burden of Information Collection

The following estimates of average burden hours and costs are made solely for purposes
of the Paperwork Reduction Act of 19957 and are not derived from a comprehensive or even
representative survey or study of the cost of Commission rules and forms.

Table 1: Rule 3a-4 burden of I nformation collection for certain investment
advisory programs
Estimated Responses

Estimated Burden
Hours

Estimated Cost Burdens 8

2,127,147 9

1.3 annual hours x
2,127,147 =
2,765,291 annual
hours
for an operations
specialist

2,765,291 annual hours x $140
per hour = $387,140,740 annual
costs for an operations specialist

Prepare, conduct,
and/or review initial
interviews with new
clients annually

.2 hours x 2,127,147
support staff time =
425,429 annual hours
for a general clerk
2,765,291 + 425,429 =
3,190,720

425,429 annual hours x $64 per
hour = $27,227,456 annual costs
for a general clerk
$387,140,740 + $27,227,456
$414,368,196

8

The Commission’s estimate concerning the wage rate is based on salary information for the securities
industry compiled by the Securities Industry and Financial Markets Association. The cost burdens for
professional personnel are based on SIFMA’s Management & Professional Earnings in the Securities
Industry 2013, modified for 2020 by the 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 and the
cost burdens for clerical personnel are based on SIFMA's Office Salaries in the Securities Industry 2013,
modified for 2021 by Commission staff to account for an 1800-hour work-year and inflation, and multiplied
by 2.93 to account for bonuses, firm size, employee benefits and overhead.

9

These estimates are based on the number of new clients expected due to average year-over-year growth in
individual clients from Form ADV Item 5D(a)(1) and (b)(1) (about 8%) and an assumed rate of yearly client
turnover of 10%.

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=

Totals

Prepare, conduct,
and/or review annual
interviews with
continuing clients

2,127,147 total annual
estimated responses

3,190,720 total annual
estimated burden
hours 10

$414,368,196 total annual
estimated costs

25,852,313 (estimated
existing clients) 11

.83 annual hours x
25,852,313 =
21,457,420 annual
hours for an
operations specialist

21,457,420 annual hours x
$140 per hour = $3,004,038,800
annual
costs for an operations specialist

.17 x 25,852,313
support staff time =
4,394,893 annual
hours for a general
clerk
21,457,420 +
4,394,893 =
25,852,313
Totals

Prepare and mail
each quarterly client
account statement,
including the notice
to update
information,
annually

4,394,893 annual hours x $64 per
hour = $281,273,152 annual costs
for a general clerk

$3,004,038,800 + $281,273,152=
$3,285,311,952

25,852,313 total annual
estimated responses

25,852,313 total
annual estimated
burden hours 12

$3,285,311,952 total annual
estimated costs

27,979,460 total clients x 4
statements = 111,917,840

111,917,460 x .25
hours = 27,979,460
hours for a general

27,979,460 burden hours x $64 =
$1,790.685,440 annual costs for a
general clerk

10

These estimates are based upon consultation with investment advisers that operate investment advisory
programs that rely on rule 3a-4.

11

These estimates are based on an analysis of the number of individual clients from Form ADV Item 5D(a)(1)
and (b)(1) of advisers that report they provide portfolio management to wrap programs as indicated in Form
ADV Item 5I(2)(b) and (c), and the number of individual clients of advisers that identify as internet advisers
in Form ADV Item 2A(11). From analysis comparing reported individual client assets in Form ADV Item
5D(a)(3) and 5D(b)(3) to reported wrap portfolio manager assets in Form ADV Item 5I(2)(b) and (c), we
discount the estimated number of individual clients of non-internet advisers providing portfolio management
to wrap programs by 10%.

12

See, supra n.10.

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clerk
27,979,460 estimated
annual hours

Total

111,917,840 estimated
annual responses

TOTALS

2,127,147
3,190,720 +
+25,979,460+111,917,840= 25,852,313 +
27,979,460 =
140,024,447 total
estimated annual
57,022,493 total
responses
estimated annual
burden hours

$1,790,685,440 estimated annual
costs
$414,368,196 +
$3,285,311,952 +
$1,790,685,440 =
$5,490,365,588 total estimated
annual costs

Table 2: Change in Burden Estimates

Interview
new clients
Interview
continuing
clients
Prepare and
mail
quarterly
account
statements
Totals

Annual No. of Responses (in thousands)
Previously
Requested
Change
approved
3,531
2,127
-1,404

Annual Time Burden (thousands of hours)
Previously
Requested
Change
approved
5,297
3,191
-2,106

16,087

25,852

9,765

16,087

25,852

9,765

78,475

111,918

33,443

19,619

27,979

8,360

98,094

140,024

41,930

41,003

57,022

16,019

13.

Cost to Respondents

Rule 3a-4 does not impose any paperwork related cost burden not discussed in item 12
above.

We expect that sponsors mail quarterly account statements to their clients in the ordinary

course of business and therefore we do not believe the requirement in rule 3a-4 to mail quarterly
client account statements or quarterly notices would impose additional postage or printing costs.

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14.

Cost to the Federal Government

The rule imposes no costs on the federal government.
15.

Changes in Burden

The total annual hour burden of 57,022,493 hours represents an increase of 16,019,345
hours from the prior estimate of 41,003,148 hours. This increase is a result of the increase in the
estimated number of clients, which was due to a change in the way the staff has made its estimates
as a result of changes in Form ADV that provide more detailed information about this issue.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.
Exceptions to Certification Statement for Paperwork Reduction Act
Submissions
Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

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