Rule 204-3 (2022) Supporting Statement

OMB CONTROL NUMBER: 3235-0047
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.

Certain 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
certain 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 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.

3

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 is requesting public comment on the collection of information
requirements in rule 204-3. A 60-Day and 30-Day Federal Register Notice for public
comment will be published in the Federal Register.
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
advisers deliver an amended brochure or brochure supplement (or just a statement

4

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 49,090
hours. This currently approved burden is based on 13,173 investment advisers registered
with the Commission having a median estimated 78 clients each. 3 We are updating and
revising the total collection of information burden based upon updated data. 4
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,
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 1.84 hours per
adviser. 5 Thus, we estimate the total burden hours for 14,777 advisers to distribute their
firm brochure to clients annually to be approximately 27,190 hours per year. 6

3

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, 2022. The median
number of clients is based on advisers’ responses to Form ADV, Part 1A, Item 5.D.(a)(1) as of
March 31, 2022. Since 2019, as a result of the changes to Form ADV set forth in Investment
Advisers Act Release No. 4509 (August 25, 2016) (81 FR 60418) (September 1, 2016), we
estimate the median number of clients by using responses to Form ADV, Part 1A, Item 5.D.(a)(1)
to evaluate the burdens of rule 204-3. We believe that using the median number of clients as
opposed to the average number of clients excludes outliers more appropriately than the average
that we had used in estimating previous burdens.

4

These estimates are based on the Form ADVs filed through the IARD system as of March 31,
2022.

5

(0.02 hours per client x 92 clients per adviser based on IARD data as of March 31, 2022) =
approximately 1.84 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.

6

(0.02 hours per client x 92 clients per adviser) x 14,777 advisers based on IARD data as of March
31, 2022 = approximately 27,190 hours.

5

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 739. 7 We further estimate that an adviser will require no more than 0.1
hours per client for delivery of each such update. 8 This represents about 9.2 hours per
interim update. 9 Thus, the aggregate annual hour burden for affected advisers to deliver
interim updates to their brochures or supplements will be approximately 6,799 hours per
year. 10
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. 11 We estimate that on average each of the 118 large advisers will spend 200
hours per year designing and implementing such systems, for a total of 23,600 hours per
7

Of the advisers registered with the Commission, 12.61% report disciplinary events on their Form
ADVs (as of March 31, 2022, only 1,863 of all 14,777 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 739 interim updates per year. 0.05 x 14,777 x 1 update =~739 updates.

8

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. 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.

9

0.1 hours per client x 92 clients per adviser = approximately 9.2 hours per interim update.

10

739 updates x 9.2 = ~6,799 hours.

11

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 0.73% of
medium advisers report in response to Form ADV, Part 1A, Item 5.B.(1) that more than 250
employees perform investment advisory functions.

6

year. 12 Thus, rule 204-3 now results in a total collection of information burden of 57,589
hours per year, or approximately 3.9 hours per adviser. 13 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 an increase of 8,499 hours from the currently approved burden. 14
This increase in the hourly burden is primarily due to updated information on the number
of SEC-registered investment advisers that we obtained from Form ADVs filed through the
IARD as of March 31, 2022. 15 With the initial, annual, and interim delivery requirements,
we estimate that the 14,777 advisers will deliver approximately 1.05 times a year,
resulting in approximately 15,516 responses. 16 This represents an increase of 1,684
responses from the currently approved burden of 13,832 responses. 17 We estimate the
burden associated with delivery of brochures, supplements, and the summary of material
changes would represent an annual internal burden cost of $3,916,052. 18

12

118 large advisers x 200 hours per year per large adviser = 23,600 hours per year.

13

27,190 hours (initial and annual delivery) + 6,799 hours (interim delivery of updates to disciplinary
information) + 23,600 (supplement tracking systems) = 57,589 hours. 57,589 hours / 14,777 advisers
= approximately 3.9 hours per adviser.

14

57,589 hours – 49,090 hours = +8,499 hours.

15

For purposes of the estimates herein, we assume that all SEC-registered investment advisers are
subject to the burdens associated with rule 204-3.

16

1 response for initial and annual delivery + 0.05 response for annual interim delivery = 1.05
annual responses. 1.05 responses x 14,777 advisers = ~15,516 responses. See supra note 7.
(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.)

17

15,516 requested responses – 13,832 currently approved responses = 1,684 responses.

18

Based on data from the Securities Industry and Financial Markets Association’s Office Salaries in
the Securities Industry 2013, modified by Commission staff for 2022 to account for an 1,800-hour
work-year 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 $68 per hour. 57,589 hours x $68
= $3,916,052. We estimate that advisers will not incur any incremental postage costs in these

7

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
Median Estimated Number of
Clients of Each Registered
Investment Adviser

Previously
Approved

Change

14,777

13,173

1,604

92

78

14

Table 2: Summary of the Aggregate Annual Internal Burden Hours
Description

Requested

Initial and Annual Delivery

Previously
Approved

Change

27,190

20,550

+6,640

Interim Delivery of Updates to
Disciplinary Information

6,799

5,140

+ 1,659

Supplement Tracking Systems

23,600

23,400

+200

Total

57,589

49,090

+8,499

Table 3: Summary of the Aggregate Annual Number of Registered Investment
Advisers, Number of Responses, Internal Burden Hours, and Internal Burden Cost
Description

Requested

Previously
Approved

Change

Number of Registered Investment
Advisers

14,777

13,173

+1,604

Number of Responses

15,516

13,832

+1,684

Internal Burden Hours )

57,589

49,090

+8,499

$3,196,052

$3,043,580

+ 152,472

Internal Burden Cost

19

mailings because we assume that advisers will mail the 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.
19

See supra note 18.

8

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 increased from 49,090 to 57,589 hours per year
in aggregate, representing an increase of 8,499 hours per year from the currently approved
burden. This revised estimate is primarily due to updated information on the number of
SEC-registered investment advisers that we obtained from Form ADVs filed through the
IARD as of March 31, 2022. The estimated number of annual responses has increased from
approximately 13,382 to 15,516, representing an increase of 1,684 responses from the
currently approved number of responses.
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.

9