SUPPORTING STATEMENT
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" and "mutual fund wrap" programs, generally are designed to provide professional portfolio management services to clients who are investing less than the minimum usually required by portfolio managers 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. Some of these investment advisory programs may meet the definition of investment company under the Act because of the similarity of account management.
In 1997, the Commission adopted rule 3a-4, which clarifies that programs organized and operated in a manner consistent with the conditions of rule 3a-4 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 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 consistent with any reasonable restrictions the client imposes on managing the account. When an account is opened, the sponsor2 (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
The program 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. Purpose 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. Role of Improved Information Technology
Rule 31a‑2(f) under the Act permits investment companies to maintain many types of records (and produce them for the Commission's examination as necessary) on magnetic tape, disk, or other computer storage media. 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 annual client contact. The Adopting Release specifically notes that annual client contact may be made “in person, by telephone, or by letter or electronic mail that includes a questionnaire requesting the client to provide or update relevant information.”5
4. Efforts to Identify Duplication
The Commission periodically evaluates rule-based reporting and recordkeeping 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 adviser program in accordance with rule 3a-4 does not necessarily indicate that the program is an investment company.
6. Consequences of Less Frequent 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.
7. Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)
None.
8. Consultation Outside the Agency
The Commission proposed rule 3a-4 for public comment before its adoption and made rule changes based on the comments it received from the public.7 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 to Respondents
Not applicable.
10. Assurance of Confidentiality
Not applicable.
11. Sensitive Questions
Not applicable.
12. Estimate of Hour Burden
The Commission staff estimates that 3,109,671 clients participate each year in investment advisory programs relying on rule 3a-4.8 Of that number, the staff estimates that 220,805 are new clients and 2,888,866 are continuing clients.9 The staff estimates that each year under the rule, investment advisory program sponsors engage in the following collections of information and associated burden hours:10
To prepare, conduct and/or review initial interviews with new clients:
1.5 hours: 60 minutes of professional time;
30 minutes of staff time.
To prepare, conduct and/or review annual interviews with continuing clients:
45 minutes: 30 minutes of professional time;
15 minutes of staff time.
To prepare and mail each quarterly client account statement, including the notice to update information:
15 minutes: 15 minutes of staff time.11
Based on the estimates above, the Commission estimates that the total annual burden of the rule's paperwork requirements is 5,607,528 hours.12 We estimate that professional staff performs 1,665,238 of these burden hours at a total cost of $188 million,13 while support staff performs 3,942,290 of these burden hours at a total cost of $193 million.14 Thus, the Commission estimates the aggregate annual cost of the burden hours associated with rule 3a-4 is $381 million.15
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 a representative survey or study of Commission rules.
13. Estimate of Total Annual Cost Burden
Rule 3a-4 does not impose any paperwork related cost burden not discussed in item 12 above.
14. Estimate of Cost to the Federal Government
The rule imposes no costs on the federal government.
15. Explanation of Changes in Burden
The total annual hour burden of 5,607,528 hours represents an increase of 1,158,112.5 hours from the prior estimate of 4,449,415.5 hours. This increase principally results from an increase in the number of continuing clients, but also reflects an increase in the estimated burden hours associated with several of the collections of information required under the rule. The increase in estimated burden hours per collection of information results from an increase in burden hours reported by representatives of investment advisers that rely on rule 3a-4 that Commission staff surveyed.
16. Information Collection Planned for Statistical Purposes
Not applicable.
17. Approval to not Display Expiration Date
Not applicable.
18. Exceptions to Certification Statement
Not applicable.
Not applicable.
1 Status of Investment Advisory Programs Under the Investment Company Act of 1940, Investment Company Act Release 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 these programs. See 17 CFR 270.3a-4, introductory note.
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.
? 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.
? The sponsor also must provide a means by which clients can contact the sponsor (or its designee).
5See Adopting Release, supra note 1, at text following n.36.
6 Rule 3a-4 is also consistent with a series of no-action letters the Commission issued from 1982 until the rule’s adoption in March 1997. 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, many sponsors already provide quarterly statements to clients, and the burden of the quarterly activity report is likely to be less for those sponsors.
7 See Investment Company Act Release No. 20260 (July 27, 1995), (60 FR 39574 (Aug. 2, 1995)) (proposing release); Adopting Release, supra note 1.
8 See Cerulli Associates, The Cerulli Edge: Managed Accounts Edition, Channel Analysis; IBDs and TPVs Issue at 10, 12-14 (4th quarter 2008). This estimate is determined by multiplying the number of investment advisory accounts (7,268,802) by the ratio of assets in discretionary advisory programs relative to assets in all advisory programs (43% = $723 billion / $1.69 trillion). Id.
9 Staff estimates the average annual number of new clients by multiplying the average annual increase in total assets under management from 1999 through 3Q, 2008 ($120 billion) by 43% and dividing that amount by the average account size in discretionary advisory programs ($232,500). See id. at 9, 12-14. Staff estimated average account size in discretionary advisory programs by dividing the amount of assets under management in discretionary advisory accounts ($723 billion) by the number of accounts in those programs (3,109,671 accounts). See id. Staff estimated the number of continuing clients by subtracting the number of new clients (220,805) from the number of total clients (3,109,671).
10 These estimates are based upon consultation with lawyers and accountants familiar with the practices of fund boards and the staff of investment advisers.
11 The staff bases this estimate in part on the fact that, by business necessity, computer records already will be available that contain the information in the quarterly reports.
12 This estimate is based on the following calculation: (2,888,866 continuing clients x 0.75 hours) + (220,805 new clients x 1.5 hours) + (3,109,671 total clients x (0.25 hours x 4 statements)) = 5,607,528 hours.
13 The professional staff estimates are based on the following calculations: 1,665,238 hours = (220,805 new clients x 1 hour) + (2,888,866 continuing clients x 0.5 hours); and 1,665,238 hours x $113/hour = $188,171,894. The per hour cost estimates are based on figures for operations specialist positions found in SIFMA’s Management & Professional Earnings in the Securities Industry 2008, modified to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead.
14 The support staff estimates are based on the following calculations: 3,942,290 hours = (220,805 new clients x 0.5 hour) + (2,888,866 continuing clients x 0.25 hours) + (3,109,671 total clients x (0.25 hours x 4 statements); and 3,942,290 hours x $49/hour = $193,172,210. The per hour cost estimates are based on figures for general clerk positions found in SIFMA’s Management & Professional Earnings in the Securities Industry 2008, modified as discussed above.
15 This estimate is based on the following calculation: $381,344,104 = $188,171,894 + $193,172,210.
| File Type | application/msword |
| File Title | .SUPPORTING STATEMENT |
| Author | U.S. |
| Last Modified By | abernethyd |
| File Modified | 2009-12-03 |
| File Created | 2009-12-02 |