Rule 203A-2(f) Supporting Statement 6_11

SUPPORTING STATEMENT
FOR THE PAPERWORK REDUCTION ACT SUBMISSION FOR AN EXTENSION
OF A CURRENT INFORMATION COLLECTION
“Rule 203A-2(f)”

A.

JUSTIFICATION
1.

Necessity for the Information Collection

Pursuant to section 203A of the Advisers Act of 1940 (“Advisers Act” or “Act”),
an investment adviser that is regulated or required to be regulated as an investment
adviser in the state in which it maintains its principal office and place of business is
prohibited from registering with the Commission unless that adviser has at least $25
million in assets under management or advises a Commission-registered investment
company. Advisers failing to meet either requirement are prohibited from registering
with the Commission.1 The Dodd-Frank Wall Street Reform and Consumer Protection
Act (“Dodd-Frank Act”)2 amends section 203A effective on July 21, 2011 to prohibit
from Commission registration an adviser that: (i) has assets under management between
$25 million and $100 million; (ii) is required to be registered as an investment adviser
with the state in which it maintains its principal office and place of business; and (iii) if
registered, would be subject to examination as an adviser by that state.3 A mid-sized
adviser that otherwise would be prohibited may register with the Commission if it would
be required to register with 15 or more states.4 A mid-sized adviser also will be required
to register with the Commission if it is an adviser to a registered investment company or

1

15 U.S.C. 80b-3a(a).

2

Pub. L. No. 111-203, 124 Stat. 1376 (2010).

3

See section 410 of the Dodd-Frank Act.

4

See id.

business development company under the Investment Company Act.5 Section 203A(c) of
the Advisers Act, however, authorizes the Commission to exempt an adviser from the
prohibition on Commission registration if the prohibition would be "unfair, a burden on
interstate commerce, or otherwise inconsistent with the purposes" of section 203A of the
Act.6 Under this authority, the Commission adopted rule 203A-2 in 1997 to provide
certain types of advisers with exemptions from the prohibition on registration. Rule
203A-2 was amended by the Commission in 2002 when it adopted an exemption for
Internet advisers under subsection (f).7 The Commission proposed to amend three of the
other exemptions in rule 203A-2 on November 19, 2010 to reflect developments since
their adoption, including the enactment of the Dodd-Frank Act.8 The Commission did
not propose substantive amendments to the internet adviser exemption.9
Rule 203A-2(f) exempts from the prohibition on Commission registration an
Internet investment adviser who (1) provides investment advice to all of its clients
exclusively through computer software-based models or applications termed under the

5

See id.

6

15 U.S.C. 80b-3a(c).

7

See Exemption for Certain Investment Advisers Operating Though the Internet, Investment
Advisers Release No. 2091 (December 12, 2002) (67 F.R. 77620 (Dec. 18, 2002)). Other
exempted advisers include: (1) nationally recognized statistical rating organizations, commonly
referred to as rating agencies; (2) pension consultants that provide investment advice to employee
benefit plans with respect to assets of plans having an aggregate value of at least $50 million
during the adviser's last fiscal year; (3) an adviser that controls, is controlled by, or is under
common control with a Commission-registered adviser if the two advisers have the same principal
office and place of business; (4) a newly formed adviser with a reasonable expectation that it
would be eligible for Commission registration within 120 days after its registration has become
effective with the Commission; and (5) an adviser required to register with the securities
authorities in at least 30 states. 17 CFR 275.203A-2.

8

See Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment
Advisers Release No. 3110 (November 19, 2010 (75 FR 77052 (December 10, 2010)) (“Proposing
Release”). The Commission proposed amendments to the exemptions for rating agencies, pension
consultants and multi-state advisers,

9

The Commission renumbered rule 203A-2(f) as rule 203A-2(e), and made minor conforming
changes. See Proposing Release.

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rule as “interactive websites”10 and (2) maintains in an easily accessible place, for a
period of not less than five years from the filing of a Form ADV relying on the rule,11 a
record demonstrating that the adviser provides investment advice to its clients exclusively
through an interactive website in accordance with the rule. Rule 203A-2(f)’s record
maintenance requirement is a “collection of information” for Paperwork Reduction Act
(“PRA”) purposes. The title for the collection of information is “Exemption for Certain
Investment Advisers Operating Through the Internet (Rule 203A-2(f))”. This collection
of information is necessary for use by the Commission staff in its examination and
oversight program. The collection of information for rule 203A-2(f) is currently
approved under OMB control number 3235-0559 (expires October 31, 2011).
Respondents to this collection of information are advisers who provide investment
advice through interactive websites and who rely on the exemption to register with the
Commission. Providing this information is mandatory in qualifying for and maintaining
Commission registration eligibility under rule 203A-2(f). Responses provided to the
Commission in the context of its examination and oversight program are generally kept
confidential under section 210(b) of the Advisers Act.12

10

17 CFR 275.203A-2(f). Included in rule 203A-2(f) is a limited exception to the interactive
website requirement which allows these advisers to provide investment advice to no more than 14
clients through other means on an annual basis. 17 CFR 275.203A-2(f)(1)(i). The rule also
precludes advisers in a control relationship with an SEC-registered Internet adviser from
registering with the Commission under the common control exemption provided by rule 203A2(c) (17 CF.R. 275.203A-2(c)).
17 CFR 275.203A-2(f)(1)(iii).

11

The five-year record retention period is a similar recordkeeping retention period as imposed on all
SEC-registered advisers under rule 204-2 of the Adviser Act. See rule 204-2 (17 CFR 275.204-2).

12

15 U.S.C. 80b-10(b).

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2.

Purpose of the Information Collection

The information collected under rule 203A-2(f) permits the Commission’s
examination staff to determine an advisers’ eligibility for registration with the
Commission under this exemptive rule.
3.

Role of Improved Information Technology
An investment adviser registering or registered with the Commission under rule

203A-2(f) must maintain, in an easily accessible place, for five years from the filing of a
Form ADV, a record that demonstrates that the adviser provides investment advice to its
clients exclusively through an interactive website as defined under the rule.13 Advisers
are permitted to meet the recordkeeping obligation under the rule micrographically or
electronically, and their storage of this required record in such media is governed by
Advisers Act rule 204-2(g).14 The rule does not require the reporting of any information
to, or the filing of any documents with, the Commission, so the Commission’s use of
computer technology in its various electronic filing systems will be of no effect.
4.

Efforts to Identify Duplication

The recordkeeping requirement of rule 203A-2(f) is not duplicated elsewhere for
investment advisers that must comply with this collection requirement.
5.

Effect on Small Entities

The collection of information requirements are the same for all investment

13

17 CFR 275.203A-2(f).

14

17 CFR 275.204-2(g). Rule 204-2 requires that the record be arranged and indexed in a way that
permits easy location, access, and retrieval of any particular record, and that the micrographic or
electronic duplicate of the record be separately stored for the time required by rule 204-2 to
preserve the original record. See 17 CFR 275.204-2(g)(2). An investment adviser must establish
and maintain procedures to keep the required records so as to reasonably safeguard the records
from loss, alteration, or destruction; to limit access to the records to properly authorized personnel
and the Commission; and to reasonably ensure that any reproduction of a non-electronic original
record is complete, true, and legible when retrieved. See 17 CFR 275.204-2(g)(3).

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advisers registering or registered with the Commission, including those that are small
entities. Currently under section 203A, advisers with assets under management of less
than $25 million are eligible to register with the Commission as a general rule only if
they advise a registered investment company. Under section 203A as amended by the
Dodd-Frank Act beginning on July 21, 2011, advisers with assets under management of
less than $100 million generally will not be eligible to register with the Commission.
However, under rule 203A-2(f), these small entities are permitted to register with the
Commission if they meet the conditions of the rule. The recordkeeping requirement
under the rule affects small advisers and larger advisers similarly, because the required
information is about the adviser maintaining the records and about its business, which
should be readily available to any adviser regardless of size. It would defeat the purpose
of the rule to exempt small entities from these requirements.
6.

Consequences of Less Frequent Collection

An adviser registering with the Commission under rule 203A-2(f) must maintain a
record, for a period of not less than five years from the filing of a Form ADV, showing
that substantially all of its advisory business has been conducted through an interactive
website. Because the period between examinations may be as long as five years, it is
important that the Commission have access to records that cover the period between
examinations. If the required information is not collected, the Commission’s examiners
would not be able to verify that an investment adviser’s reliance on rule 203A-2(f) in
registering with the Commission was appropriate.
7.

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

Rule 203A-2(f) includes a recordkeeping provision under which an adviser
relying on the rule to register with the Commission would be required to maintain certain

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information, specified more fully in Item 1 above, for five years. Although this period
exceeds the three-year guideline for most kinds of records under 5 CFR 1320.5(d)(2)(iv),
the long-term retention of these records is designed to contribute to the effectiveness of
the Commission’s examination and inspection program, and is necessary for the
Commission’s inspection program to determine compliance with the Advisers Act,
including an adviser’s continued eligibility to register with the Commission. Because the
period between examinations may be as long as five years, it is important that the
Commission have access to records that cover the period between examinations.
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 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.
In addition, the Commission requested public comment on the information
collection requirements in rule 203A-2(f) 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 to Respondents

Not applicable.
10.

Assurance of Confidentiality

Responses to the recordkeeping responses required under rule 203A-2(f) in the
context of the Commission’s examination and oversight program are generally kept

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confidential.15
11.

Sensitive Questions

Not applicable.
12.

Estimate of Hourly Burden

Rule 203A-2(f) requires advisers registering with the Commission under the
exemption to maintain a record demonstrating that the adviser’s advisory business has
been conducted through an interactive website in accordance with the rule. Although
most advisers registering under the rule usually generate the necessary records in the
ordinary conduct of their Internet advisory business, the recordkeeping requirement of
rule 203A-2(f) nonetheless may impose a small additional burden on these advisers. We
continue to estimate that this recordkeeping burden should not exceed an average of four
(4) hours annually per adviser.16
The number of respondents has increased from the estimated 39 advisers to 58
investment advisers.17 Accordingly, the total recordkeeping burden hours for all rule
203A-2(f) advisers has increased from 156 hours to 232 hours.18
The Commission estimates that the total cost to each Internet adviser to comply
with the recordkeeping provision of rule 203A-2(f) would be approximately $1324,19

15

See Section 210(b) of the Advisers Act.

16

The adviser would need only to demonstrate that no more than 15 of its clients obtain investment
advice from the firm through means other than the interactive website. Internet advisers that
conduct their business exclusively through interactive websites would likely need to spend very
little time documenting their compliance with the condition. An adviser that also meets in person
with some clients or communicates with them through other means may need to spend more time.

17

This estimate is based on information reported by advisers through the Investment Adviser
Registration Depository (“IARD”). Based on IARD data as of January 3, 2011, of the
approximately 11,000 SEC-registered advisers, 58 checked Item 2.A(10) of Part 1A of Form ADV
to indicate their basis for SEC registration under the Internet advisers rule.

18

Four (4) hours x 58 advisers = 232 hours.

19

Four (4) hours x $331 = $1324. The Commission estimated this figure by multiplying the burden

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such that the total cost for the 58 advisers relying on this exemption at this time would be
$76,792.20
13.

Estimate of Total Annual Cost Burden

Excluding the burden hours identified in item 12, the collection of information
requirement for rule 203A-2(f) is not expected to impose additional non-labor or capital
costs. The Commission anticipates that most advisers registering under the rule would
generate the necessary records in the ordinary conduct of their advisory businesses.
14.

Estimate of Cost to the Federal Government

There are no costs to the federal government directly attributable to rule
203A-2(f).
15.

Explanation of Changes in Burden

The revised burden for rule 203A-2(f) results from an increase in the number of
advisers relying on the rule for Commission registration eligibility. The annual
recordkeeping burden under the rule previously was 156 hours, or four hours per adviser
for a total of 39 advisers. Adjusting this number for the nineteen additional advisers
relying on the rule, the annual recordkeeping burden is revised from 156 hours to 232
hours.21

hours to comply with rule 203A-2(f)’s recordkeeping requirements (4 hours) by an average hourly
compensation rate of $331. The compensation rate used is the rate for a Sr. Operations Manager
in the Securities Industry and Financial Markets Association’s Report on Management &
Professional Earnings in the Securities Industry 2010 and is modified to account for an 1,800-hour
work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and
overhead.
20

Four (4) hours x $331 = $1324 x 58 advisers = $76,792.

21

Four (4) hours x 58 advisers = 232 hours.

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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.
B. COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL
METHODS
Not applicable.

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