Rule 206(4)-7 Supporting Statement (2013)

SUPPORTING STATEMENT
for the Paperwork Reduction Act Submission for
“Rule 206(4)-7”
A.

JUSTIFICATION
1.

Information Collection Necessity

Rule 206(4)-7 under the Investment Advisers Act of 1940 (“Advisers Act”) requires each
investment adviser registered with the Securities and Exchange Commission (the “Commission”)
to (i) adopt and implement internal compliance policies and procedures, (ii) review those policies
and procedures annually, (iii) designate a chief compliance officer, and (iv) maintain certain
compliance records. The rule is designed to protect investors by fostering better compliance
with the securities laws. This collection of information is found at 17 CFR 275.206(4)–7, Office
of Management and Budget control number 3235-0585, and is mandatory.
The collection of information under rule 206(4)-7 is necessary to assure that investment
advisers maintain comprehensive internal programs that promote the advisers’ compliance with
the Advisers Act. The respondents are investment advisers registered with the Commission. The
Commission’s examination and oversight staff may review the information collected to assess
investment advisers’ compliance programs.
2.

Purpose of the Information Collection

The purpose of the information collection requirements in rule 206(4)-7 is to ensure that
advisers maintain comprehensive, written internal compliance programs that promote
compliance with the federal securities laws. The information collection in the rule also assists
the Commission’s examination staff in assessing the adequacy of advisers’ compliance
programs.

3.

Consideration Given to Information Technology

Rule 206(4)-7 does not require the reporting of any information or the filing of any
documents with the Commission. The rule requires advisers to maintain written policies and
procedures. Each adviser is required to maintain for at least five years copies of any records
documenting the adviser’s annual review of its compliance policies and procedures. The
Commission permits advisers to maintain the records required under rule 204-2 through
electronic media.
4.

Duplication

Rule 206(4)-7 imposes a broad requirement that advisers have in place written
compliance policies and procedures. Advisers currently are subject to certain requirements
elsewhere in the federal securities laws that require them to maintain written policies and
procedures. Rule 206(4)-7, however, does not require advisers to maintain duplicate copies of
records covered by these more targeted requirements. The staff believes, therefore, that any
duplication of regulatory requirements is limited and does not impose significant additional costs
on advisers.
5.

Effect on Small Entities

Advisers, regardless of their size, are subject to the requirements in rule 206(4)-7.
Effective internal compliance programs are essential for firms of all sizes. Rule 206(4)-7 affords
advisers the flexibility to tailor their compliance program to the nature of their business. Small
advisers, which generally have less complex and more limited operations, would likely need less
extensive compliance programs than their larger counterparts. Thus, rule 206(4)-7 should not
inappropriately burden small advisers. The Commission believes that it could not adjust the rule

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to lessen the burden on small entities of complying with the rule without jeopardizing the
interests of clients of small advisers.
6.

Consequences of Less Frequent Collection

Rule 206(4)-7 requires advisers to review their policies and procedures annually. The
annual reviews required under the rule are integral to detecting and correcting any gaps in the
program before irrevocable or widespread harm is inflicted upon investors, and extending the
time between reviews increases the likelihood that such harm could go unchecked.
7.

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

Rule 206(4)-7 requires advisers to maintain their internal compliance policies and
procedures and documents related to the annual review of those policies and procedures for at
least five years. Although this period exceeds the three-year guideline for most kinds of records
under 5 CFR 1320.5(d)(2)(iv), the staff believes that this is warranted because the rule
contributes to the effectiveness of the Commission’s examination and inspection program.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 206(4)-7 before it submitted this request for extension to the Office of
Management and Budget. The Commission received no comments in response to its request.
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.
9.

Payment or Gift

Not applicable.

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10.

Confidentiality

The information documented pursuant to rule 206(4)-7 is reviewed by the Commission’s
examination staff; it will be accorded the same level of confidentiality accorded to other
responses provided to the Commission in the context of its examination and oversight program. 1
11.

Sensitive Questions

Not applicable.
12.

Time Burden Estimate

Rule 206(4)-7 requires investment advisers to (i) adopt and implement internal
compliance policies and procedures, (ii) review those policies and procedures annually, (iii)
designate a chief compliance officer, and (iv) maintain certain compliance records. The current
approved total collection of information for rule 206(4)-7 is 1,007,228 hours per year. 2
We are updating and revising the total collection of information burden based upon new
data. 3 Our new data indicates that there are 10,773 advisers registered with the SEC. Using this
new number of total respondents for our calculation, the revised total estimated collection of
information burden imposed by rule 206(4)-7 is now decreased to 937,251 hours. 4
We estimate that on average each respondent would have compliance managers perform
65.25 of its 87 burden hours and the remaining 21.75 hours of work would be performed by
compliance clerical staff. Our new data indicate the hourly wage rate for a compliance manager
1

Section 210(b) of the Advisers Act (15 U.S.C. 80b-10(b)).

2

This figure is based on an average annual burden of 80 hours per adviser for rule 206(4)-7 and an
average annual burden of between 8 – 250 hours per adviser (depending on the size of the
adviser) subject to rule 206(4)-5 under the Advisers Act for implementing policies and
procedures to comply with rule 206(4)-5 and related amendments to rules 204-2 and 206(4)-3, for
an average of 87 hours per adviser annually.

3

The data are collected from the Form ADVs filed through the IARD system as of February 1,
2013.

4

10,773 respondents x 87 hours per respondent = 937,251 hours.

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is $279, while the hourly wage rate for a compliance clerk is $60 an hour. 5 Using the new hourly
wage rates and new number of respondents, rule 206(4)-7 now results in a total cost of
$210,178,536.75. 6
13.

Total Annual Cost Burden Estimate

The staff estimates that the rule 206(4)-7 will not impose a material cost burden on
advisers, apart from the cost of the burden hours. Although the rule requires advisers to maintain
certain records for five years, these records may be maintained electronically and, even if
maintained in hard copy, are unlikely to be voluminous.
14.

Cost to the Federal Government

Rule 206(4)-7 does not impose any costs on the Federal government, since there is no
separate filing required with the Commission. However, Commission staff may review records
produced pursuant to the rule in order to assist the Commission in carrying out its examination
and oversight program.
15.

Changes in Burden

We have revised the estimated burden based on new information on the number of SECregistered investment advisers. The revised number of registered investment advisers was
obtained from Form ADVs filed through the IARD as of February 1, 2013.

5

Our hourly wage rate estimates for a compliance professional and a compliance clerk are based
on data from the Securities Industry and Financial Markets Association’s Management &
Professional Earnings in the Securities Industry 2011 and Office Salaries in the Securities
Industry 2011, modified by Commission staff to account for an 1800-hour work-year and
multiplied by 5.35 (in the case of compliance managers) or 2.93 (in the case of compliance
clerks) to account for bonuses, firm size, employee benefits and overhead.

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(10,733 registered investment advisers x 65.25 hours by compliance managers x $279 per hour) +
(10,733 registered investment advisers x 21.75 hours by compliance clerical staff x $60 per
hour) = $210,178,536.75.

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16.

Information Collection Planned for Statistical Purposes
Not applicable.

17.

Approval to Omit OMB Expiration Date
Not applicable.

18.

Exceptions to Certification Requirement
Not applicable.

B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

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