204A-1 Supporting Statement - CJM Comments

SUPPORTING STATEMENT
Rule 204A-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 204A of the Investment Advisers Act of 1940 (“Advisers Act” or “Act”) gives
the Securities and Exchange Commission (“Commission”) authority to adopt rules to require
policies and procedures designed to prevent misuse of material, nonpublic information. The
Commission adopted rule 204A-1 under the Advisers Act to require SEC-registered investment
advisers to adopt codes of ethics. 1 An adviser’s code of ethics must set forth standards of
conduct expected of personnel of the adviser, and address conflicts that arise from personal
trading by personnel of the adviser.
Each adviser’s code of ethics is required to (i) set forth standards of conduct expected of
advisory personnel (including compliance with the federal securities laws); (ii) safeguard
material nonpublic information about client transactions; and (iii) require the adviser’s “access
persons” to report their personal securities transactions. The code of ethics also requires access
persons to obtain the adviser’s approval before investing in an initial public offering (“IPO”) or
private placement. The code of ethics also requires prompt reporting, to the adviser’s chief
compliance officer or another person designated in the code of ethics, of any violations of the
code. Finally, the code of ethics requires the adviser to provide each supervised person with a
copy of the code and any amendments, and require the supervised persons to acknowledge, in
writing, their receipt of these copies.
The collection of information under rule 204A-1 is necessary to establish and maintain
standards of business conduct for supervised persons of investment advisers and to facilitate
1

17 CFR 275.204A-1.

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investment advisers’ efforts to prevent fraudulent personal trading by their supervised persons.
The collection of information is mandatory. The respondents are investment advisers registered
with the Commission, and certain of their supervised persons who must submit reports of their
personal trading activities to their firms. These investment advisers use the information collected
to control and assess the personal trading activities of their supervised persons. Responses to the
reporting requirements will be kept confidential to the extent each investment adviser provides
confidentiality under its particular practices and procedures.
2.

Purposes of Information Collection

The purposes of the information collection requirements in rule 204A-1 are to (i) ensure
that advisers maintain codes of ethics applicable to their supervised persons; (ii) provide advisers
with information about the personal securities transactions of their access persons for purposes of
monitoring such transactions; (iii) provide advisory clients with information with which to
evaluate advisers’ codes of ethics; and (iv) assist the Commission’s examination staff in
assessing the adequacy of advisers’ codes of ethics and assessing personal trading activity by
advisers’ supervised persons.
3.

Role of Improved Information Technology

The Advisers Act permits advisers to maintain required records through electronic
media. 2 The rule does not require the reporting of any information to, or the filing of any
documents with, the Commission. Therefore, the Commission’s uses of computer technology in
its various electronic filing systems will be of no effect.

3

17 CFR 270.17j-1

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4.

Efforts to Identify Duplication

The rule requires access persons of investment advisers to report basic information about
their personal securities trading activities. Access persons of advisers who manage portfolios for
investment companies are subject to requirements under rule 17j-1 under the Investment
Company Act of 1940 (the “Investment Company Act”) to report basic information about their
personal securities trading activities. 3 Rule 17j-1 contains provisions designed to prevent access
persons from filing personal securities transactions reports under rule 17j-1 if such reports would
duplicate personal securities transaction information that is required to be recorded under
Advisers Act rule 204-2(a)(13). 4 Rule 204A-1 is designed to coordinate with, rather than
conflict with or duplicate, the requirements of rule 17j-1.
5.

Effect on Small Entities

The requirements for rule 204A-1 are the same for all investment advisers registered with
the Commission. It would defeat the purpose of the rule to exempt small entities from these
requirements. However, small entities that have only one supervised person are exempted from
the requirement for access person securities reporting and IPO and limited offering preclearance.
The rule also affords advisers the flexibility to tailor a code of ethics that fits the nature of their
business. Small firms, which generally have less complex and more limited operations, likely
need less complex codes than their larger counterparts.
6.

Consequences of Less Frequent Collection

Less frequent information collection would be incompatible with the objectives of the
rule. For instance, it could delay detection of improper personal securities transactions by access

3

17 CFR 270.17j-1

4

17 CFR 275.204-2(a)(13) requires that registered investment advisers make and keep books
related to information required by rule 204A-1.

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persons and may not allow advisers to identify conflicts of interest that access persons may have
with advisory clients.
7.

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

The collection of information imposes no additional requirements regarding record
retention.
8.

Consultations 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 requested public comment on the collection of information requirements in rule 204A1 before it submitted this request for extension and approval to the Office of Management and
Budget. The Commission received no comments in response to this request.
9.

Payment or Gift to Respondents

Not applicable.
10.

Assurances of Confidentiality

Responses from access persons to the reporting requirements under rule 204A-1 are kept
confidential to the extent each investment adviser provides confidentiality under its particular
practices and procedures. If information collected pursuant to the rule 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. 5

5

See section 210(b) of the Advisers Act (15 U.S.C. 10(b)).

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11.

Sensitive Questions

Not applicable.
12.

Estimates of Hour Burden

Rule 204A-1 requires SEC-registered investment advisers to establish a written code of
ethics for their supervised persons. We estimate that each adviser would be required to spend 6
hours annually, on average, documenting its code of ethics. In preparing this estimate, we have
taken into account that investment advisers currently maintain certain policies and procedures
that could serve as the core of their codes of ethics. For instance, advisers are required to
maintain written policies and procedures reasonably designed to prevent the misuse of material
nonpublic information, to keep records of their advisory representatives’ personal securities
transactions, adopt policies and procedures reasonably designed to prevent their supervised
persons from violating the Advisers Act, and advisers who advise investment companies have
codes of ethics pursuant to Investment Company Act rule 17j-1. There are approximately 10,643
investment advisers registered with the Commission that we estimate will incur this burden, for a
total of 63,858 hours. 6
Rule 204A-1 also requires each adviser’s code of ethics to include provisions under
which the adviser’s access persons report their personal securities transactions and holdings to
the adviser. For purposes of estimating the paperwork burden for access persons under rule
204A-1, we assume that advisers will treat all their non-clerical employees as access persons. 7
We continue to estimate that investment advisers have 84 non-clerical employees on average,
although this estimate likely overstates the number of such employees at the majority of advisory
6

10,643 advisers x 6 hours = 63,858 total annual hours.

7

We are aware that many investment advisers currently elect to treat all employees as “advisory
representatives” or access persons for purposes of personal securities reporting under Advisers
Act rule 204-2(a)(12) and Company Act rule 17j-1, respectively.

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firms. Based on this average, we estimate that 894,012 access persons would be subject to the
collection of information under the rule. 8
These access persons are required to file an initial report of their personal securities
holdings upon becoming access persons, and an annual holdings report at least once a year
thereafter. We estimate access persons would spend 0.7 hours on average completing each such
report. Access persons also are required to file transaction reports once each quarter stating
whether they had any personal securities transactions during such quarter and providing basic
information about any such transactions. We estimate access persons would spend 0.6 hours on
average completing such reports each year. 9 Thus, the total annual burden hours for all access
persons under the rule would be 1,162,216 hours. 10
Rule 204A-1 also requires each adviser’s code of ethics to include provisions under
which the adviser provides each supervised person with a copy of the code of ethics and any
amendments, and obtains written acknowledgment of receipt from the supervised person. We
continue to estimate that each investment adviser has 100 supervised persons on average,
although this estimate overstates the number of supervised persons at the majority of advisory
firms, and that each adviser will be required to provide a copy and obtain an acknowledgment 55
times each year, on average. This is based on our estimate that advisers will amend their codes

8

84 access persons x 10,643 investment advisers = 894,012.

9

In preparing this 0.6 hour annual estimate, we assumed access persons would have no
transactions to report for three quarters each year (at 0.1 hours to complete each report affirming
no activity) and one transaction to report one quarter each year (at 0.3 hours to complete such
report listing the transaction).

10

(0.7 hours holdings report + 0.6 hours transactions report) x 894,012 access persons = 1,162,216
hours.

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every other year and hire five new supervised persons each year. 11 We further estimate each
iteration will take an investment adviser 0.05 hours on average, for an annual burden of 2.75
hours per adviser and a total burden of 29,268 hours for all advisers. 12
Based on these estimates, the total annual burden for advisers and access persons under
rule 204A-1 would be 1,255,342 hours. 13 The total number of respondents would be 904,655, 14
and the total annual responses would be 2,958,754. 15 Compliance professionals and clerical staff
are likely to record and prepare and deliver copies of the codes of ethics and amendments.
Accordingly, we estimate the annual cost to each respondent for this aspect of the rule to be
$1,817 (6 hours of professional time to record the code of ethics at $279 per hour (approx.
$1,674), 16 and 2.75 hours of clerical time to deliver codes of ethics and amendments at $52 per

11

Over any two-year period, 100 copies of amendments for all 100 supervised persons in year 1 +
10 copies of complete code for new supervised persons in year 1 through 2 = 110 copies, divided
by 2 years = 55 copies.

12

0.05 hours per copy x 55 copies per year = 2.75 hours. 2.75 hours x 10,643 investment advisers =
29,268 hours total.

13

63,858 hours by advisers to record their codes of ethics + 1,162,216 hours for reporting by
access persons + 29,268 hours for advisers to deliver copies of codes and amendments =
1,255,342.

14

Under 3235-0596 as currently approved, investment advisers themselves are respondents, as are
non-clerical employees who are deemed access persons for purposes of the PRA analysis and are
required to submit reports of their personal securities transactions to their investment adviser for
monitoring purposes. Each investment adviser has, on average, 84 non-clerical employees.
10,643 + (10, 643 x 84) = 904,655.

15

Under 3235-0596 as currently approved, each investment adviser is estimated to deliver its code
of ethics to an average of 55 supervised persons each year, and these supervised persons are
required to return written acknowledgements of receipt, for a total of 110 annual responses per
adviser. In addition, an average of 84 access persons of each adviser are required to submit an
average of 2 personal securities transactions reports to their adviser, for a total of 168 annual
responses per adviser. 10,643 x (110 + 168) = 2,958,754.

16

Data from the Securities Industry and Financial Markets Association’s Report on Management &
Professional Earnings in the Securities Industry 2011 suggest that the cost for a Compliance
Manager is approximately $279 per hour.

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hour (approx. $143)), 17 for an annual cost of $19,338,331. 18 Access persons are responsible for
filing their initial holdings reports and transaction reports. Accordingly, we estimate the annual
cost to each adviser for this aspect of the rule to be $7,753 (((0.7 hours holdings report + 0.6
hours transactions report) x 84 access persons) x $71 per hour), 19 for an annual cost of
$82,515,179. 20 The grand total estimated annual cost of rule 204A-1 is $101,853,510. 21
13.

Estimate of Total Annual Cost Burden

$0
14.

Estimate of Cost to the Federal Government

There are no additional costs to the federal government.
15.

Explanation of Changes in Burden

We have revised the estimated burden based on new information on the number of SECregistered investment advisers that we obtained from Form ADVs filed through the IARD. The
number of responses per investment adviser and the number of hours per response have not changed
since the last estimate. The decrease in hour burden is due to a decrease in the estimated number of
respondents.
16.

Information Collections Planned for Statistical Purposes

Not applicable.
17.

Approval to not Display Expiration Date

17

Data from the Securities Industry and Financial Markets Association’s Report on Office Salaries
in the Securities Industry 2011 (“SIFMA Office Report”) suggest that the cost for a General Clerk
is approximately $52 per hour.

18

$1,817 x 10,643 = $19,338,331.

19

Data from the SIFMA Office Report suggest that the cost for a Senior Retail Sales Assistant is
approximately $71 per hour.

20

$7,753 x 10,643 = $82,515,179.

21

$82,515,179 + $19,338,331 = $101,853,510.

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Not applicable.
18.

Exceptions to Certification Statement

Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.