Rule 206(4)-6 Supporting Statement (2013 revision clean)

SUPPORTING STATEMENT
Rule 206(4)-6
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 206(4) of the Investment Advisers Act of 1940 (“Advisers Act” or “Act”)
(15 USC 80b-6(4)) prohibits any investment adviser from engaging in any act, practice or course
of business which is fraudulent, deceptive or manipulative and gives the Securities and Exchange
Commission (“Commission”) the power, by rules and regulations, to define and prescribe means
reasonably designed to prevent such acts, practices and courses of business. The Commission
adopted rule 206(4)-6 under the Advisers Act to address an investment adviser’s fiduciary
obligation to clients who have given the adviser authority to vote their proxies. Under the rule,
an investment adviser that exercises voting authority over client securities is required to: (i)
adopt and implement written policies and procedures that are reasonably designed to ensure that
the adviser votes securities in the best interest of clients, including procedures to address any
material conflict that may arise between the interest of the adviser and the client; (ii) disclose to
clients how they may obtain information on how the adviser has voted with respect to their
securities; and (iii) describe to clients the adviser’s proxy voting policies and procedures and, on
request, furnish a copy of the policies and procedures to the requesting client.
Rule 206(4)-6 contains “collection of information” requirements within the meaning of
the Paperwork Reduction Act of 1995. 1 The title of this collection is “Rule 206(4)-6” and the
Commission previously submitted this collection to the Office of Management and Budget

1

44 U.S.C. 3501 to 3520.

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(“OMB”) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. OMB approved,
and subsequently extended, this collection under control number 3235-0571 ([expiring on][May
31, 2014]). An agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control number. This collection of
information is codified at 17 CFR 275.206(4)-6 and is mandatory. The respondents are
investment advisers registered with the Commission that vote proxies with respect to clients’
securities. This collection of information is necessary to permit advisory clients of these
investment advisers to use the information collected to assess investment advisers’ proxy voting
policies and procedures and to monitor the advisers’ performance of their proxy voting activities.
Responses to the disclosure requirement are not kept confidential.
2.

Purposes of the Information Collection

The rule is designed to assure that advisers that vote securities for their clients vote those
securities in their clients’ best interest and provide clients with information about how their
securities were voted. As discussed in Item 1 (above), advisory clients use the information
required by rule 206(4)-6 to assess investment advisers’ proxy voting policies and procedures
and to monitor the advisers’ performance of their proxy voting activities. The information
required by Advisers Act rule 204-2, a recordkeeping rule, also is used by the Commission staff
in its examination and oversight program. Without the information collected under the rules,
advisory clients would not have information they need to assess their advisers’ services and
monitor their advisers’ handling of their accounts, and the Commission would be less efficient
and effective in its programs.

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3.

Role of Improved Information Technology

The collection of information requirements under rule 206(4)-6 take the form of
(1) writing policies and procedures that are reasonably designed to ensure that the adviser votes
proxies in the best interest of clients, (2) disclosing how clients may obtain information on how
the adviser has voted their proxies, and (3) describing to clients information about the adviser’s
proxy voting procedures and policies. Accordingly, the Commission’s use of computer
technology may have little effect. The Commission, however, does currently permit advisers to
maintain the records related to their proxy voting policies and to how they have voted client
proxies though the use of electronic media. 2
4.

Efforts to Identify Duplication

The requirements of rule 206(4)-6 are not duplicated elsewhere for those investment
advisers that must comply with the rule, although those advisers effectively are required to use
disclosures mandated by Form ADV and related rules to meet their disclosure obligations under
rule 206(4)-6. Rule 204-3 under the Advisers Act generally requires investment advisers to
furnish certain information to clients and prospective clients by providing them a brochure that
contains all information required by Part 2 of Form ADV.
As required by Part 2 of Form ADV, this brochure must include, among other things, the
same proxy-related disclosure mandated by rule 206(4)-6. That is, an investment adviser that
has, or will accept, the authority to vote its clients’ securities must (i) describe in its brochure its
voting policies and procedures, including those adopted pursuant to rule 206(4)-6; (ii) describe in
its brochure whether (and, if so, how) its clients can direct a vote in a particular solicitation; (iii)
2

These records are separately required under the Advisers Act recordkeeping rule 204-2.

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describe in its brochure how it addresses conflicts of interest between it and its clients with
respect to voting their securities; (iv) describe in its brochure how clients may obtain information
from the investment adviser about how it voted their securities; and (v) explain in the brochure
that clients may obtain a copy of its proxy voting policies and procedures upon request. These
brochure disclosure requirements are not duplicative of those contained in rule 206(4)-6 because
an adviser need not make separate disclosures to satisfy each requirement.
5.

Effect on Small Entities

All advisers, regardless of their size, are equally subject to the collection requirements.
The requirements of rule 206(4)-6 apply equally to all investment advisers that are registered
with the Commission and vote proxies on behalf of their clients, including those advisers that are
small entities. It would be incompatible with the objectives of the rule to exempt small entities
from these requirements, which are designed to ensure clients are afforded the full protections
attendant to an adviser’s fiduciary duties as recognized by the Advisers Act when an adviser is
voting their proxies. Nevertheless, in designing the rule, the Commission took an approach that
permits small firms to implement the rule in whatever manner is least burdensome in light of
their particular circumstances. The Commission drafted rule 206(4)-6 to permit each firm
subject to the rule to design and structure its own policies and procedures in light of the firm’s
operational structure and the particular types of conflicts encountered by the firm in connection
with its unique business and clients.
6.

Consequences of Less Frequent Collection

Less frequent information collection would be incompatible with the objectives of rule
206(4)-6. For example, if the information required by the rule were to be either not collected or

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collected less frequently, both the Commission’s ability to protect investors and the ability of
advisory clients to assess and monitor advisers’ proxy voting practices would be reduced.
7.

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

The collection of information imposes no additional requirements regarding record
retention. 3
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 206(4)-6 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. The Commission and the staff of the Division of Investment Management also
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.
9.

Payment or Gift to Respondents

Not applicable.

3

As discussed in Items 3 and 4 (above), records related to an adviser’s proxy voting policies and
procedures and proxy voting history are separately required under the Advisers Act
recordkeeping rule 204-2. The standard retention period required for books and records under
rule 204-2 is five years, in an easily accessible place, the first two years in an appropriate office
of the investment adviser. Rule 204-2(e). Although this period exceeds the three-year guideline
for most kinds of records under 5 CFR 1320.5(d)(2)(iv), OMB has previously approved the
collection with this retention period. The retention periods in Rule 204-2 are warranted because
retention of these records is necessary for the Commission’s inspection program to ascertain
compliance with the Investment Advisers Act.

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10.

Assurance of Confidentiality

Rule 206(4)-6 requires investment advisers to make certain disclosures to their clients.
These responses are not kept confidential.
11.

Sensitive Questions

No PII collected/Not applicable.
12.

Estimate of Hour Burden

Rule 206(4)-6 requires an investment adviser that votes client securities to adopt written
policies and procedures reasonably designed to ensure that the adviser votes client securities in
the best interests of clients, and requires the adviser to disclose to clients information about those
policies and procedures. For purposes of estimating the paperwork burden for investment
advisers under rule 206(4)-6, we estimate that the number of investment advisers subject to
collection of information requirements under the rule is 9,650. 4 We further estimate that each of
these advisers is required to spend on average 10 hours annually documenting its proxy voting
procedures under the requirements of the proposed rule, for a total burden of 96,500 hours. 5
The rule also requires these advisers to describe their proxy voting policies and
procedures to clients and make certain related disclosures, as discussed in Item 1, above. The
attendant paperwork burden is already incorporated in collections titled “Form ADV” (OMB

4

Based on records of information submitted to the Commission by investment advisers in Part 1 of
Form ADV, 9,650 of the 10,825 total investment advisers registered with the Commission report
that they provide continuous and regular supervisory or management services for client securities
portfolios on a discretionary basis. Because Part 1 of ADV does not require investment advisers
to describe whether they vote proxies on behalf of clients, for purposes of this estimate, we infer
that these advisers vote proxies on behalf of one or more clients in connection with providing
discretionary asset management services.

5

9,650 x 10 = 96,500

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control number 3235-0049) and “Rule 204-3” (OMB control number 3235-0047). As discussed
above, investment advisers are required to make disclosures concerning their proxy voting
policies and procedures in brochures that contain all information required by Part 2 of Form
ADV, including the information described in rule 206(4)-6.
In addition, rule 206(4)-6 requires these investment advisers to provide copies of their
proxy voting policies and procedures to clients upon request. Based on information submitted to
the Commission by SEC-registered investment advisers, we estimate that SEC-registered
advisers have, on average, 1,390 clients each. However, we estimate that, on average, at least 90
percent of each adviser’s clients would find the adviser’s description of its policies sufficiently
informative, and at most ten percent, or 139 clients of each adviser on average, would request
copies of the underlying policies and procedures. 6 We estimate that it would take these advisers
0.1 hours per client to deliver copies of the policies and procedures, for a total burden of 134,135
hours. 7
Accordingly, we estimate that rule 206(4)-6 results in an annual aggregate burden of
collection for SEC-registered investment advisers of a total of 230,635 hours. 8
We believe that investment advisers use compliance professionals to document their
firms’ proxy voting policies and procedures. We estimate the hourly wage for compliance
professionals to be $269, including benefits. Additionally, we believe that investment advisers
use clerical staff to deliver copies of proxy voting policies in response to clients’ requests. We
6

1,390 x 10% = 139

7

0.1 x 139 x 9,650 =134,135

8

96,500 + 134,135 = 230,635

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estimate the hourly wage for clerical staff to be $53, including benefits. Accordingly, we
estimate the annual aggregate cost of collection to be $33,067,655. 9
13.

Estimate of Total Annual Cost Burden

We do not anticipate that rule 206(4)-6 will impose any non-labor costs.
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 increased the estimated hour burden from 225,575 hours to 230,635 hours based
on new information with respect to the average number of clients that we estimate SEC-registered
investment advisers to have. This new information is based on data derived from information
submitted by advisers on Form ADVs filed through the IARD. The number of hours per response
has not changed since the last estimate. The increase in hour burden is entirely due to an increase in
the estimated average number of clients of respondents.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to not Display Expiration Date

Not applicable.
18.

Exception to Certification Statement

Not applicable.
9

Data from the Securities Industry and Financial Markets Association’s Report on Management &
Professional Earnings in the Securities Industry 2012 suggest that the cost for a Compliance
Manager is approximately $269 per hour. Data from the Securities Industry and Financial
Markets Association’s Report on Office Salaries in the Securities Industry 2012 suggest that the
cost for a General Clerk is approximately $53 per hour. (96,500 hours x $269 per hour) +
(134,135 hours x $53 per hour) = 33,067,655

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B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.