Rule 206(3)-3T Supporting statement

SUPPORTING STATEMENT
For the Paperwork Reduction Act Submission for
“Rule 206(3)-3T”
A.

JUSTIFICATION
1.

Information Collection Necessity

Section 206(3) of the Investment Advisers Act of 1940 (“Advisers Act” or “Act”)
(15 U.S.C. 80b-6(3)) requires an investment adviser to follow certain procedures if the
adviser trades with its clients as principal (selling securities it owns to clients or buying
securities from clients). Advisers Act rule 206(3)-3T (17 CFR 275.206(3)-3T) provides
an alternative means for investment advisers that are also registered broker-dealers to
comply with section 206(3).
Rule 206(3)-3T contains “collection of information” requirements within the
meaning of the Paperwork Reduction Act of 1995 (“PRA”) (44 U.S.C. 3501 et seq.). 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. The title of
this collection is “Temporary rule for principal trades with certain advisory clients, rule
206(3)-3T,” and the Commission previously submitted this collection to the Office of
Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d) and
5 CFR 1320.11. OMB approved this collection under control number 3235-0630
(expiring on May 31, 2014).
The rule contains two types of collections of information: information provided
by an adviser to its advisory clients and information collected from advisory clients by an
adviser. The information collection requirements of the rule consist of the following:
(i) prospective disclosure in writing of the conflicts arising from principal trades;

(ii) obtaining written, revocable consent from the client prospectively authorizing the
adviser to enter into principal trades; (iii) trade-by-trade oral or written disclosure of
principal trading and oral or written client consent before each principal transaction;
(iv) trade-by-trade written confirmation statements disclosing the capacity in which the
adviser acted; and (v) delivering to the client an annual report itemizing the principal
transactions. Providing the information required by rule 206(3)-3T is necessary for
advisers also registered as broker-dealers to obtain the benefit of the alternative means of
complying with section 206(3) of the Advisers Act.
2.

Information Collection Purpose

Rule 206(3)-3T establishes an alternative means for certain advisers to meet the
requirements of section 206(3) of the Advisers Act when they act in a principal capacity
in transactions with certain advisory clients. The rule contains information collection
requirements that provide important protections to investors when advisers engage in
principal trades. Specifically, the rule requires advisers, among other things, to apprise
their clients regarding the conflicts of interests arising from principal trades. The rule
also requires advisers to provide information to clients regarding transactions that the
adviser executed on a principal basis. We believe clients of advisers will primarily use
the information collections for the purpose of monitoring principal trades.

3.

Consideration Given to Information Technology

Investment advisers are permitted to provide to clients the information required
by rule 206(3)-3T electronically. 1
4.

Duplication

There are no rules that duplicate or conflict with rule 206(3)-3T. There are rules
that require broker-dealers to provide certain information in a confirmation statement to
their customers regarding the transactions they effect. While rule 206(3)-3T requires
information in a confirmation statement, the rule is designed to work efficiently together
with those rules by permitting firms to incorporate the required disclosure into one
confirmation statement.
5.

Effect on Small Entities

Small SEC-registered investment advisers that also are registered with the
Commission as broker-dealers seeking to rely on the rule would be subject to the same
disclosure requirements as larger entities. 2 In developing the requirements of the rule,
the Commission considered the extent to which they would have a significant impact on a
substantial number of small entities, and included flexibility where possible, calling for
disclosures that are already generated by the relevant firms in one form or another
whenever possible in the light of the objectives of the rule, to reduce the corresponding

1

2

Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for
Delivery of Information; Additional Examples Under the Securities Act of 1933, Securities
Exchange Act of 1932, and Investment Company Act of 1940, Investment Advisers Act Release
No. 1562 (May 9, 1996).

Under Advisers Act rule 0-7, an investment adviser generally is a small entity if it: (i) has assets
under management having a total value of less than $25 million; (ii) did not have total assets of $5 million
or more on the last day of its most recent fiscal year; and (iii) does not control, is not controlled by, and is
not under common control with another investment adviser that has assets under management of $25
million or more, or any person (other than a natural person) that had $5 million or more on the last day of
its most recent fiscal year.

burdens imposed. It would defeat the purpose of the rule to exempt small entities from
the rule.
6.

Consequences of Less Frequent Collection

Information must be given to a client at the following times: (i) before the adviser
engages in principal trades with respect to the client’s account, so the client can consent
to prospective transactions; (ii) prior to the execution of each principal trade; (iii) after
completion of each principal trade in the form of a confirmation statement; and (iv)
annually, a report itemizing all principal transactions. Less frequent reporting would not
give clients adequate information regarding principal trades executed by advisers.
7.

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

The collection of information imposes no additional requirements regarding
record retention.
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 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. At the time the Commission issued temporary rule
206(3)-3T on an interim-final basis, it requested comment on the rule and the collection of
information. The Commission also requested comment on its previous PRA estimates,
among other matters, in connection with its 2010 and 2012 proposals to extend the rule. No
comments were submitted on the Commission’s PRA estimates in response to these requests
for comments.

The Commission separately requested public comment on the collection of
information requirements in temporary rule 206(3)-3T 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

Not applicable.
10.

Confidentiality

The rule contains two types of collections of information: information provided
by an adviser to its advisory clients and information collected from advisory clients by an
adviser. Although the rule does not call for any of the information collected to be
provided to the Commission, to the extent advisers include any of the information
required by the rule in a filing, such as Form ADV, the information will not be kept
confidential. The collection of information delivered by clients to advisers would be
subject to the confidentiality strictures that govern those relationships, and we would
expect them to be confidential communications.
11.

Sensitive Questions

Not applicable. No information of a sensitive nature is required under Rule
206(3)-3T. No Personally Identifiable Information (PII) is collected.
12.

Time Burden Estimate

The Commission’s estimates of the burden of each of the collections reflects the
fact that the alternative means of compliance provided by the rule is substantially similar
to the approach advisers currently employ to comply with the disclosure and consent
obligations of section 206(3) of the Advisers Act and the approach that broker-dealers

employ to comply with the confirmation requirements of rule 10b-10 under the Exchange
Act.
The Commission’s estimate of the burden hours that will be imposed by the
collections of information in rule 206(3)-3T are set forth below. These burden hours
consist of both initial and annual, or ongoing, burdens. Because the paperwork burdens
imposed by rule 206(3)-3T are being extended, rather than being imposed initially, firms
relying on the rule already will have incurred the initial burdens, and generally will incur
in the future only the annual burdens. We anticipate that certain additional firms also will
choose to rely on the rule, and these firms will incur both initial and annual burdens.
a. Prospective Disclosure Statement and Consent
i. Drafting prospective disclosure statement (initial burden)
1. Respondents initially relying on the rule per year
2. Responses per respondent
3. Burden hours per response
4. Initial hours requested

11*
1
5
_____
55

*We estimate for PRA purposes, based on data from the Investment Adviser
Registration Depository (“IARD”), that annually 11 advisers also registered
as broker-dealers who do not maintain non-discretionary advisory accounts
will choose to do so and rely on rule 206(3)-3T. These advisers thus will
incur the initial burdens described above and throughout this supporting
statement. We also estimate for PRA purposes, based on IARD data, that
278 advisers rely on rule 206(3)-3T, which estimate includes the 11 advisers
that we anticipate will rely on the rule. We use this estimate of total
advisers to estimate annual, as opposed to initial, burdens.
ii. Distributing prospective disclosure statement (initial burden)
1. Number of new affected accounts per year
15,641*
2. Responses per account
1
3. Burden hours per response
0.1 (six minutes)
________
4. Initial hours requested
1,564
* We estimate for PRA purposes, based on IARD data, that advisers
annually will initially rely on rule 206(3)-3T to engage in principal trades

with 15,641 accounts, which will cause advisers (and in some cases,
accountholders) to incur the initial burdens described above and throughout
this supporting statement in connection with those accounts. We also
estimate for PRA purposes, based on IARD data, that advisers are likely to
rely on rule 206(3)-3T with respect to a total of 260,699 accounts. We use
this estimate of total accounts to estimate annual, as opposed to initial,
burdens. These account estimates take into account programs, such as
mutual fund asset allocation programs, to which rule 206(3)-3T will not
apply and retirement accounts that are unlikely to participate in principal
trading.
iii.

Reviewing prospective disclosure and responding to consent solicitation
(initial burden)
1. Number of new affected accountholders per year
15,641
2. Responses per accountholder
1
3. Burden hours per response
0.05 (3 minutes)
_________
4. Initial hours requested
782

iv.

Updating disclosure, maintaining records, and processing revocations and
prospective consents (annual burden)
1. Respondents relying on the rule
278
2. Responses per respondent
1
3. Burden hours per response
100
______
4. Annual hours requested
27,800

b.

Trade-by-Trade Disclosure and Consent (initial and annual burden)

i.
ii.
iii.

Number of affected accountholders
Responses per accountholder
Burden hours per response

iv.

Initial and annual hours requested

234,629*
50*
0.0083 (30 seconds)
______
97,371

*We estimate that 90 percent of the 260,699 accountholders, or 234,629
accountholders, will execute and return the consent. We also estimate that nondiscretionary advisory accountholders at eligible advisers engage in an average of
approximately 50 trades per year.
c. Principal Transactions Report
i. Programming computer systems (initial burden)
1. Respondents initially relying on the rule per year
2. Responses per respondent
3. Burden hours per response

11
1
5

4. Initial hours requested

_____
55

ii. Electronically-generated reports (initial and annual burden)
1. Affected accounts
234,629
2. Responses per account
1
3. Burden hours per response
.05 (3 minutes)
_______
4. Initial and annual hours requested
11,731

d. Total Burden Hours Requested
55
1,564
782
27,800
97,371
55
11,731
______
139,358
The total hour burden, expressed on a per-eligible-adviser basis, is therefore
approximately 501 hours per eligible adviser (139,358 hours divided by the estimated
278 advisers that will rely on rule 206(3)-3T).
The dollar cost estimates corresponding to each hour burden described above are
as follows:
a. Prospective Disclosure Statement and Consent
i. Drafting prospective disclosure statement (initial burden)
1. Total hour burden
2. Hour burden per adviser
3. Cost per hour
4. Cost per adviser
5. Total cost

55
5
$63*
$315*
_____
$3,465*

*We expect that the internal preparation function will most likely be
performed by compliance professionals. Data from SIFMA’s Office
Salaries in the Securities Industry 2012 (“Industry Salary Report”), modified
by Commission staff to account for an 1800-hour work-year and multiplied

by 2.93 to account for bonuses, firm size, employee benefits and overhead,
suggest that the cost for a Compliance Clerk is approximately $63 per hour.
$63 per hour x 5 hours on average per adviser = $315 on average per adviser
of initial internal costs for preparation of the prospective disclosure. $315
on average per adviser of initial internal costs x 11 advisers expected to
incur this initial burden = $3,465 in total burden-related costs for the
preparation of the prospective disclosure.

ii. Distributing prospective disclosure statement (initial burden)
1. Total hour burden
1,564
2. Hour burden per adviser
142
3. Cost per hour
$53*
4. Cost per adviser
$7,536*
________
5. Total cost
$82,892*
* We expect that the distribution function for the prospective written
disclosure and consent solicitation will most likely be performed by a
general clerk. Data from the Industry Salary Report, modified by
Commission staff to account for an 1800-hour work-year and multiplied by
2.93 to account for bonuses, firm size, employee benefits and overhead,
suggest that the cost for a General Clerk is approximately $53 per hour.
53 per hour x 1,564 total hours = $82,892 (which, if divided by the
estimated 11 advisers that will choose initially to rely on rule 206(3)-3T,
equals a total cost for distribution of approximately $7,536 on average per
adviser).
iii. Reviewing prospective disclosure and responding to consent solicitation
(initial burden)
1. Total hour burden (on accountholders)
782
2. Total number of new accountholders
15,641
3. Hour burden per accountholder
0.05 (3 minutes)*
4. Cost per accountholder
$0.50*
5. Cost per hour
$10*
_________
6. Total cost
$7,821*
*We expect that reviewing prospective disclosure and responding to the
consent solicitation will be undertaken by accountholders, of which we
estimate there are approximately 15,641 that will be subject to this initial
burden. We do not believe there will be a significant difference in burden
between those clients that consent and those that do not. As such, the
burden per accountholder is 782 hours ÷ 15,641 accounts = 0.05 hours (3
minutes). We estimate the cost per accountholder to review the disclosure
and respond to the consent solicitation will be $0.50. As such, the total cost
for these accountholders will be 15,641 accountholders x $0.50 per account
= $7,821 (which, if divided by the total number of burden hours, equals a
cost per hour of $10).

iv. Updating disclosure, maintaining records, and processing revocations and
prospective consents (annual burden)
1. Total hour burden
27,800
2. Hour burden per adviser
100
3. Cost per hour
$63*
4. Cost per adviser
$6,300*
______
5. Total cost
$1,751,400*
*We expect that this function will most likely be performed by compliance
professionals at $63 per hour. See Industry Salary Report. 100 hours on
average per adviser per year x $63 per hour = $6,300 on average per adviser
per year. $6,300 on average per adviser per year x 278 eligible advisers =
$1,751,400.
b. Trade-by-Trade Disclosure and Consent (initial and annual burden)
i.
ii.
iii.
iv.

Total hour burden
Hour burden per adviser
Cost per hour
Cost per adviser

v. Total cost

97,371
350*
$63*
$22,050*
______
$6,129,900*

*The burden for the average adviser would be 97,371 total hours per year ÷
278 eligible advisers = approximately 350 hours on average per adviser per
year. We expect that this function will most likely be performed by
compliance professionals at $63 per hour. See Industry Salary Report. 350
hours on average per adviser per year x $63 per hour = $22,050 on average
per adviser per year. $22,050 on average per eligible adviser per year x 278
eligible advisers = approximately $6,129,900 total cost per year.
c. Principal Transactions Report
i. Programming computer systems (initial burden)
1. Total hour burden
2. Hour burden per adviser
3. Cost per hour
4. Cost per adviser
5. Total cost

55
5
$82*
$410*
_____
$4,510*

*We expect that the internal programming function most likely will be
performed by computer programmers. Data from the Industry Salary
Report, modified by Commission staff to account for an 1800-hour workyear and multiplied by 2.93 to account for bonuses, firm size, employee

benefits and overhead, suggest that the cost for a Sr. Computer Operator is
approximately $82 per hour. 5 hours on average per adviser x $82 per hour
= $410 on average per adviser (or, across all the 11 advisers that we estimate
initially will rely on rule 206(3)-3T, $4,510).
ii. Electronically-generated reports (initial and annual burden)
1. Total hour burden
11,731
2. Hour burden per adviser
42
3. Cost per hour
$53*
4. Cost per adviser
$2,236*
_______
5. Total cost
$621,743*
*We expect that the generation and delivery of annual principal trade reports
will most likely be performed by general clerks at $53 per hour. $53 per
hour x 11,731 total hours per year = $621,743 (or, if divided among all 278
eligible advisers, approximately $2,236 on average per adviser per year).
d. Total Costs Associated with Burden Hours Requested
Burden hours
55
1,564
782
27,800
97,371
55
11,731
______
139,358
13.

Associated Cost
$3,465
$82,892
$7,821
$1,751,400
$6,129,900
$4,510
$621,743
_________
$8,601,731

Cost Burden Estimate

The Commission estimates that there are four additional initial cost burdens for
the rule, excluding any cost of the burden hours as identified in Item 12 above.
a. Professional fees for preparation of disclosure statement
i. Advisers initially relying on the rule per year
ii. Cost burden per adviser
iii. Initial cost burden

11
$1,200
________
$13,200

b. Printing and distributing prospective disclosure statement
i. Accounts initially subject to the rule
ii. Cost burden per account
iii. Initial cost burden

15,641
$1.50
______
$23,462

c. Reprogramming computer systems to generate trade-by-trade
confirmations
i. Advisers initially relying on the rule per year
ii. Cost burden per adviser
iii. Initial cost burden

11
$20,000
_______
$220,000

d. Programming computer systems to generate annual principal transactions
report
i. Advisers initially relying on the rule per year
ii. Cost burden per adviser
iii.

Initial cost burden

11
$10,000
_______
$110,000

e. Total Additional Cost Burden Estimate
$13,200
$23,462
$220,000
$110,000
__________
$366,662

The total additional costs, expressed on a per-eligible-adviser basis, are therefore
approximately $1,319 per eligible adviser ($366,662 divided by the estimated 278
advisers that will rely on rule 206(3)-3T).
14.

Cost to the Federal Government

There are no costs to the federal government directly attributable to Rule 206(3)3T.

15.

Changes in Burden

We have reduced the estimated hour burden from 378,992 hours to 139,358 hours
based on new information regarding the number of SEC-registered investment advisers
that are also registered with the SEC as broker-dealers and the number of nondiscretionary accounts held by such investment advisers. The revised numbers were
obtained from Form ADVs filed through the IARD as of September 3, 2013. The
number of responses per investment adviser and the number of hours per response have
not changed since the previous estimate. We revised the costs discussed in Item 13 above
-- reducing the costs from $824,220 to $366,662-- for the same reason.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exceptions to Certification Statement

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL
METHODS
Not applicable.