Supporting Statement 204-2

SUPPORTING STATEMENT FOR PAPERWORK REDUCTION ACT SUBMISSION
PROPOSAL TO AMEND RULE 204-2 UNDER THE ADVISERS ACT
A.

JUSTIFICATION
1.

Necessity for the Information Collection

On May 6, 2016, the Securities and Exchange Commission (the “Commission” or
“SEC”) issued a release 1 proposing a rule (the “Proposed 956 Rule”) pursuant to section 956 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and
an amendment to rule 204-2 under the Investment Advisers Act of 1940 (the “Advisers Act” or
“Act”). 2 The proposed amendment to rule 204-2 would require registered investment advisers
that would be subject to the Proposed 956 Rule to maintain the records required by, and for the
periods specified in, section 303.4(f) and, for certain of these registered investment advisers, 3 the
records required by, and for the periods specified in, sections 303.5 and 303.11 of the Proposed
956 Rule in accordance with the recordkeeping requirements of rule 204-2.
Section 204 of the Advisers Act provides that investment advisers required to register
with the Commission must make and keep certain records for prescribed periods, and make and
disseminate certain reports. Rule 204-2 sets forth mandatory requirements for maintaining and
preserving specified books and records. 4 The records that an investment adviser must keep in

1

See Incentive-based Compensation Arrangements, Investment Advisers Act Release No. 4383
(May 6, 2016) (the “Proposed 956 Release”).

2

15 U.S.C 80b-4.

3

The Proposed 956 Rule identifies three categories of investment advisers based on average total
consolidated assets, as defined therein. Investment advisers with average total consolidated assets
greater than or equal to $250 billion, greater than or equal to $50 billion and less than $250
billion or greater than or equal to $1 billion and less than $50 billion would be Level 1, Level 2 or
Level 3 covered institutions, respectively. See the Proposed 956 Release.

4

17 CFR 275.204-2.

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accordance with rule 204-2 must generally be retained for not less than five years. 5 These
requirements constitute a mandatory “collection of information,” within the meaning of the
Paperwork Reduction Act. The collection of information under rule 204-2 is necessary for the
Commission staff to use in its examination and oversight program. The collection has been
previously approved and subsequently extended under Office of Management and Budget
(“OMB”) control number 3235-0278 (expiring March 31, 2020), and it is found at 17 CFR
275.204-2. 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 OMB number.
2. Purpose and Use of the Information Collection
The purpose of the information collection in rule 204-2 is to assist the Commission’s
examination and oversight program in determining compliance with the Advisers Act and
corresponding rules. The respondents are investment advisers registered with the Commission.
Responses provided to the Commission in the context of its examination and oversight program
are generally kept confidential. 6 This collection of information is found at 17 CFR 275.204-2
and is mandatory.
3.

Consideration Given to Information Technology

The Commission’s use of computer technology in connection with this information
collection, which has been previously approved by OMB, would not change. The Commission

5

See rule 204-2(e) (17 CFR 275.204-2(e)). 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.

6

See section 210(b) of the Advisers Act [15 U.S.C. 80b-10(b)].

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currently permits advisers to maintain records required by rule 204-2 through electronic media. 7
4.

Duplication

The collection of information requirements of rule 204-2, including the proposed
amendment, are not duplicated elsewhere.
5.

Effect on Small Entities

The requirements of rule 204-2, including the proposed amendment, are the same for all
investment advisers registered with the Commission, including those that are small entities.
OMB has previously approved the effect of this collection on all investment advisers in general,
including advisers that are small entities. Moreover, it would defeat the purpose of rule 204-2 to
exempt small entities from these requirements.
6.

Consequences of Not Conducting Collection

Less frequent information collection would be incompatible with the objectives of rule 2042 and could hinder the Commission’s oversight and examination program for investment advisers
and thereby reduce the protection to investors.
7.

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

The collection requirements under rule 204-2 generally require advisers to maintain
documents for five years, and in some cases longer. 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 the recordkeeping requirements in rule 204-2 of the Advisers Act are

7

See Electronic Recordkeeping by Investment Companies and Investment Advisers, Investment
Advisers Act Release No. 1945 (May 24, 2001) [66 FR 29224 (May 30, 2001)].

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designed to contribute to the effectiveness of the Commission’s examination and inspection
program. 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 entire period between examinations.
8.

Consultation Outside the Agency

In the Proposed 956 Release, the Commission requested public comment on the effect of
information collections under the proposed amendment to rule 204-2. The Commission and the
staff of the Division of Investment Management continue to 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 facing the industry.
9.

Payment or Gift

None.
10.

Confidentiality

Responses provided to the Commission pursuant to rule 204-2 in the context of the
Commission’s examination and oversight program are generally kept confidential.
11.

Sensitive Questions

Not applicable .
12.

Burden of Information Collection

The proposed amendment to rule 204-2 would require registered investment advisers that
are Level 1, Level 2 or Level 3 covered institutions to make and keep true, accurate and current
records required by, and for the period specified in, section 303.4(f) and, for those registered
investment advisers that are Level 1 or Level 2 covered institutions, the records required by, and
for the periods specified in, sections 303.5 and 303.11 of the Proposed 956 Rule.

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The currently-approved total annual burden estimate for rule 204-2 is 2,199,791 hours.
This burden estimate was based on estimates that 12,024 investment advisers were subject to rule
204-2, and each of these investment advisers spends an average of 182.95 hours preparing and
preserving records in accordance with the rule. Based on updated data as of December 1, 2017,
there are 12,693 registered investment advisers. 8 This is an increase of 669 registered
investment advisers over the previously approved burden. This increase in the number of
registered investment advisers increases the total burden hours of current rule 204-2 from
2,199,791 to 2,322,184, an increase of 122,393 hours. 9
Based on the Commission’s staff experience, the Commission estimates that the proposed
amendment to rule 204-2 would increase each registered investment adviser’s average annual
collection burden under rule 204-2 by 2 hours 10 for each of the three types of records required to
be preserved pursuant to the collection of information relating to the Proposed 956 Rule. 11 The
Commission also estimates that 18, 21 and 630 investment advisers would be Level 1, Level 2 or
Level 3 covered institutions, respectively, under the Proposed 956 Rule. Therefore, for a
registered investment adviser that is a Level 1 covered institution, the increase in its average
annual collection burden would be from 182.95 hours to 188.95 hours, 12 and would thus increase

8

Based on data from the Commission’s Investment Adviser Registration Depository (“IARD”) as
of December 1, 2017.

9

This estimate is based on the following calculations: (12,693 – 12,024) x 182.95 = 122,393;
122,393 + 2,199,791 = 2,322,184.

10

The burden hours estimated for amending rule 204-2 assumes that the investment adviser already
has systems in place to comply with the general requirements of rule 204-2. Accordingly, the 2
burden hours estimated for each type of record required to be preserved pursuant to the Proposed
956 Rule is attributable solely to the burden associated with maintaining such record.

11

The records required by sections 303.4(f), 303.5 and 303.11 of the Proposed 956 Rule.

12

This estimate is based on the following calculation: 182.95 existing hours + 6 new hours = 188.95

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the annual aggregate burden for rule 204-2 by 108 hours, 13 from 2,322,184 hours to 2,322,292
hours. 14 As monetized, the estimated burden for each such investment adviser’s average annual
burden under rule 204-2 would increase by approximately $456, 15 which would increase the
estimated monetized aggregate annual burden for rule 204-2 by $8,208 16, from $130,316,112 to
$130,324,320. 17 For a registered investment adviser that is a Level 2 covered institution, the
increase in its average annual collection burden would be from 182.95 hours to 186.95 hours, 18
and would thus increase the annual aggregate burden for rule 204-2 by 84 hours, 19 from
2,322,292 hours 20 to 2,322,376 hours. 21 As monetized, the estimated burden for each such
investment adviser’s average annual burden under rule 204-2 would increase by approximately

hours.
13

This estimate is based on the following calculation: 18 (Investment advisers considered as Level
1 covered institutions) x 6 hours = 108 hours.

14

This estimate is based on the following calculation: 2, 322,184 hours + 108 hours = 2, 322,292
hours.

15

This estimate is based on the following calculation: 6 hours x $76 (hourly rate for an
administrative assistant) = $456. The hourly wage used is from SIFMA’s Office Salaries in the
Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year
and inflation and multiplied by 2.93 to account for bonuses, firm size, employee benefits, and
overhead.

16

This estimate is based on the 18 (Level 1 covered institutions) x $456 = $8,208.

17

This estimate is based on the following calculations: $130,316,112 + $8,208 = $130,324,320.

18

This estimate is based on the following calculation: 182.95 existing hours + 4 new hours = 186.95
hours.

19

This estimate is based on the following calculation: 21 (Level 2 covered institutions) advisers x 4
hours = 84 hours.

20

This estimate includes the increase in the annual aggregate burden for covered investment
advisers that are Level 1 covered institutions.

21

This estimate is based on the following calculation: 2, 322,292 hours + 84 hours = 2, 322,376
hours.

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$304, 22 which would increase the estimated monetized aggregate annual burden for rule 204-2
by $6,384 23, from $130,324,320 24 to $130,330,704. 25 For a registered investment adviser that is
a Level 3 covered institution, the increase in its average annual collection burden would be from
182.95 hours to 184.95 hours, 26 and would thus increase the annual aggregate burden for rule
204-2 by 1,260 hours, 27 from 2,322,376 hours 28 to 2,323,636 hours. 29 As monetized, the
estimated burden for each such investment adviser’s average annual burden under rule 204-2
would increase by approximately $152, 30 which would increase the estimated monetized
aggregate annual burden for rule 204-2 by $95,760 31, from $130,330,704 32 to $130,426,464. 33

22

This estimate is based on the following calculation: 4 hours x $76 (hourly rate for an
administrative assistant) = $304. The hourly wage used is from SIFMA’s Office Salaries in the
Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year
and inflation and multiplied by 2.93 to account for bonuses, firm size, employee benefits, and
overhead.

23

This estimate is based on the following calculation: 21 (Level 2 covered institutions) x $304 =
$6,384.

24

This estimate includes the monetized increase in the annual aggregate burden for covered
investment advisers that are Level 1 covered institutions.

25

This estimate is based on the following calculations: $130,324,320 + $6,384 = $130,330,704.

26

This estimate is based on the following calculation: 182.95 existing hours + 2 new hours = 184.95
hours.

27

This estimate is based on the following calculation: 630 (Level 3 covered institutions) advisers x
2 hours = 1,260 hours.

28

This estimate includes the increase in the annual aggregate burden for covered investment
advisers that are Level 1 or Level 2 covered institutions.

29

This estimate is based on the following calculation: 2,322,376 hours + 1,260 hours = 2,323,636
hours.

30

This estimate is based on the following calculation: 2 hours x $76 (hourly rate for an
administrative assistant) = $152. The hourly wage used is from SIFMA’s Office Salaries in the
Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year
and inflation and multiplied by 2.93 to account for bonuses, firm size, employee benefits, and
overhead.

31

This estimate is based on the following calculation: 630 (Level 3 covered institutions) x $152 =

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The Commission estimates that the proposed amendment would not result in any additional
external costs associated with this collection of information for rule 204-2.
13.

Cost to Respondents

There is no cost burden other than the cost of the hour burden described above.
14.

Cost to the Federal Government

There are no additional costs to the federal government directly attributable to rule 204-2.
15.

Changes in Burden

The Commission estimates that the total burden hour associated with rule 204-2 will
increase from 2,199,791 hours per year to 2,323,636 hours per year because the Commission has
increased its estimate of the number of respondents subject to rule 204-2 as well as increased its
estimate of the per investment adviser annual burden due to the proposed amendment to rule
204-2.
16.

Information Collection Planned for Statistical Purposes

None.
17.

Approval to Omit OMB Expiration Date

Not Applicable.
18.

Exceptions to Certification Statement for Paperwork Reduction Act

Submission
Not Applicable.

$95,760.
32

This estimate includes the monetized increase in the annual aggregate burden for covered
investment advisers that are Level 1 or Level 2 covered institutions.

33

This estimate is based on the following calculations: 130,330,704 + $95,760 = $130,426,464.

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B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.