Rule 206(3)-2 Supporting Statement FINAL

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
RULE 206(3)-2
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 206(3) of the Investment Advisers Act of 1940 (15 U.S.C 80b-6(3)) (“Advisers
Act” or “Act”) makes it unlawful for any investment adviser, by use of the mails or any means or
instrumentality of interstate commerce, directly or indirectly:
[A]cting as principal for his own account, knowingly to sell any security to or
purchase any security from a client, or acting as broker for a person other than
such client, knowingly to effect any sale or purchase of any security for the
account of such client, without disclosing to such client in writing before the
completion of such transaction the capacity in which he is acting and obtaining
the consent of the client to such transaction.
This specific conflict of interest provision addresses instances in which an adviser deals
with an advisory client as a principal, as well as instances when an adviser acts as agent for
another. Principal transactions occur when the adviser sells securities it owns to the client or
when it buys securities from the client for its own account. Agency cross transactions occur
when an adviser acts as broker to both the advisory client and the opposite party to the
transaction. Section 206(3) of the Advisers Act requires an investment adviser to obtain a
client’s consent in writing prior to engaging in any principal or agency cross transaction.
The Securities and Exchange Commission (the “Commission” or “SEC”) adopted rule
206(3)-2 (17 CFR 275.206(3)-2) to permit investment advisers to enter into agency cross

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transactions under section 206(3) if certain conditions are met. 1 Rule 206(3)-2 permits an
adviser to obtain a blanket consent from a client for agency cross transactions, provided the
adviser furnishes certain specified information to the client at specified times. The information
requirements of the rule consist of the following: (a) prior to obtaining the client’s consent,
appropriate disclosure must be made to the client as to the practice of, and the conflicts of
interest involved in, agency cross transactions; (b) at or before the completion of any such
transaction the client must be furnished with a written confirmation containing specified
information and offering to furnish upon request certain additional information; and (c) at least
annually, the client must be furnished with a written statement or summary as to the total number
of transactions during the period covered by the consent and the total amount of commissions
received by the adviser or its affiliated broker-dealer attributable to such transactions.
The Commission adopted rule 206(3)-2 under the authority of sections 206(3) and 211(a)
(15 U.S.C. 80b-3, 80b-11(a)) of the Advisers Act. The premise of rule 206(3)-2 is that
appropriate disclosure of agency cross transaction practices is made in advance and that a client
is furnished with information as to each transaction immediately after it occurs. The
overreaching that section 206(3) is designed to prevent can thereby be sufficiently minimized so
that the adviser need not obtain a client’s consent prior to entering into each agency cross
transaction as otherwise would be required by section 206(3). Accordingly, the information
requirements of rule 206(3)-2 are necessary to make the rule consistent with investor protection.

1

Agency Cross Transactions for Advisory Clients, Investment Advisers Act Release No. 589 (June 1, 1977).
Section 206 (15 U.S.C. 80b-6) applies to all investment advisers as defined in section 202(a)(11) (15
U.S.C. 80b-2(a)(11)) regardless of whether such advisers are required to be registered. Rule 206(3)-2 (17
CFR 275.206(3)-2) formerly was available only to registered investment advisers, however, the rule was
amended in 1997 to make it available to all investment advisers in light of changes to the registration
provisions of the Advisers Act under the National Securities Markets Improvement Act of 1996. Rules

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Disclosure regarding the practice of agency cross transactions apprises the client of the inherent
conflicts of interest involved in such transactions. Disclosure regarding each transaction upon its
completion permits the client to review each transaction to determine whether the terms of the
transaction should be challenged as unfair or the blanket consent should be revoked. Similarly,
annual disclosure of all such transactions permits the client to make an informed judgment as to
whether to continue the consent.
2.

Purpose and Use of the Information Collection

Clients of investment advisers primarily use the information collected for the purpose of
monitoring agency cross transactions as described in Item 1, above. In addition, Commission
staff reviews the information during its routine investment adviser inspections to assess
compliance with the rule.
3.

Consideration Given to Information Technology

Investment advisers are permitted to provide to clients the information required by rule
206(3)-2 electronically. 2
4.

Duplication

The collection of information requirements of the rule are not duplicated elsewhere.
5.

Effect on Small Entities

The requirements of rule 206(3)-2 apply equally to all investment advisers, including
small entities. The rule functions as a safe harbor which small entities may choose to use for

Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No.
1633 (May 15, 1997).
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).

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affecting an agency cross transaction without having to obtain specific prior consent from the
client. Exempting small entities would defeat the rule’s purpose and deprive them of the benefits
of the rule. No reasonable alternative exists that would permit the Commission to afford special
treatment to small entities while continuing to protect investors.
6.

Consequences of Not Conducting Collection

Information must be given to a client at the following times: (a) before the adviser
engages in any agency cross transaction with respect to the client’s account, so the client can
consent to prospective transactions; (b) at or before completion of each agency cross transaction
to give the client the opportunity to evaluate the transaction; (c) at least annually, to summarize
all agency cross transactions since the adviser gave the last such summary. Less frequent
reporting would not give a client adequate opportunity to evaluate an adviser's actions or the
corresponding inherent conflicts associated with agency cross transactions.
7.

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

The rule itself imposes no additional requirements regarding record retention. However,
SEC-registered investment advisers may otherwise be required to maintain and preserve certain
information required under rule 206(3)-2 for at least five (5) years. Rule 204-2 under the
Advisers Act (17 CFR 275.204-2) generally requires that registered investment advisers maintain
certain records for not less than five years, including (a) written communications received and
sent by the adviser relating to its recommendations and the placing or execution of any order to
purchase or sell any security, and (b) all written agreements entered into by the investment
adviser with any client.
The long-term retention of these records is necessary for the Commission’s inspection
program to ascertain compliance with the Advisers Act.

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8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 206(3)-2 before submitting this request for extension and approval to the
Office of Management and Budget. The Commission received no comments in response to its
request.
In addition, the Commission and the staff of the Division of Investment Management
participate in an ongoing dialogue with representatives of the investment adviser industry
through public conferences, meetings, as well as informal exchanges. These various forums
provide the Commission and the staff with a mechanism to ascertain and act upon paperwork
burdens confronting the industry.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

The information collected pursuant to the rule takes the form of disclosures made by
advisers to their clients. These disclosures are not kept confidential.
11.

Sensitive Questions

No questions of a sensitive nature are asked. The information collection does not collect
any Personally Identifiable Information (PII).
12.

Burden of Information Collection

The reporting burden will vary depending upon the number of clients for which an
adviser enters into agency cross transactions and the number of such transactions. The currentlyapproved annual aggregate burden of the collection under rule 206(3)-2 is 7,424 hours. This

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approved annual aggregate burden was based on information about the number of registered
advisers who reported in their Form ADV filings as of December 1, 2014 that they or an affiliate
engage in agency cross transactions. We are updating those prior calculations based on current
information about the number of registered advisers who reported in their Form ADV filings as
of December 31, 2017 that they or an affiliate engage in agency cross transactions. Based on
current data, we estimate that approximately 426 SEC-registered investment advisers use rule
206(3)-2. 3
We are also updating, based on current information, the number of clients for whom the
investment adviser engages in agency cross transactions. We estimate that each adviser relying
on the rule has an average of 16 clients who receive confirmation statements and annual
statements for agency cross transactions and that each of those clients receive approximately 2
confirmation statements per year. Thus, each adviser relying on the rule annually will prepare
32 confirmation statements for agency cross transactions 4 and 16 annual statements. Also, we
estimate that an adviser would be required to provide disclosure to 2 clients per year in
connection with obtaining the initial consent to engage in agency cross transactions. 5 These

3

This estimate is based on information reported by advisers through the Investment Adviser
Registration Depository (“IARD”). Based on IARD data as of December 31, 2017, of the
approximately 12,709 SEC-registered advisers, 426 responded “yes” to Form ADV, Part 1A, Item
8.B.1, a question pertaining to agency cross transactions. This represents approximately 3.36%
of total population of SEC-registered advisers.

4

16 clients x 2 agency cross transactions per client = 32 confirmation statements.

5

We have updated our estimate of the number of clients to whom an investment adviser engages in
agency cross transactions from 10 clients to 16 clients. This revised estimate is based on an
analysis of the change in the median number of clients reported by investment advisers who
indicated in response to Form ADV, Part 1A, Item 8.B.1, that the investment adviser engages in
agency cross transactions. This estimate was calculated, using IARD data, as follows: estimated
median number of clients reported as of December 31, 2003 (the last time an analysis of this
estimate was performed, establishing 10 clients as the estimate): 63; estimated median number of
clients reported as of December 31, 2017: 100. Increase in estimated median number of clients:

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estimates result in an average of 50 responses per respondent each year for a total of 21,300
responses annually. 6 Based on the estimate that each of these responses requires one half an
hour, we estimate a burden amounting to 10,650 hours per year. 7

This amounts to an increase

of 3,226 hours from December 1, 2014 estimates.
Compliance attorneys and compliance clerks are likely to prepare and deliver
these documents. We estimate that approximately 75 percent of these burden hours will
be performed by clerical employees and about 25 percent will be performed by
compliance attorneys. Based upon an average cost of $66 per hour for a compliance
clerk and an average cost of $345 per hour for a compliance attorney, 8 the total cost of
the information collection requirements of Rule 206(3)-2 is estimated at approximately
$1,445,738 annually. 9 These estimates of average burden hours and average costs of
those average burden hours are made solely for the purposes of the Paperwork Reduction
Act and are not derived from a comprehensive or representative survey or study, or the
100 - 63 = 37 (59% increase). Prior estimate: 10 clients x 1.59 (pro rata increase) =
approximately 16 clients. We are not aware of other data suggesting revisions to the estimates of
the number of responses per client.
6

426 advisers x 50 annual responses = 21,300 responses per year.

7

21,300 responses x 0.5 hours per response = 10,650 hours per year.

8

The figure of $66 per hour for a Compliance Clerk is from the 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. The figure of $345 per hour is based on reported industry wages for a Compliance
Attorney taken from SIFMA's Management & Professional Earnings in the Securities Industry
2013, modified by Commission staff to account for an 1800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead.

9

(0.75 x 10,650 x $66) + (0.25 x 10,650 x $345) = $527,175+ $918,563 = $1,445,738. This cost
estimate is higher than that previously submitted in connection with this collection. This increase
in estimated cost results primarily from a combination of a decrease in the number of advisers
using the rule annually and an increase in the estimate of the number of clients for whom an
adviser engages in agency cross transactions.

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cost of Commission rules and forms.
13.

Cost to Respondents

It is estimated that there is no cost burden for the rule, excluding any cost of the burden
hours as identified in Item 12 above.
14.

Cost to the Federal Government

There are no costs to the federal government directly attributable to Rule 206(3)-2.
15.

Changes in Burden

As discussed in Item 12 above, the number of respondents has decreased from
approximately 464 investment advisers to approximately 426 investment advisers. In addition,
the number of clients for whom the investment adviser engages in agency cross transactions has
increased from approximately 10 clients to approximately 16 clients (although the number of
responses and hours per response have not changed since the last estimate). Accordingly, the
total burden hours for all respondents has increased from 7,424 hours to 10,650 hours. The
increased burden reflects the net effect of a decrease in the estimated number of investment
advisers relying on the rule and an increase in the estimated number of clients for whom the
investment adviser engages in agency cross transactions, since the last extension request.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the OMB expiration date.
18.

Exceptions to Certification Statement for Paperwork Reduction Act

Submission
Not applicable.

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B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.