Form ADV Supporting Statement for 2018 Proposed Amendments

SUPPORTING STATEMENT FOR PAPERWORK REDUCTION ACT SUBMISSION
AMENDMENTS TO FORM ADV
UNDER THE INVESTMENT ADVISERS ACT OF 1940
(17 CFR 279.1)
A.
JUSTIFICATION
1.

Necessity for the Information Collection

On April 18, 2018, the Securities and Exchange Commission (the “Commission”
or “SEC”) issued a release proposing amendments to Form ADV 1, and related rules
under the Investment Advisers Act of 1940 (the “Advisers Act” or “Act”), which would
add new Form ADV Part 3: Form CRS (the relationship summary) requiring certain
registered investment advisers to prepare and file a relationship summary for retail
investors. The Commission uses the information on Form ADV to determine eligibility
for registration with us and to manage our regulatory and examination programs. Clients
would use the information required in From ADV (including proposed Part 3) to
determine whether to hire or retain an investment adviser, as well as what types of
accounts and services are appropriate for their needs.
Form ADV is currently a two-part investment adviser registration form. Part 1 of
Form ADV contains information used primarily by Commission staff, and Part 2 is the
client brochure. The Commission did not propose amendments to Part 1 or 2. 2 Rule
203-1 3 under the Advisers Act requires every person applying for investment adviser
registration with the Commission to file Form ADV. Rule 204-4 4 under the Advisers Act

1

17 CFR 279.1.

2

The Commission proposed conforming technical amendments to the General Instructions
of Form ADV to add references to the Part 3, but these amendments would not affect the
burden of Part 1 or Part 2.

3

17 CFR 275.203-1.

4

17 CFR 275.204-4.

requires certain investment advisers exempt from registration with the Commission to file
reports with the Commission by completing a limited number of items on Form ADV
(“exempt reporting advisers”). Rule 204-1 5 under the Advisers Act requires any adviser
that is required to complete Form ADV to update the form at least annually, including
exempt reporting advisers that report to the Commission pursuant to rule 204-4 and
requires advisers to submit electronic filings through the Investment Adviser Registration
Depository (“IARD”). The paperwork burdens associated with rules 203-1 and 204-1 are
included in the approved annual burden associated with Form ADV and thus do not entail
a separate collection of information. The paperwork burdens associated with rule 204-4
are also included in the approved annual burden associated with Form ADV and likewise
do not entail a separate collection of information.
Form ADV contains “collection of information” requirements within the meaning
of the Paperwork Reduction Act of 1995. 6 Proposed Part 3 of Form ADV contains
collections of information for which the annual aggregate burden will likely be affected
as a result of the amendments. The collections are necessary to provide advisory clients,
prospective clients, and the Commission with information about the adviser, and its
business, conflicts of interest and personnel. Responses are not kept confidential.
The title of this collection of information is: “Form ADV under the Investment
Advisers Act of 1940” 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, and subsequently extended, this collection
under control number 3235-0049 (expiring on August 31, 2020). An agency may not
5

17 CFR 275.204-1.

6

44 U.S.C. 3501 to 3520.

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conduct or sponsor, and a person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number. This collection of information
is codified at 17 CFR 279.1, 17 CFR 275.203-1, 17 CFR 275.204-1 and 17 CFR 275.2044 and is mandatory. The respondents are investment advisers registered with the
Commission or applying for registration with the Commission or exempt reporting
advisers.
2.

Purpose and Use of the Information Collection

The purpose of this collection of information is to provide advisory clients,
prospective clients, and the Commission with information about an adviser, and its
business, conflicts of interest and personnel. We use the information to determine
eligibility for registration with us and to manage our regulatory, examination, and
enforcement programs. Clients use certain of the information to determine whether to
hire an adviser and, if hired, how to manage that relationship.
This collection of information is found at 17 CFR 275.203-1, 275.204-1, 275.2044, and 275.279.1, and it is mandatory. Responses are not kept confidential. The majority
of the respondents to the Form ADV collection of information are investment advisers
registered with the Commission or applying for registration with the Commission while
the additional respondents to the Form ADV collection of information are exempt
reporting advisers. The information collected takes the form of disclosures to
respondents’ clients, potential clients, and the Commission.
3.

Consideration Given to Information Technology

The information collected pursuant to Form ADV takes the form of disclosures
made by investment advisers to their clients and potential clients and reporting to the

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Commission. Investment advisers currently file their Form ADV electronically on the
IARD system. This method of collecting information reduces the regulatory burden upon
investment advisers by permitting them to file applications for registration, and
amendments thereto, at one central location, rather than filing Form ADV separately with
the Commission and the states for notice filing purposes.
Exempt reporting advisers are subject to reporting, but not registration,
requirements and must submit their reports through the IARD using the same process as
registered investment advisers. Because exempt reporting advisers may be required to
register on Form ADV with one or more state securities authorities, use of the existing
form and filing system permits these advisers to satisfy both state and Commission
requirements with a single electronic filing. Our approach permits an adviser to
transition from filing reports with us to applying for registration under the Act by simply
amending its Form ADV; the adviser would check the box to indicate it is filing an initial
application for registration, complete the items it did not have to answer as an exempt
reporting adviser, and update the pre-populated items that it already has on file.
4.

Duplication

The collection of information requirements of the form, including the
amendments to the form, are not duplicated elsewhere. The Commission periodically
evaluates rule-based reporting and recordkeeping requirements for duplication, and
reevaluates these requirements whenever it adopts amendments to its rules.
5.

Effect on Small Entities

The requirements of Form ADV, including the amendments, are the same for all
investment advisers registered with the Commission, and they are the same for all exempt

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reporting advisers, including (in both cases) those advisers that are small entities.
Investment advisers with less than $100 million in assets under management generally
are not permitted to register with the Commission and must register with state securities
authorities. The Commission reviews all rules periodically, as required by the Regulatory
Flexibility Act, to identify methods to minimize recordkeeping or reporting requirements
affecting small businesses.
6.

Consequences of Not Conducting Collection

The collection of information required by the form is necessary to protect
investors by providing clients and potential clients, as well as the Commission, with
information about the adviser, and its business, conflicts of interest and personnel. The
consequences of not collecting this information would be that clients and prospective clients
may not have the information they need in order to evaluate the adviser’s business practices
and to determine whether to hire an adviser and, if hired, how to manage that relationship.
In addition, if the information is either not collected or is collected less frequently, the
Commission’s ability to protect investors would be reduced.
7.

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

Not applicable.
8.

Consultation Outside the Agency

In its release proposing amendments to Form ADV, the Commission requested
public comment on the effect of information collections under the proposed rule
amendments. The Commission and staff of the Division of Investment Management
participate in an ongoing dialogue with representatives of the investment advisory and
industry through public conferences, meetings, and informal exchanges. These various

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forums provide the Commission and staff with a means of ascertaining and acting upon
paperwork burdens confronting the industry.
9.

Payment or Gift

None.
10.

Confidentiality

The information collected pursuant to Form ADV is through filings with the
Commission. These disclosures are not kept confidential.
11.
a.

Sensitive Questions

No information of a sensitive nature will be required under this collection of

information. The IARD system contains an embedded check which prevents individuals'
social security numbers from being subject to public view.
b.

The information collection collects basic Personally Identifiable Information (PII)

that may include names, dates of birth and social security numbers (the social security
numbers are screened from public view). The agency has determined that the
information collection constitutes a system of record for purposes of the Privacy Act and
is covered under System of Records Notice (SORN) SEC-50 "Investment Adviser
Records". The Investment Adviser Records SORN is provided as a supplemental
document and is also available at https://www.sec.gov/privacy. A Privacy Act Statement
is applicable for the information collection and is available on the paper form and web
platform.
c.

In accordance with Section 208 of the E-Government Act of 2002, the agency has

conducted a Privacy Impact Assessment (PIA) of the IARD system, in connection with

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this collection of information. The IARD PIA, published on July 8, 2014, is provided as a
supplemental document and is also available at https://www.sec.gov/privacy.
Form ADV collects Personally Identifiable Information (PII). Form ADV
requires filers to provide names, dates of birth and social security numbers (the social
security numbers are screened from public view). The IARD system contains an
embedded check which prevents individuals from providing social security numbers. All
individuals (and entities other than trusts) are required to obtain CRD numbers, which do
not constitute PII. Such collection and usage is necessary for verification purposes.
Commission staff uses this information for positive verification of individuals and
entities. Alternative identities are used for all individuals and entities other than trusts
because a social security number is the only identifier available to them. The
Commission complies with section 7 of the Privacy Act of 1974 because the Advisers
Act authorizes the Commission to collect this information on Form ADV from advisers. 7
Filing Form ADV is mandatory. A System of Records Notice has been published in the
Federal Register at 66 FR 7820. It, along with instructions on how to obtain the
applicable Privacy Impact Assessment, can be found at:
http://www.sec.gov/about/privacy/secprivacyoffice.htm.
12.

Burden of Information Collection

The currently approved total aggregate annual hour burden estimate for all
advisers of completing, amending and filing Form ADV (Part 1 and Part 2) with the

7

See 15 U.S.C. §§ 80b-3 and 80b-4.

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Commission is 363,082 hours, 8 or a blended average of 23.77 hours per adviser, 9 with a
monetized total of $92,404,369, or $6,051 per adviser. 10 The currently approved annual
cost burden is $13,683,500. This burden estimate is based on: (i) the total annual
collection of information burden for SEC-registered advisers to file and complete Form
ADV (Part 1 and Part 2); and (ii) the total annual collection of information burden for
exempt reporting advisers to file and complete the required items of Part 1A of Form
ADV. Broken down by adviser type, the current approved total annual hour burden is
29.22 hours per SEC-registered adviser, and 3.60 hours per exempt reporting adviser. 11
The proposed amendments would increase the current burden estimate to 31.74 hours per
SEC-registered adviser, and 3.60 hours per exempt reporting adviser due in part to the
proposed amendments to Form ADV to add Form ADV Part 3 (the relationship
summary) and the increased number of investment advisers and exempt reporting
advisers since the last burden estimate. As noted above, we are not proposing any
changes to Part 1 or Part 2 of Form ADV.
The respondents to current Form ADV are investment advisers registered with the
Commission or applying for registration with the Commission and exempt reporting
advisers. 12 As of December 31, 2017, 12,721 investment advisers were registered with
8

See Form ADV and Investment Advisers Act Rules, Final Rule, Investment Advisers Act
Release No. 4509 (Aug. 25, 2016) [81 FR 60418 (Sep. 1, 2016)] (“2016 Form ADV
Paperwork Reduction Analysis”).

9

363,082 hours / (12,024 registered advisers + 3,248 exempt reporting advisers) = 23.77
hours.

10

$92,404,369 hours / (12,024 registered advisers + 3,248 exempt reporting advisers) =
$6,051.

11

See 2016 Form ADV Paperwork Reduction Analysis, supra note 8, at 81 FR 60454.

12

An exempt reporting adviser is an investment adviser that relies on the exemption from
investment adviser registration provided in either section 203(l) of the Advisers Act
because it is an adviser solely to one or more venture capital funds or 203(m) of the

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the Commission, and 3,848 exempt reporting advisers report information to the
Commission.
Only those registered investment advisers offering services to retail investors
would be required to prepare and file a relationship summary. Based on IARD system
data, the Commission estimates that 7,625 registered investment advisers provide advice
to individual high net worth and individual non-high net worth clients. 13 This would
leave 5,096 registered investment advisers that do not provide advice to retail investors 14
and 3,848 exempt reporting advisers that would not be subject to Form ADV Part 3
requirements, but are included in the PRA analysis for purposes of updating the overall
Form ADV information collection. 15
The proposed amendments to Form ADV to add Part 3 would increase the
information collection burden for registered investment advisers with retail investors.
The Commission proposed to require that those investment advisers file their Form ADV

Advisers Act because it is an adviser solely to private funds and has assets under
management in the United States of less than $150 million. An exempt reporting adviser
is not a registered investment adviser and therefore would not be subject to the
relationship summary requirements.
13

Based on responses to Item 5.D. of Form ADV. These advisers indicated that they advise
either high net worth individuals or individuals (other than high net worth individuals),
which includes trusts, estates, and 401(k) plans and IRAs of individuals and their family
members, but does not include businesses organized as sole proprietorships. The
proposed definition of retail investor would include a trust or other similar entity that
represents natural persons, even if another person is a trustee or managing agent of the
trust. We are not able to determine, based on responses to Form ADV, exactly how many
advisers provide investment advice to these types of trusts or other entities; however, we
believe that these advisers most likely also advise individuals and are therefore included
in our estimate.

14

12,721 registered investment advisers – 7,625 = 5,096 registered investment advisers not
providing advice to retail investors.

15

Based on IARD system data. We also note that these figures include the burdens for 366
registered broker-dealers that are dually registered as investment advisers as of December
31, 2017.

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Part 3 with the Commission electronically through IARD in the same manner as they
currently file Form ADV Parts 1 and 2. Under the proposal, investment advisers also
would need to amend and file an updated relationship summary within 30 days whenever
any information becomes materially inaccurate.
For investment advisers not required to prepare and file Form ADV Part 3, the per
adviser annual hour burden for meeting their Form ADV requirements would remain the
same, at 29.22 hours per registered investment adviser without Form ADV Part 3
obligations. Similarly, because exempt reporting advisers would not have Form ADV
Part 3 obligations, the annual hour burden for exempt reporting advisers to meet their
Form ADV obligations would remain the same, at 3.60 hours per exempt reporting
adviser. However, although we are not proposing changes to Form ADV Part 1 and Part
2, and the per adviser information collection burden would not increase for those without
the obligation to prepare and file Form ADV Part 3, the information collection burden
attributable to Parts 1 and 2 of Form ADV would increase due to an increase in the
number of registered investment advisers and exempt reporting advisers since the last
information collection burden estimate.
a.

Initial Preparation and Filing of Relationship Summary

For investment advisers that provide advice to retail investors, we estimate that
the initial first year burden for preparing and filing the relationship summary would be
five hours per registered adviser. We therefore estimate that the total burden of preparing
and filing the relationship summary would be 38,125 hours. 16

16

5.0 hours x 7,625 investment advisers = 38,125 total aggregate initial hours.

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As with the Commission’s prior Paperwork Reduction Act estimates for Form
ADV, we believe that most of the paperwork burden would be incurred in advisers’
initial preparation and submission of Form ADV Part 3, and that over time this burden
would decrease substantially because the paperwork burden would be limited to updating
information. 17 As under the currently approved collection, the estimated initial burden
associated with preparing the relationship summary would be amortized over the
estimated period that advisers would use the relationship summary, i.e., over a three-year
period. 18 The annual hour burden of preparing and filing the relationship summary
would therefore be 12,708. 19 In addition, based on IARD system data, the Commission
assumes that 1,000 new investment advisers will file Form ADV with us annually. Of
these, we estimate that 477 would be required to prepare and file the relationship
summary. 20 Therefore, the aggregate initial burden for newly registered advisers to
prepare the relationship summary would be 2,385 21 and, amortized over three years, 795
on an annual basis. 22 In sum, the annual hour burden for existing and newly registered

17

We discuss the burden for advisers making annual updating amendments to Form ADV
below.

18

See 2016 Form ADV Paperwork Reduction Analysis, supra note 8.

19

5.0 hours x 7,625 investment advisers / 3 = 12,708 total annual aggregate hours.

20

The number of new investment advisers is calculated by looking at the number of new
advisers in 2016 and 2017 and then determining the number each year that serviced retail
investors. (455 for 2016 + 499 for 2017) / 2 = 477.

21

477 new RIAs required to prepare relationship summary x 5.0 hours = 2,385 hours for
new RIAs to prepare relationship summary.

22

477 x 5.0 hours / 3 = 795.

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investment advisers to prepare and file a relationship summary would be 13,503 hours, 23
or 1.67 hours per adviser. 24
b.

Initial Preparation and Filing of Relationship Summary

The current approved information collection burden for Form ADV also includes
the hour burden associated with annual and other amendments to Form ADV, among
other requirements. We anticipate that the proposed relationship summary would
increase the annual burden associated with Form ADV by 0.5 hours 25 due to amendments
to the relationship summary, 26 for those advisers required to prepare and file a
relationship summary. We do not expect amendments to be frequent, but based on the
historical frequency of amendments made on Form ADV Parts 1 and 2, estimate that on
average, each adviser preparing a relationship summary will likely amend the disclosure
an average of 1.80 times per year. 27 The collection of information burden of 0.5 hours
for amendments to the relationship summary would include filing it. Based on the
number of other-than-annual amendments filed by investment advisers with retail
investors last year, we estimate that advisers will file an estimated total of 1.80 28
23

(38,125 + 2,385) / 3 years = 13,503 annual hour burden for existing and new advisers to
prepare and file relationship summary.

24

13,503 hours / (7,625 existing advisers + 477 new advisers) = 1.67 hours per year.

25

We have previously estimated that investment advisers would incur 0.5 hours to prepare
an interim (other-than-annual) amendment to Form ADV. See 2016 Form ADV
Paperwork Reduction Analysis, supra note 8, at 81 FR at 60452. We believe that an
amendment to the relationship summary would take a similar amount of time, if not less.

26

Similarly, we estimated that 0.5 hours would be required for interim updating
amendments to Form ADV Part 2. See Amendments to Form ADV, Investment Advisers
Act Release No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 2010)] , at 75 FR at 49257.

27

This estimate is based on IARD system data regarding the number of filings of Form
ADV amendments.

28

Based on IARD data, 7,625 investment advisers with retail clients filed 13,756 otherthan-annual amendments to Form ADV. 13,756 other-than-annual amendments / 7,625
investment advisers = 1.80 amendments per investment adviser.

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relationship summary amendments per year for an estimated total paperwork burden of
6,878 hours per year. 29
For existing and newly-registered advisers with relationship summary obligations,
the additional burden attributable to amendments to Form ADV to add Part 3, (including
the initial preparation and filing of the relationship summary and amendments thereto)
totals 20,381 hours, 30 or 2.52 hours per adviser, 31 and a monetized cost of $5,248,193, or
$648 per adviser. 32 The incremental external legal and compliance cost is estimated to be
$4,251,792. 33
As discussed above, the currently approved total aggregate annual hour burden for
all registered advisers completing, amending, and filing Form ADV (Part 1 and Part 2)
with the Commission is 363,082 hours, or a blended average per adviser burden of 23.77
hours, with a monetized cost of $92,404,369, or $6,051 per adviser. This includes the
total annual hour burden for registered advisers of 351,386 hours, or 29.22 hours per
registered adviser, and 11,696 hours for exempt reporting advisers, or 3.60 hours per
exempt reporting adviser. For purposes of updating the total information collection based
29

7,625 investment advisers amending relationship summaries x 1.80 amendments per year
x 0.5 hours = 6,878 hours.

30

13,503 hours for initial preparation and filing of the relationship summary + 6,878 hours
for amendments to the relationship summary = 20,381 total aggregate annual hour burden
attributable to the Form ADV amendments to add Part 3: Form CRS.

31

20,381 hours / (7,625 existing advisers + 477 newly registered advisers) = 2.52 hours per
adviser.

32

20,381 total aggregate annual hour burden for preparing and filing a relationship
summary. We expect that performance of this function will most likely be equally
allocated between a senior compliance examiner and a compliance manager. Data from
the SIFMA Management and Professional Earnings Report suggest that costs for these
positions are $229 and $298 per hour, respectively. 20,381 hours x 0.5 x $229 =
$2,211,375. 20,381 hours x 0.5 x $298 = $3,036,819. $2,211,375 + $3,036,819 =
$5,248,193. $5,248,193 / (7,625 existing registered advisers + 477 newly registered
advisers) = $648 per adviser.

33

See Proposed Item 2.B.4. of Form CRS.

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on the proposed amendments to Form ADV, we consider three categories of respondents,
as noted above: (i) existing and newly-registered advisers preparing and filing a
relationship summary, (ii) registered advisers with no obligation to prepare and file a
relationship summary, and (iii) exempt reporting advisers.
For existing and newly-registered advisers preparing and filing a relationship
summary, including amendments to the disclosure, the total annual collection of
information burden for preparing all of Form ADV, updated to reflect the proposed
amendments to Form ADV, equals 31.74 hours per adviser, with 2.52 hours attributable
to the proposed amendments. 34 On an aggregate basis, this totals 257,122 hours for
existing and newly registered advisers, with a monetized value of $66,208,857. 35
As noted above, we estimate 5,096, or approximately 40% of existing registered
advisers, would not have retail investors; therefore, they would not be obligated to
prepare and file relationship summaries, so their annual per adviser hour burden would
remain unchanged. 36 To that end, using the currently approved total annual hour estimate
of 29.22 hours per registered investment adviser to prepare and amend Form ADV, we
estimate that the updated annual hourly burden for all existing and newly-registered

34

29.22 hours + 2.52 hours for increase in burden attributable to initial preparation and
filing of, and amendments to, relationship summary = 31.74 hours total.

35

31.74 hours x 7,625 existing RIAs required to prepare a relationship summary + 477
newly registered RIAs required to prepare a relationship summary = 257,122 total
aggregate annual hour burden for preparing, filing and amending a relationship summary.
We expect that performance of this function will most likely be equally allocated
between a senior compliance examiner and a compliance manager. Data from the
SIFMA Management and Professional Earnings Report suggest that costs for these
positions are $229 and $298 per hour, respectively. 257,122 hours x 0.5 x $229 =
$27,897,712. 257,122 hours x 0.5 $298 = $38,311,144. $27,897,712 + $38,311,144 =
$66,208,857.

36

12,721 registered investment advisers – 7,625 registered investment advisers with retail
investors = 5,096 registered investment advisers without retail investors.

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investment advisers not required to prepare a relationship summary would be 164,187, 37
with a monetized value of $43,263,322. 38 The revised total annual collection of
information burden for exempt reporting advisers, using the currently approved estimate
of 3.60 hours per exempt reporting adviser, would be 15,653 hours, 39 for a monetized
cost of $4,124,513, or $949 per exempt reporting adviser. 40
In summary, factoring in the proposed amendments to Form ADV to add Part 3,
the revised aggregate burden for Form ADV for all registered advisers and exempt
reporting advisers would be 436,962, 41 for a monetized cost of $115,139,422. 42 This
results in a blended average per adviser burden for Form ADV of 26.37 hours 43 and
37

29.22 hours x (5,096 existing and 523 newly-registered investment advisers without retail
investors) = approximately 164,187 total annual hour burden for RIAs not preparing a
relationship summary.

38

We expect that performance of this function for registered advisers will most likely be
equally allocated between a senior compliance examiner and a compliance manager. Data
from the 2018 SIFMA Management and Professional Earnings Report suggest that costs
for these positions are $229 and $298 per hour, respectively. 164,187 hours x 0.5 x $229
= $18,799,432. 164,187 hours x 0.5 x $298 = $24,463,890. $18,799,432 + $24,463,890
= $43,263,322.

39

3.60 hours x 3,848 exempt reporting advisers currently + 500 new exempt reporting
advisers = 15,653 hours.

40

As with preparation of the Form ADV for registered advisers, we expect that
performance of this function for exempt reporting advisers will most likely be equally
allocated between a senior compliance examiner and a compliance manager. Data from
the 2018 SIFMA Management and Professional Earnings Report suggest that costs for
these positions are $229 and $298 per hour, respectively. 15,653 hours x 0.5 x $229 =
$1,792,246. 15,653 hours x 0.5 x $298 = $2,322,267. $1,792,246 + $2,322,267 =
$4,124,513. $4,124,513 / (3,848 exempt reporting advisers currently + 500 new exempt
reporting advisers) = $949 per exempt reporting adviser.

41

257,122 annual hour burden for RIAs preparing relationship summary + 164,187 annual
hour burden for RIAs not preparing relationship summary + 15,653 annual hour burden
for exempt reporting advisers = 436,962 total updated Form ADV annual hour burden.

42

$66,208,857 for RIAs preparing relationship summary + $43,263,890 for RIAs not
preparing relationship summary + $4,124,513 for exempt reporting advisers =
$115,139,422 total updated Form ADV annual monetized hourly burden.

43

436,962 / (12,721 registered investment advisers + 3,843 exempt reporting advisers) =
26.37 hours per adviser.

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$6,949 per adviser. 44 This is an increase of 73,880 hours, 45 or $22,735,053 46 in the
monetized value of the hour burden, from the currently approved annual aggregate
burden estimates, increases which are attributable primarily to the proposed burden
estimates on the larger registered investment adviser and exempt reporting adviser
population since the most recent approval, adjustments for inflation, and the amendments
to Form ADV.
13.

Cost to Respondents

The currently approved annual cost burden for Form ADV is $13,683,500,
$3,600,000 of which is attributable to external costs incurred by new advisers to prepare
Form ADV Part 2, and $10,083,500 of which is attributable to obtaining the fair value of
certain private fund assets. 47 The currently approved total annual collection of
information burden estimate for Form ADV anticipates that there will be external costs,
including (i) a one-time initial cost for outside legal and compliance consulting fees in
connection with the initial preparation of Part 2 of Form ADV, and (ii) the cost for
investment advisers to private funds to report the fair value of their private fund assets. 48

44

$115,139,422 / 12,721 registered investment advisers + 3,843 exempt reporting advisers)
= $6,949 per adviser.

45

436,962 hours estimated – 363,082 hours currently approved = 73,880 hour increase in
aggregate annual hourly burden.

46

$115,139,422 monetized hourly burden - $92,404,369 = $22,735,053 increase in
aggregate annual monetized hourly burden.

47

See 2016 Form ADV Paperwork Reduction Analysis, supra note 8, at 81 FR at 60452-53.
The $10,083,500 is based on 4,469 registered advisers reporting private fund activity as
of May 16, 2016.

48

See 2016 Form ADV Paperwork Reduction Analysis, supra note 8, at 81 FR 60452. We
do not anticipate that the amendments that the Commission proposed to add Form ADV
Part 3 will affect those per adviser cost burden estimates for outside legal and compliance
consulting fees. The estimated external costs of outside legal and consulting services for
the relationship summary are in addition to the estimated hour burden discussed above.

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We do not anticipate that the amendments discussed here would affect the per adviser
cost burden for those existing requirements but anticipate that some advisers may incur a
one-time initial incremental cost for outside legal and consulting fees in connection with
the initial preparation of the relationship summary. We do not anticipate external costs to
investment advisers in the form of website set-up, maintenance, or licensing fees because
they would not be required to establish a website for the sole purpose of posting their
relationship summary if they do not already have a website. We also do not expect other
ongoing external costs for the relationship summary. We believe that the amount of time,
and thus cost, required for outside legal and compliance review is unlikely to vary
substantially among those advisers who elect to obtain outside assistance. 49
Most of the information proposed to be required in the relationship summary is
readily available to investment advisers from Form ADV Part 2, and the narrative
descriptions are narrowly tailored and brief or prescribed. As a result, we anticipate that
a quarter of advisers will seek the help of outside legal services and half will seek the
help of compliance consulting services in connection with the initial preparation of the
relationship summary. We estimate that the initial per existing adviser cost for legal

49

We estimate that an external service provider would spend 3 hours helping an adviser
prepare an initial relationship summary. In estimating the external cost for the initial
preparation of Form ADV Part 2, we estimated that small, medium, and large advisers
would require 8, 11, and 26 hours of outside assistance, respectively, to prepare Form
ADV Part 2. In comparison, the relationship summary is limited to four pages in length
(or equivalent limit if in electronic format) and is standardized across investment advisers
in terms of the mandated selection and sequence of topic areas. While we recognize that
different firms may require different amounts of external assistance in preparing the
relationship summary, we believe that this is an appropriate average number for
estimating an aggregate amount for the industry purposes of the PRA analysis. See
Amendments to Form ADV, Investment Advisers Act Release No. 3060 (Jul. 28, 2010)
at 75 FR at 49257.

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services related to the preparation of the relationship summary would be $1,416. 50 We
estimate that the initial per existing adviser cost for compliance consulting services
related to the preparation of the relationship summary would be $2,109. 51 Thus, the
incremental external cost burden for existing investment advisers is estimated to be
$10,739,813, or $3,579,938 annually when amortized over a three-year period. 52 In
addition, we assume that 1,000 new advisers will register with us annually, 477 of which
would be required to prepare a relationship summary. For these 477 new advisers, we
estimate that they will require $671,855 in external costs to prepare the relationship
summary. 53 In summary, the annual external legal and compliance consulting cost for
existing and new advisers relating to relationship summary obligations is estimated to
total $4,251,792, or $525 per adviser. 54

50

External legal fees are in addition to the projected hour per adviser burden discussed
above. $472 per hour for legal services x 3 hours per adviser = $1,416. The hourly cost
estimate of $472 is based on an inflation-adjusted figure and our consultation with
advisers and law firms who regularly assist them in compliance matters.

51

External compliance consulting fees are in addition to the projected hour per adviser
burden discussed above. Data from the SIFMA Management and Professional Earnings
Report, modified to account for an 1,800-hour work year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead, and adjusted for
inflation (“SIFMA Management and Professional Earnings Report”), suggest that outside
management consulting services cost approximately $703 per hour. $703 per hour for
outside consulting services x 3 hours per adviser = $2,109.

52

25% x 7,625 existing advisers x $1,416 for legal services = $2,699,250 for legal services.
50% x 7,625 existing advisers x $2,109 for compliance consulting services = $8,040,563.
$2,699,250 + $8,040,563 = $10,739,813 in external legal and compliance consulting
costs for existing advisers. $10,739,813 / 3 = $3,579,938 annually.

53

25% x 477 new advisers x $1,416 for legal services = $168,858. 50% x 477 new advisers
x $2,109 for compliance consulting services = $502,997. $168,858 + $502,997 =
$671,855 annually in external legal and compliance consulting costs for newly registered
advisers.

54

$3,579,938 in external legal and compliance consulting costs for existing advisers +
$671,855 for new advisers = $4,251,792 annually for existing and new advisers.
$4,251,792 / ($7,625 existing advisers + 477 new advisers) = $525 per adviser.

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We do not expect any change in the annual external costs relating to new advisers
preparing Form ADV Part 2. Due to the slightly higher number of registered advisers
with private funds, however, the cost of obtaining the fair value of private fund assets
may be higher. We estimate that 6% of registered advisers have at least one private fund
client that may not be audited. Based on IARD system data as of December 31, 2017,
4,670 registered advisers advise private funds. We therefore estimate that approximately
281 registered advisers may incur costs of $37,625 each on an annual basis, for an
aggregate annual total cost of $10,572,625. 55
In summary, taking into account (i) a one-time initial cost for outside legal and
compliance consulting fees in connection with the initial preparation of Part 2 of Form
ADV, (ii) the cost for investment advisers to private funds to report the fair value of their
private fund assets, and (iii) the incremental external legal or compliance costs for the
preparation of the proposed relationship summary, we estimate the annual aggregate
external cost burden of the Form ADV information collection would be $18,424,417, or
$1,448 per registered adviser. 56 This represents a $4,740,917 increase from the current
external costs estimate for the information collection. 57
14.

Cost to the Federal Government

There are no costs to the government directly attributable to Form ADV.
15.

Change in Burden

55

6% x 4,760 = 281 advisers needing to obtain the fair value of certain private fund assets.
281 advisers x $37,625 = $10,572,625.

56

$3,600,000 for preparation of Form ADV Part 2 + $10,572,625 for registered investment
advisers to fair value their private fund assets + $4,251,792 to prepare relationship
summary = $18,424,417 in total external costs for Form ADV. $18,424,417 / 12,721
total registered advisers as of December 31, 2017 = $1,448 per registered adviser.

57

$18,424,417 - $13,683,500 = $4,740,917.

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We estimate that amendments to Form ADV, the revised total aggregate annual
hour burden for the form will be approximately 436,962 hours. 58 This is an increase of
73,880 hours from the currently approved annual aggregate burden estimate, 59 which is
attributable primarily to proposed Part 3; but also to the larger registered investment
adviser and exempt reporting adviser population since the most recent approval,
adjustments for inflation, and the amendments to Form ADV. The resulting blended
average per adviser burden for Form ADV is 26.37 hours, 60 which consists of an average
annual burden of 31.74 hours 61 for each of the estimated 12,721 SEC registered advisers,
and 3.60 hours 62 for each of the estimated 3,843 exempt reporting advisers.
Registered investment advisers are also expected to incur an annual cost burden of
$18,424,417, an increase of $4,740,917 from the current approved cost burden estimate
of $13,683,500. The increase in annual cost burden is attributable to proposed Part 3 and
also to the larger registered investment adviser and exempt reporting adviser population
since the most recent approval.
16.

Information Collection Planned for Statistical Purposes
Not applicable.

58

257,122 annual hour burden for RIAs preparing relationship summary + 164,187 annual
hour burden for RIAs not preparing relationship summary + 15,653 annual hour burden
for exempt reporting advisers = 436,962 total updated Form ADV annual hour burden.

59

436,962 hours - 363,082 hours = 73,880 hours.

60

436,962 / (12,721 registered investment advisers + 3,843 exempt reporting advisers) =
26.37 hours per adviser.

61

29.22 hours + 2.52 hours for increase in burden attributable to initial preparation and
filing of, and amendments to, relationship summary = 31.74 hours total.

62

3.60 hours is the currently approved average annual burden for exempt reporting adviser.
See 2016 Form ADV Paperwork Reduction Analysis, supra note 8, at 81 FR 60454.

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17.

Approval to Omit OMB Expiration Date

We request authorization to omit the expiration date on the electronic version of
the form, although the OMB control number will be displayed. Including the expiration
date on the electronic version of this form will result in increased costs, because the need
to make changes to the form may not follow the application’s scheduled version release
dates.
18.

Exceptions to Certification Statement for Paperwork Reduction Act

Submission
Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL

METHODS
Not applicable.

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