30day notice

SECURITIES AND EXCHANGE COMMISSION
Submission for OMB Review; Comment Request
Upon Written Request, Copies Available From
Securities and Exchange Commission
Office of FOIA Services
100 F Street, NE
Washington, DC 20549-2736
Extension:

Rule 3a-4

SEC File No. 270-401; OMB Control No. 3235-0459
Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995
(44 U.S.C. 350l-3520), the Securities and Exchange Commission (the "Commission") has
submitted to the Office of Management and Budget a request for extension of the previously
approved collection of information discussed below.
Rule 3a-4 (17 CFR 270.3a-4) under the Investment Company Act of 1940 (15 U.S.C.
80a) (“Investment Company Act” or “Act”) provides a nonexclusive safe harbor from the
definition of investment company under the Act for certain investment advisory programs.
These programs, which include “wrap fee” programs, generally are designed to provide
professional portfolio management services on a discretionary basis to clients who are investing
less than the minimum investments for individual accounts usually required by the investment
adviser but more than the minimum account size of most mutual funds.

Under wrap fee and

similar programs, a client's account is typically managed on a discretionary basis according to
pre-selected investment objectives.

Clients with similar investment objectives often receive the

same investment advice and may hold the same or substantially similar securities in their
accounts.

Because of this similarity of management, some of these investment advisory

programs may meet the definition of investment company under the Act.

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In 1997, the Commission adopted rule 3a-4, which clarifies that programs organized and
operated in accordance with the rule are not required to register under the Investment Company
Act or comply with the Act's requirements. 1

These programs differ from investment companies

because, among other things, they provide individualized investment advice to the client.

The

rule’s provisions have the effect of ensuring that clients in a program relying on the rule receive
advice tailored to the client’s needs.
For a program to be eligible for the rule’s safe harbor, each client’s account must be
managed on the basis of the client’s financial situation and investment objectives and in
accordance with any reasonable restrictions the client imposes on managing the account.

When

an account is opened, the sponsor 2 (or its designee) must obtain information from each client
regarding the client’s financial situation and investment objectives, and must allow the client an
opportunity to impose reasonable restrictions on managing the account. 3

In addition, the

sponsor (or its designee) must contact the client annually to determine whether the client’s
financial situation or investment objectives have changed and whether the client wishes to
impose any reasonable restrictions on the management of the account or reasonably modify
existing restrictions.

The sponsor (or its designee) must also notify the client quarterly, in

1

Status of Investment Advisory Programs Under the Investment Company Act of 1940,
Investment Company Act Rel. No. 22579 (Mar. 24, 1997) [62 FR 15098 (Mar. 31,1997)]
(“Adopting Release”). In addition, there are no registration requirements under section 5 of the
Securities Act of 1933 for programs that meet the requirements of rule 3a-4. See 17 CFR
270.3a-4, introductory note.

2

For purposes of rule 3a-4, the term “sponsor” refers to any person who receives compensation for
sponsoring, organizing or administering the program, or for selecting, or providing advice to
clients regarding the selection of, persons responsible for managing the client’s account in the
program.

3

Clients specifically must be allowed to designate securities that should not be purchased for the
account or that should be sold if held in the account. The rule does not require that a client be
able to require particular securities be purchased for the account.

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writing, to contact the sponsor (or its designee) regarding changes to the client’s financial
situation, investment objectives, or restrictions on the account’s management.
Additionally, the sponsor (or its designee) must provide each client with a quarterly
statement describing all activity in the client's account during the previous quarter.

The sponsor

and personnel of the client’s account manager who know about the client’s account and its
management must be reasonably available to consult with the client.

Each client also must

retain certain indicia of ownership of all securities and funds in the account.
The Commission staff estimates that 19,618,731 clients participate each year in
investment advisory programs relying on rule 3a-4. 4

Of that number, the staff estimates that

3,531,372 are new clients and 16,087,359 are continuing clients. 5 The staff estimates that each
year the investment advisory program sponsors’ staff engage in 1.5 hours per new client and 1
hour per continuing client to prepare, conduct and/or review interviews regarding the client’s
financial situation and investment objectives as required by the rule. 6 Furthermore, the staff
estimates that each year the investment advisory program sponsors’ staff spends 1 hour per client
to prepare and mail quarterly client account statements, including notices to update information. 7
4

These estimates are based on an analysis of the number of individual clients from Form ADV
Item 5D(a)(1) and (b)(1) of advisers that report they provide portfolio management to wrap
programs as indicated in Form ADV Item 5I(2)(b) and (c), and the number of individual clients
of advisers that identify as internet advisers in Form ADV Item 2A(11). From analysis comparing
reported individual client assets in Form ADV Item 5D(a)(3) and 5D(b)(3) to reported wrap
portfolio manager assets in Form ADV Item 5I(2)(b) and (c), we discount the estimated number
of individual clients of non-internet advisers providing portfolio management to wrap programs
by 10%.

5

These estimates are based on the number of new clients expected due to average year-over-year
growth in individual clients from Form ADV Item 5D(a)(1) and (b)(1) (about 8%) and an
assumed rate of yearly client turnover of 10%.

6

These estimates are based upon consultation with investment advisers that operate investment
advisory programs that rely on rule 3a-4.

7

The staff bases this estimate in part on the fact that, by business necessity, computer records
already will be available that contain the information in the quarterly reports.

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Based on the estimates above, the Commission estimates that the total annual burden of the
rule's paperwork requirements is 41,003,148 hours. 8
The estimate of average burden hours is made solely for the purposes of the Paperwork
Reduction Act.

The estimate is not derived from a comprehensive or even a representative

survey or study of the costs of Commission rules and forms.

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 control number.
The public may view the background documentation for this information collection at the
following website, www.reginfo.gov. Comments should be directed to: (i) Desk Officer for the
Securities and Exchange Commission, Office of Information and Regulatory Affairs, Office of
Management and Budget, Room 10102, New Executive Office Building, Washington, DC
20503, or by sending an e-mail to: [email protected] ; and (ii) Charles Riddle,
Acting Director/Chief Information Officer, Securities and Exchange Commission, c/o Candace
Kenner, 100 F Street, NE, Washington, DC 20549 or send an email to:
[email protected]. Comments must be submitted to OMB within 30 days of this notice.

Eduardo A. Aleman
Deputy Secretary
February 12, 2019

8

This estimate is based on the following calculation: (16,087,359 continuing clients x 1 hour) +
(3,531,372 new clients x 1.5 hours) + (19,618,731 total clients x (0.25 hours x 4 statements)) =
41,003,148 hours. We note that the breakdown of burden hours between professional and staff
time discussed below may not equal the estimate of total burden hours due to rounding.