60day notice

SECURITIES AND EXCHANGE COMMISSION
Proposed Collection; 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") is soliciting
comments on the collection of information summarized below. The Commission plans to submit
this existing collection of information to the Office of Management and Budget for extension and
approval.
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

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similarity of management, some of these investment advisory programs may meet the definition of
investment company under the Act.
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 sponsor2 (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

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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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 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

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%. These estimates are based on the number of new clients expected due to average year-overyear 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%.

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%.

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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 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
control number.
Written comments are invited on: (a) whether the collections of information are necessary
for the proper performance of the functions of the Commission, including whether the information
has practical utility; (b) the accuracy of the Commission's estimate of the burdens of the
collections of information; (c) ways to enhance the quality, utility, and clarity of the information
collected; and (d) ways to minimize the burdens of the collections of information on respondents,
including through the use of automated collection techniques or other forms of information
technology. Consideration will be given to comments and suggestions submitted in writing within
60 days of this publication.

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.

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.

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Please direct your written comments to 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].
Digitally signed by EDUARDO
EDUARDO
ALEMAN
Date: 2018.12.10 15:51:40
ALEMAN
-05'00'
Eduardo A. Aleman
Deputy Secretary

December 10, 2018