Rule 204-2 Supporting Statement 7-15-19

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

JUSTIFICATION
1.

Necessity for the Information Collection

On June 5, 2019, the Securities and Exchange Commission (the “Commission” or
“SEC”) adopted amendments to Form ADV to add a new Part 3, and related rules, which would
require certain registered investment advisers to provide a brief relationship summary to retail
investors to inform them about certain aspects of the relationships and services the firm offers. 1
The relationship summary will be subject to Commission filing and recordkeeping requirements,
and thus the Commission adopted amendments to rule 204-2 under the Investment Advisers Act
of 1940 (the “Advisers Act”). 2 The amendments to rule 204-2 will require registered advisers to
retain copies of each relationship summary. Under the amendments to the rule, investment
advisers will also be required to maintain each amendment to the relationship summary as well
as to make and preserve a record of dates that each relationship summary and each amendment
was delivered to any client or to any prospective client who subsequently becomes a client.
These records will be required to be maintained in the same manner, and for the same period of
time, as other books and records required to be maintained under rule 204-2(a).
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

1

Form CRS Relationship Summary; Amendments to Form ADV, Release Nos. IA-5247; 34-86032 (June 5,
2019) [84 FR 33492 (Jul. 12, 2019]. The amendments to Form ADV were proposed in Form CRS
Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and
Restrictions on use of Certain Names or Titles, Investment Advisers Act Release No. 4888. Exchange Act
Release No. 83063 (Apr. 18, 2018) [83 FR 23848 (May 23, 2018)].

2

15 U.S.C 80b-4.

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disseminate certain reports. Advisers Act rule 204-2 sets forth mandatory requirements for
maintaining and preserving specified books and records. 3 The records that an adviser must keep
in accordance with rule 204-2 must generally be retained for not less than five years. 4 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 of the Information Collection
The amendments to rule 204-2 will require registered advisers to retain copies of each
relationship summary. Investment advisers will also be required to maintain each amendment to
the relationship summary as well as to make and preserve a record of dates that each relationship
summary and each amendment was delivered to any client or to any prospective client who
subsequently becomes a client. The purpose of the information collection in rule 204-2 is to
assist the Commission’s examination and oversight program. Requiring maintenance of the
relationship summary as part of rule 204-2 would facilitate the Commission’s ability to inspect
for and enforce compliance with firms’ obligations with respect to Form CRS.
The respondents to the rule are investment advisers registered with the Commission. The
3

17 CFR 275.204-2.

4

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.

3
likely respondents for the amendments to the rule will be the investment advisers registered with
the Commission that will be required to prepare and deliver a relationship summary per new rule
204-5 and amendments to Form ADV under the Advisers Act. Responses provided to the
Commission in the context of its examination and oversight program are generally kept
confidential. 5 This collection of information is found at 17 CFR 275.204-2 and is mandatory.
3.

Role of Improved 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
currently permits advisers to maintain records required by the rule through electronic media. 6
4.

Efforts to Identify Duplication

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

Effect on Small Entities

The requirements of the rule are the same for all investment advisers registered with the
Commission, including those that are small entities. The requirements of the amendments to rule
204-2 will not distinguish between small entities and other investment advisers because the
protections of the Advisers Act are intended to apply equally to retail investor clients of both
large and small firms. 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 the rule to exempt small entities from these requirements. The

5

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

6

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

4
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 Less Frequent Collection

Less frequent information collection will be incompatible with the objectives of the rule and
would 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. 7 The retention period will not be affected by
the amendments to the rule. 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 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 With Persons Outside the Agency

In its release proposing to amend Form ADV to add a new Part 3 (the relationship
summary), and to amend rule 204-2, the Commission requested public comment on the effect of

7

See supra note 4.

5
information collections under these amendments. The Commission received several comments
on the collection of information requirements suggesting that our estimated burdens for the
relationship summary recordkeeping obligations were too low. Commenters argued that keeping
records of when a relationship summary was given to prospective retail clients would be
unnecessarily burdensome or not feasible, these burdens were not adequately considered in the
Commission’s burden estimates, it would be difficult for firms to integrate pre-relationship
delivery dates into firms’ operational systems and procedures, and there is no way to track when
a disclosure is accessed on a website.
Based on our experience with similar requirements for Form ADV Part 2A brochures, we
disagree that retaining these records would be significantly more burdensome for investment
advisers than the proposed estimate of 0.2 hours. Advisers already maintain this information with
respect to their brochures and should be able to update their systems to also include the
relationship summary.
The Commission and the staff of the Division of Investment Management also 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 to Respondents

None.
10.

Assurance of Confidentiality

Responses provided to the Commission pursuant to rule 204-2 in the context of the

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Commission’s examination and oversight program are generally kept confidential. 8
11.

Sensitive Questions

No information of a sensitive nature, including social security numbers, will be required
under this collection of information. The information collection collects basic Personally
Identifiable Information (PII) that may include names, job titles, work addresses, and phone
numbers. However, the agency has determined that the information collection does not
constitute a system of record for purposes of the Privacy Act. Information is not retrieved by a
personal identifier.
12.

Estimate of Hour Burden

The approved annual aggregate burden for rule 204-2 is currently 2,199,791 hours, with a
total annual aggregate monetized cost burden of approximately $130,316,112, based on an
estimate of 12,024 registered advisers, or 183 hours per registered adviser. 9 Taking into account
the estimated annual burden of registered advisers that will be required to maintain records of the
relationship summary, as well as the estimated annual burden of registered advisers that do not
have relationship summary obligations and whose information collection burden is unchanged,
the revised annual aggregate burden for all respondents to rule 204-2, under the amendments,
will be 2,435,364 10 hours, represented by a monetized cost of $154,304,664,11 based on an

8

See supra note 5.

9

2,199,791 hours / 12,024 registered advisers = 183 hours per adviser. 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”), at 81
FR at 60454-55.

10

8,235 registered investment advisers required to prepare relationship summary x 183.2 hours =
1,508,652 hours. 5,064 registered investment advisers not required to prepare the relationship
summary x 183 hours = 926,712 hours. 1,508,652 hours + 26,712 hours = 2,435,364 hours.

7
estimate of 8,235 registered advisers with the relationship summary obligation and 5,064
registered advisers without the relationship summary obligation.
Based on Investment Adviser Registration Depository data as of December 31, 2018,
there are approximately 13,299 SEC registered advisers required to maintain copies of certain
books and records relating to their advisory business. This is an increase of 1,275 SEC
registered advisers over the previously approved burden. Only those registered investment
advisers offering services to retail investors will be required to prepare and file a relationship
summary. We estimate that based on updated IARD data as of December 31, 2018, 8,235
investment advisers provide advice to individual high net worth and individual non-high net
worth clients, and would therefore be subject to the amended provisions of rule 204-2 to preserve
the relationship summary as a result of the new rule 204-5 and amendments to Form ADV under
the Advisers Act. 12
We estimate that the amendments to rule 204-2 will result in an increase in the collection
of information burden estimate by 0.2 hours 13 for each of the estimated 8,235 registered advisers
with relationship summary obligations, resulting in a total of 183.2 hours per adviser. This will
11

See infra note 18.

12

The adoption includes amendments to Form ADV to add a new Part 3 (the firm relationship
summary), and new rule 204-5 regarding delivery of the relationship summary. The hourly and
cost burdens for those requirements are included in separate collections of information associated
with their respective rules.

13

In the Paperwork Reduction Act analysis for amendments to Form ADV adopted in 2016, we
estimated that 1.5 hours would be required for each adviser to make and keep records relating to
(i) the calculation of performance the adviser distributes to any person and (ii) all written
communications received or sent relating to the adviser’s performance. Because the burden of
preparing of the relationship summary is already included in the collection of information
estimates for Form ADV, and because the relationship is a short, standardized document, we
assume that recordkeeping burden for the relationship summary will be considerably less than 1.5
hours and estimate that 0.2 hours will be appropriate.

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yield an annual estimated aggregate burden of 1,508,652 hours under amended rule 204-2 for all
registered advisers with relationship summary obligations,14 representing an aggregate
monetized cost of $95,588,191, or $11,607 per adviser. 15 In addition, the 5,064 advisers not
subject to the amendments will continue to be subject to an unchanged burden of 183 hours
under rule 204-2, or a total aggregate annual hour burden of 926,712,16 for a monetized cost of
$58,716,472, or $11,595 per adviser. 17

14

8,235 registered investment advisers required to prepare relationship summary x 183.2 hours =
1,508,652 hours.

15

As with our estimates relating to the previous amendments to Advisers Act rule 204-2 (see 2016
Form ADV Paperwork Reduction Analysis, supra note 9, at 81 FR at 60454-55), we expect that
performance of this function will most likely be allocated between compliance clerks and general
clerks, with compliance clerks performing 17% of the function and general clerks performing
83% of the function. Data from the 2019 SIFMA Office Salaries in the Securities Industry
Report, modified to account for an 1,800-hour work year and multiplied by 2.93 to account for
bonuses, firm size, employee benefits, and overhead, suggest that costs for these position are $70
and $62, respectively. (17% x 1,508,652 hours x $70) + (83% x 1,508,652 hours x $62) =
$95,588,191. $95,588,191 / 8,235 advisers = $11,607 per adviser.

16

5,064 registered investment advisers not required to prepare the relationship summary x 183
hours = 926,712.

17

As with our estimates relating to the previous amendments to Advisers Act rule 204-2 (see 2016
Form ADV Paperwork Reduction Analysis, supra note 9 at 81 FR at 60454–55, we expect that
performance of this function will most likely be allocated between compliance clerks and general
clerks, with compliance clerks performing 17% of the function and general clerks performing
83% of the function. Data from the 2019 SIFMA Office Salaries Report suggest that costs for
these positions are $70 and $62, respectively. (17% x 926,712 hours x $70) + (83% x 926,712
hours x $62) = $58,716,473. $58,716,473 / 5,064 = $11,595 per adviser.

Table 1: Summary of Annual Responses, Burden Hours, and Burden Hour Costs Estimates for Rule 204-2

IC

Rule 204-2 under the Investment
Advisers Act of 1940
Description of Parts of IC

IC1 Recordkeeping and Recordretention
Total for IC

Annual No. of Responses
Requested
Previously Change Due
Total
to Agency
approved
Discretion
12,024
13,299
1,275
12,024
13,299
1,275

Annual Time Burden (Hrs.)
Requested
Previously Change Due
Total
approved to Agency
Discretion
2,199,791
2,435,364 235,573
2,199,791
2,435,364 235,573

Monetized Time Burden ($)
Requested
Previously Change Due
Total
approved
to Agency
Discretion
130,316,112 154,304,664 23,988,552
130,316,112 154,304,664 23,988,552

13.

Estimate of Total Annual Cost Burden

There is no cost burden other than the cost of the hour burden described above.
14. Estimate of Cost to the Federal Government
There are no additional costs to the federal government directly attributable to rule 204-2.
15.

Explanation of Changes in Burden

We estimate that the total burden hour associated with rule 204-2 will increase from
2,199,791 hours per year to 2,435,364 hours per year and an increase from $130,316,112 per
year to $154,304,664 in monetized cost,18 because of the amendments to rule 204-2. 19 This
represents an increase of 235,57320 annual aggregate hours in the hour burden and an annual
increase of $23,988,552 from the currently approved total aggregate monetized cost for rule 2042. 21 These increases are attributable to a larger registered investment adviser population since
the most recent approval and adjustments for inflation, as well as the rule 204-2 amendments
relating to the relationship summary.
16.

Information Collection Planned for Statistical Purposes

None.
17.

Approval to not Display Expiration Date

Not Applicable.
18.

Exceptions to Certification Statement

Not Applicable.

18

$95,588,191 + $58,716,473 = $154,304,664.

19

See supra note Error! Bookmark not defined..

20

2,435,364 hours – 2,199,791 hours = 235,573 hours.

21

$154,304,664 – $130,316,112 = $23,988,552.

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B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.