supporting statement

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Rule 206(4)-1 Under the Investment Advisers Act of 1940

OMB: 3235-0784

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OMB CONTROL NUMBER: 3235-xxxx
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
RULE 206(4)-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

On November 4, 2019, the Securities and Exchange Commission (the “Commission” or
“SEC”) proposed amendments to rules related to how advisers advertise to and solicit clients and
investors 1. The proposed amendments to the advertising rule, rule 206(4)-1 2 under the
Investment Advisers Act of 1940 (the “Advisers Act”)3, would replace the current advertising
rule’s broadly drawn limitations with principles-based provisions.
Under the proposed rule investment advisers are prohibited from including in any
advertisement any testimonial or endorsement unless the adviser clearly and prominently
discloses, or the investment adviser reasonably believes that the testimonial or endorsement
clearly and prominently discloses, that the testimonial was given by a client or investor, or the
endorsement was given by a non-client or non-investor and, if applicable, that cash or non-cash
compensation has been provided by or on behalf of the adviser in connection with obtaining or
using the testimonial or endorsement.4
The proposed amendments would also would allow an investment adviser to include
third-party ratings in advertisements if the adviser reasonably believes that any questionnaire or

1

Investment Adviser Advertisements; Compensation for Solicitations, Release No. IA-5407 (November 4,
2019) [84 FR 67518 (Dec. 10, 2019]

2

17 CFR § 275.206(4)-1.

3

15 U.S.C 80b-4.

4

Proposed rule 206(4)-1(b)(1).

2
survey used in the preparation of the third-party rating is structured to make it equally easy for a
participant to provide favorable and unfavorable responses, and is not designed or prepared to
produce any predetermined result. 5 In addition, the adviser would have to clearly and
prominently disclose (or reasonably believe that the third-party rating clearly and prominently
discloses): (i) the date on which the rating was given and the period of time upon which the
rating was based, (ii) the identity of the third-party that created and tabulated the rating, and (iii)
if applicable, that cash or non-cash compensation has been provided by or on behalf of the
adviser in connection with obtaining or using the third-party rating. In many cases, third-party
ratings are developed by relying significantly on questionnaires or client surveys. Investment
advisers may compensate the third-party to obtain or use the ratings or rankings that are
calculated as a result of the survey.
The proposed rule would impose certain conditions on the presentation of performance
results in advertisements. Specifically, the proposed rule would require that advertisements that
present gross performance provide or offer to provide promptly a schedule of fees and expenses
deducted to calculate the net performance. 6 In addition, the proposed rule would require that
advertisements that present any related performance must include all related portfolios, except
that related performance may exclude any related portfolio if (a) the advertised performance
results are no higher than if all related portfolios had been included and (b) the exclusion of any
related portfolio does not alter the presentation of the time periods prescribed by paragraph

5

Proposed rule 206(4)-1(b)(2).

6

Proposed rule 206(4)-1(c)(1)(i).

3
(c)(2)(ii). 7 The proposed rule also would require that advertisements that present any extracted
performance must provide or offer to provide promptly the performance results of all
investments in the portfolio from which the performance was extracted. 8 Finally, the proposed
rule would require, for advertisements that present hypothetical performance, that the adviser: (i)
adopt and implement policies and procedures reasonably designed to ensure that the hypothetical
performance is relevant to the financial situation and investment objectives of the person to
whom the advertisement is disseminated; (ii) provide sufficient information to enable such
person to understand the criteria used and assumptions made in calculating such hypothetical
performance; and (iii) provide (or in the case of Non-Retail Persons, provides or offers to
provide promptly) sufficient information to enable such person to understand the risks and
limitations of using such hypothetical performance in making investment decisions. 9
The proposed amendments to rule 206(4)-1 described above would result in a new
“collection of information” requirements within the meaning of the Paperwork Reduction Act of
1995. 10 The title of the new collection of information we proposed is “Rule 206(4)-1 under the
Investment Advisers Act.” OMB has not yet assigned a control number for “Rule 206(4)-1
under the Investment Advisers Act.” 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.

7

Proposed rule 206(4)-1(c)(1)(iii).

8

Proposed rule 206(4)-1(c)(1)(iv).

9

Proposed rule 206(4)-1(c)(1)(v).

10

44 U.S.C. 3501 to 3520.

4
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 advisers advertising practices. We use
the information to determine support and manage our regulatory, examination, and enforcement
programs. Clients use this information to determine whether to hire an adviser.
This collection of information is found at 17 CFR.206(4)-1 and it is mandatory.
Responses provided to the Commission in the context of its examination and oversight program
concerning the proposed amendments would be kept confidential subject to the provisions of
applicable law. Disclosures made to investors under the proposed amendments would not
remain confidential. The information collected takes the form of records retained by respondents
and disclosures to respondents’ clients, potential clients, and the Commission.
3.

Consideration Given to 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. Investment
advisers are permitted to provide the information required by rule 206(4)-1 electronically. 11
4.

Duplication

No other rule requires investment advisers to retain records or provide clients or
prospective clients with the same information that is required by rule 206(4)-1.
5.

Effect on Small Entities

The requirements for rule 206(4)-1 are the same for all investment advisers registered

11

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 1934, and
Investment Company Act of 1940, Investment Advisers Act Release No. 1562 (May 9, 1996).

5
with the Commission, including small entities. It would defeat the purpose of the rule to exempt
small entities from these requirements. For purposes of Commission rulemaking, an investment
adviser is a small business if it has assets under management of less than $25 million and meets
certain other requirements. Advisers with assets under management of less than $25 million are
eligible to register with the Commission only if they advise a registered investment company, are
not regulated or required to be regulated as an investment adviser in the state in which they
maintain their principal office and place of business, or are qualified under rule 203A-2.
6.

Consequences of Not Conducting Collection

Amended Rule 206(4)-1 would require certain information regarding testimonials, third
party ratings, and performances data used in investment adviser advertisements be disclosed in
such advertisements to clients and potential clients; without this information, the client would be
unaware of the limitations and potential misleading nature of the information contained in an
advertisement.
7.

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

Not applicable.
8.

Consultation Outside the Agency

The Commission and staff of the Division of Investment Management participate in an
ongoing dialogue with representatives of the investment adviser profession through public
conferences, meetings and informal exchanges. These various forums provide the Commission
and staff with a means of ascertaining and acting upon paperwork burdens confronting the
industry. In addition, the Commission has requested public comment on the information
collection requirements in rule 206(4)-1 in the release proposing the amendments described
above. The Commission has not yet received any comments in response to this request.

6
9.

Payment or Gift

Not applicable.
10.

Confidentiality

The information collected pursuant to rule 206(4)-1 requires advisers to provide
information to advisory clients and prospective clients. Accordingly, these disclosures would not
be kept confidential.
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.

Burden of Information Collection
a. Testimonials and endorsements in advertisements

Under the proposed rule investment advisers are prohibited from including in any
advertisement any testimonial or endorsement unless the adviser clearly and prominently
discloses, or the investment adviser reasonably believes that the testimonial or endorsement
clearly and prominently discloses, that the testimonial was given by a client or investor, or the
endorsement was given by a non-client or non-investor and, if applicable, that cash or non-cash
compensation has been provided by or on behalf of the adviser in connection with obtaining or

7
using the testimonial or endorsement.12 We estimate that approximately 50 percent of registered
investment advisers would use testimonials or endorsements in advertisements (because we
estimate that 100 percent of registered investment advisers would advertise under the proposed
rule, we estimate that the number of advisers that would use testimonials or endorsements in
their advertisements would be 6,732 advisers (50 percent of 13,463 advisers)). We estimate that
an investment adviser that includes testimonials or endorsements in advertisements would use
approximately 5 testimonials or endorsements per year, and would create new advertisements
with new or updated testimonials and endorsements approximately once per year. We estimate
that an investment adviser that includes testimonials or endorsements in its advertisement would
incur an internal burden of 1 hour to prepare the required disclosure for its testimonials and/or
endorsements (approximately 0.2 hours per each testimonial and/or endorsement). Since each
testimonial and/or endorsement used would likely be different, we believe this burden would
remain the same each year. There would therefore be an annual cost to each respondent of this
hour burden of $337.00 to draft and finalize the required disclosure for the advisers’
advertisements that contain testimonials or endorsements. 13 We are not proposing an initial
burden because we estimate that advisers would create new advertisements with new or updated
testimonials and endorsements each year, and because we believe the disclosures would be brief
and straightforward.

12

Proposed rule 206(4)-1(b)(1).

13

This estimate is based on the following calculation: 1 hour (for preparation and review of disclosures) x
$337 (blended rate for a compliance manager ($309) and a compliance attorney ($365)). The hourly wages
used are from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified 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.

8
b. Third-party ratings in advertisements
Proposed rule 206(4)-1(b)(2) would allow an investment adviser to include third-party
ratings in advertisements if the adviser reasonably believes that any questionnaire or survey used
in the preparation of the third-party rating is structured to make it equally easy for a participant
to provide favorable and unfavorable responses, and is not designed or prepared to produce any
predetermined result. In addition, the adviser would have to clearly and prominently disclose (or
reasonably believe that the third-party rating clearly and prominently discloses): (i) the date on
which the rating was given and the period of time upon which the rating was based, (ii) the
identity of the third-party that created and tabulated the rating, and (iii) if applicable, that cash or
non-cash compensation has been provided by or on behalf of the adviser in connection with
obtaining or using the third-party rating. In many cases, third-party ratings are developed by
relying significantly on questionnaires or client surveys. Investment advisers may compensate
the third-party to obtain or use the ratings or rankings that are calculated as a result of the survey.
Due to the costs associated with third-party ratings, we estimate that approximately 50 percent,
or 6,732 advisers, will use third-party ratings in advertisements, and that they will typically use
one third-party rating on an annual basis.
We estimate that advisers would incur an initial internal burden of 1.5 hours to draft and
finalize the required disclosure for third-party ratings. Accordingly, we estimate the initial cost
to each respondent of this hour burden to be $505.50. 14 The third-party rating provision requires
investment advisers to disclose up to four pieces of information. We estimate that the total

14

$337 per hour x 1.5 hours. See supra footnote 13 for a discussion of the blended hourly rate for a
compliance manager and a compliance attorney.

9
burden for drafting and reviewing initial third-party rating disclosures for all investment advisers
that we believe use third-party ratings in advertisements would be 10,098 hours, 15 with a total
initial internal cost of the hour burden of approximately $3,403,026. 16
In addition, since many of these ratings or rankings are done yearly (e.g., 2018 Top
Wealth Adviser), an adviser that continues to use a third-party rating in a retail advertisement
would incur ongoing, annual costs associated with this burden. We estimate that these ongoing
annual costs would be approximately 25 percent of the investment adviser’s initial costs per year,
since the adviser would typically only need to update its disclosures related to the date on which
the rating was given and the period of time upon which the rating was based. Therefore, we
estimate that an investment adviser would spend 0.375 burden hours annually associated with
drafting the required third-party rating disclosure updates. 17 Accordingly, we estimate the
annual ongoing cost to each respondent of this hour burden to be $126.38. 18 The aggregated
ongoing burden for investment advisers updating initial third-party rating disclosures for all
investment advisers that we estimate would use third-party ratings in advertisements would be
2,524.5 hours,19 at a total ongoing annual cost of the hour burden of approximately

15

This estimate is based on the following calculation: 1.5 hours per adviser x 6,732 advisers.

16

This estimate is based on the following calculation: 10,098 hours per advisers in the aggregate x $337 per
hour.

17

This estimate is based in the following calculation: 25 percent of 1.5 hours.

18

This estimate is based in the following calculation: 0.375 hours per adviser x $337.

19

This estimate is based in the following calculation: 0.375 hours x 6,732 advisers

10
$850,756.50. 20
c. Performance Advertising
The proposed rule would impose certain conditions on the presentation of performance
results in advertisements. Specifically, the proposed rule would require that advertisements that
present gross performance provide or offer to provide promptly a schedule of fees and expenses
deducted to calculate the net performance. 21 In addition, the proposed rule would require that
advertisements that present any related performance must include all related portfolios, except
that related performance may exclude any related portfolio if (a) the advertised performance
results are no higher than if all related portfolios had been included and (b) the exclusion of any
related portfolio does not alter the presentation of the time periods prescribed by paragraph
(c)(2)(ii). 22 The proposed rule also would require that advertisements that present any extracted
performance must provide or offer to provide promptly the performance results of all
investments in the portfolio from which the performance was extracted. 23 Finally, the proposed
rule would require, for advertisements that present hypothetical performance, that the adviser: (i)
adopt and implement policies and procedures reasonably designed to ensure that the hypothetical
performance is relevant to the financial situation and investment objectives of the person to
whom the advertisement is disseminated; (ii) provide sufficient information to enable such

20

This estimate is based in the following calculation: 2,524.5 hours x $337.

21

Proposed rule 206(4)-1(c)(1)(i).

22

Proposed rule 206(4)-1(c)(1)(iii).

23

Proposed rule 206(4)-1(c)(1)(iv).

11
person to understand the criteria used and assumptions made in calculating such hypothetical
performance; and (iii) provide (or in the case of Non-Retail Persons, provides or offers to
provide promptly) sufficient information to enable such person to understand the risks and
limitations of using such hypothetical performance in making investment decisions. 24 As a result
of these conditions, the proposed rule would include “collection of information” requirements
within the meaning of the PRA for investment advisers presenting performance results in
advertisements.
We estimate that almost all advisers provide, or seek to provide, performance information
to their clients. Based on staff experience, we estimate that 95 percent, or 12,790 advisers,
provide performance information in their advertisements. The estimated numbers of burden
hours and costs regarding performance results in advertisements may vary depending on, among
other things, the complexity of the calculations and whether preparation of the disclosures is
performed by internal staff or outside counsel.
i. Gross Performance: Provide or offer to provide promptly a
schedule of fees and expenses deducted to calculate net
performance
We estimate that an investment adviser that elects to present gross performance in an
advertisement will incur an initial burden of 5 hours in preparing a schedule of the fees and
expenses deducted to calculate net performance, in order to provide such a schedule, which may
be upon request. 25 We further estimate each adviser electing to present gross performance will
include gross performance for 3 different portfolios.

24

Proposed rule 206(4)-1(c)(1)(v).

25

This estimate includes only the time spent by an adviser in preparing the schedule initially.

12
Advisers’ staff generally would have to conduct diligence to determine which fees and
expenses were applied and how to categorize them for purposes of the schedule. We believe
many advisers that currently advertise performance will have this information already, but will
use compliance staff to confirm and categorize the relevant fees and expenses. We expect that
an accountant or financial personnel at the adviser will extract the relevant data needed to
prepare the schedule. There would therefore be an initial burden cost of 5 hours, with an
estimated cost of $1,564, for each adviser to prepare its schedule with respect to each initial
presentation of net performance of each portfolio. 26 We estimate that the initial burden, on a peradviser basis, will be $4,692. 27
For purposes of this analysis, we estimate that advisers will update their schedules 3.5
times each year. 28 We estimate that after initially preparing a schedule of fees and expenses, an
adviser will incur a burden of 0.5 hours to update the schedule. Accordingly, we estimate that
the amortized average annual burden with respect to preparation of schedules would be 10.25
hours per year. 29 The estimated amortized aggregate annual burden with respect to schedules is

26

This estimate is based on the following calculation: 4.0 hours (for review of disclosures) x $337 (blended
rate for a compliance manager ($309) and a compliance attorney ($365)) + 1.0 hour (for extraction of
relevant fees and expenses) x $216 (senior accountant) = $1,564. See supra footnote 13 for a discussion of
the blended rate.

27

This estimate is based on the following calculation: $1,564 for each schedule per initial presentation per
portfolio X 3 portfolios per adviser.

28

This estimate takes into account the Commission’s experience with the hour and cost burden estimates we
have adopted for rule 482 under the Securities Act, which requires in part that advertisements with respect
to RICs and BDCs to be filed with the Commission or with FINRA. In our most recent hour and cost
burden estimate for rule 482, we estimated that approximately 3.5 responses are filed each year per
portfolio. We believe that estimate fairly represents the number of times an advertisement is filed for
purposes of rule 482, and so use that same estimate in establishing how often an advertisement’s
performance is updated for purposes of this analysis.

29

We estimate that the average investment adviser will have an amortized average annual burden of 10.25

13
131,098 hours per year for each of the first three years, 30 and the aggregate internal cost burden
is estimated to be $44,180,026 per year. 31
We estimate that registered investment advisers may incur external costs in connection
with the requirement to provide a schedule of fees and expenses. We estimate that the average
annual costs associated with printing and mailing these documents upon request would be
collectively $500 for all documents associated with a single registered investment adviser. 32
Accordingly, we estimate that the aggregate annual external costs associated with printing and
mailing these documents in connection with Non-Retail Advertisements would be $6,395,000. 33
ii. Related performance
We estimate that an investment adviser that elects to present related performance in an

hours ((1 initial schedule X 5 hours + 3.5 subsequent updates to schedule X 0.5 hours) (year 1) + (3.5
subsequent updates to schedule X 0.5 hours) (year 2) + (3.5 subsequent updates to schedule X 0.5 hours)
(year 3) = 10.25 over 3 years. 10.25 hours X 3 portfolios = 30.75 hours per adviser; and 30.75 hours ÷ 3
years = 10.25 hours).
30

We estimate that 10.25 burden hours on average per year X 12,790 advisers presenting performance results
(i.e., 95% of 13,463 total advisers).

31

This estimate is based on the following calculation: 131,098 hours per advisers in the aggregate per year X
$337 per hour.

32

We do not have specific data regarding how the cost of printing and mailing the schedule would differ, nor
are we able to specifically identify how the cost of printing and mailing the schedule might be affected by
the proposed rule. For these reasons, we estimate $500 per year to collectively print and mail upon request
the schedule associated with an investment adviser for purposes of our analysis. This estimate assumes
only 25% of clients who receive the relevant advertisement request the schedule from the adviser and
assumes that marketing personnel at the adviser would respond to each such request. However, we are
requesting comment on this estimate. In addition, investors may also request to receive a schedule
electronically. We estimate that there would be negligible external costs associated with emailing
electronic copies of the schedules.

33

This estimate is based upon the following calculations: $500 per adviser x 12,790 advisers that provide
performance information (i.e., 95% of the 13,463 total advisers) = $6,395,000. For purposes of this
Paperwork Reduction Act analysis, based upon our experience, we assume that the burden of emailing
these documents would be outsourced to third-party service providers and therefore would be included
within these external cost estimates.

14
advertisement will incur an initial burden of 25 hours, with respect to each advertised portfolio,
in preparing the relevant performance of all related portfolios. This time burden would include
the adviser’s time spent classifying which portfolios meet the proposed rule’s definition of
“related portfolio” – i.e., which portfolios have “substantially similar investment policies,
objectives, and strategies as those of the services being offered or promoted.”34 This burden also
would include time spent determining whether to exclude any related portfolios in accordance
with the proposed rule’s provision allowing exclusion of one or more related portfolios if “ the
advertised performance results are no higher than if all related portfolios had been included” and
“the exclusion of any related portfolio does not alter the presentation of the time periods
prescribed by rule 206(4)-1(c)(2)(ii).” 35 For purposes of making this determination, we assume
that an adviser generally would have to run at least two sets of calculations – one with, and one
without, a related portfolio, that will allow the adviser to consider whether the exclusion of the
portfolio would result in performance that is inappropriately higher or performance that would
not satisfy the time period requirement. 36 Finally, this time burden would include the adviser’s
time calculating and presenting the net performance of any related performance presented. There
would therefore be an initial cost of $8,425 for each adviser to comply with this proposed
requirement to present all related portfolios in connection with any related performance. 37

34

See proposed rule 206(4)-1(e)(12). Our estimate accounts for advisers that may already be familiar with
any composites that meet the definition of “related portfolio.”

35

See proposed rule 206(4)-1(c)(1)(iii).

36

Our estimate also accounts for firms that exclude accounts subject to investment restrictions that materially
affect account holdings regardless of whether the exclusion increases or decreases overall performance,
such as is required under GIPS.

37

This estimate is based on the following calculation: 25.0 hours (for review of disclosures) x $337 (blended

15
Today, advisers may advertise related performance using their own definition, which may
vary between advisers. For purposes of this analysis, we estimate 80 percent of advisers will
have other portfolios with substantially similar investment policies, objectives, and strategies as
those being offered or promoted in the advertisement and choose to include related performance,
as defined under the proposal. We estimate that after initially preparing related performance for
each portfolio, investment advisers will incur a burden of 5 hours to update the performance for
each subsequent presentation. For purposes of this analysis, we estimate that advisers will
update the relevant related performance 3.5 times each year.
Accordingly, we estimate that the amortized average annual burden would be 25.8 hours
for each of the first three years for each investment adviser to prepare related performance in
connection with this requirement. 38 The estimated amortized aggregate annual burden with
respect to Retail Advertisements is 277,866 hours per year for each of the first three years, 39 and
the aggregate internal cost burden is estimated to be $93,640,842 per year. 40

rate for a compliance manager ($309) and a compliance attorney ($365)) = $8,425. See Release No. IA5407, supra footnote 1, at footnote 624 (discussing the blended hourly rate for a compliance manager and a
compliance attorney).
38

We estimate that the average investment adviser will make 4.5 presentations of related performance to meet
this requirement in three years, for an amortized average annual burden of 14.2 hours ((1 initial
presentation X 25 hours + 3.5 subsequent updates to presentations X 5 hours) (year 1) + (3.5 subsequent
updates to presentations X 5 hours) (year 2) + (3.5 subsequent updates to presentations X 5 hours) (year 3)
= 77.5 hours per adviser; and 77.5 hours ÷ 3 years = 25.8 hours).

39

We estimate that 25.8 burden hours on average per year X 10,770 advisers presenting related performance
(i.e., 80% of 13,463 advisers).

40

This estimate is based on the following calculation: 277,866 hours per advisers in the aggregate per year X
$337 per hour.

16
iii. Extracted performance
We estimate that an investment adviser that elects to present extracted performance in an
advertisement will incur an initial burden of 10 hours in preparing the performance results of the
entire portfolio from which the performance is extracted in order to provide such performance
results to investors, which may be promptly upon request. There would therefore be an initial
cost of $3,370 for each adviser to prepare such performance. 41
For purposes of this analysis, we assume 5 percent of advisers will include extracted
performance. We estimate that after initially preparing the performance of the entire portfolio
from which extracted performance is extracted, investment advisers will incur a burden of 2
hours to update the performance for each subsequent presentation. For purposes of this analysis,
we estimate that advisers will update the relevant “entire portfolio” performance 3.5 times each
year.
Accordingly, we estimate that the amortized average annual burden would be 10.3 hours
for each of the first three years for each investment adviser to prepare the performance of the
entire portfolio from which the presentation of extracted performance is extracted. 42 The
estimated amortized aggregate annual burden with respect to the “entire portfolio” requirement is

41

This estimate is based on the following calculation: 10.0 hours (for review of disclosures) x $337 (blended
rate for a compliance manager ($309) and a compliance attorney ($365)) = $3,370. See Release No. IA5407, supra footnote 1, at footnote 624 (discussing the blended hourly rate for a compliance manager and a
compliance attorney).

42

We estimate that the average investment adviser will make 4.5 presentations of “entire portfolio”
performance to meet this requirement in three years, for an amortized average annual burden of 5.7 hours
((1 initial presentation X 10 hours + 3.5 subsequent presentations X 2 hours) (year 1) + (3.5 subsequent
presentations X 2 hours) (year 2) + (3.5 subsequent presentations X 2 hours) (year 3) = 31 hours; and 31
hours ÷ 3 years = 10.3 hours).

17
6,932 hours per year for each of the first three years, 43 and the aggregate internal cost burden is
estimated to be $2,336,084 per year. 44
We estimate that registered investment advisers may incur external costs in connection
with the requirement to provide performance results of an entire portfolio from which extracted
hypothetical performance is extracted. We estimate that the average annual costs associated with
printing and mailing this information upon request would be collectively $500 for all documents
associated with a single registered investment adviser. Accordingly, we estimate that the
aggregate annual external costs associated with printing and mailing these documents in
connection with extracted performance presented would be $336,500.45
iv. Hypothetical performance
We estimate that an investment adviser that elects to present hypothetical performance in
an advertisement will incur an initial burden of 5 hours in preparing and adopting policies and
procedures reasonably designed to ensure that hypothetical performance is relevant to the
financial situation and investment objectives of the person to whom the advertisement is
disseminated. For purposes of this analysis, we assume 50 percent of advisers will include
hypothetical performance in advertisements.

43

We estimate that 10.3 burden hours on average per year x approximately 673 advisers presenting extracted
performance (i.e., 5% of 13,463 advisers).

44

This estimate is based on the following calculation: 6,932 hours per advisers in the aggregate per year X
$337 per hour.

45

This estimate is based upon the following calculations: $500 per adviser x approximately 673 advisers
presenting extracted performance (i.e., 5% of 13,463 advisers) = $336,500. For purposes of this Paperwork
Reduction Act analysis, based upon our experience, we assume that the burden of emailing these
documents would be outsourced to third-party service providers and therefore would be included within
these external cost estimates.

18
Advisers’ compliance personnel typically would draft policies and procedures to evaluate
whether hypothetical performance is relevant to each recipient. There would therefore be an
initial burden cost of 5 hours related to the adoption of such policies and procedures, with an

estimated cost of $2,650, for each adviser to prepare its policies and procedures. 46
For purposes of this analysis, we estimate that advisers that use hypothetical performance
will disseminate advertisements containing hypothetical performance 20 times each year. We
estimate that after adopting appropriate policies and procedures, an adviser will incur a burden of
0.25 hours to categorize each investor based on its policies and procedures. Accordingly, we
estimate that the average annual burden with respect to preparation of schedules would be 10
hours per year. 47 The estimated aggregate annual burden is 67,320 hours per year, 48 and the
aggregate internal cost burden is estimated to be $35,679,600 per year. 49
Additionally, we estimate that an investment adviser that elects to present hypothetical
performance in an advertisement will incur an initial burden of 16 hours in preparing the

46

This estimate is based on the following calculation: 5 hours (for adoption of policies and procedures) x
$530 (rate for a chief compliance officer). The hourly wages used are from SIFMA’s Management &
Professional Earnings in the Securities Industry 2013, modified 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.

47

We estimate that the average investment adviser will have an average annual burden of 3.3 hours (5 hours
for adoption of policies and procedures + 20 advertisements X 0.25 hours = 10 hours).

48

We estimate that 10 burden hours on average per year X 6,732 advisers presenting performance results
(i.e., 50% of 13,463 total advisers).

49

This estimate is based on the following calculation: 67,320 hours per advisers in the aggregate per year X
$530 per hour.

19
information sufficient to understand the criteria used and assumptions made in calculating, as
well as risks and limitations in using, the hypothetical performance (the “underlying
information”), in order to provide such information, which may in certain circumstances be upon

request.50 There would therefore be an initial cost of $5,384 for each adviser to prepare such
information. 51
We estimate that after initially preparing the underlying information, investment advisers
will incur a burden of 3 hours to update the information for each subsequent presentation. For
purposes of this analysis, we estimate that advisers will update their hypothetical performance,
and thus the underlying information, 3.5 times each year.
Accordingly, we estimate that the amortized average annual burden would be 8.5 hours
for each of the first three years for each investment adviser to prepare the underlying
information. 52 The estimated amortized aggregate annual burden with respect to the “underlying

50

This estimate includes the time spent by an adviser in preparing the information. The time spent
calculating the hypothetical performance that is based on such information is not accounted for in this
estimate, as the proposed rule has no requirement that an advertisement present hypothetical performance.

51

This estimate is based on the following calculation: 15.0 hours (for review of disclosures) x $337 (blended
rate for a compliance manager ($309) and a compliance attorney ($365)) + 1 hour (to explain the
assumptions used in creating the hypothetical performance) x $329 (senior portfolio manager) = $5,384.
The hourly wages used are from SIFMA’s Management & Professional Earnings in the Securities Industry
2013, modified 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.

52

We estimate that the average investment adviser will make 4.5 presentations of hypothetical performance,
and thus underlying information to meet this requirement, in three years, for an amortized average annual
burden of 8.5 hours (1 initial presentation X 15 hours + 3.5 subsequent presentations X 3 hours = 25.5
hours; and 25.5 hours ÷ 3 years = 8.5 hours).

20
information” requirement is 57,222 hours per year for each of the first three years, 53 and the
aggregate internal cost burden is estimated to be $19,283,814 per year. 54
We estimate that registered investment advisers may incur external costs in connection
with the requirement to provide this underlying information upon the request of a client or
prospective client. We estimate that the average annual costs associated with printing and
mailing this underlying information upon request would be collectively $500 for all documents
associated with a single registered investment adviser. 55 Accordingly, we estimate that the
aggregate annual external costs associated with printing and mailing these documents in
connection with hypothetical performance presented in advertisements would be $3,366,000.56
d. Additional Conditions related to Performance Results in Retail
Advertisements
The proposed rule would impose certain additional conditions on the presentation of
performance results in Retail Advertisements. The proposed rule requires that Retail

53

We estimate that 8.5 burden hours on average per year x 6,732 advisers presenting hypothetical
performance (i.e., 50% of 13,463 advisers).

54

This estimate is based on the following calculation: 57,222 hours per advisers in the aggregate per year X
$337 per hour.

55

We do not have specific data regarding how the cost of printing and mailing the underlying information
would differ, nor are we able to specifically identify how the cost of printing and mailing the underlying
information might be affected by the proposed rule. For these reasons, we estimate $500 per year to
collectively print and mail upon request the underlying information associated with hypothetical
performance for purposes of our analysis. However, we are requesting comment on this estimate. In
addition, investors may also request to receive the underlying information electronically. We estimate that
there would be negligible external costs associated with emailing electronic copies of the underlying
information.

56

This estimate is based upon the following calculations: $500 per adviser x 6,732 advisers presenting
hypothetical performance = $3,366,000. For purposes of this Paperwork Reduction Act analysis, based
upon our experience, we assume that the burden of printing and mailing the underlying information would
be outsourced to third-party service providers rather than handled internally, and therefore would be
included within these external cost estimates.

21
Advertisements that present gross performance must also present net performance: (a) with at
least equal prominence to, and in a format designed to facilitate comparison with, gross
performance, and (b) calculated over the same time period, and using the same type of return and
methodology as, the gross performance. 57 In addition, the proposed rule requires that Retail
Advertisements that present performance results of any portfolio or any composite aggregation
of related portfolios must include performance results of the same portfolio or composite
aggregation for 1-, 5-, and 10-year periods, each presented with equal prominence and ending on
the most recent practicable date; except that if the relevant portfolio did not exist for a particular
prescribed period, then the life of the portfolio must be substituted for that period. 58 As a result
of these conditions, the proposed rule would include additional “collection of information”
requirements within the meaning of the PRA for investment advisers presenting performance
results in any Retail Advertisements.
Based on Form ADV data, approximately 62 percent, or 8,396 investment advisers
registered with the Commission have some portion of their business dedicated to retail clients,
including either individual high net worth clients or individual non-high net worth clients. 59

57

Proposed rule 206(4)-1(c)(2)(i).

58

Proposed rule 206(4)-1(c)(2)(ii).

59

See Release No. IA-5407 supra footnote 1, at footnote Error! Bookmark not defined.. The number of
advisers that have retail investors as clients is based on the number of advisers that report high net worth
and non-high net worth clients, determined by responses to Item 5.D.(1)(a or b), or advisers who do not
report individual clients per Item 5.D.(1)(a or b), but do report regulatory assets under management
attributable to retail clients as per Item 5.D.(3)(a or b). If at least one of these responses was filled out as
greater than 0, the firm is considered as providing business to a client that would be a “retail investor” for
purposes of the proposed rule. The data on individual clients obtained from Form ADV may not be exactly
the same as who would be a “retail investor” for purposes of the proposed rule because Form ADV allows
advisers to treat as a “high net worth individual” an individual who is a “qualified client” for purposes of
rule 205-3 or a “qualified purchaser” as defined in section 2(a)(51)(A) of the Investment Company Act. In
contrast, the proposed rule would treat any individual client who meets the definition of “qualified

22
Estimating the number of advisers servicing retail investors based on a review of individual
clients reported on Form ADV entails certain limitations, and this estimate is only being used for
purposes of this PRA analysis.
i. Presentation of Net Performance in Retail Advertisements
We estimate that an investment adviser that elects to present gross performance in a
Retail Advertisement will incur an initial burden of 10 hours in preparing net performance for
each portfolio, including the time spent determining and deducting the relevant fees and
expenses to apply in calculating the net performance and then actually running the calculations.
Based on staff experience, we estimate that the average investment adviser will present
performance for three portfolios over the course of a year. Accordingly, we estimate that the
initial burden, on a per-adviser basis, will be 30 hours. There would therefore be an initial
estimated cost of $10,110 for the average adviser to comply with this proposed requirement to
present net performance in a Retail Advertisement. 60
We expect that the calculation of net performance may be modified every time an adviser

purchaser” or “knowledge employee” as a non-retail investor. See also 2018 Investment Management
Compliance Testing Survey, Investment Adviser Association and ACA Compliance Group, at 67 (Jun. 14,
2018) (indicating that 60% of 454 survey respondents “provide services to individual clients (e.g. retail,
high net worth, trusts)”), available at:
https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/publications/2018-Investment-Management_Compliance-Testing-SurveyResults-Webcast_pptx.pdf.
The figure representing advisers with non-retail clients or investors is the number of advisers that have
advisory clients that are retail clients subtracted from the total number of registered investment advisers.
These figures do not reflect investors in pooled investment vehicles.
60

This estimate is based on the following calculation: 30.0 hours (for review of disclosures) x $337 (blended
rate for a compliance manager ($309) and a compliance attorney ($365)) = $10,110. See Release No. IA5407, supra footnote 1, at footnote 624 (discussing the blended hourly rate for a compliance manager and a
compliance attorney).

23
chooses to update the advertised performance. We estimate that after initially preparing net
performance for each portfolio, investment advisers will incur a burden of 2 hours to update the
net performance for each subsequent presentation. Accordingly, for each presentation of net
performance after the initial presentation, we estimate that the burden, on a per-portfolio basis,

will entail an estimated cost of $674. 61
For purposes of this analysis, we estimate that advisers will update the relevant
performance of each portfolio 3.5 times each year. 62 Accordingly, we estimate that the
amortized average annual burden would be 17 hours for each of the first three years for each
investment adviser to prepare net performance. 63 The estimated amortized aggregate annual
internal burden with respect to Retail Advertisements is 135,592 hours per year for each of the
first three years, 64 and the aggregate internal cost burden is estimated to be $45,694,504 per
year. 65

61

This estimate is based on the following calculation: 2 hours (for review of disclosures) x $337 (blended rate
for a compliance manager ($309) and a compliance attorney ($365)) = 674. See Release No. IA-5407,
supra footnote 1, at footnote 624 (discussing the blended hourly rate for a compliance manager and a
compliance attorney).

62

Id. at footnote 641 (discussing the Commission’s experiences with portfolio performance advertising in the
context of rule 482 under the Securities Act of 1933, 17 CFR § 230.482).

63

We estimate that the average investment adviser will make 13.5 presentations of net performance in three
years, for an amortized average annual burden of 17 hours (1 initial presentation X 10 hours + 3.5
subsequent presentations X 2 hours = 17 hours X 3 portfolios = 51 hours per adviser; and 51 hours ÷ 3
years = 17 hours).

64

We estimate that 17 burden hours on average per year X 7,976 “retail advisers” presenting performance
results (i.e., 95% of 8,396 “retail advisers”).

65

This estimate is based on the following calculation: 135,592 hours per advisers in the aggregate per year x
$337 per hour.

24
ii. Time Period Requirements in Retail Advertisements
We estimate that an investment adviser that elects to present performance results in a
Retail Advertisement will incur an initial burden of 35 hours in preparing performance results of
the same portfolio for 1-, 5-, and 10-year periods, taking into account that these results must be
prepared on a net basis (and may also be prepared and presented on a gross basis). This estimate
reflects that many advisers currently prepare and present GIPS-compliant performance
information, and also that many advisers, particularly private fund advisers, currently prepare
annual performance for investors. There would therefore be an initial cost of $11,795 for each
adviser to comply with this proposed time period requirement in a Retail Advertisement. 66
Advisers may vary in the frequency with which they calculate performance in order to
satisfy this proposed time period requirement, though presumably advisers will do so every time
they choose to update the advertised performance. We estimate that after initially preparing 1-,
5-, and 10-year performance for each portfolio, investment advisers will incur a burden of 8
hours to update the performance for these time periods for each subsequent presentation. For
purposes of this analysis, we estimate that advisers will update the relevant performance 3.5
times each year.
Accordingly, we estimate that the amortized average annual burden would be 21 hours
for each of the first three years for each investment adviser to prepare performance in
compliance with this time period requirement. 67 The estimated amortized aggregate annual
66

This estimate is based on the following calculation: 35 hours (for review of disclosures) x $337 (blended
rate for a compliance manager ($309) and a compliance attorney ($365)) = $11,795. See Release No. IA5407, supra footnote 1, at footnote 624 (discussing the blended hourly rate for a compliance manager and a
compliance attorney).

67

We estimate that the average investment adviser will make 4.5 presentations of performance to meet this

25
burden with respect to Retail Advertisements is 167,496 hours per year for each of the first three
years, 68 and the aggregate internal cost burden is estimated to be $56,446,152 per year. 69
e. Review and Approval of Advertisements
The proposed rule would require that any advertisement be reviewed and approved in
writing by a designated employee. 70 As noted above, the use of advertisements is not
mandatory, but given that advertising is an essential part of retaining and attracting clients, and
that advertising may be disseminated easily through the internet and social media, we estimate
that all investment advisers will disseminate at least one communication meeting the proposed
rule’s definition of “advertisement”. 71
Based on staff experience, we expect 80% of investment advisers, or 10,770, are light
advertisers and 20%, or 2,693, are heavy advertisers. 72 We estimate that investment advisers that
are light advertisers and heavy advertisers would create new advertisements approximately 10
and 50 times, respectively, per year. We also estimate that investment advisers that are light

time period requirement (i.e., 1-, 5-, and 10-year performance calculations) in three years, for an amortized
average annual burden of 22.7 hours (1 initial presentation X 35 hours + 3.5 subsequent presentations X 8
hours = 63 hours per adviser; and 63 hours ÷ 3 years = 21 hours).
68

We estimate that 21 burden hours on average per year X 7,976 “retail advisers” presenting performance
results in a Retail Advertisement (i.e., 95% of all 8,396 advisers that have retail clients).

69

This estimate is based on the following calculation: 167,496 hours per advisers in the aggregate per year X
$337 per hour.

70

Proposed rule 206(4)-1(d).

71

Additionally, if an adviser includes in any legal or regulatory document information beyond what is
required under applicable law, and such additional information “offers or promotes” the adviser’s services,
then that information would be considered an “advertisement” for purposes of the proposed rule, and
therefore would be subject to the employee review and approval requirement. See Release No. IA-5407,
supra footnote 1, at footnote 111 and accompanying text.

72

0.80 X 13,463 (total investment advisers) = 10,770 light advertisers. 0.20 X 13,463 (total investment
advisers) = 2,693 heavy advertisers.

26
advertisers and heavy advertisers would update existing advertisements approximately 50 and
250 times, respectively, per year. These estimates account for the proposed rule’s expanded
definition of “advertisement” relative to the current rule. We further estimate that an investment
adviser would incur an average burden of 1.5 and 0.5 hours to review each new advertisement
and review each update of an existing advertisement, respectively. Since each advertisement
requiring employee review would likely be different, we believe this burden would remain the
same each year. Although the proposed rule permits advisers to designate any employee to
review and approve advertisements, we would anticipate many investment advisers to designate
their chief compliance officers with this task. In addition, a compliance attorney would review
any revisions that occur during the course of review. There would therefore be an annual cost to
each respondent of this hour burden of $671.25 and $223.75 to review and approve each new or
updated advertisement, respectively, that is subject to the review requirement. 73 Therefore, we
estimate that the yearly total burden of reviewing and approving advertisements would be
430,800 hours and 538,600 hours for advisers that are light and heavy advertisers, respectively,
or 969,400 hours across all advisers. 74 Thus, the aggregate internal cost of the hour burden for

73

This estimate for new advertisements is based on the following calculation: 0.75 hour (for review and
approval) x $530 (hourly rate for a chief compliance officer) + 0.75 hour (for revisions) x $365 (hourly rate
for a compliance attorney) = $671.25. This estimate for updates to existing advertisements is based on the
following calculation: 0.25 hour (for review and approval) x $530 (hourly rate for a chief compliance
officer) + 0.25 hour (for revisions) x $365 (hourly rate for a compliance attorney) = $223.75. The hourly
wages used are from SIFMA’s Management & Professional Earnings in the Securities Industry 2013,
modified 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.

74

This estimate for light advertisers is based on the following calculation: [1.5 hours per adviser x 10 new
advertisements per year + 0.5 hours per adviser x 50 updated advertisements per year] x 10,770 light
advertisers = 430,800 hours. This estimate for heavy advertisers is based on the following calculation: [1.5
hours per adviser x 50 new advertisements per year + 0.5 hours per adviser x 250 updated advertisements
per year] x 2,693 heavy advertisers = 538,600 hours. 430,800 + 538,600 = 969,400.

27

all investment advisers is estimated to be $448,347,500 per year. 75
We estimate that light advertisers and heavy advertisers would utilize 10 and 50 hours,
respectively, of external legal services per year to review advertisements. Therefore, we estimate
that the average annual costs associated with external legal review of advertisements would be
$4,000 for a light advertiser and $20,000 for a heavy advertiser, or $24,000 across all advisers. 76
f. Total Hour Burden
Accordingly, we estimate the total annual hour burden for investment advisers registered
or required to be registered with the Commission under proposed rule 206(4)-1 to prepare
testimonials and endorsements, third-party ratings, and performance results disclosures, as well
as review and approve advertisements, would be 1,832,281 hours,77 at a time cost of
$736,001,832. 78
A chart summarizing the various components of the total annual burden for investment
advisers is below.

75

This estimate is based on the following calculation: 969,400 hours for advisers in the aggregate per year x
$462.5 per hour (blended rate of a chief compliance officer and a compliance attorney).

76

The estimated $4,000 figure for light advertisers has been calculated as follows: $400 per hour cost for
outside legal services x 10 hours = $4,000. The estimated $4,000 figure for heavy advertisers has been
calculated as follows: $400 per hour cost for outside legal services x 50 hours = $20,000.
These estimates are based on an estimated $400 per hour cost for external legal services. We do not have
specific data regarding these external legal costs. However, we are requesting comment on this estimate.

77

This estimate is based upon the following calculations: 6,732 + 10,098 + 2,524.5 + 131,098+ 277,866 +
6,932 + 67,320 + 57,222 + 135,592 + 167,496 + 969,400 hours = 1,832,281 hours.

78

This estimate is based upon the following calculations: $2,268,684 + $3,403,026 + $850,756.50 +
$29,094,221 + $93,640,842 + $1,292,732 + $35,679,600 + $19,283,814 + $45,694,504 + $56,446,152 +
$448,347,500 = $736,001,832.

28

Rule 206(4)-1 Description of
Requirements
Ongoing annual burden for
testimonials and endorsements*

No. of
Responses

Internal Burden
Hours

External
Burden Costs

33,660 (5 per
adviser)

6,732 (1 per
response)

Initial burden for third-party rating

6,732 (1 per
adviser)

10,098 (1.5 per
response)

Ongoing annual burden for thirdparty rating

6,732 (1 per
adviser)

2,525 (0.375 per
response)

Initial burden for advertisements
presenting gross performance and
providing a schedule of fees and
expenses

38,370 (3 per
adviser)

63,950 (5 per
response)

$500 per
adviser

Ongoing annual burden for
advertisements presenting gross
performance and providing a
schedule of fees and expenses

134,295 (10.5
per adviser)

6,395 (0.5 per
response)

$500 per
adviser

Initial burden for advertisements
presenting related performance

10,770 (1 per
adviser
presenting
related
performance)

269,250 (25 per
response)

Ongoing annual burden for
advertisements presenting related
performance

32,310 (3.5 per 64,620 (5 per
adviser
response)
presenting
related
performance)

Initial burden for advertisements

673 (1 per
adviser

* This is not broken up into initial
and ongoing burden because the
annual burden is estimated to be the
same each year, as discussed above.

6,730 (10 per

$500 per

29
presenting extracted performance

presenting
extracted
performance)

response)

adviser

Ongoing annual burden for
advertisements presenting extracted
performance

2,356 (3.5 per
adviser
presenting
extracted
performance)

1,346 (2 per
response)

$500 per
adviser

Initial burden for policies and
procedures for hypothetical
performance

6,732 (1 per
adviser
presenting
hypothetical
performance)

33,660 (5 per
response)

Ongoing annual burden for policies
and procedures for hypothetical
performance

134,640 (20
per adviser
presenting
hypothetical
performance)

1,683 (0.25 per
response)

Initial burden for advertisements
presenting underlying information for
hypothetical performance

6,732(1 per
adviser
presenting
hypothetical
performance)

107,712 (16
hours per
response)

Ongoing annual burden for
advertisements presenting underlying
information for hypothetical
performance

23,562 (3.5 per 20,196 (3 hours
adviser
per response)
presenting
hypothetical
performance)

Initial burden for Retail
Advertisements presenting gross
performance

7,976 (1 per
adviser
presenting
gross

79,760 (10 hours
per response)

$500 per
adviser

$500 per
adviser

30
performance)
Ongoing burden for Retail
Advertisements presenting gross
performance

27,916 (3.5 per 55,832 (2 hours
adviser
per response)
presenting
gross
performance)

Initial burden for Retail
Advertisements meeting “time
period” requirement

7,976 (1 per
retail adviser)

Ongoing annual burden for Retail
Advertisements meeting “time
period” requirement

27,916 (3.5 per 223,328 (8 per
retail adviser)
response)

Annual burden for review of
advertisements for light advertisers*

107,770 and
538,500 (10
new and 50
updated per
each adviser)

161,655 and
269,250 (1.5
hours per
response for new
advertisements,
0.5 hours per
response for
updated
advertisements)

$4,000 per
adviser

134,650 and
673,250 (50
new and 250
updated per
each adviser)

201,975 and
336,625 (1.5
hours per
response for new
advertisements,
0.5 hours per
response for
updated
advertisements)

$20,000 per
adviser

* This is not broken up into initial
and ongoing burden because the
annual burden is estimated to be the
same each year.

Annual burden for review of
advertisements for heavy advertisers*
* This is not broken up into initial
and ongoing burden because the
annual burden is estimated to be the
same each year.

13.

279,160 (35 per
response)

Cost to Respondents

In addition to the burden costs described above, and as described in the table, we estimate

31
the total external cost per adviser per year to be $27,000. 79
14.

Cost to the Federal Government

Rule 206(4)-1 does not impose any costs on the Federal government because there are no
separate filing requirements with the Commission.
15.

Changes in Burden

This is a new information collection.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exceptions to Certification Statement for Paperwork Reduction Act

Submission
Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

79

This estimate is based upon the following calculations: $500 + $500 +$500 + $500 + $500 + $500 +
$24,000 = $27,000.


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