Rule_206(4)-2 (2022) Supporting_Statement

OMB CONTROL NUMBER: 3235-0241
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 206(4)-2
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) [15 U.S.C.
80b-6(4)] prohibits any investment adviser from engaging in any act, practice or course of
business which is fraudulent, deceptive or manipulative and gives the Commission the power, by
rules and regulations, to define and prescribe means reasonably designed to prevent such acts,
practices and courses of business.
Rule 206(4)-2 under the Advisers Act requires advisers to protect the assets that their
clients have entrusted to their custody. 1 The rule contains several “collection of information”
requirements within the meaning of the Paperwork Reduction Act of 1995 [44 U.S.C. 3510 to
3520]. The title for the collection of information is “Rule 206(4)-2 under the Investment
Advisers Act of 1940 -- Custody of Funds or Securities of Clients by Investment Advisers.” The
collection of information is currently approved under OMB control number 3235-0241. The
Commission is submitting this Paperwork Reduction Act submission for an extension and a
revision to the currently approved collection of information requirements.
Rule 206(4)-2 requires each registered investment adviser that has custody of client funds
or securities to maintain those client funds or securities with a broker-dealer, bank or other

1

17 CFR 275.206(4)-2.

2
“qualified custodian.” 2 This requirement is necessary to safeguard the client assets over which
the adviser has control or access. The rule requires the adviser to promptly notify clients as to
the place and manner of custody after opening an account for the client and following any
changes. 3 If an adviser sends account statements to its clients, it must insert a legend in the
notice and in subsequent account statements sent to those clients urging them to compare the
account statements from the custodian with those from the adviser. 4 The adviser also must have
a reasonable basis, after due inquiry, for believing that the qualified custodian maintaining client
funds and securities sends account statements directly to the advisory clients at least quarterly,
identifying the amount of funds and of each security in the account at the end of the period and
setting forth all transactions in the account during that period. 5 The client funds and securities of
which an adviser has custody must undergo an annual surprise examination by an independent
public accountant to verify client assets pursuant to a written agreement with the accountant that
specifies certain duties. 6 Unless client assets are maintained by an independent custodian (i.e., a
custodian that is not the adviser itself or a related person), the adviser also is required to obtain or
receive a written report of the internal controls relating to the custody of those assets from an

2

17 CFR 275.206(4)-2(a)(1).

3

17 CFR 275.206(4)-2(a)(2).

4

17 CFR 275.206(4)-2(a)(2).

5

17 CFR 275.206(4)-2(a)(3).

6

17 CFR 275.206(4)-2(a)(4).

3
independent public accountant that is registered with and subject to regular inspection by the
Public Company Accounting Oversight Board (“PCAOB”). 7
Advisers to limited partnerships, limited liability companies and other pooled investment
vehicles are excepted from the account statement delivery requirement and are deemed to comply
with the annual surprise examination requirement if the limited partnerships, limited liability
companies or pooled investment vehicles are subject to annual audit by an independent public
accountant registered with, and subject to regular inspection by the PCAOB, and the audited
financial statements are distributed to investors in the pools. 8 The rule also provides an
exception to the surprise examination requirement for advisers that have custody solely because
they have authority to deduct advisory fees from client accounts, 9 and advisers that have custody
solely because a related person holds the adviser’s client assets (or has any authority to obtain
possession of them) and the related person is operationally independent of the adviser. 10
These collection of information requirements are found at 17 CFR 275.206(4)-2 and are
mandatory. As discussed, advisory clients use this information to confirm proper handling of
their accounts. The Commission’s staff uses the information obtained through the collection in
its enforcement, regulatory and examination programs. The respondents to this information
collection are those investment advisers that are registered with the Commission and have
custody of client funds or securities.
7

17 CFR 275.206(4)-2(a)(6).

8

17 CFR 275.206(4)-2(b)(4).

9

17 CFR 275.206(4)-2(b)(3).

10

17 CFR 275.206(4)-2(b)(6).

4
2.

Purpose and Use of the Information Collection

As discussed above, the Commission uses the information required by rule 206(4)-2 in
connection with its investment adviser enforcement, regulatory, and examination programs.
Advisory clients use the information required by rule 206(4)-2 to monitor their advisers’
handling of their accounts. Without the information collected under the rule, the Commission
would be less efficient and effective in its programs and advisory clients would not have
information they need to monitor the adviser’s handling of their accounts.

3.

Consideration Given to Information Technology

The collection of information requirements under rule 206(4)-2 take the form of (1)
annual surprise examinations conducted by independent public accountants, (2) delivery of
audited financial statements to investors in a pooled investment vehicle, (3) delivery of notices to
clients about new custodial accounts, and (4) internal control reports by independent public
accountants registered with, and subject to regular inspection by, the PCAOB. The Commission
currently permits advisers to provide to clients the information required by rule 206(4)-2
electronically. 11 Accountants also electronically file with the Commission their reports with their
surprise examination findings. Finally, the Commission does not prescribe a particular format or
delivery method for internal control reports, and similarly it does not prohibit the use of
information technology for these purposes.

11

See 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 1562, (May 9, 1996).

5
4.

Duplication

The requirements of rule 206(4)-2 are not duplicated elsewhere for those investment
advisers that must comply with the rule.
5.

Effect on Small Entities

The requirements of rule 206(4)-2 apply equally to all investment advisers that are
registered with the Commission and have custody of funds or securities of their clients, including
those advisers that are small entities. It would defeat the purpose of the rule to exempt small
entities from these requirements.
6.

Consequences of Not Conducting Collection

If the information required by rule 206(4)-2 is either not collected or is collected less
frequently, both the Commission's ability to protect investors and the ability of clients to monitor
the handling of their accounts would be reduced.
7.

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

Investment advisers registered with the Commission may be required to maintain and
preserve certain information required under rule 206(4)-2 for more than three years. The longterm retention of these records is necessary for the Commission's inspection program to ascertain
compliance with the Investment Advisers Act and its rules.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 206(4)-2 before it submitted this request for extension and approval to the
Office of Management and Budget. The Commission received no comments in response to its
request.

6
The Commission and the staff of the Division of Investment Management also 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 confronting the
industry.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

Not applicable.
12.

Burden of Information Collection

Currently approved burdens. The current annual collection of information burden
approved by OMB for rule 206(4)-2 is 246,532 hours. This burden includes 80,266 hours
relating to the requirement to obtain a surprise examination, 29,539 hours relating to distribution
of audited financial statements, and 136,727 hours relating to notice to clients.
We now estimate the total information collection hours to be 288,202 hours. 12 The
primary cause of the increase is the result of (a) an increase in the estimated number of investors
in pooled investment vehicles whose advisers do not provide advisory services exclusively to
pooled investment vehicles and (b) an increase in the estimated average number of clients of

12

See infra note 39.

7
advisers that have custody of client assets. 13
Annual surprise examination. Rule 206(4)-2 requires each registered investment adviser
that has custody of client funds or securities to undergo an annual surprise examination by an
independent public accountant to verify client assets pursuant to a written agreement with the
accountant that specifies certain duties. 14 The current approved annual burden for rule 206(4)-2
includes 80,266 hours that relate to the requirement to obtain a surprise examination. We
estimated that 1,713 advisers registered with the Commission would be subject to the surprise
examination. We now estimate that 1,868 advisers are subject to the surprise examination
requirement under rule 206(4)-2. 15
For purposes of estimating the collection of information burden, we have divided the
estimated 1,868 advisers into three subgroups. First, we estimate that 418 advisers have custody
because they serve as qualified custodians for their clients, or they have a related person that
serves as qualified custodian for clients, in connection with advisory services the adviser

13

See infra notes 25 and 38.

14

17 CFR 275.206(4)-2(a)(4).

15

Based on data from the Investment Adviser Registration Depository (“IARD”) as of
November 29, 2021 (unless indicated otherwise, all data we use in this Supporting
Statement were as of November 29, 2021, 8,057 advisers answered “yes” to Form ADV,
Part 1A Items 9.A. or 9.B. (indicating that they or a related person has custody of client
assets, excluding advisers that have custody solely because they have authority to deduct
fees from clients’ accounts) or answered “yes” to another question in Part 1A Item 9.C.
Of these advisers, 1,868 advisers indicated in response to Item 9.C.(3) that an
independent public accountant conducts an annual surprise examination of client funds
and securities.

8
provides to the clients. 16 We estimate that these advisers are subject to an annual surprise
examination with respect to 100 percent of their clients (or 8,490 clients per adviser) based on
the assumption that all of their clients maintain custodial accounts with the adviser or related
person. 17 We estimate that each adviser will spend an average of 0.02 hours for each client to
create a client contact list for the independent public accountant. The estimated total annual
aggregate burden with respect to the surprise examination requirement for this group of advisers
is 70,976 hours. 18
The second group of advisers, estimated at 1,276, are those that have custody because
they have broad authority to access client assets held at an independent qualified custodian, such
as through a power of attorney or acting as a trustee for a client’s trust. 19 Based on our staff’s
experience, advisers that have access to client assets through a power of attorney, acting as
trustee, or similar legal authority typically do not have access to all of their client accounts, but
16

Based on IARD data, 412 advisers indicated that an independent public accountant
prepares an internal control report because the adviser or its affiliate acts as a qualified
custodian (in response to Item 9.C.(4)). Similarly, 74 advisers indicated that they act as a
qualified custodian (in response to Item 9.D.(1)), and 350 advisers indicated that their
related person(s) act as qualified custodian(s) (in response to Item 9.D.(2)). 74 + 350 =
424.

17

We base our estimate on IARD data of the average number of clients of all the advisers
that will be subject to the surprise examination requirement under the rule. To derive our
estimate, we utilized the winsorization method, by setting all values for advisers within
the 99th percentile of number of clients at the number of clients at the 99th percentile. The
method lessens the effect of outliers on client estimates.

18

418 advisers x 8,490 (average number of clients subject to the surprise examination
requirement) x 0.02 hour = 70,976 hours.

19

This estimate is based on the total number of advisers subject to surprise examinations
less those described above in the first group (custody as a result of serving as, or having a
related person serving as, qualified custodian) less those described below in the third
group (custody as a result of solely managing private funds). 1,868– 418– 174= 1,276.

9
rather only to a small percentage of their client accounts pursuant to these special arrangements.
We estimate that these advisers will be subject to an annual surprise examination with respect to
5 percent of their clients (or 425 clients per adviser) who have these types of arrangements with
the adviser. 20 We estimate that each adviser will spend an average of 0.02 hours for each client
to create a client contact list for the independent public accountant. The estimated total annual
aggregate burden with respect to the surprise examination requirement for this group of advisers
is 10,846 hours. 21
A third group of advisers provides advice to pooled investment vehicles that are not
undergoing an annual audit and therefore would undergo the surprise examination with respect to
those pooled investment vehicle clients. Based on current IARD data, we estimate that 12
advisers provide advice exclusively to pooled investment vehicles and undergo the surprise
examination with respect to all of their pooled investment vehicle clients. 22 {We estimate that
126 advisers that provide advice exclusively to pooled investment vehicles are subject to an
annual surprise examination because some of the pooled investment vehicles they advise do not

20

Based on the IARD data, we estimate that the average number of clients of advisers
subject to the surprise examination requirement is 8,490. 8,490 x 0.05 = 425.

21

1,276 advisers x 425 clients x 0.02 hours = 10,846 hours.

22

Based on IARD data, we estimate that 631 advisers manage private funds and undergo a
surprise examination (responses to Items 7.B. and 9.C.(3)). Based on IARD data, we
estimate that 12 solely manage pooled investment vehicles, undergo a surprise
examination, and do not undergo an annual audit of the pooled investment vehicles they
manage (responses to Item 5.D.(1)(f) and Item 9.C.).

10
undergo an annual audit. 23} We further estimate that 36 advisers that provide advice not
exclusively to pooled investment vehicles are subject to an annual surprise examination because
some of the pooled investment vehicles they advise do not undergo an annual audit. 24 We
estimate that each adviser providing advisory services exclusively to pooled investment vehicles
will have 16 funds and 664 investors total across all funds combined, and each adviser not
providing advisory services exclusively to pooled investment vehicles will have 17 funds and
1,055 investors total across all funds combined. 25 We estimate that advisers to these pooled
investment vehicles will spend 1 hour for the pool and 0.02 hours for each investor in the pool to
create a contact list for the independent public accountant, for an estimated total annual burden
with respect to the surprise examination requirement for these advisers of 5,484 hours. 26
23

Based on IARD data, we estimate that 69 advisers that provide services exclusively to
pooled investment vehicles undergo an annual audit and obtain an annual surprise
examination because some of the pooled investment vehicles they advise do not undergo
an annual audit (responses to Items 5.D.(1)(f), 7.B., and 9.C.(3)).

24

We estimate, based on staff experience, that ten percent of the 364 advisers that provide
services not exclusively to pooled investment vehicles obtain an annual surprise
examination because some of the pooled investment vehicles they advise do not undergo
an annual audit (responses to Items 5.D.(1), 7.B. and 9.C.(3)).

25

The number of funds and investors per adviser is estimated based on the information we
collected from Schedule D of Form ADV filed by advisers that indicated that they
undergo a surprise examination and provide advisory services to pooled investment
vehicles. Specifically, this estimate results from finding, for each such adviser, an
average number of beneficial owners for each private fund advised, multiplying the
average number of beneficial owners by the number of funds an adviser manages, and
then calculating an average of that figure for all advisers in this group. Information
collected on Form ADV does not permit an estimate as to the number of owners for other
types of pooled investment vehicles.

26

[((16 funds x 1 hour) + (664 investors x 0.02 hours)) x (138 advisers] + [((17 funds x 1
hour) + (1,055 investors x 0.02 hours)) x 36 advisers] = [29.8 hours x 138 advisers] +
[38.10 hours x 36 advisers] =4,112.40 hours + 1,371.60 hours = 5,484 hours.

11
These estimates bring the total annual aggregate burden with respect to the surprise
examination requirement for all three groups of advisers to 87,306. 27 This estimate does not
include the collection of information discussed below relating to the written agreement required
by paragraph (a)(4) of the rule.
Written agreement with accountant. Rule 206(4)-2 requires that an adviser subject to the
surprise examination requirement must enter into a written agreement with the independent
public accountant engaged to conduct the surprise examination and specify certain duties to be
performed by the independent public accountant. 28 We estimate that each adviser will spend
0.25 hour to add the required provisions to the written agreement, with an aggregate of
approximately 467 hours for all advisers that undergo surprise examinations. 29 Therefore the
total annual burden in connection with the surprise examination is estimated at 88,258 hours
under the rule. 30
Audited pooled investment vehicles. The rule excepts advisers to pooled investment
vehicles from having a qualified custodian send quarterly account statements to the investors in a
pool if it is audited annually by an independent public accountant and the audited financial
statements are distributed to the investors in the pool. 31 The rule also requires that an adviser to
a pooled investment vehicle that is relying on the annual audit provision must have the pool
27

70,976 hours + 10,846 hours + 5,484 hours = 87,306 hours.

28

17 CFR 275.206(4)-2(a)(4).

29

1,868 advisers required to obtain a surprise examination x 0.25 = 467.

30

87,306 exam hours + 467 written agreement hours = 87,773 hours.

31

17 CFR 275.206(4)-2(b)(4)(i).

12
audited and distribute the audited financial statements to the investors in the pool promptly after
completion of the audit if the fund liquidates at a time other than its fiscal year-end. 32
The currently approved annual burden in connection with the required distribution of
audited financial statements in connection with the annual audit and liquidation audit
requirements is 28,132 hours. We estimate that the average burden for advisers to deliver
audited financial statements to investors in the pool is 1 minute per investor. Under our revised
estimate of the number of advisers to audited pooled investment vehicles, the number of pooled
investment vehicles and the number of investors, we estimate that the aggregate annual hour
burden in connection with the distribution of annual audited financial statements is 25,160
hours. 33 We estimate that 5 percent of pooled investment vehicles are liquidated annually at a
time other than their fiscal year-end, which results in an additional burden of 1,258 hours per
year. 34 As a result, the total annual hour burden to distribute audited financial statements in
connection with the annual audit and liquidation audit requirements under the rule is estimated to

32

17 CFR 275.206(4)-2(b)(4)(iii).

33

Based on IARD data, we estimate that 2,638 advisers have custody of client assets and
provide advisory services to pooled investment vehicles (responses to Items 5.D.(1)(f),
9.A and 9.B). Of these advisers, we estimate that 2,608 advisers will have their pooled
investment vehicles audited and distribute audited financial statements to investors in the
pool. [2,638 advisers to pooled investment vehicles – 138 advisers that undergo a
surprise examination = 2,500 advisers that undergo an audit] We estimate that the 2,500
advisers provide advice to 40,000 private funds that have a total of 1,480,000 investors.
1,480,000 investors x 0.017 hour = 25,160 total burden hours to distribute annual audited
financials.

34

25,160 (total burden hours relating to distribution of annual audited financials) x 0.05 =
1,258 hours.

13
be 26,418 hours. 35
Notice to clients. The rule also requires each adviser, if the adviser sends account
statements in addition to those sent by the custodian, to add a legend in its notification to clients
upon opening a custodial account on their behalf, and in any subsequent account statements it
sends to those clients, urging them to compare the account statements from the qualified
custodian to those from the adviser. 36 The legend is placed in a notification that is otherwise
required to be sent to clients at specified times, so the collection of information burden is
negligible. We estimate that 4,290 advisers will be subject to this collection of information, 37
and that each adviser will on average open a new custodial account for 5% of its clients per year,
either because the adviser has new clients that request that the adviser open an account on their
behalf, or because the adviser selects a new custodian and moves its existing clients’ accounts to
that custodian. We further estimate that the adviser will spend 10 minutes per client drafting and
sending the notice. The total hour burden relating to this requirement is estimated at 174,011
35

25,160 (total burden hours relating to distribution of annual audited financials) + 1,258
(total burden hours relating to distribution of liquidation audited financials) = 26,418
hours.

36

17 CFR 275.206(4)-2(a)(2).

37

Based on IARD data, 7,893 advisers reported that they have custody (this excludes
advisers having custody solely because of deducting fees, which we understand do not
typically open custodial accounts on behalf of their clients). Of those advisers, 2,608 are
advisers exclusively to audited pooled investment vehicles. Since we estimate that 97%
of advisers to audited pooled investment vehicles obtain an annual audit (see supra note
33), the notice requirement does not apply to 2,530] advisers, leaving 5,363] advisers that
may be subject to this information collection. [7,893 advisers with custody – (2,608
advisers to pooled investment vehicles x 0.97) = 7,893 – 2,530 = 5,363 advisers] Based
on our staff’s observation, we estimate that clients of 80% of these advisers will receive
account statements from their advisers in addition to the account statements from the
qualified custodian. 0.8 x 5,363 = 4,290.

14
hours per year. 38
Based on the above estimates, we anticipate that the estimated total information
collection burden under rule 206(4)-2 would be 288,202 hours. 39 This represents an increase
from the currently approved burden, primarily due to an increase associated with a new burden
estimate related to the annual audit and liquidating audit exception, as discussed above]. The
total costs due to this information collection hour burden is estimated at $20,697,236. 40
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 representative survey
or study of Commission rules.

38

[4,290 x 4,772 (average number of clients for the advisers with custody of client assets) x
0.05] x 0.17 hours = 174,011 hours.

39

87,773 (surprise examination) + 26,418 (distribution of audited financial statements) +
174,011 (notice to clients) = 288,202.

40

[467 (hours spent on written agreement) x $316 (average hour rate for compliance
managers)] + [285,412 (hours spent on complying with other provisions of the rule) x $72
(average rate for compliance clerks)] = $147,572 + $20,549,664 = $20,697,236. Data
from the Securities Industry and Financial Markets Association’s Office Salaries in the
Securities Industry 2013 (“SIFMA Data”), modified by Commission staff to account for
an 1800-hour work-year and inflation and multiplied by 2.93 to account for bonuses, firm
size, employee benefits and overhead, suggest that the cost for a compliance clerk is $72
per hour. SIFMA data modified by Commission staff to account for an 1800-hour workyear and inflation and multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead, suggest that the cost for a compliance manager position is $316
per hour.

15
Table 1: Summary of Revised Annual Responses, Burden Hours, and Burden
Hour Costs Estimates for Each Rule 206(4)-2 Information Collection (“IC”) Hour
Costs
IC

Rule 206(4)-2 IC Description

IC1
IC1

Annual Surprise Examination
Investment Adviser or Related Person
Serves as Qualified Custodian
Investment Adviser has Broad Authority to
Access Client Assets Held at an
Independent Custodian
Investment Adviser Provides Advice
Exclusively to Pooled Investment Vehicles
and Undergoes Surprise Examination With
Respect to All Pooled Investment Vehicle
Clients
Investment Adviser Provides Advice
Exclusively to Pooled Investment Vehicles
and Undergoes Surprise Examination
Because Some of the Pooled Investment
Vehicles do not Undergo an Annual Audit
Investment Advisers Provides Advice Not
Exclusively to Pooled Investment Vehicles
and Undergoes Surprise Examination
Because Some of the Pooled Investment
Vehicles do not Undergo an Annual Audit
Totals for IC1

IC1
IC1

IC1

IC1

IC1
IC2
IC3
IC4

Burden
Hours

Burden
Hour Costs

Responses
4,155,008
3,548,820
542,300
4,032

42,000

17,856

87,306

$6,118,776

8,310,016

Written Agreement with Independent Public
Accountant
Distribution of Audited Financial
Statements
Notice to Clients

467

$147,572

1,868

26,418

$1,902,096

1,480,000

174,011

$12,528,792

20,471,880

Totals for all ICs

288,202

$20,697,236

30,263,764

16
13.

Cost to Respondents

The currently approved collection of information for the custody rule includes an
aggregate accounting fee estimate of $163,610,000. We now estimate a total annual aggregate
accounting fee of $174,367,000. 41 The increase in estimated aggregated cost is attributable to an
increase in the number of medium sized advisers that will be subject to the surprise examination
requirement with respect to 5% of their clients as well as inflation adjustments.
We estimate that of the 1,868 advisers subject to the surprise examination requirement,
approximately 306 advisers will be subject to the surprise examination with respect to 100
percent of their clients and will each spend an average of approximately $162,000 annually, 42
151 medium-sized advisers will be subject to the surprise examination requirement with respect
to 5% of their clients and will each spend an average of approximately $26,000 annually, and
1,397 small sized advisers will be subject to the surprise examination requirement with respect to
5% of their clients and will each spend an average of approximately $13,000 annually, 43 with an
41

See infra note 47 and accompanying text.

42

We estimate, based on IARD data, there are 306 advisers that do not currently use an
independent qualified custodian and will be subject to the surprise examination with
respect to 100% of their clients (they indicated on Form ADV, Part 1A, Items 9.C.(3) and
9.C.(4) that they are subject to examination and have internal control reports because the
adviser or its related person is a qualified custodian).
We note that the costs of reporting to the Commission (i) regarding “material
discrepancy” pursuant to rule 206(4)-2(a)(4)(ii) and (ii) upon termination of engagement
pursuant to rule 206(4)-2(a)(4)(iii) are included in the estimated accounting fees.

43

Based on responses to Item 5.C. of Form ADV, we estimate that the average number of
clients for the 1,548 advisers that indicated they do not have internal control reports is
1,669. We determined, for purposes of this analysis, that an adviser with clients more
than this average number is a medium size adviser (151) and an adviser with clients less
than this average number is a small adviser (1,397).

17
aggregate annual accounting fee of $71,659,000 for all advisers subject to the surprise
examination. 44
We understand that the cost to prepare an internal control report relating to custody will
vary based on the size and services offered by the qualified custodian. We estimate that, on
average, an internal control report would cost approximately $324,000 per year for each adviser
subject to the requirement. We estimate that under rule 206(4)-2, 317 advisers will be subject to
the requirement of obtaining or receiving an internal control report. 45 Therefore the total cost
attributable to this requirement will be $102,708,000. 46 The total estimated accounting fee under
the rule 206(4)-2 is therefore estimated at $174,367,000. 47
14.

44

Cost to the Federal Government

(306 x $162,000) + (151 (medium advisers) x $26,000) + (1,397 (small advisers) x
$13,000) = $49,572,000 + $3,926,000 + $18,161,000 = $71,659,000.
We note that the estimated costs in this calculation have been adjusted for inflation from
prior estimates, rounded to the nearest $1,000.

45

We estimate that 412 advisers obtain an internal control report (see supra note 16 for this
estimate). Of the 306 advisers that will be subject to both the surprise examination and
internal control report requirement (see supra note 42 for this estimate), we further
estimate, based on prior consultation with several accounting firms, that 10% of these
advisers already obtain an internal control report for purposes other than the custody rule.
In addition, we believe that some related persons may serve as the qualified custodian for
more than one affiliated adviser. We estimate that this will reduce the number of required
internal control reports by an additional 15%. 412 – (306 x 10%) – (424 x 15%) = 412 –
31 – 64 = 317.

46

$324,000 x 317 = $102,708,000
We note that the estimated costs in this calculation have been adjusted for inflation from
prior estimates, rounded to the nearest $1,000.

47

$71,659,000 (accounting fee for surprise examination) + $102,708,000 (accounting fee
for internal control report) = $174,367,000.

18
There are no additional costs to the federal government.
15.

Changes in Burden

The current annual burden approved by OMB for rule 206(4)-2 is 246,532 hours. We now
estimate that the total information collection hours is 288,202 hours. The primary cause of the
increase is the result of (a) an increase in the estimated number of investors in pooled investment
vehicles whose advisers do not provide advisory services exclusively to pooled investment
vehicles and (b) an increase in the estimated average number of clients of advisers that have
custody of client assets. 48 The currently approved annual burden under rule 206(4)-2 includes an
aggregate cost estimate of $163,610,000. We now estimate that the annual cost burden under the
rule would increase to $174,367,000, which is attributable to an increase in the number of
medium sized advisers that will be subject to the surprise examination requirement with respect
to 5% of their clients as well as inflation adjustments.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exception to Certification Statement for Paperwork Reduction Act

Submission
Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS

Not applicable.
48

See supra notes 25 and 38.