Rule 206(4)-7 (P-PFA) Supporting Statement

OMB CONTROL NUMBER: 3235-0585
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Amendments to Rule 206(4)-7 under the Investment Advisers Act of 1940
A. JUSTIFICATION
1.

Necessity for the Information Collection

Rule 206(4)-7 under the Investment Advisers Act of 1940 (“Advisers Act”)
requires each investment adviser registered with the Securities and Exchange
Commission (“Commission”) to (1) adopt and implement written policies and procedures
reasonably designed to prevent violations of the Advisers Act and its rules, (2) review
those compliance policies and procedures annually, and (3) designate a chief compliance
officer who is responsible for administering the compliance policies and procedures. The
rule is designed to protect investors by fostering better compliance with the securities
laws.
Rule 206(4)-7 contains “collection of information” requirements within the
meaning of the Paperwork Reduction Act of 1995. 1 The title of the collection of
information is “Investment Advisers Act rule 206(4)-7, 17 C.F.R. Sec. 275.206(4)-7,
Compliance procedures and practices.” This collection of information has been
previously approved and then extended by the Office of Management and Budget under
control number 3235-0585. This collection of information is found at 17 CFR
275.206(4)–7, and is mandatory.
The collection of information under rule 206(4)-7 is necessary to help ensure that
investment advisers maintain comprehensive internal programs that promote the advisers’
compliance with the Advisers Act and its rules. The respondents are investment advisers
registered with the Commission. The Commission’s examination and oversight staff may
review the information collected to assess investment advisers’ compliance programs.
On February 9, 2022, the Commission proposed an amendment to rule 206(4)-7 to
require all advisers (not only advisers to private funds) that are registered or required to
be registered with the Commission to document the annual review of their compliance
policies and procedures in writing. 2 This requirement would focus renewed attention on
the importance of the annual compliance review process and would help ensure that
advisers maintain records regarding their annual compliance review that will allow the
Commission’s staff to determine whether advisers have complied with the rule 206(4)-7.
2.

Purpose and Use of the Information Collection

The purpose of the information collection requirements in rule 206(4)-7 is to help
ensure that investment advisers maintain comprehensive internal programs that promote
the advisers’ compliance with the Advisers Act and its rules. The information collection
1
2

44 U.S.C. 3501, et seq.
15 U.S.C. 80b-1 et seq.; Private Fund Advisers; Documentation of Registered Investment Adviser
Compliance Reviews Release No. IA-5955 (Feb. 9, 2022) available at
https://www.sec.gov/rules/proposed/2022/ia-5955.pdf (“Private Fund Advisers; Documentation of
Registered Investment Adviser Compliance Reviews”).

requirement to document their annual compliance reviews would also assist the
Commission’s examination and oversight program.
3.

Consideration Given to Information Technology

Rule 206(4)-7 does not require advisers or any others to report or file any
information with the Commission.
4.

Duplication

Rule 206(4)-7 imposes a broad requirement that advisers have in place written
compliance policies and procedures. Other federal securities laws require advisers to
maintain written policies and procedures, including more targeted policies and
procedures. Rule 206(4)-7, however, does not require advisers to maintain duplicate
copies of records covered by these more targeted requirements. The staff believes,
therefore, that any duplication of regulatory requirements is limited and does not impose
significant additional costs on advisers.
5.

Effect on Small Entities

Registered advisers, regardless of their size, are subject to the requirements in rule
206(4)-7. Comprehensive internal compliance programs are essential for advisers of all
sizes. Rule 206(4)-7 affords advisers the flexibility to tailor their compliance program to
the nature of their business. Small advisers, which generally have less complex and more
limited operations, would likely need less extensive compliance programs than their
larger counterparts. Therefore, rule 206(4)-7 should not inappropriately burden small
advisers. The staff does not believe it can adjust the rule to lessen the burden on small
entities, without jeopardizing the interests of small advisers’ clients.
6.

Consequences of Not Conducting Collection

If registered investment advisers are not required to comply with rule 206(4)-7, it
is harder to ensure they maintain comprehensive internal programs that promote the
advisers’ compliance with the Advisers Act and its rules. Rule 206(4)-7 requires advisers
to review their compliance policies and procedures annually. The proposed amendment
to rule 206(4)-7 would require advisers to document the annual review of their
compliance policies and procedures in writing. These annual reviews are integral to
detecting and correcting any gaps in an adviser’s compliance program before irrevocable
or widespread harm is inflicted upon investors. Extending the time between reviews
increases the likelihood that such harm could go unchecked.
7.

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

Not applicable.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 206(4)-7, including the proposed amendment, before it submitted
this request for extension to the Office of Management and Budget.

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The Commission and the 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 the staff with a means of ascertaining and acting
upon paperwork burdens facing the industry.
9.

Payment or Gift

Not Applicable.
10.

Confidentiality

Responses provided to the Commission pursuant to the rule in the context of the
Commission’s examination and oversight program are generally kept confidential. 3
11.

Sensitive Questions

No PII collected / Not applicable.
12.

Estimate of Hour and Cost Burden of Information Collection

Rule 206(4)-7 requires investment advisers to (1) adopt and implement written
policies and procedures reasonably designed to prevent violations of the Advisers Act
and its rules, (2) review those compliance policies and procedures annually, and (3)
designate a chief compliance officer who is responsible for administering the compliance
policies and procedures. The current approved number of responses is 14,376 per year.
The current approved aggregate time burden is 1,293,840 hours, per year. The current
approved aggregate monetized time burden is $322,036,776 per year. We are updating
and revising the burdens based on revised analysis and updated data.
Revised analysis. Rule 206(4)-7 requires, among other things, registered
investment advisers to adopt and implement written policies and procedures reasonably
designed to prevent violations of the Advisers Act and its rules. Therefore, as the
Advisers Act and its rules evolve, the burden analysis changes to account for new or
rescinded requirements that advisers would need to address in their compliance policies
and procedures to prevent violations. We are revising our analysis to account for the new
requirement under Rule 206(4)-7 for investment advisers to document the annual review
of their compliance policies and procedures in writing. Based on this analysis, taking
into account the new requirement, we believe the annual time burden hours should
increase from 90 hours to 93 hours per adviser.
Updated Data. Based on Form ADV filings as of November 30, 2021, there were
14,832 advisers registered with the SEC, which represents the total number of
respondents. Each respondent would produce one response, per year. Therefore, with
the updated data showing 14,832 responses, we believe the annual aggregate time burden
should increase to 1,379,936 hours. 4

3
4

See section 210(b) of the Advisers Act (15 U.S.C. 80b-10(b)).
14,832 responses x 93 hours per response = 1,379,376 hours.

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We estimate that on average, each respondent would have compliance managers
perform 65.25 of its 90 burden hours under the current rule and compliance clerks
perform the remaining 24.75 hours of work. Our updated data indicate the hourly wage
rate for a compliance manager is $339, while the hourly wage rate for a compliance clerk
is $77 an hour. 5 This translates into a blended internal rate of $266.95. 6
For its additional 3 burden hours under the proposed amendment to the current
rule, we estimate that 50% of advisers will use outside legal services for this collection of
information, which takes into account that advisers may elect to use outside legal services
(along with in-house counsel), based on factors such as the adviser’s budget and the
adviser’s standard practices for using outside legal services, as well as personnel
availability and expertise. 7 This translates into a blended external rate of $431.50. 8
Using the updated hourly wage rates and updated number of respondents, we estimate
that rule 206(4)-7 results in a monetized time burden of $371,885,331.60. 9
Table 1: Summary of the Annual Number of Respondents, Number of Responses
per Respondent, and Average Time Burden per Response
Description

Previously
Approved

Requested

Change

14,832

14,376

456

Number of Responses per
Respondent

1

1

0

Average Time Burden per
Response (Hours)

93

90

3

Respondents

5

6
7
8
9

The $339 per hour figure for a compliance manager is from SIFMA’s Management &
Professional Earnings in the Securities Industry 2013, modified by Commission staff 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. The $77 per hour figure for a compliance clerk is from SIFMA’s
Office Salaries in the Securities Industry 2013, 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.
(65.25 hours/90 hours x $339 per hour figure for a compliance manager) + (24.75 hours/90 hours
x $77 per hour figure for a compliance clerk) = $266.95
14,832 responses x 50% = 7,416 responses.
(0.5 hours x $531 for an attorney) + (0.5 hours x $332 for an accountant) = $431.50.
(14,832 responses x 90 x $266.95) + (7,416 responses x 3 x $266.95) + (7,416 responses x 3 x
$431.50) = $371,885,331.60

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Table 2: Summary of the Annual Number of Responses, Aggregate
Time Burden, and Aggregate Monetized Time Burden
Description

Requested

14,376

456

1,379,376

1,293,840

85,536

$371,885,331.60

$322,036,776

$49,848,555.60

Time Burden (Hours)

13.

Change

14,832

Responses

Monetized Time Burden (Dollars)

Previously
Approved

Cost to Respondents

There is no cost burden other than the cost of the hour burden described above.
14.

Cost to the Federal Government

There are no additional costs to the federal government directly attributable to
rule 206(4)-7.
15.

Change in Burden

We estimate that the annual aggregate time burden associated with rule 206(4)-7
will increase from 1,293,840 hours to 1,379,376 hours, resulting in an increase of 85,536
hours. We estimate that the annual aggregate monetized cost burden will increase from
$322,036,776 to $371,885,331.60 resulting in an increase in $49,848,555.60. These
increases are attributable to revised analysis and updated data. Rule 206(4)-7 requires,
among other things, registered investment advisers to adopt and implement written
policies and procedures reasonably designed to prevent violations of the Advisers Act
and its rules. We are revising our analysis to account for new requirements that advisers
would document in writing the annual review of their compliance policies and
procedures. Also, according to updated data, more advisers are registered with the
Commission, therefore more respondents must comply with rule 206(4)-7, resulting in an
increase in the number of responses. Additionally, we increased our hourly wage
estimates to account for inflation. Further, we estimate that the external cost burden
associated with rule 206(4)-7 has increased to $9,600,012 based on an adviser’s decision
to use external parties to document in writing the annual review. 10
16.

Information Collection Planned for Statistical Purposes

Not Applicable.
10

7,416 responses x 3 hours x $431.50 blended external rate = $9,600,012.

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17.

Approval to Omit OMB Expiration Date

Not Applicable.
18.

Exceptions to Certification Statement for Paperwork Reduction Act
Submission

Not Applicable.
B. COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
The collection of information will not employ statistical methods.

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