Rule 206(4)-10 (P-PFA) Supporting Statement

OMB CONTROL NUMBER: 3235-XXXX
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 206(4)-10 under the Investment Advisers Act of 1940

A.

JUSTIFICATION
1.

Necessity for the Information Collection

On February 9, 2022, the Commission proposed rules related to private fund transparency
and conflicts of interest as well as amendments to certain rules that govern investment adviser
and fund disclosures under the Investment Advisers Act of 1940 (the “Advisers Act”). 1 The
proposed rules and amendments are designed protect those who directly or indirectly invest in
private funds by increasing visibility into certain practices, establishing requirements to address
certain practices that have the potential to lead to investor harm, and prohibiting adviser activity
that is contrary to the public interest and the protection of investors.
The Commission proposed new rule 206(4)-10 2 to require an adviser registered or
required to be registered with the Commission to cause each private fund they advise, directly or
indirectly, to undergo a financial statement audit at least annually and upon liquidation and to
distribute the fund’s audited financial statements to current investors promptly after completion
of the audit. The rule would also require an adviser to enter into a written agreement between
the adviser or the private fund, on one hand, and the auditor, on the other hand, under which the
auditor would be required to notify the Division of Examinations upon the auditor’s termination
or issuance of a modified opinion. This information bolsters the Commission’s efforts to prevent
fraudulent, deceptive, and manipulative activity and aids the oversight of private fund advisers.
2.

Purpose and Use of the Information Collection

The purpose of new rule 206(4)-10 is to protect investors against misappropriation of
client assets and the overcharging of client fees because of inflated valuations by requiring
private fund advisers to cause each private fund they advise to undergo a financial statement
audit.
3.
Consideration Given to Information Technology
Rule 206(4)-10 would not require the adviser to report any information or file any
documents with the Commission. Rule 206(4)-10 would, however, require the auditor to notify
the Commission by electronic means directed to the Division of Examinations: (i) promptly upon
issuing an audit report to the private fund that contains a modified opinion and (ii) within four

1

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”).

2

17 CFR 275.206(4)-10.

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OMB CONTROL NUMBER: 3235-XXXX
business days of resignation or dismissal from, or other termination of, the engagement, or upon
removing itself or being removed from consideration for being reappointed.
4.

Duplication

The collection of information requirements are not duplicated elsewhere.
5.

Effect on Small Entities

Rule 206(4)-10 would not affect most investment advisers that are small entities (“small
advisers”) because the rule applies only to advisers that are registered with the Commission and
small advisers are generally unregistered or are registered with one or more state securities
authorities and not with the Commission. In fact, under section 203A of the Advisers Act, most
small advisers are prohibited from registering with the Commission and are regulated by state
regulators. Based on IARD data, we estimate that as of November 30, 2021, approximately 594
Commission-registered advisers are small advisers. Of these 594 advisers, approximately 29
advise private funds, and we estimate that all of these 29 advisers would be subject to rule
206(4)-10. As discussed below, rule 206(4)-10 under the Advisers Act would create a new
annual burden of approximately 18.36 hours per adviser, or 532.44 hours in aggregate for small
advisers. We therefore expect the annual monetized aggregate cost to small advisers associated
with our proposed amendments would be $15,819,118.65.
6.

Consequences of Not Conducting Collection

The collection of information would bolster the Commission’s efforts at preventing
fraudulent, deceptive, and manipulative activity and would aid oversight of private fund advisers.
The consequences of not collecting this information would be that the Commission may not have
information when an auditor issues an audit report to a private fund containing a modified
opinion or when an auditor has been terminated by an adviser to a private fund, which may
hinder the Commission’s ability to identify advisers potentially engaged in harmful misconduct
and that have other compliance issues.
7.

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

This collection is not inconsistent with 5 CFR 1320.5(d)(2).
8.

Consultation Outside the Agency

The Commission and the staff of the Division of Investment Management participate in
an ongoing dialogue with representatives of the investment management industry 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 rule 206(4)-10. Before
adopting rule 206(4)-10, the Commission will receive and evaluate public comments on the
proposed rule and its associated collection of information requirements.

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OMB CONTROL NUMBER: 3235-XXXX
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Confidentiality

The information collected pursuant to rule 206(4)-10 would be by electronic means to a
dedicated email address established by the Division of Examinations. These transmissions
would be kept confidential.
11.

Sensitive Questions

Not applicable.
12.

Burden of Information Collection

The following estimates of average burden hours and costs are made solely for purposes
of the Paperwork Reduction Act of 1995 3 and are not derived from a comprehensive or even
representative survey or study of the cost of Commission rules and forms.
Based on IARD data, as of November 30, 2021, there were 14,832 investment advisers
registered with the Commission. According to this data, 5,037 registered advisers provide advice
to private funds. We estimate that these advisers would, on average, each provide advice to 9
private funds. We further estimate that these private funds would, on average, each have a total
of 67 investors. As a result, an average private fund adviser would have a total of 603 investors
across all private funds it advises.
We have made certain estimates of this data solely for the purpose of this analysis. The
table below summarizes the initial and ongoing annual burden estimates associated with the rule.

3

44 U.S.C. 3501 et seq.

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OMB CONTROL NUMBER: 3235-XXXX
Table 1: Rule 206(4)-10 Estimates
Internal initial
burden hours

Internal
annual
burden
hours

Wage rate1

Internal time
cost

Annual external cost burden

PROPOSED ESTIMATES

Distribution
of audited
financial
statements2

Preparation
of the
written
agreement5

0 hours

1.12 hours3

$153.33
(blended rate
for
intermediate
accountant
($175),
general
accounting
supervisor
($221), and
general clerk
($64))

$171.73

$60,0004

0.92 hours7

$476 (rate
for assistant
general
counsel)

$437.92

$0

1.25 hours6

Total new
annual
burden per
private fund

2.04 hours

$609.65

$60,0008

Avg. number
of private
funds per
adviser

9 private
funds

9 private funds

9 private funds

Number of
advisers

5,037
advisers

5,037 advisers

5,037 advisers

Total new
annual
burden

92,479.32
hours

$27,637,263.40

$2,719,980,000

Notes:
1.The Commission’s estimates of the relevant wage rates are based on salary information for the securities industry compiled by the Securities Industry
and Financial Markets Association’s Office Salaries in the Securities Industry 2013. The estimated figures are modified by firm size, employee
benefits, overhead, and adjusted to account for the effects of inflation. See Securities Industry and Financial Markets Association, Report on
Management & Professional Earnings in the Securities Industry 2013.
2. The proposed audit provision would require an adviser to obtain an audit at least annually and upon an entity’s liquidation. To the extent not
prohibited, we anticipate that, in some cases, the fund will bear the audit expense, in other cases the adviser will bear it, and in other instances both the
adviser and fund will share the expense. The liquidation audit would serve as the annual audit for the fiscal year in which it occurs. See proposed rule
206(4)-10.

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OMB CONTROL NUMBER: 3235-XXXX
3. This estimate takes into account that the financial statements must be distributed once annually under the proposed audit rule and that a liquidation
audit would replace a final audit in a year. Based on our experience with similar requirements under the custody rule, we estimate the hour burden
imposed on the adviser relating to the distribution of the audited financial statements with respect to the investors in each fund should be minimal,
approximately one minute per investor. See Custody of Funds or Securities of Clients by Investment Advisers, Investment Advisers Act Release No.
2968 (Dec. 30, 2009) [75 FR 1455 (Jan. 11, 2010)] (“Custody Rule 2009 Adopting Release”), at 59-60. We estimate that the average private fund has
67 investors.
4. Based on our experience, we estimate that the party (or parties) that bears the audit expense would pay an average audit fee of $60,000 per fund. We
estimate that individual fund audit fees would tend to vary over an estimated range from $15,000 to $300,000, and that some fund audit fees would be
higher or lower than this range. We understand that the price of the audit has many variables, such as whether it is a liquid fund or illiquid fund, the
number of its holdings, availability of a PCAOB-registered and –inspected auditor, economies of scale, and the location and size of the auditor.
5. The proposed rule would require the adviser or the private fund to enter into an agreement with the independent public accountant. The agreement
would require the independent public accountant that completes the audit to notify the Commission by electronic means directed to the Division of
Examinations promptly upon certain events. See proposed rule 206(4)-10(e).
6. For purposes of this estimate we assume that, regardless of whether the adviser or the fund enters into the written agreement, the accountant would
incur the hour burden of preparing the agreement. We also assume that, if the fund was party to the agreement, the fund would delegate the task of
reviewing the agreement to the adviser. This estimate also assumes that the adviser would enter into a separate agreement for each private fund, even if
multiple funds use the same auditor. We believe that written agreements are commonplace and reflect industry practice when a person retains the
services of a professional such as an accountant, and they are typically prepared by the accountant in advance. We therefore estimate that each adviser
would spend 1.25 hours to add the required provisions to, or confirm that the required provisions are in, the written agreement.
7. This includes the internal initial burden estimate annualized over a three-year period, plus 0.5 hours of ongoing annual burden hours, and it assumes
annual reassessment and execution: ((1.25 initial hours / 3 years) + 0.5 hours of additional ongoing burden hours) = 0.92 hours.
8. We assume the same frequency of these cost estimates as for the internal annual burden hours estimate.

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OMB CONTROL NUMBER: 3235-XXXX
13.

Cost to Respondents

Cost burden is the cost of goods and services purchased to meet the requirements of rule
206(4)-10, such as for the services of outside counsel. The cost burden does not include the hour
burden discussed in Item 12 above. Estimates are based on the Commission’s experience.
As summarized above, Commission staff estimates that the annual cost of outside
services associated with rule 206(4)-10 is approximately $540,000 per adviser and the total
annual external cost burden for rule 206(4)-10 is $2,719,980,000.
14.

Cost to the Federal Government

There are no costs to the government directly attributable to the rule.
15.

Change in Burden

New collection.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.
Submission

Exceptions to Certification Statement for Paperwork Reduction Act

Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

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