Rule 211(h)(1)-2 (P-PFA) Supporting Statement

OMB CONTROL NUMBER: 3235-XXXX

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 211(h)(1)-2 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 to 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 211(h)(1)-2 2 to require an investment adviser
registered or required to be registered with the Commission to prepare a quarterly statement that
includes certain standardized disclosures regarding the cost of investing in the private fund and
the private fund’s performance for any private fund that it advises, directly or indirectly, that has
at least two full calendar quarters of operating results, and distribute the quarterly statement to
the private fund's investors within 45 days after each calendar quarter end, unless such a
quarterly statement is prepared and distributed by another person. The quarterly statement would
provide investors with fee and expense disclosure for the prior quarterly period or, in the case of
a newly formed private fund initial account statement, its first two full calendar quarters of
operating results. It would also provide investors with certain performance information
depending on whether the fund is categorized as a liquid fund or an illiquid fund.
The collection of information is necessary to provide private fund investors with information
about their private fund investments.
2.

Purpose and Use of the Information Collection

The purpose of rule 211(h)(1)-2 is to provide private fund investors with fee and expense
disclosure for the prior quarterly period or, in the case of a newly formed private fund initial
account statement, its first two full calendar quarters of operating results. It would also provide
investors with certain performance information depending on whether the fund is categorized as
a liquid fund or an illiquid fund. The quarterly statement would allow a private fund investor to
compare standardized cost and performance information across its private fund investments. This
information would help inform investment decisions, including whether to remain invested in
certain private funds or to invest in other private funds managed by the adviser or its related
1

15 U.S.C. 80b-1 et seq.; Private Fund Advisers; Documentation of Registered Investment Adviser
Compliance Reviews Release Nos. 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 275.211(h)(1)-2.

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persons. More broadly, this disclosure would help inform investors about the cost and
performance dynamics of this marketplace and potentially improve efficiency for future
investments.
3.

Consideration Given to Information Technology

Rule 211(h)(1)-2 would not require the reporting of any information or the filing of any
documents with the Commission. Proposed amendments to rule 204-2, however, would require
an adviser to (i) retain a copy of any quarterly statement distributed to fund investors as well as a
record of each addressee, the date(s) the statement was sent, address(es), and delivery method(s);
(ii) retain all records evidencing the calculation method for all expenses, payments, allocations,
rebates, offsets, waivers, and performance listed on any statement delivered pursuant to the
quarterly statement rule; and (iii) make and keep books and records substantiating the adviser’s
determination that the private fund it manages is a liquid fund or an illiquid fund pursuant to the
quarterly statement rule. 3
4.

Duplication

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

Effect on Small Entities

Rule 211(h)(1)-2 would not affect most investment advisers that are small entities (“small
advisers”) because this rule would apply only to advisers that are registered with the
Commission, and small advisers are generally not registered or are registered with one or more
state securities authorities and not with the Commission. There are approximately 29 small
advisers to private funds currently registered with the Commission, and we estimate that 100
percent of these advisers would be subject to rule 211(h)(1)-2. As discussed below, we expect
that rule 211(h)(1)-2 would create a new annual burden of approximately 130.5 hours per
adviser, which totals 3,784.5 hours in aggregate for small advisers. We therefore expect the
annual monetized aggregate cost to small advisers associated with our proposed amendments
would be $1,802,466. 4 The Commission believes that it could not adjust the rule to lessen the
burden on small entities of complying with the rule without jeopardizing the interests of
investors. The Commission reviews all rules periodically, as required by the Regulatory
Flexibility Act, to identify methods to minimize recordkeeping or reporting requirements
affecting small businesses.
6.

Consequences of Not Conducting Collection

The collection of information required by the rule is necessary to protect investors by
providing investors and potential investors with information about the adviser, its business, and
its conflicts of interest. The consequences of not collecting this information would be that
3

See rule 204-2(a)(20)(i) and (ii) and (a)(22).

4

This includes the internal time cost and the annual external cost burden and assumes that, for
purposes of the annual external cost burden, 50% of small advisers will use outside legal services,
as set forth in the table below.

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investors and prospective investors may not have the information they need in order to evaluate
the adviser’s business practices, performance, whether or not to select or retain that adviser and,
if selected or retained, how to manage that relationship.
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 211(h)(1)-2. Before
adopting rule 211(h)(1)-2, the Commission will receive and evaluate public comments on the
proposed rule and its associated collection of information requirements.
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Confidentiality

The information collected pursuant to rule 211(h)(1)-2 would be by delivery of quarterly
statements to investors. These disclosures would not be kept confidential, but there is no
requirement that this information be filed with the Commission or publicly disclosed.
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 5 and are not derived from a comprehensive or even
representative survey or study of the cost of Commission rules and forms.
Based on Investment Adviser Registration Depository (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. 6 We estimate that these advisers
would, on average, each provide advice to 9 private funds. 7 We further estimate that these

5

44 U.S.C. 3501 et seq.

6

See Form ADV, Part 1A, Schedule D, Section 7.B.(1).

7

See Form ADV, Part 1A, Schedule D, Section 7.B.(1).

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private funds would, on average, each have a total of 67 investors. 8 As a result, an average
private fund adviser would have, on average, a total of 603 investors across all private funds it
advises. As noted above, because the information collected pursuant to rule 211(h)(1)-2 would
require disclosures to private fund investors, these disclosures would not be kept confidential.
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 rule
211(h)(1)-2.
Table 1: Rule 211(h)(1)-2 Estimates
Internal
initial
burden
hours

Internal
annual
burden
hours

Wage rate1

Internal time
cost

Annual external cost burden

PROPOSED ESTIMATES

8

Preparation
of account
statements

9 hours

11 hours2

$382 (blended rate
for compliance
attorney ($373),
assistant general
counsel ($476), and
financial reporting
manager ($297))

Distribution
of account
statements
to existing
investors

1.5
hours

3.5 hours4

$64 (rate for general
clerk)

$4,202

$4,0303

$224

$9305

Total new
annual
burden per
private
fund

14.5 hours

$4,426

$4,960

Avg.
number of
private
funds per
adviser

9 private
funds

9 private
funds

9 private funds

Number of
PF advisers

5,037
advisers

5,037
advisers

2,5186

See Form ADV, Part 1A, Schedule D, Section 7.B.(1).A., #13.

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Total new
annual
burden

657,328.5
hours

$200,643,858

$112,403,250

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. This includes the internal initial burden estimate annualized over a three-year period, plus 8 hours of ongoing annual burden hours and takes
into account that there would be four statements prepared each year. The estimate of 11 hours is based on the following calculation: ((9 initial
hours / 3 years) + 8 hours of additional ongoing burden hours) = 11 hours.
3. This estimated burden is based on the sum of the estimated wage rate of $496/hour, for 5 hours, ($2,480) for outside legal services and the
estimated wage rate of $310/hour, for 5 hours, ($1,550) for outside accountant assistance, and it assumes that there would be four statements
prepared each year. The Commission’s estimates of the relevant wage rates for external time costs, such as outside legal services, takes into
account staff experience, a variety of sources including general information websites, and adjustments for inflation.
4. This includes the internal initial burden estimate annualized over a three-year period, plus 3 hours of ongoing annual burden hours that takes
into account that there would be four statements prepared each year. The estimate of 3.5 hours is based on the following calculation: ((1.5 initial
hours / 3 years) + 3 hours of additional ongoing burden hours) = 3.5 hours.
5. This estimated burden is based on the estimated wage rate of $310/hour, for 3 hours, for outside accounting services, and it assumes that there
would be four statements distributed each year.
6. We estimate that 50% of advisers will use outside legal and accounting services for these collections of information. This estimate takes into
account that advisers may elect to use outside these services (along with in-house counsel), based on factors such as adviser budget and the
adviser’s standard practices for using such outside services, as well as personnel availability and expertise.

13.

Cost to Respondents

Cost burden is the cost of goods and services purchased to meet the requirements of rule
211(h)(1)-2, 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 in Table 1 above, Commission staff estimates that the annual cost of
outside services associated with rule 211(h)(1)-2 would be approximately $44,640 per adviser
and the total annual external cost burden for rule 211(h)(1)-2 would be $112,403,250.
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
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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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