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

OMB CONTROL NUMBER: 3235-XXXX

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 211(h)(2)-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 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)(2)-2 2 to prohibit an adviser registered or
required to be registered with the Commission from completing an adviser-led secondary
transaction with respect to any private fund, unless the adviser, prior to the closing of the
transaction, distributes to investors in the private fund a fairness opinion from an independent
opinion provider and a summary of any material business relationships the adviser or any of its
related persons has, or has had within the past two years, with the independent opinion provider.
This rule would provide an important check against an adviser’s conflicts of interest in
structuring and leading a transaction from which it may stand to profit at the expense of private
fund investors and would help ensure that private fund investors are offered a fair price for their
private fund interests.
The collection of information is necessary to provide investors with information about
securities transactions in which they may engage. Moreover, this requirement is designed to help
ensure that investors receive the benefit of an independent price assessment, which is designed to
improve their decision-making ability and their overall confidence in the transaction.
2.

Purpose and Use of the Information Collection

Rule 211(h)(2)-2 would require an adviser to obtain a fairness opinion in connection with
certain adviser-led secondary transactions where an adviser offers fund investors the option to
sell their interests in the private fund, or to exchange them for new interests in another vehicle
advised by the adviser. This would provide an important check against an adviser’s conflicts of
interest in structuring and leading a transaction from which it may stand to profit at the expense
of private fund investors. Moreover, as noted above, this requirement is designed to help ensure
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)(2)-2.

1

that investors receive the benefit of an independent price assessment, which will improve their
decision-making ability and their overall confidence in the transaction.
3.

Consideration Given to Information Technology

Rule 211(h)(2)-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 retain a copy of any fairness opinion and summary of material business
relationships distributed pursuant to the rule along with a record of each addressee and the
corresponding date(s) sent, address(es), and delivery method(s) for each such addressee. 3
4.

Duplication

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

Effect on Small Entities

Rule 211(h)(2)-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)(2)-2. As discussed below, we expect
that rule 211(h)(2)-2 would create a new annual burden of approximately 7 hours per adviser,
which totals 21 hours in aggregate for small advisers. 4 We therefore expect the annual monetized
aggregate cost to small advisers associated with rule 211(h)(2)-2 would be $129,805.92. 5 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 with information about the adviser, its business, and its conflicts of interest.
7.

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

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

3

See proposed rule 204-2(a)(23).

4

We assume that 10% (~3) of all small advisers will conduct an adviser-led secondary transaction
on an annual basis.

5

This includes the internal time cost and the annual external cost burden, as set forth below.

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)(2)-2. Before
adopting rule 211(h)(2)-2, the Commission will receive and evaluate public comments on the
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)(2)-2 would be by delivery of
information and documentation to private fund 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 6 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. 7 Of these 5,037 advisers, we
estimate that 10%, or approximately 504 advisers, conduct an adviser-led secondary transaction
each year. Of these advisers, we further estimate that each conducts one adviser-led secondary
transaction each year. As a result, an adviser would have obligations under the rule with regard
to 67 investors. 8 As noted above, because the information collected pursuant to rule 211(h)(2)-2
would require disclosures to private fund investors, these disclosures would not be kept
confidential.

6

44 U.S.C. 3501 et seq.

7

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

8

See section V.B. of Private Fund Advisers; Documentation of Registered Investment Adviser
Compliance Reviews.

3

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)(2)-2.

4

Table 1: Rule 211(h)(2)-2 Estimates
Internal
initial
burden
hours

Internal
annual
burden hours

Wage rate1

Internal time
cost

Annual external
cost burden

$1,506.64

$40,0003

$849

$4964

$64

$0

7 hours

$2,419.64

$40,849

Number of advisers

504
advisers5

504 advisers

504 advisers

Total new annual burden

3,528 hours

$1,219,498.56

$20,587,896

PROPOSED ESTIMATES

Preparation/Procurement
of fairness opinion

0 hours

4 hours2

Preparation of material
business relationship
summary

0 hours

2 hours

Distribution of fairness
opinion and material
business relationship
summary

0 hours

1 hour

Total new annual burden
per private fund

$376.66
(blended rate for
compliance
attorney ($373),
assistant general
counsel ($476),
and senior
business analyst
($281))
$424.50
(blended rate for
compliance
attorney ($373)
and assistant
general counsel
($476))

$64 (rate for
general clerk)

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. Includes the time an adviser would spend gathering materials to provide to the independent opinion provider so that the latter can prepare the
fairness opinion.
3. This estimated burden is based on our understanding of the general cost of a fairness opinion in the current market. The cost will vary based
on, among other things, the complexity, terms, and size of the adviser-led secondary transaction, as well as the nature of the assets of the fund.
4. This estimated burden is based on the estimated wage rate of $496/hour, for 1 hours, for outside legal services at the same frequency as the
internal burden hours estimate. 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.
5. We estimate that 10% of all registered private fund advisers conduct in an adviser-led secondary transaction each year.

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13.

Cost to Respondents

Cost burden is the cost of goods and services purchased to meet the requirements of rule
211(h)(2)-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)(2)-2 would be approximately $40,849 per applicable
adviser and the total annual external cost burden for rule 211(h)(2)-2 would be $20,587,896. 9
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.

9

As noted above, we estimate that 10% of all registered private fund advisers conduct in an
adviser-led secondary transaction each year.

6