Rule 211(h)(2)-3 (P-PFA) Supporting Statement

OMB CONTROL NUMBER: 3235-XXXX
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 211(h)(2)-3 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)-3 2 to prohibit all private fund advisers
from providing preferential terms to certain investors regarding redemption or information about
portfolio holdings or exposures. The rule would also prohibit these advisers from providing any
other preferential treatment to any investor in the private fund unless the adviser provides written
disclosures to prospective and current investors in a private fund regarding all preferential
treatment the adviser or its related persons are providing to other investors in the same fund. For
prospective investors, the new rule would require advisers to provide the written notice prior to
the investor’s investment in the fund. For current investors, the new rule would require advisers
to distribute an annual update regarding any preferential treatment provided since the last notice,
if any.
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 new rule 211(h)(2)-3 is to protect investors and serve the public interest
by requiring disclosure of preferential treatment afforded to certain investors. The new rule
would increase transparency in order to better inform investors regarding the breadth of
preferential terms, the potential for those terms to affect their investment in the private fund, and
the potential costs (including compliance costs) associated with these preferential terms. Also,
this disclosure would help investors shape the terms of their relationship with the adviser of the
private fund.

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 275.211(h)(2)-3.

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3.

Consideration Given to Information Technology

Rule 211(h)(2)-3 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) to retain copies of all written notices sent to current and prospective investors in
a private fund pursuant to rule 211(h)(2)-3; and (ii) retain copies of a record of each addressee
and the corresponding dates sent, addresses, and delivery method for each addressee. 3
4.

Duplication

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

Effect on Small Entities

Rule 211(h)(2)-3 would have an impact on all investment advisers to private funds,
regardless of whether they are registered with the Commission, one or more state securities
authorities, or are unregistered. It is difficult to estimate the number of advisers not registered
with the Commission that have private fund clients. However, we are able to provide the
following estimates based on IARD data: as of November 30, 2021, there are 5,022 exempt
reporting advisers (“ERAs”), all of whom advise private funds, by definition. All ERAs would,
therefore, be subject to the rules that would apply to all private fund advisers. We estimate that
there are no ERAs that would meet the definition of “small entity.” We do not have a method for
estimating the number of state-registered advisers to private funds that would meet the definition
of “small entity.”
Rule 211(h)(2)-3 would also apply to other advisers that are not registered with the SEC
or with the states and that do not make filings with either the SEC or states. This includes foreign
private advisers, advisers that are entirely unregistered, and advisers that rely on the intrastate
exemption from SEC registration and/or the de minimis exemption from SEC registration. We
are unable to estimate the number of advisers in each of these categories because these advisers
do not file reports or other information with the SEC and we are unable to find reliable, public
information. As a result, our estimates are based on information from SEC-registered advisers to
private funds, ERAs (at the state and Federal levels), and state-registered advisers to private
funds.
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)-3. As discussed above, we estimate that there are no ERAs that would meet the
definition of “small entity” and we do not have a method for estimating the number of stateregistered advisers to private funds that would meet the definition of “small entity.” As discussed
below, rule 211(h)(2)-3 under the Advisers Act would create a new annual burden of
approximately 31.01 hours per adviser, or 899.29 hours in aggregate for small advisers. We
therefore expect the annual monetized aggregate cost to small advisers associated with our
proposed amendments would be $374,569.51.

3

See proposed rule 204-2(a)(7)(v).

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6.

Consequences of Not Conducting Collection

The collection of information is necessary to provide private fund investors with
information about their private fund investments. The consequences of not collecting this
information would be that investors and prospective investors may not have the information they
need in order to evaluate the adviser’s business practices, whether or not to select the adviser
and, if selected, 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)(2)-3. Before
adopting rule 211(h)(2)-3, 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)-3 would be by delivery of written
disclosures to all prospective and current investors of all preferential treatment that an adviser or
its related persons are providing to other investors in the same fund. 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 4 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 12,500 investment advisers
that provide advice to private funds. We estimate that these advisers would, on average, each
provide advice to 7 private funds. We further estimate that these private funds would, on
average, each have a total of 63 investors. As a result, an average private fund adviser would
4

44 U.S.C. 3501 et seq.

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have a total of 441 investors across all private funds it advises. As noted above, because the
information collected pursuant to rule 211(h)(2)-3 requires disclosures to private fund investors
and prospective 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 the rule.

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Rule 211(h)(2)-3 Estimates
Internal
initial
burden
hours

Internal
annual
burden
hours

Wage rate1

Internal time cost

Annual external cost
burden

PROPOSED ESTIMATES

Preparation of
written notice

Provision/distribution
of written notice

4 hours

3.3 hours2

0.25
hours

1.13 hours4

$424.50
(blended
rate for
compliance
attorney
($373) and
assistant
general
counsel
($476))
$64 (rate for
general
clerk)

$1,400.85

$4963

$72.32

Total new annual
burden per private
fund

4.43 hours

$1,473.17

$496

Avg. number of
private funds per
adviser

7 private
funds

7 private funds

7 private funds

Number of advisers

12,500
advisers

12,500 advisers

9,375 advisers5

Total new annual
burden

387,625
hours

$128,902,375

$32,550,000

Notes:
1. 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 2 hours of ongoing annual burden hours and assumes
notices would be issued once annually to existing investors and once quarterly for prospective investors. The estimate of 3.3 hours is based on
the following calculation: ((4 initial hours /3 years) + 2 hours of additional ongoing burden hours) = 3.3 hours. The burden hours associated with
reviewing preferential treatment provided to other investors in the same fund and updating the written notice takes into account that (i) most
closed-end funds would only raise new capital for a finite period of time and thus the burden hours would likely decrease after the fundraising
period terminates for such funds since they would not continue to seek new investors and would not continue to agree to new preferential
treatment for new investors and (ii) most open-end private funds continuously raise capital and thus the burden hours would likely remain the
same year over year since they would continue to seek new investors and would continue to agree to preferential treatment for new investors.
3. 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.
4. This includes the internal initial burden estimate annualized over a three-year period, plus 1.05 hours of ongoing annual burden hours. The
estimate of 1.13 hours is based on the following calculation: ((0.25 initial hours /3 years) + 1.05 hours of additional ongoing burden hours) = 1.13
hours.
5. We estimate that 75% of advisers will use outside legal services for these collections of information. This estimate takes into account that
advisers may elect to use outside legal services (along with in-house counsel), based on factors such as adviser budget and the adviser’s standard
practices for using outside legal services, as well as personnel availability and expertise.

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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)-3, 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 211(h)(2)-3 would be approximately $3,472 per adviser and the total annual
external cost burden for rule 211(h)(2)-3 would be $32,550,000.
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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