Rule 211(h)(2)-4_Supporting Statement

OMB CONTROL NUMBER: 3235-xxxx
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 211(h)(2)-4 under the Investment Advisers Act of 1940
A. JUSTIFICATION
1. Necessity for the Information Collection
On July 26, 2023, the Securities and Exchange Commission (the “Commission” or
“SEC”) proposed new rule 275.211(h)(2)-4 (“rule 211(h)(2)-4”) under Section 211 of the
Investment Advisers Act of 1940 (the “Advisers Act”) that would require investment advisers
registered, or required to register with the Commission, to identify and eliminate, or neutralize
the effects of, conflicts of interest associated with the use of covered technologies in investor
interactions because the effects of these conflicts of interest are contrary to the public interest
and the protection of investors. 1 Proposed rule 211(h)(2)-4 would contain certain requirements as
described below.
Elimination, or neutralization of effect of, conflicts of interest. Proposed rule 211(h)(2)4(b) would require an adviser to (i) evaluate any use or reasonably foreseeable potential use by
the adviser or its associated person of a covered technology in any investor interaction to identify
any conflict of interest 2 associated with that use or potential use; (ii) determine whether any such
conflict of interest places or results in placing the adviser’s or its associated person’s interest
ahead of the interest of investors; and (iii) eliminate, or neutralize the effect of, those conflicts of

1

Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and
Investment Advisers, Release No. IA- 6353 (July 26, 2023) [88 FR 53960 (Aug. 9, 2023)], available at
https://www.sec.gov/files/rules/proposed/2023/34-97990.pdf.

2

As used in the proposed rule, the term “associated person” means a natural person who is a “person
associated with an investment adviser” as defined in section 202(a)(17) of the Advisers Act. Covered
technology, conflict of interest, investor interaction are each defined terms under the proposed rules. See
proposed rule 211(h)(2)-4(a).

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interest that place the adviser’s or its associated person’s interest ahead of the interest of
investors. 3
Policies and procedures. Proposed rule 211(h)(2)-4(c) would require a firm that has any
investor interaction using covered technology to adopt and implement written policies and
procedures reasonably designed to achieve compliance with the proposed conflicts rule,
including: (i) a written description of the process for evaluating any use (or reasonably
foreseeable potential use) of a covered technology in any investor interaction; (ii) a written
description of any material features of any covered technology used in any investor interaction
and of any conflicts of interest associated with that use; (iii) a written description of the process
for determining whether any conflict of interest identified pursuant to the proposed rule results in
an investor interaction that places the interest of the adviser or person associated with the adviser
ahead of the interests of the investor; (iv) a written description of the process for determining
how to eliminate, or neutralize the effect of, any conflicts of interest determined pursuant to
proposed rule 211(h)(2)-4 to result in an investor interaction that places the interest of the adviser
or its associated person ahead of the interests of the investor; and (v) a review and written
documentation of that review, no less frequently than annually, of the adequacy of the policies
and procedures established pursuant to the proposed rule and the effectiveness of their
implementation as well as a review of the written descriptions established pursuant to the
proposed rule. 4

3
4

See proposed rule 211(h)(2)-4(b).
See proposed rule 211(h)(2)-4(c).

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The requirements under proposed rule 211(h)(2)-4(c) would result in a new “collection of
information” within the meaning of the Paperwork Reduction Act of 1995. 5 The title of the new
collection of information we proposed is “Rule 211(h)(2)-4 under the Investment Advisers Act.”
OMB has not yet assigned a control number for “Rule 211(h)(2)-4 under the Investment
Advisers Act.” An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless it displays a currently valid OMB number.
2. Purpose and Use of the Information Collection
These proposed collections are designed to require firms to have an established framework
for eliminating or neutralizing conflicts of interest that could harm clients and which would assist
advisers in complying with the requirements under proposed 211(h)(2)-4(b). Additionally, the
Commission’s staff could use the information obtained through these collections in its
enforcement, regulatory, and examination programs. The respondents to these collections of
information requirements would be investment advisers that are registered or required to be
registered under the Advisers Act that used covered technologies in investor interactions, which
would likely include all investment advisers registered with the Commission.
The information collected takes the form of records retained by respondents. Responses
provided to the Commission in the context of its examination and oversight program are

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44 U.S.C. 3501 to 3520. The requirements under proposed rule 211(h)(2)-4(b) do not constitute an
independent information collection and, to the extent they would, the process advisers would engage in to
comply with the policies and procedures requirements under proposed 211(h)(2)-4(c), and the information
collection burden related thereto, are inextricable from any information collection burden under proposed
211(h)(2)-4(b). Therefore, the information collection burden resulting from the policies and procedures
required under the proposed rule would constitute the full burden of the rules.

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generally kept confidential subject to the applicable law. 6 This collection of information is found
at 17 CFR 275.211(h)(2)-4 and is mandatory.
3. Consideration Given to Information Technology
The Commission’s use of computer technology in connection with this information
collection, which has been previously approved by OMB, would not change. The Commission
currently permits advisers to maintain records required by the rule through electronic media. 7
4. Duplication
The collection of information requirements of the proposed rule are not duplicated
elsewhere. The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication, and reevaluates these requirements whenever it adopts amendments
to its rules.
5. Effect on Small Entities
The requirements of the proposed rule are the same for all investment advisers registered
with the Commission, including those that are small entities. The requirements of the proposed
rule will not distinguish between small entities and other investment advisers because the
protections of the Advisers Act are intended to apply equally to retail investor clients of both
large and small firms. Moreover, it would defeat the purpose of the rule to exempt small entities
from these requirements. 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

See section 210(b) of the Advisers Act [15 U.S.C. 80b-10(b)].

7

See Electronic Recordkeeping by Investment Companies and Investment Advisers, Investment Advisers
Act Release No. 1945 (May 24, 2001) 66 FR 29224 (May 30, 2001).

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6. Consequences of Not Conducting Collection
Less frequent information collection will be incompatible with the objectives of the
proposed rule and would hinder the Commission’s oversight and examination program for
investment advisers and thereby reduce the protection to investors.
7. Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)
Not applicable.
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 proposed rule
211(h)(2)-4, including the collection of information requirements resulting from the proposed
rule. Before adopting the rule, the Commission will receive and evaluate public comments on
the proposed amendments and their associated collection of information requirements.
9. Payment or Gift
None.
10. Confidentiality
Responses provided to the Commission pursuant to proposed rule 211(h)(2)-4 in the
context of the Commission’s examination and oversight program are generally kept confidential
subject to the applicable law.
11. Sensitive Questions
Whether information of a sensitive nature, including social security numbers, will be
required under this collection of information depends on a particular adviser’s investor
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interactions using covered technology. The information collection is likely to collect basic
Personally Identifiable Information (“PII”) that may include names, job titles, work addresses,
and phone numbers. However, the agency has determined that the information collection does
not constitute a system of record for purposes of the Privacy Act. Information is not retrieved by
a personal identifier.
12. Estimate of Hour and Cost 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 8 and are not derived from a comprehensive or even
representative survey or study of the cost of Commission rules and forms.
The respondents to this collection of information are investment advisers registered or
required to be registered with the Commission that use covered technology in investor
interactions. All such advisers will be subject to the proposed rule. As of February 2023, there
were 15,402 advisers registered with the Commission. We estimate that substantially all of these
advisers would be subject to the proposed rule. The table below summarizes the initial and
ongoing annual burden estimates associated with the proposed rule per adviser. We have made
certain estimates of the burdens associated with the proposed amendments solely for the purpose
of this PRA analysis. The application of the provisions of the proposed rule—and thus the extent
to which there are collections of information and their related burdens—would be contingent on
a number of factors, such as, among others, the types of covered technologies an adviser uses, an
adviser’s business model, the number of clients of the adviser, the extent, nature and frequency
of investor interactions, and the nature and extent of an adviser’s conflicts. Because of the wide

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44 U.S.C. 3501 et seq.

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diversity of services and relationships offered by investment advisers, we expect that the
obligations imposed by the proposed rule would, accordingly, vary substantially among advisers.

Table 1: Rule 211(h)(2)-4 PRA Estimates
Internal initial
burden hours1

Adopting and
implementing
policies and
procedures

Preparation of
written descriptions6

Annual review of
policies and
procedures and
written descriptions

Total new annual
burden

21 hours

60 hours

Internal annual
Wage rate3
burden hours2
PROPOSED ESTIMATES
$487 (blended rate
for senior
corporate and
information
technology
managers, assistant
general counsel,
and compliance
attorney)

30 hours

$446 (blended rate
for senior
corporate and
information
technology
managers and
staff, assistant
general counsel,
and compliance
attorney)
$446 (blended rate
for senior
corporate and
information
technology
managers and
staff, assistant
general counsel,
and compliance
attorney)

42.5 hours

5 hours

77.5 hours (equal to
the sum of the
above boxes)7

Internal time
cost4

Annual external
cost burden5

$14,610
(equal to
the
internal
annual
burden x
the wage
rate)

$0

$18,955
(equal to
the
internal
annual
burden x
the wage
rate)

$0

$2,230
(equal to
the
internal
annual
burden
hours x
the wage
rate)

$0

$35,795 (equal to
the sum of the
above boxes)8

7

$0 (equal to
the sum of
the above
four boxes)

Notes:
1.

Most advisers using covered technology already have certain policies and procedures in place relevant to these
technologies so as to fulfill the adviser’s fiduciary duty, comply with the Federal securities laws, and protect clients
from potential harm. In reaching our estimates, we considered that advisers relying more heavily on complex covered
technologies may exceed this average, while advisers relying less heavily on these technologies may fall below this
average.

2.

Totals for this category include internal initial hour burden estimates annualized over a three-year period.

3.

The Commission’s estimates of the relevant wage rates are based on salary information for the securities industry
compiled by Securities Industry and Financial Markets Association’s Office Salaries in the Securities Industry 2013, as
modified by Commission staff for 2023 (“SIFMA Wage Report”). The estimated figures are modified by firm size,
employee benefits, overhead, and adjusted to account for the effects of inflation.

4.

All costs calculated are rounded to the nearest dollar.

5.

Firms may incur third-party costs in connection with the proposed conflicts rules but, due to data limitations, for the
purpose of this Paperwork Reduction Act analysis, we estimate the full cost of compliance to be internal.

6.

Includes all written descriptions to be required under proposed rules 275.211(h)(2)-4(c)(1) through (3).

7.

77.5 hours per adviser x 15,402 advisers = 1,193,655 aggregate burden hours.

8.

$35,795 per adviser x 15,402 advisers = $551,314,590 aggregate internal monetized cost.

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13. Cost to Respondents
Cost burden is the cost of goods and services purchased to meet the requirements of
proposed rule 211(h)(2)-4, 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, we estimate that the annual external cost associated
with the proposed rule 211(h)(2)-4 is $0.
14. Cost to Federal Government
There are no additional costs to the federal government directly attributable to proposed
rule 211(h)(2)-4.
15. Change in Burden
Not applicable. This is the first request for approval of a collection of information for this
proposed rule.
16. Information Collection Planned for Statistical Purposes
None.
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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