Supporting Statement_Rule 3a-4

OMB CONTROL NUMBER: 3235-0459
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
RULE 3a-4
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 3a-4 (17 CFR 270.3a-4) under the Investment Company Act of 1940 (15 U.S.C. 80a)
(“Investment Company Act” or “Act”) provides a nonexclusive safe harbor from the definition of
investment company under the Act for certain investment advisory programs. These programs, which
include “wrap fee” programs, generally are designed to provide professional portfolio management
services on a discretionary basis to clients who are investing less than the minimum investments for
individual accounts usually required by the investment adviser but more than the minimum account
size of most mutual funds. Under wrap fee and similar programs, a client’s account is typically
managed on a discretionary basis according to pre-selected investment objectives. Clients with similar
investment objectives often receive the same investment advice and may hold the same or
substantially similar securities in their accounts. Because of this similarity of management, some of
these investment advisory programs may meet the definition of investment company under the Act.
In 1997, the Commission adopted rule 3a-4, which clarifies that programs organized and
operated in accordance with the rule are not required to register under the Investment Company Act or
comply with the Act's requirements.1 These programs differ from investment companies because,
among other things, they provide individualized investment advice to the client. The rule’s provisions
have the effect of ensuring that clients in a program relying on the rule receive advice tailored to the
client’s needs.

1

Status of Investment Advisory Programs Under the Investment Company Act of 1940, Investment Company Act
Rel. No. 22579 (Mar. 24, 1997) [62 FR 15098 (Mar. 31,1997)] (“Adopting Release”). In addition, there are no
registration requirements under section 5 of the Securities Act of 1933 for programs that meet the requirements of
rule 3a-4. See 17 CFR 270.3a-4, introductory note.

For a program to be eligible for the rule’s safe harbor, each client’s account must be managed
on the basis of the client’s financial situation and investment objectives and in accordance with any
reasonable restrictions the client imposes on managing the account. When an account is opened, the
sponsor2 (or its designee) must obtain information from each client regarding the client’s financial
situation and investment objectives, and must allow the client an opportunity to impose reasonable
restrictions on managing the account.3 In addition, the sponsor (or its designee) must contact the
client annually to determine whether the client’s financial situation or investment objectives have
changed and whether the client wishes to impose any reasonable restrictions on the management of the
account or reasonably modify existing restrictions. The sponsor (or its designee) must also notify the
client quarterly, in writing, to contact the sponsor (or its designee) regarding changes to the client’s
financial situation, investment objectives, or restrictions on the account’s management.4
Additionally, the sponsor (or its designee) must provide each client with a quarterly statement
describing all activity in the client's account during the previous quarter. The sponsor and personnel of
the client’s account manager who know about the client’s account and its management must be
reasonably available to consult with the client. Each client also must retain certain indicia of
ownership of all securities and funds in the account.
2.

Purpose and Use of the Information Collection

The requirement that the sponsor (or its designee) obtain information about each new client’s
financial situation and investment objectives when their account is opened is designed to ensure that

2

For purposes of rule 3a-4, the term “sponsor” refers to any person who receives compensation for sponsoring,
organizing or administering the program, or for selecting, or providing advice to clients regarding the selection of,
persons responsible for managing the client’s account in the program.

3

Clients specifically must be allowed to designate securities that should not be purchased for the account or that
should be sold if held in the account. The rule does not require that a client be able to require particular securities
be purchased for the account.

4

The sponsor also must provide a means by which clients can contact the sponsor (or its designee).

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the investment adviser has sufficient information regarding the client’s unique needs and goals to
enable the portfolio manager to provide individualized investment advice. The sponsor is required to
contact clients annually and provide them with quarterly notices to ensure that the sponsor has current
information about the client’s financial status, investment objectives, and restrictions on management
of the account. Maintaining current information enables the portfolio manager to evaluate each client’s
portfolio in light of the client’s changing needs and circumstances. The requirement that clients be
provided with quarterly statements of account activity is designed to ensure each client receives an
individualized report, which the Commission believes is a key element of individualized advisory
services.
3.

Consideration Given to Information Technology

Quarterly statements to clients are generally mailed, physically or electronically, to clients, and
quarterly notices must be provided in writing. In addition, rule 3a-4 gives sponsors flexibility in the
manner in which they comply with the requirements for the initial information collection or annual
client contact. The Adopting Release specifically notes that the initial information collection and
annual client contact can be done in-person, by telephone or through questionnaires.5
4.

Duplication

The Commission periodically evaluates rule-based reporting and recordkeeping requirements
for duplication, and reevaluates them whenever it proposes a rule or a change in a rule. Rule 3a-4 does
not require duplicative reporting or recordkeeping.
5.

Effect on Small Entities

The Commission does not believe that compliance with rule 3a-4 is unduly burdensome for
large or small entities. The rule’s requirements are consistent with providing individualized

5

See Adopting Release, supra note 1, at n.33 and text following n.36.

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investment advice.6 Moreover, sponsors that find the requirements of the rule to be overly
burdensome are not required to operate their investment advisory programs in reliance on the safe
harbor provided by the rule. Failure to operate an investment advisory program in accordance with
rule 3a-4 does not necessarily indicate that the program is an investment company.
6.

Consequences of Not Conducting Collection

Rule 3a-4’s requirement for sponsors to obtain information regarding each new client’s
financial situation and investment goals is a one-time obligation incurred when a new client opens an
account. The requirements for annual and quarterly client contact reflect the view that without regular
contact with clients, portfolio managers are unlikely to have current information regarding each
client’s financial situation and investment objectives, which the managers need in order to provide
individualized investment advice. The requirement for quarterly account activity statements also
enables the portfolio manager to be familiar with the client’s account and its
management. This requirement also provides current information to clients about their accounts,
which might prompt them to update the sponsor regarding changing financial situations or goals.
7.

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

None.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information requirements in
rule 3a-4 before it submitted this request for extension and approval to OMB. The Commission
received no comments in response to this request.
The Commission and staff of the Division of Investment Management also participate in an

6

Rule 3a-4 is also consistent with a series of no-action letters the Commission’s staff issued before the rule was
adopted. Compliance with the rule generally should not be burdensome to those sponsors that operated their
programs in a manner consistent with these previously issued no-action positions. In addition, sponsors typically
already provide quarterly statements to clients, so the burden of the quarterly activity report is likely limited.

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ongoing dialogue with representatives of the investment company industry through public
conferences, meetings, and informal exchanges. These forums provide the Commission and the staff
useful means to identify and address paperwork burdens that may confront the industry.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

No information of a sensitive nature will be required under this collection of information.
The information collection collects basic Personally Identifiable Information (“PII”) that may include
financial accounts and financial transactions. 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. A System of Records Notice has been published
in the Federal Register at (SEC-69) 83 FR 6892 and can also be found at
https://www.sec.gov/about/privacy/secprivacyoffice.htm.
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 19957 and are not derived from a comprehensive or even representative
survey or study of the cost of Commission rules and forms.

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Table 1: Rule 3a-4 burden of Information collection for certain investment
advisory programs

Prepare,
conduct,
and/or review
initial
interviews
with new
clients
annually

Estimated
Responses
3,073,7969

Estimated Burden Hours

Estimated Cost Burdens8

1.3 annual hours x 3,073,796 = 3,995,934.8
annual hours
for an operations specialist

3,995,934 annual hours x $168 per hour =
$671,316,912 annual costs for an operations
specialist

.2 hours x 3,073,796 support staff time =
614,759.2 annual hours for a general clerk
3,995,934.8 + 614,759 = 4,610,694

614,759 annual hours x $57 per hour =
$35,041,263 annual costs for a general clerk

$671,316,912 + $35,041,263
$706,358,175

=

Totals

3,073,796 total
annual
estimated
responses

4,610,694 total annual estimated burden
hours10

$706,358,175 total annual estimated costs

Prepare,
conduct,
and/or review
annual

31,208,571
(estimated
existing
clients)11

.83 annual hours x 31,208,571 = 25,903,113.9
annual hours for an operations specialist

25,903,113.9 annual hours x $168 per hour =
$4,351,723,135.26 annual
costs for an operations specialist

.17 x 31,208,571

8

The Commission’s estimate concerning the wage rate is based on salary information for the securities industry
compiled by the Securities Industry and Financial Markets Association. The cost burdens for professional
personnel are based on SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified
for 2020 by the Commission staff to account for an 1800-hour work –year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead and the cost burdens for clerical personnel are
based on SIFMA's Office Salaries in the Securities Industry 2013, modified for 2021 by Commission staff to
account for an 1800-hour work-year and inflation, and multiplied by 2.93 to account for bonuses, firm size,
employee benefits and overhead.

9

These estimates are based on the number of new clients expected due to average year-over-year growth in
individual clients from Form ADV Item 5D(a)(1) and (b)(1) (about 9%) and an assumed rate of yearly client
turnover of 10%.

10

These estimates are based upon consultation with investment advisers that operate investment advisory programs
that rely on rule 3a-4.

11

These estimates are based on an analysis of the number of individual clients from Form ADV Item 5D(a)(1) and
(b)(1) of advisers that report they provide portfolio management to wrap programs as indicated in Form ADV
Item 5I(2)(b) and (c), and the number of individual clients of advisers that identify as internet advisers in Form
ADV Item 2A(11). From analysis comparing reported individual client assets in Form ADV Item 5D(a)(3) and
5D(b)(3) to reported wrap portfolio manager assets in Form ADV Item 5I(2)(b) and (c), we discount the estimated
number of individual clients of non-internet advisers providing portfolio management to wrap programs by 10%.

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interviews
with
continuing
clients

support staff time = 5,305,457.07 annual hours
for a general clerk

5,305,457.07 annual hours x $57 per hour =
$302,411,052.99 annual costs
for a general clerk

25,903,113.9 + 5,305,457.07 = 31,208,571

$4,351,723,135.2 + $302,411,052.99 =
$4,654,134,188.19
$3,965,985,198.48 total annual estimated
costs

Totals

31,208,571
total annual
estimated
responses

31,208,571 total annual estimated burden
hours12

Prepare and
mail each
quarterly
client account
statement,
including the
notice to
update
information,
annually
Total

34,282,367
total clients x 4
statements =
137,129,468

137,129,468 x .25 hours = 34,282,367 hours
for a general clerk

34,282,367 burden hours x $57 =
$1,954,094,919 annual costs for a general
clerk

137,129,468
estimated
annual
responses

34,282,367 estimated annual hours

$1,954,094,9198 estimated annual costs

TOTALS

3,073,796
+31,208,571+1
37,129,367=

4,610,694 + 31,208,571 + 34,282,367 =

$706,358,175 +
$4,654,134,188.19 +
$1,954,094,919 =

171,411,744
total estimated
annual
responses

12

70,101,632 total estimated annual burden
hours

See, supra n.10.

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$7,314,587,282 total estimated annual costs

Table 2: Change in Burden Estimates

Interview
new clients
Interview
continuing
clients
Prepare and
mail
quarterly
account
statements
Totals

Annual No. of Responses (in thousands)
Previously
Requested
Change
approved
3,531
3,074
-457

Annual Time Burden (thousands of hours)
Previously
Requested
Change
approved
5,297
4,611
-686

16,087

31,208

15,121

16,087

31,208

15,121

78,475

137,129

58,654

19,619

34,282

14,663

98,094

171,412

73,318

41,003

70,102

29,099

13.

Cost to Respondents

Rule 3a-4 does not impose any paperwork related cost burden not discussed in item 12 above.
We expect that sponsors mail quarterly account statements to their clients in the ordinary course of
business and therefore we do not believe the requirement in rule 3a-4 to mail quarterly client account
statements or quarterly notices would impose additional postage or printing costs.

14.

Cost to the Federal Government

The rule imposes no costs on the federal government.
15.

Changes in Burden

The total annual hour burden of 70,101,632 hours represents an increase of 29,098,484 hours
from the prior estimate of 41,003,148 hours. This increase is a result of the increase in the estimated
number of clients.

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16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exceptions to Certification Statement for Paperwork Reduction Act Submissions

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

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