[Federal Register Volume 89, Number 126 (Monday, July 1, 2024)]
[Notices]
[Pages 54596-54602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-14363]
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SECURITIES AND EXCHANGE COMMISSION
[SEC File No. 270-xxx, OMB Control No. 3235-0784]
Proposed Collection; Comment Request; Extension: Rule 206(4)-1
Upon Written Request, Copies Available From: Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736
Notice is hereby given that, pursuant to the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange
Commission (the ``Commission'' or ``SEC'') is soliciting comments on
the collection of information summarized below. The Commission plans to
submit this existing collection of information to the Office of
Management and Budget (``OMB'') for extension and approval.
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\37\ 17 CFR 200.30-3(a)(12).
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Rule 206(4)-1 under the Investment Advisers Act of 1940 (``Advisers
Act''), known as the ``marketing rule,'' addresses advisers marketing
their services to clients and investors.\1\ Specifically, the marketing
rule states that, as a means reasonably designed to prevent fraudulent,
deceptive, or manipulative acts, practices, or courses of business
within the meaning of section 206(4) of the Act, it is unlawful for any
investment adviser registered or required to be registered under
section 203 of the of the Advisers Act, directly or indirectly, to
disseminate any advertisement that violates any of paragraphs (a)
through (d) of the rule, which include the rule's general prohibitions,
as well as conditions applicable to an adviser's use of testimonials,
endorsements, third-party ratings, and performance information.
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\1\ See 17 CFR 206(4)-1; Investment Adviser Marketing, Release
No. IA-5653 (Dec. 22, 2020) [86 FR 13024 (Mar. 5, 2021)] (the
``Adopting Release''); the Commission adopted amendments to Rule
206(4)-1 in 2020 that amended existing rule 206(4)-1 (the
``advertising rule''), which was adopted in 1961 to target
advertising practices that the Commission believed were likely to be
misleading, and replaced rule 206(4)-3 (the ``solicitation rule''),
which was adopted in 1979 to help ensure clients are aware that paid
solicitors who refer them to advisers have a conflict of interest;
see Adopting Release; see also 17 CFR 275.206(4)-1; Advertisements
by Investment Advisers, Release No. IA-121 (Nov. 1, 1961) [26 FR
10548 (Nov. 9, 1961)]; Requirements Governing Payments of Cash
Referral Fees by Investment Advisers, Release No. 688 (July 12,
1979) [44 FR 42126 (Jul 18, 1979)].
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Each requirement under the marketing rule that an adviser disclose
information, offer to provide information, or adopt policies and
procedures constitutes a ``collection of information'' requirement
under the Paperwork Reduction Act of 1995 (``PRA''). The respondents to
these collections of information requirements will be investment
advisers that are registered or required to be registered with the
Commission. As of September 2023, there were 15,555 investment advisers
registered with the Commission. Investment adviser marketing is not
mandatory. However, marketing is an essential part of retaining and
attracting clients and may be conducted easily through the internet and
social media. Accordingly, we estimate that all investment advisers
will disseminate at least one communication that meets the rule's
definition of ``advertisement'' and therefore be subject to the
requirements of the marketing rule.
Because the use of testimonials, endorsements, third-party ratings,
and performance results in advertisements is voluntary, the percentage
of investment advisers that would include these items in an
advertisement is uncertain. However, we have made certain estimates of
this data, as discussed below, solely for the purpose of this PRA
analysis.
The purpose of this collection of information is to provide
advisory clients, prospective clients, and the Commission with
information about an adviser's marketing practices. We use the
information to support and manage our regulatory, examination, and
enforcement programs. Clients use this information to determine whether
to hire an adviser.
This collection of information is found at 17 CFR.206(4)-1 and it
is mandatory. The information collected takes the form of records
retained by respondents and disclosures to respondents' clients,
potential clients, and the Commission.
General Prohibitions
The general prohibitions under the rule do not create a collection
of information and are, therefore, not discussed, with one exception.
The rule prohibits advertisements that include a material statement of
fact that the adviser does not have a reasonable basis for believing
that it will be able to substantiate upon demand by the Commission.
Advisers would be able to demonstrate this reasonable belief in a
number of ways.\2\ For example, they could make a record
contemporaneous with the advertisement demonstrating the basis for
their belief. An adviser might also choose to implement policies and
procedures to address how this requirement is met. This will create a
collection of information burden within the meaning of the PRA.
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\2\ See Adopting Release, supra footnote 1, at section II.B.2.
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As stated above, we estimate that all investment advisers will
disseminate at least one communication that meets the rule's definition
of ``advertisement'' and therefore be subject to the requirements of
the marketing rule. We also estimate that such advertisements will
include at least one statement of material fact that will be subject to
this general prohibition, for which an adviser will create and/or
maintain a record documenting its reasonable belief that it can
substantiate the statement. This estimate reflects that many types of
statements typically included in an advertisement (e.g. performance)
can likely be substantiated by other records that an adviser will be
required to create and maintain under the rule.\3\ Table 1 summarizes
the PRA estimates for the internal and external burdens associated with
this requirement.
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\3\ See id.
Table 1--General Prohibitions
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Annual
Internal hour Wage rate \1\ Internal time external cost
burden costs burden
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Estimates for Rule 204-1 for General Prohibitions
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Determine whether statements in an 0.5 x $372 (compliance $186 ..............
advertisement are material facts. 0.5 x manager). $220
$440 (compliance
attorney).
[[Page 54597]]
Creation and maintenance of 4 x $75 (general clerk).. $300 ..............
records substantiating material 1 x $84 (compliance $84
facts in any advertisements. clerk).
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Total burden per adviser...... 6 ..... ..................... $790 ..............
Total number of affected x 15,555 ..... ..................... x 15,555 ..............
advisers.
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Total burden for general 93,330 hours ..... ..................... $12,288,450 ..............
prohibitions.
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Notes:
\1\ See SIFMA Report, infra footnote 8.
Testimonials and Endorsements in Advertisements
Under the marketing rule, investment advisers are prohibited from
including in any advertisement, or providing any compensation for, any
testimonial or endorsement unless the adviser discloses, or the
investment adviser reasonably believes that the person giving the
testimonial or endorsement discloses: (i) clearly and prominently: (A)
that the testimonial was given by a current client or investor, or the
endorsement was given by a person other than a current client or
investor; (B) that cash or non-cash compensation was provided for the
testimonial or endorsement, if applicable; and (C) a brief statement of
any material conflicts of interest on the part of the person giving the
testimonial or endorsement resulting from the investment adviser's
relationship with such person; (ii) the material terms of any
compensation arrangement, including a description of the compensation
provided or to be provided, directly or indirectly, to the person for
the testimonial or endorsement; and (iii) a description of any material
conflicts of interest on the part of the person giving the testimonial
or endorsement resulting from the investment adviser's relationship
with such person and/or any compensation arrangement.\4\ The rule also
imposes an oversight obligation that requires that an investment
adviser have a reasonable basis to believe that the testimonial or
endorsement complies with the marketing rule and have a written
agreement with the person giving a testimonial or endorsement (except
for certain affiliated persons of the adviser) that describes the scope
of the agreed upon activities and the terms of the compensation for
those activities when making payments for compensated testimonials and
endorsements that are above the de minimis threshold.\5\ This
collection of information consists of two components: (i) the
requirement to disclose certain information in connection with the
testimonial and endorsement, and (ii) the requirement to oversee the
testimonial or endorsement, including a written agreement with certain
persons giving the testimonial or endorsement.
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\4\ Rule 206(4)-1(b)(1).
\5\ Rule 206(4)-1(b)(2).
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The marketing rule's definitions of testimonials and endorsements
generally contain three elements: (i) statements about the client's/
non-client's or investor's experience with the investment adviser or
its supervised persons, (ii) statements that directly or indirectly
solicit any prospective client or investor in a private fund for the
investment adviser, or (iii) statements that refer any prospective
client or investor in a private fund to the investment adviser.
We previously estimated that 50 percent of advisers will use a
testimonial or endorsement in their advertisements.\6\ However, we are
reducing this estimate to 21 percent in light of amendments to Form ADV
that became effective in 2021 that require advisers to provide
additional information regarding their marketing practices.\7\ We
continue to estimate that each adviser will use an average of five
promoters and use 35 testimonials or endorsements annually, which
includes testimonials and endorsements incorporated into an adviser's
own advertisement and those communicated by promoters directly.
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\6\ See Adopting Release, supra footnote 1, at section IV.B.
\7\ See Form ADV, Item 5.L (requiring an adviser to state, among
other things, whether any of its advertisements include performance
results, testimonials, endorsements, or third-party ratings).
Specifically, 3,231 advisers indicated that they use either
testimonials or endorsements in response to Item 5.L. 3,231
advisers/15,555 total advisers registered as of September 2023 =
approximately 21%; see also Adopting Release, supra footnote 1, at
section II.H.
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Under the marketing rule, an adviser that uses a testimonial or
endorsement will be required to disclose certain information at the
time it is disseminated. We estimate this burden at 0.20 hours per
disclosure and believe that advisers will incur this same burden each
year, since each testimonial and/or endorsement used will likely be
different and thus require updated disclosures. An investment adviser's
in-house compliance managers and compliance attorneys will likely
prepare disclosures, which will likely be included in the
advertisement.\8\
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\8\ We estimate the hourly wage rate for compliance manager is
$372 and a compliance attorney is $440; the hourly wages used are
from SIFMA's Management & Professional Earnings in the Securities
Industry 2013 (``SIFMA Report''), modified by 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.
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Some of these third-party testimonials and endorsements will
require delivery; thus, we estimate that 20 percent of the disclosures
would be delivered by the U.S. Postal Service, with the remaining 80
percent delivered electronically or as part of another delivery of
documents. For the 20% of advisers that will use physical mail, we
estimate that the average annual costs associated with printing and
mailing this information will be collectively $592 for all disclosure
documents associated with a single registered investment adviser.\9\
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\9\ We do not have specific data regarding how the cost of
printing and mailing the underlying information would differ, nor
are we able to specifically identify how the cost of printing and
mailing the underlying information might be affected by the rule;
for these reasons, we estimate $592 per year to collectively print
and mail, upon request, the underlying information associated with
hypothetical performance for purposes of our analysis; we previously
estimated this cost at $500 and are adjusting to account for
inflation between December of 2020 and January of 2024; see Adopting
Release, supra footnote 1, at section IV.B; U.S. Bureau of Labor
Statistics, CPI Inflation Calculator, https://www.bls.gov/data/inflation_calculator.htm; in addition, investors may also request to
receive the underlying information electronically; we estimate that
there would be negligible external costs associated with emailing
electronic copies of the underlying information.
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We estimate the average burden hours each year per adviser to
oversee testimonials and endorsements will be one hour for each
promoter, or five hours in total for each adviser that is subject to
this collection of
[[Page 54598]]
information.\10\ While the rule provides flexibility as to how advisers
conduct this oversight, we generally believe that this burden will
include contacting solicited clients, pre-reviewing testimonials or
endorsements, or other similar methods. Additionally, we estimate that
each adviser will incur an average burden hour of one hour for each
promoter, or five hours in total, to prepare the required written
agreements. In-house compliance managers and compliance attorneys are
likely to provide oversight of the third party testimonials and
endorsements and prepare the written agreements.
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\10\ This estimate is based on the following calculation: 1 hour
per each solicitor relationship x 5 promoter relationships.
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Finally, we are no longer including our prior estimate that each
adviser that uses a compensated testimonial or endorsement will incur
an initial burden of two hours to modify its policies and procedures to
reflect the adviser's oversight of testimonials and endorsements, as
this estimate related to initial burdens of the rule only. Table 2
summarizes the PRA estimates for the internal and external burdens
associated with these requirements.
Table 2--Testimonials and Endorsements
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Internal hour Internal time Annual external
burden Wage rate \1\ costs cost burden
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ESTIMATES FOR TESTIMONIALS AND ENDORSEMENTS
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Revise and update each required 0.1 hours x 35 x $372 (compliance $1,302
disclosure. disclosures. manager).
0.1 hours x 35 x $440 (compliance $1,540
disclosures. attorney).
Oversight of compensated 1 hours x 5 x $372 (compliance $1,860
testimonials and endorsements promoters. manager).
and preparation of written
agreements.
1 hours x 5 x $440 (compliance $2,200
promoters. attorney).
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Total burden per adviser... 17 hours.......... $6,902 $592
Total number of affected x 3,231........... x 3,231 x 3,231 (x 20% of
advisers. advisers that
will use
physical mail).
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Total burden for 54,927 hours...... $22,300,362 $382,550.
testimonials and
endorsements.
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Notes:
1. See SIFMA Report, supra footnote 8.
Third-Party Ratings in Advertisements
As referenced above, rule 206(4)-1(c) prohibits an investment
adviser from including a third-party rating in an advertisement unless
certain conditions are met, including that the adviser must clearly and
prominently disclose (or reasonably believe that the third-party rating
clearly and prominently discloses): (i) the date on which the rating
was given and the period of time upon which the rating was based, (ii)
the identity of the third-party that created and tabulated the rating,
and (iii) if applicable, that cash or non-cash compensation has been
provided directly or indirectly by the adviser in connection with
obtaining or using the third-party rating.
We previously estimated that approximately 50 percent of advisers
will use third-party ratings in advertisements, but we are reducing
this estimate to 15 percent.\11\ We continue to believe that these
advisers will typically use one third-party rating on an annual basis.
We are no longer including our prior estimate that advisers will incur
an initial internal burden of 3.0 hours to draft and finalize the
required disclosures for third-party ratings, as this estimate related
to initial burdens of the rule only. Because many of these ratings or
rankings are done yearly (e.g., 2018 Top Wealth Adviser), we continue
to estimate that an adviser that continues to use a third-party rating
will incur ongoing, annual costs of 0.75 burden hours to draft the
third-party rating disclosure updates.\12\ Table 3 summarizes the PRA
estimates for the internal and external burdens associated with these
requirements.
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\11\ See supra footnote 7 and accompanying text (explaining that
we have revised our estimates in light of additional information
that advisers must now report on Form ADV); specifically, 2,373
advisers indicated that they include third-party ratings in their
advertisements in response to Item 5.L of Form ADV. 2,373 advisers/
15,555 total advisers registered as of September 2023 =
approximately 15%; see also Adopting Release, supra footnote 1, at
section IV.B.
\12\ We believe that this burden will also be split evenly
between an adviser's compliance attorney and compliance manager.
Table 3--Third-Party Ratings
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Annual
Internal hour Wage rate \1\ Internal time external cost
burden costs burden
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ESTIMATES FOR THIRD PARTY RATINGS
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Update required disclosures....... 0.375 hours x $372 (compliance $139.50
manager).
0.375 hours x $440 (compliance $165
attorney).
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Total burden per adviser...... .75 hours $304.50
Total number of affected x 2,373 x 2,373
advisers.
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Total burden for third-party 1,780 hours $722,579
ratings.
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Notes:
1. See SIFMA Report, supra footnote 8.
[[Page 54599]]
Performance Advertising
The marketing rule imposes certain conditions on the presentation
of performance results in advertisements, as discussed above. Below we
discuss the conditions that create ``collection of information''
requirements within the meaning of the PRA. First, the rule prohibits
any presentation of gross performance unless the advertisement also
presents net performance that meets certain criteria.\13\ Second, the
rule prohibits any presentation of performance results of any portfolio
or any composite aggregation of related portfolios, other than any
private fund, unless the advertisement includes performance results of
the same portfolio or composite aggregation for one-, five-, and ten-
year periods, except that if the relevant portfolio did not exist for a
particular prescribed period, then the life of the portfolio must be
substituted for that period.\14\ Third, the rule prohibits an
advertisement from including related performance, unless it includes
all related portfolios, subject to a conditional exception.\15\ Fourth,
the rule prohibits an advertisement from including extracted
performance, unless the advertisement provides, or offers to provide
promptly, the performance results of the total portfolio from which the
performance was extracted.\16\ Fifth, the rule also prohibits an
advertisement from including predecessor performance, unless certain
conditions are satisfied.\17\ Finally, the rule requires that an
adviser that advertises hypothetical performance: (i) adopts and
implements policies and procedures reasonably designed to ensure that
the hypothetical performance is relevant to the likely financial
situation and investment objectives of the intended audience of the
advertisement; (ii) provide reasonably sufficient information to enable
the intended audience to understand the criteria used and assumptions
made in calculating such hypothetical performance; and (iii) provide
(or, if the intended audience is an investor in a private fund provide,
or offers to provide promptly) reasonably sufficient information to
enable the intended audience to understand the risks and limitations of
using such hypothetical performance in making investment decisions.
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\13\ Rule 206(4)-1(d).
\14\ Id. at (d)(2).
\15\ Id. at (d)(4).
\16\ Id. at (d)(5).
\17\ Id. at (d)(7).
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We previously estimated that 95 percent, or 13,038 advisers,
provide performance information in their advertisements, but we are
reducing this estimate to 40 percent.\18\ The estimated numbers of
burden hours and costs regarding performance results in advertisements
may vary depending on, among other things, the complexity of the
calculations, the type of performance and the risks that investors may
not understand the limitations of the information, and whether
preparation of the disclosures is performed by internal staff or
outside counsel.
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\18\ See supra note 7 and accompanying text (explaining that we
have revised our estimates in light of additional information that
advisers must now report on Form ADV); specifically, 6,186 advisers
indicated that they include performance results in their
advertisements in response to Item 5.L of Form ADV. 6,186 advisers/
15,555 total advisers registered as of September 2023 =
approximately 40%; see also Adopting Release, supra footnote 1, at
section IV.B.
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Presentation of Net Performance in Advertisements
We are no longer including our prior estimate that an investment
adviser that elects to present gross performance in an advertisement
will incur an initial burden of 15 hours in preparing net performance
for each portfolio, including the time spent determining and deducting
the relevant fees and expenses to apply in calculating the net
performance and then actually running the calculations, as this
estimate related to initial burdens of the rule only. Based on staff
experience, we estimate that the average investment adviser will
present performance for 3 portfolios over the course of a year,
excluding any related portfolios that an adviser may need to include
for purposes of presenting related performance.\19\ As noted above, we
estimate that 40 percent, or 6,186 advisers, provide performance
information in their advertisements and thus will be subject to this
collection of information burden.
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\19\ The burden associated with calculating net performance in
connection with presenting related performance is discussed below.
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We expect that the calculation of net performance may be modified
every time an adviser chooses to update the advertised performance. We
estimate that after initially preparing net performance for each
portfolio, investment advisers will incur a burden of 3 hours to update
the net performance for each subsequent presentation. For purposes of
this analysis, we estimate that advisers will update the relevant
performance of each portfolio 3.5 times each year.\20\
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\20\ We believe that this burden will be split evenly between an
adviser's compliance attorney and compliance manager (3 hours x 3.5
times per year = 10.5 hours; 10.5 hours/2 = 5.25 hours each).
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Time Period Requirement in Advertisements
We are no longer including our prior estimate that an investment
adviser that elects to present performance results in an advertisement
will incur an initial burden of 35 hours in preparing performance
results of the same portfolio for one-, five-, and ten-year periods
(excluding private funds), taking into account that these results must
be prepared on a net basis (and may also be prepared and presented on a
gross basis), as this estimate related to initial burdens of the rule
only. We estimate that after initially preparing one-, five-, and ten-
year performance for each portfolio, investment advisers will incur a
burden of 8 hours to update the performance for these time periods for
each subsequent presentation. For purposes of this analysis, we
estimate that advisers will update the relevant performance 3.5 times
each year.\21\
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\21\ We believe that this burden will be split evenly between an
adviser's compliance attorney and compliance manager (8 hours x 3.5
times per year = 28 hours; 28 hours/2 = 14 hours each).
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Related Performance
We are no longer including our prior estimate that an investment
adviser that elects to present related performance in an advertisement
will incur an initial burden of 30 hours, with respect to each
advertised portfolio or composite aggregation of portfolios, in
preparing the relevant performance of all related portfolios, as this
estimate related to initial burdens of the rule only.
We estimate that 40 percent of advisers (or 6,186 advisers) will
have other portfolios with substantially similar investment policies,
objectives, and strategies as those offered in the advertisement and
choose to include related performance.\22\ We estimate that after
initially preparing related performance for each portfolio or composite
aggregation of portfolios, investment advisers will incur a burden of 5
hours to update the performance for each subsequent presentation. We
continue to estimate that advisers will update the relevant related
performance 3.5 times each year.\23\
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\22\ See supra footnote 7 and accompanying text (explaining that
we have revised our estimates in light of additional information
that advisers must now report on Form ADV); we assume that all
advisers that indicated that they include performance results, see
supra footnote 18 and accompanying text, include related
performance.
\23\ We believe that this burden will be split evenly between an
adviser's compliance attorney and compliance manager (5 hours x 3.5
times per year = 17.5 hours; 17.5 hours/2 = 8.75 hours each).
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[[Page 54600]]
Extracted Performance
We are no longer including our prior estimate that an investment
adviser that elects to present extracted performance in an
advertisement will incur an initial burden of 10 hours in preparing the
performance results of the total portfolio from which the performance
is extracted in order to provide or offer to provide such performance
results to investors, as this estimate related to initial burdens of
the rule only. For purposes of this analysis, we assume that 40 percent
of advisers will include extracted performance.\24\ We estimate that
after initially preparing the performance of the total portfolio from
which extracted performance is extracted, investment advisers will
incur a burden of 2 hours to update the performance for each subsequent
presentation. For purposes of this analysis, we estimate that advisers
will update the relevant total portfolio performance 3.5 times each
year.\25\ We also estimate that registered investment advisers may
incur external costs in connection with the requirement to provide
performance results of a total portfolio from which extracted
hypothetical performance is extracted. We estimate that the average
annual costs associated with printing and mailing this information upon
request will be collectively $592 for all documents associated with a
single registered investment adviser.
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\24\ See supra footnote 7 and accompanying text (explaining that
we have revised our estimates in light of additional information
that advisers must now report on Form ADV); we assume that all
advisers that indicated that they include performance results, see
supra footnote 18 and accompanying text, include extracted
performance.
\25\ We believe that this burden will be split evenly between an
adviser's compliance attorney and compliance manager (2 hours x 3.5
times per year = 7 hours; 7 hours/2 = 3.5 hours each).
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Hypothetical Performance
We are no longing including our prior estimate that an investment
adviser that elects to present hypothetical performance in an
advertisement will incur an initial burden of 7 hours in preparing and
adopting policies and procedures reasonably designed to ensure that the
hypothetical performance is relevant to the likely financial situation
and investment objectives of the intended audience of the
advertisement, as this estimate related to initial burdens of the rule
only. For purposes of this analysis, we estimate that 21 percent of
advisers will include hypothetical performance in advertisements.\26\
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\26\ See supra footnote 7 and accompanying text (explaining that
we have revised our estimates in light of additional information
that advisers must now report on Form ADV); specifically, 3,260
advisers indicated that they include hypothetical performance in
their advertisements in response to Item 5.L of Form ADV. 3,260
advisers/15,555 total advisers registered as of September 2023 =
approximately 21%. See also Adopting Release, supra footnote 1, at
section IV.B.
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We continue to estimate that advisers that use hypothetical
performance will disseminate advertisements containing hypothetical
performance 20 times each year, including in certain one-on-one
communications that meet the rule's definition of advertisement. We
estimate that after adopting appropriate policies and procedures, an
adviser will incur a burden of 0.25 hours to categorize investors
according to their likely financial situation and investment objectives
pursuant to the adviser's policies and procedures.\27\
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\27\ We believe that an adviser's chief compliance officer will
complete this task (20 presentations per year x 0.25 hours each = 5
hours per year).
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Additionally, we are no longer including our prior estimate that an
investment adviser that elects to present hypothetical performance in
an advertisement will incur an initial burden of 20 hours in preparing
the information sufficient to understand the criteria used and
assumptions made in calculating, as well as risks and limitations in
using, the hypothetical performance, in order to provide such
information, which may in certain circumstances be upon request, as
this estimate related to initial burdens of the rule only. We estimate
that after initially preparing the underlying information, investment
advisers will incur a burden of 3 hours to update the information for
each subsequent presentation. For purposes of this analysis, we
estimate that advisers will update their hypothetical performance, and
thus the underlying information, 3.5 times each year.\28\
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\28\ We believe that this burden will be split evenly between an
adviser's compliance attorney and compliance manager (3 hours x 3.5
times per year = 10.5 hours; 10.5 hours/2 = 5.25 hours each).
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We estimate that registered investment advisers may incur external
costs in connection with the requirement to provide this underlying
information upon the request of an investor or prospective investor in
a private fund. We estimate that the average annual costs associated
with printing and mailing this underlying information upon request will
be collectively $592 for all documents associated with a single
registered investment adviser.\29\
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\29\ See supra footnote 9 for a discussion of estimated mailing
costs.
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Predecessor Performance
The marketing rule imposes conditions on an adviser's use of
predecessor performance. We are no longer including our prior estimate
that an investment adviser that elects to present predecessor
performance in an advertisement will incur an initial burden of 10
hours in preparing the relevant performance results and associated
disclosures, as this estimate related to initial burdens of the rule
only.
We previously estimated that 2% of advisers (or 275 advisers) will
include predecessor performance in an advertisement, but we are
increasing this estimate to 9%.\30\ We estimate that after initially
preparing predecessor performance, investment advisers will incur a
burden of 1 hour to update the relevant disclosures and performance
information for each subsequent presentation. For purposes of this
analysis, we estimate that advisers will update the relevant
disclosures 3.5 times each year.\31\ Table 4 summarizes the PRA
estimates for the internal and external burdens associated with these
requirements.
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\30\ See supra footnote 7 and accompanying text (explaining that
we have revised our estimates in light of additional information
that advisers must now report on Form ADV); specifically, 1,407
advisers indicated that they include predecessor performance in
their advertisements in response to Item 5.L of Form ADV. 1,407
advisers/15,555 total advisers registered as of September 2023 =
approximately 9%. See also Adopting Release, supra footnote 1, at
section IV.B.
\31\ We believe that this burden will be split evenly between an
adviser's compliance attorney and compliance manager (1 hour x 3.5
times per year = 3.5 hours; 3.5 hours/2 = 1.75 hours each).
Table 4--Performance
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Annual
Internal hour Wage rate \1\ Internal time external cost
burden costs burden
----------------------------------------------------------------------------------------------------------------
ESTIMATES FOR NET PERFORMANCE
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Updating performance.............. 5.25 x $372 (compliance $1,953 ..............
manager).
[[Page 54601]]
5.25 x $440 (compliance $2,310 ..............
attorney).
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Total burden per adviser...... 10.5 ..... .................... $4,263 ..............
Total number of affected x 6,186 ..... .................... x 6,186 ..............
advisers.
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Sub-total burden.............. 64,953 hours ..... .................... $26,370,918 ..............
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ESTIMATES FOR PERFORMANCE TIME PERIOD REQUIREMENT
----------------------------------------------------------------------------------------------------------------
Updating performance.............. 14 x $372 (compliance $5,208 ..............
manager).
14 x $440 (compliance $6,160 ..............
attorney).
-----------------------------------------------------------------------------
Total burden per adviser...... 28 ..... .................... $11,368 ..............
Total number of affected x 6,186 ..... .................... x 6,186 ..............
advisers.
----------------------------------------------------------------------------------------------------------------
Sub-total burden.............. 173,208 hours ..... .................... $70,322,448 ..............
----------------------------------------------------------------------------------------------------------------
ESTIMATES FOR RELATED PERFORMANCE
----------------------------------------------------------------------------------------------------------------
Updating performance for all 8.75 x $372 (compliance $3,255 ..............
related portfolios. manager).
8.75 x $440 (compliance $3,850 ..............
attorney).
-----------------------------------------------------------------------------
Total burden per adviser...... 17.5 ..... .................... $7,105 ..............
Total number of affected x 6,186 ..... .................... x 6,186 ..............
advisers.
-----------------------------------------------------------------------------
Sub-total burden.............. 108,255 hours ..... .................... $43,951,530 ..............
----------------------------------------------------------------------------------------------------------------
ESTIMATES FOR EXTRACTED PERFORMANCE
----------------------------------------------------------------------------------------------------------------
Updating performance.............. 3.5 x $372 (compliance $1,302 ..............
manager).
3.5 x $440 (compliance $1,540 ..............
attorney).
-----------------------------------------------------------------------------
Total burden per adviser...... 7 ..... .................... $2,842 $592
Total number of affected x 6,186 ..... .................... x 6,186 x 6,186
advisers.
-----------------------------------------------------------------------------
Sub-total burden.............. 43,302 hours ..... .................... $17,580,612 $3,662,112
----------------------------------------------------------------------------------------------------------------
ESTIMATES FOR HYPOTHETICAL PERFORMANCE
----------------------------------------------------------------------------------------------------------------
Updating policies and procedures.. 5 x $638 (chief $3,190 ..............
compliance officer).
Updating disclosures and 5.25 x $372 (compliance $1,953 ..............
underlying information. manager).
5.25 x $440 (compliance $2,310 ..............
attorney).
-----------------------------------------------------------------------------
Total burden per adviser...... 15.5 ..... .................... $7,453 $592
Total number of affected x 3,260 ..... .................... x 3,260 x 3,260
advisers.
-----------------------------------------------------------------------------
Sub-total burden.............. 50,530 hours ..... .................... $24,296,780 $1,929,920
----------------------------------------------------------------------------------------------------------------
ESTIMATES FOR PREDECESSOR PERFORMANCE
----------------------------------------------------------------------------------------------------------------
Updating disclosures and 1.75 x $372 (compliance $651 ..............
performance. manager).
1.75 x $440 (compliance $770 ..............
attorney).
-----------------------------------------------------------------------------
Total burden per adviser...... 3.5 ..... .................... $1,421 ..............
Total number of affected x 1,407 ..... .................... x 1,407 ..............
advisers.
-----------------------------------------------------------------------------
Sub-total burden.............. 4,924.5 hours ..... .................... $1,999,347 ..............
----------------------------------------------------------------------------------------------------------------
TOTAL ESTIMATED TIME BURDEN FOR PERFORMANCE REQUIREMENTS
----------------------------------------------------------------------------------------------------------------
445,173 hours ..... .................... $184,521,635 $5,592,032
----------------------------------------------------------------------------------------------------------------
Notes:
1. See SIFMA Report, supra footnote 8.
Total Hour Burden Associated With Rule 206(4)-1
Accordingly, we estimate the total annual hour burden for
investment advisers registered or required to be registered with the
Commission under proposed rule 206(4)-1 to prepare testimonials and
endorsements, third-party ratings, and performance results disclosures
will be 595,210 hours, at a time cost of $219,833,026. The total
external burden costs would be $5,974,582. The following chart
summarizes the various components of the total annual burden for
investment advisers.
[[Page 54602]]
Table 5--Totals
----------------------------------------------------------------------------------------------------------------
Internal
Internal hour burden time External cost
burden cost burden
----------------------------------------------------------------------------------------------------------------
General Prohibitions............................................ 93,330 $12,288,450 ..............
Testimonials and Endorsements................................... 54,927 22,300,362 $382,550
Third-Party Ratings............................................. 1,780 722,579 ..............
Performance..................................................... 445,173 184,521,635 5,592,032
-----------------------------------------------
Total annual burden......................................... 595,210 hours 219,833,026 5,974,582
----------------------------------------------------------------------------------------------------------------
Cost burden is the cost of goods and services purchased to comply
with rule 206(4)-1, such as legal and accounting services. The cost
burden does not include the hour burden discussed in above. Estimates
are based on the Commission's examination and oversight experience. As
summarized in Table 5 above, we estimate the total external cost per
all advisers per year to be $5,974,582, with the total per adviser per
year to be $384.\32\
---------------------------------------------------------------------------
\32\ This estimate is based upon the following calculations:
$5,974,582 (total annual external cost burden)/15,555 (number of
advisers) = $384.
---------------------------------------------------------------------------
Written comments are invited on: (a) whether the proposed
collection of information is necessary for the proper performance of
the functions of the Commission, including whether the information
shall have practical utility; (b) the accuracy of the Commission's
estimate of the burden of the collection of information; (c) ways to
enhance the quality, utility, and clarity of the information collected;
and (d) ways to minimize the burden of the collection of information on
respondents, including through the use of automated collection
techniques or other forms of information technology. Consideration will
be given to comments and suggestions submitted by August 30, 2024.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information under the PRA unless it
displays a currently valid OMB control number.
Please direct your written comments to: David Bottom, Chief
Information Officer, Securities and Exchange Commission, c/o John
Pezzullo, 100 F Street NE, Washington, DC 20549 or send an email to:
[email protected].
Dated: June 25, 2024.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-14363 Filed 6-28-24; 8:45 am]
BILLING CODE 8011-01-P