Submission for OMB Review; Comment Request; Extension: Rule 206(4)-1, 72593-72599 [2024-19959]
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calculated and implemented in
accordance with the CAT Funding
Model as approved by the SEC.
As discussed above, each of the
inputs into the calculation of CAT Fee
2024–1 is reasonable and the resulting
fee rate for CAT Fee 2024–1 calculated
in accordance with the CAT Funding
Model is reasonable. Therefore, CAT
Fee 2024–1 would not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Exchange Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Exchange Act 191
and Rule 19b–4(f)(2) thereunder,192
because it establishes or changes a due,
or fee.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend the rule change if
it appears to the Commission that the
action is necessary or appropriate in the
public interest, for the protection of
investors, or would otherwise further
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
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• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
ISE–2024–041 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
191 15
192 17
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
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All submissions should refer to file
number SR–ISE–2024–041. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
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only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
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Commission, and all written
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provisions of 5 U.S.C. 552, will be
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SR–ISE–2024–041 and should be
submitted on or before September 26,
2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.193
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–19871 Filed 9–4–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270-xxx, OMB Control No.
3235–0784]
Submission for OMB Review;
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
193 17
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CFR 200.30–3(a)(12).
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72593
and Exchange Commission (the
‘‘Commission’’) has submitted to the
Office of Management and Budget a
request for extension of the previously
approved collection of information
discussed below.
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.
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
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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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.
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.
TABLE 1—GENERAL PROHIBITIONS
Internal hour
burden
Internal time
costs
Wage rate 1
Annual
external cost
burden
ESTIMATES FOR RULE 204–1 FOR GENERAL PROHIBITIONS
Determine whether statements in an advertisement are material
facts.
Creation and maintenance of records substantiating material facts in
any advertisements.
0.5
×
$372 (compliance manager) ............
$186
0.5
4
×
×
$440 (compliance attorney) .............
$75 (general clerk) ...........................
$220
$300
1
×
$84 (compliance clerk) .....................
$84
Total burden per adviser ...............................................................
Total number of affected advisers ................................................
6
× 15,555
......
......
...........................................................
...........................................................
$790
× 15,555
Total burden for general prohibitions ............................................
93,330 hours
......
...........................................................
$12,288,450
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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
2 See Adopting Release, supra footnote 1, at
section II.B.2.
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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
3
4
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See id.
Rule 206(4)–1(b)(1).
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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.
The marketing rule’s definitions of
testimonials and endorsements
generally contain three elements: (i)
statements about the client’s/nonclient’s or investor’s experience with the
5
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Rule 206(4)–1(b)(2).
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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.
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 inhouse compliance managers and
compliance attorneys will likely prepare
disclosures, which will likely be
included in the advertisement.8
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
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
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.
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
Internal hour
burden
Internal time
costs
Wage rate 1
Annual external cost
burden
ESTIMATES FOR TESTIMONIALS AND ENDORSEMENTS
Revise and update each required disclosure ............................
Oversight of compensated testimonials and endorsements and
preparation of written agreements.
0.1 hours × 35
disclosures
0.1 hours × 35
disclosures
1 hours × 5
promoters
1 hours × 5
promoters
×
$372 (compliance manager) .......
$1,302
×
$440 (compliance attorney) ........
$1,540
×
$372 (compliance manager) .......
$1,860
×
$440 (compliance attorney) ........
$2,200
Total burden per adviser .....................................................
Total number of affected advisers ......................................
17 hours
× 3,231
......
......
.....................................................
.....................................................
$6,902
× 3,231
Total burden for testimonials and endorsements ...............
54,927 hours
......
.....................................................
$22,300,362
$592
× 3,231 (× 20% of
advisers that will
use physical mail)
$382,550
Notes:
1 See SIFMA Report, supra footnote 8.
Third-Party Ratings in Advertisements
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As referenced above, rule 206(4)–1(c)
prohibits an investment adviser from
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.
8 We estimate the hourly wage rate for
compliance manager is $372 and a compliance
attorney is $440; the hourly wages used are from
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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
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.
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.
10 This estimate is based on the following
calculation: 1 hour per each solicitor relationship
× 5 promoter relationships.
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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.
TABLE 3—THIRD-PARTY RATINGS
Internal hour
burden
Internal time
costs
Wage rate 1
Annual
external
cost burden
ESTIMATES FOR THIRD PARTY RATINGS
×
×
$372 (compliance manager) ............
$440 (compliance attorney) .............
$139.50
$165
........................
........................
.75 hours
× 2,373
......
......
...........................................................
...........................................................
$304.50
× 2,373
........................
........................
1,780 hours
......
...........................................................
$722,579
........................
Update required disclosures ................................................................
0.375 hours
0.375 hours
Total burden per adviser ...............................................................
Total number of affected advisers ................................................
Total burden for third-party ratings ...............................................
Notes:
1 See SIFMA Report, supra footnote 8.
Performance Advertising
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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
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.
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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
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.
12 We believe that this burden will also be split
evenly between an adviser’s compliance attorney
and compliance manager.
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).
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
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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.
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
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
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 burden associated with calculating net
performance in connection with presenting related
performance is discussed below.
20 We believe that this burden will be split evenly
between an adviser’s compliance attorney and
compliance manager (3 hours × 3.5 times per year
= 10.5 hours; 10.5 hours/2 = 5.25 hours each).
21 We believe that this burden will be split evenly
between an adviser’s compliance attorney and
compliance manager (8 hours × 3.5 times per year
= 28 hours; 28 hours/2 = 14 hours each).
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19
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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
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
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 × 3.5 times per year
= 17.5 hours; 17.5 hours/2 = 8.75 hours each).
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 × 3.5 times per year
= 7 hours; 7 hours/2 = 3.5 hours each).
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72597
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.
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
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
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
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.
27 We believe that an adviser’s chief compliance
officer will complete this task (20 presentations per
year × 0.25 hours each = 5 hours per year).
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Federal Register / Vol. 89, No. 172 / Thursday, September 5, 2024 / Notices
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
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
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.
TABLE 4—PERFORMANCE
Internal hour
burden
Internal time
costs
Wage rate 1
Annual external
cost burden
ESTIMATES FOR NET PERFORMANCE
Updating performance .............................................................
5.25
5.25
Total burden per adviser ......................................................
Total number of affected advisers .......................................
Sub-total burden ...................................................................
10.5
× 6,186
64,953
×
×
$372 (compliance manager) ...................
$440 (compliance attorney) ....................
$1,953
$2,310
............................
............................
......
......
......
.................................................................
.................................................................
.................................................................
$4,263
× 6,186
$26,370,918
............................
............................
............................
11
ESTIMATES FOR PERFORMANCE TIME PERIOD REQUIREMENT
Updating performance .............................................................
14
14
Total burden per adviser ......................................................
Total number of affected advisers .......................................
Sub-total burden ...................................................................
28
× 6,186
173,208
×
×
$372 (compliance manager) ...................
$440 (compliance attorney) ....................
$5,208
$6,160
............................
............................
......
......
......
.................................................................
.................................................................
.................................................................
$11,368
× 6,186
$70,322,448
............................
............................
............................
11
ESTIMATES FOR RELATED PERFORMANCE
Updating performance for all related portfolios .......................
8.75
8.75
Total burden per adviser ......................................................
Total number of affected advisers .......................................
Sub-total burden ...................................................................
17.5
× 6,186
108,255
×
×
$372 (compliance manager) ...................
$440 (compliance attorney) ....................
$3,255
$3,850
............................
............................
......
......
......
.................................................................
.................................................................
.................................................................
$7,105
× 6,186
$43,951,530
............................
............................
............................
11
ESTIMATES FOR EXTRACTED PERFORMANCE
Updating performance .............................................................
3.5
3.5
Total burden per adviser ......................................................
Total number of affected advisers .......................................
Sub-total burden ...................................................................
7
× 6,186
43,302
×
×
$372 (compliance manager) ...................
$440 (compliance attorney) ....................
$1,302
$1,540
............................
............................
......
......
......
.................................................................
.................................................................
.................................................................
$2,842
× 6,186
$17,580,612
$592
× 6,186
$3,662,112
11
ESTIMATES FOR HYPOTHETICAL PERFORMANCE
Updating policies and procedures ...........................................
Updating disclosures and underlying information ....................
5
5.25
5.25
Total burden per adviser ......................................................
Total number of affected advisers .......................................
Sub-total burden ...................................................................
15.5
× 3,260
50,530
×
×
×
$638 (chief compliance officer) ..............
$372 (compliance manager) ...................
$440 (compliance attorney) ....................
$3,190
$1,953
$2,310
............................
............................
............................
......
......
......
.................................................................
.................................................................
.................................................................
$7,453
× 3,260
$24,296,780
$592
x 3,260
$1,929,920
$651
$770
............................
............................
ESTIMATES FOR PREDECESSOR PERFORMANCE
khammond on DSKJM1Z7X2PROD with NOTICES
Updating disclosures and performance ...................................
28 We believe that this burden will be split evenly
between an adviser’s compliance attorney and
compliance manager (3 hours × 3.5 times per year
= 10.5 hours; 10.5 hours/2 = 5.25 hours each).
29 See supra footnote 9 for a discussion of
estimated mailing costs.
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22:19 Sep 04, 2024
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1.75
1.75
×
×
$372 (compliance manager) ...................
$440 (compliance attorney) ....................
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
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Frm 00235
Fmt 4703
Sfmt 4703
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 × 3.5 times per year
= 3.5 hours; 3.5 hours/2 = 1.75 hours each).
E:\FR\FM\05SEN1.SGM
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Federal Register / Vol. 89, No. 172 / Thursday, September 5, 2024 / Notices
72599
TABLE 4—PERFORMANCE—Continued
Internal hour
burden
Total burden per adviser ......................................................
Total number of affected advisers .......................................
Sub-total burden ...................................................................
3.5
× 1,407
4,924.5
Internal time
costs
Wage rate 1
......
......
......
11
.................................................................
.................................................................
.................................................................
Annual external
cost burden
$1,421
× 1,407
$1,999,347
............................
............................
............................
$184,521,635
$5,592,032
TOTAL ESTIMATED TIME BURDEN FOR PERFORMANCE REQUIREMENTS
445,173
......
.................................................................
Notes:
1 See SIFMA Report, supra footnote 8.
Total Hour Burden Associated With
Rule 206(4)–1
external burden costs would be
$5,974,582. The following chart
summarizes the various components of
the total annual burden for investment
advisers.
registered with the Commission under
proposed rule 206(4)–1 to prepare
testimonials and endorsements, thirdparty ratings, and performance results
disclosures will be 595,210 hours, at a
time cost of $219,833,026. The total
Accordingly, we estimate the total
annual hour burden for investment
advisers registered or required to be
TABLE 5—TOTALS
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Internal hour
burden
Internal burden
time cost
External cost
burden
General Prohibitions ................................................................................................................
Testimonials and Endorsements .............................................................................................
Third-Party Ratings ..................................................................................................................
Performance ............................................................................................................................
93,330
54,927
1,780
445,173
$12,288,450
22,300,362
722,579
184,521,635
........................
$382,550
........................
5,592,032
Total annual burden .........................................................................................................
595,210
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
The public may view background
documentation for this information
collection at the following website:
www.reginfo.gov. Find this particular
information collection by selecting
‘‘Currently under 30-day Review—Open
for Public Comments’’ or by using the
search function. Written comments and
recommendations for the proposed
information collection should be sent
within 30 days of publication of this
notice by October 7, 2024 to (i)
MBX.OMB.OIRA.SEC_desk_officer@
omb.eop.gov and (ii) Austin Gerig,
Director/Chief Data Officer, Securities
and Exchange Commission, c/o
Oluwaseun Ajayi, 100 F Street NE,
Washington, DC 20549, or by sending an
email to: PRA_Mailbox@sec.gov.
32 This estimate is based upon the following
calculations: $5,974,582 (total annual external cost
burden)/15,555 (number of advisers) = $384.
VerDate Sep<11>2014
22:19 Sep 04, 2024
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Dated: August 30, 2024.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–19959 Filed 9–4–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–269, OMB Control No.
3235–0276]
Submission for OMB Review;
Comment Request; Extension: 6c–7
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’’) has submitted to the
Office of Management and Budget a
request for extension of the previously
approved collection of information
discussed below.
Rule 6c–7 (17 CFR 270.6c–7) under
the Investment Company Act of 1940
(15 U.S.C. 80a–1 et seq.) (‘‘1940 Act’’)
provides exemption from certain
provisions of Sections 22(e) and 27 of
the 1940 Act for registered separate
accounts offering variable annuity
PO 00000
Frm 00236
Fmt 4703
Sfmt 4703
contracts to certain employees of Texas
institutions of higher education
participating in the Texas Optional
Retirement Program. There are
approximately 129 registrants governed
by Rule 6c–7. The burden of compliance
with Rule 6c–7, in connection with the
registrants obtaining from a purchaser,
prior to or at the time of purchase, a
signed document acknowledging the
restrictions on redeem ability imposed
by Texas law, is estimated to be
approximately 3 minutes per response
for each of approximately 5,900
purchasers annually (at an estimated
$84 per hour),1 for a total annual burden
of 295 hours (at a total annual cost of
$24,780).
Rule 6c–7 requires that the separate
account’s registration statement under
the Securities Act of 1933 (15 U.S.C. 77a
1 $84/hour figure for a Compliance Clerk is based
on the Commission’s estimates concerning the
allocation of burden hours and the relevant wage
rates from the Commission’s consultations with
industry representatives and 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 wage figures are
modified by Commission staff to account for an
1800-hour work-year and multiplied by 2.93 to
account for bonuses, 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.
E:\FR\FM\05SEN1.SGM
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]]>Agencies
[Federal Register Volume 89, Number 172 (Thursday, September 5, 2024)]
[Notices]
[Pages 72593-72599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-19959]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[SEC File No. 270-xxx, OMB Control No. 3235-0784]
Submission for OMB Review; 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'') has submitted to the Office of
Management and Budget a request for extension of the previously
approved collection of information discussed below.
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.
---------------------------------------------------------------------------
\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)].
---------------------------------------------------------------------------
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
[[Page 72594]]
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.
---------------------------------------------------------------------------
\2\ See Adopting Release, supra footnote 1, at section II.B.2.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\3\ See id.
Table 1--General Prohibitions
----------------------------------------------------------------------------------------------------------------
Annual
Internal hour Wage rate \1\ Internal time external cost
burden costs burden
----------------------------------------------------------------------------------------------------------------
ESTIMATES FOR RULE 204-1 FOR GENERAL PROHIBITIONS
----------------------------------------------------------------------------------------------------------------
Determine whether statements in an 0.5 x $372 (compliance $186
advertisement are material facts. manager).
0.5 x $440 (compliance $220
attorney).
Creation and maintenance of 4 x $75 (general clerk).. $300
records substantiating material
facts in any advertisements.
1 x $84 (compliance $84
clerk).
-----------------------------------------------------------------------------
Total burden per adviser...... 6 ..... ..................... $790
Total number of affected x 15,555 ..... ..................... x 15,555
advisers.
-----------------------------------------------------------------------------
Total burden for general 93,330 hours ..... ..................... $12,288,450
prohibitions.
----------------------------------------------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\4\ Rule 206(4)-1(b)(1).
\5\ Rule 206(4)-1(b)(2).
---------------------------------------------------------------------------
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
[[Page 72595]]
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 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.
---------------------------------------------------------------------------
\10\ This estimate is based on the following calculation: 1 hour
per each solicitor relationship x 5 promoter relationships.
---------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
Internal hour Internal time Annual external
burden Wage rate \1\ costs cost burden
----------------------------------------------------------------------------------------------------------------
ESTIMATES FOR TESTIMONIALS AND ENDORSEMENTS
----------------------------------------------------------------------------------------------------------------
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).
--------------------------------------------------------------------------------
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)
--------------------------------------------------------------------------------
Total burden for 54,927 hours ..... .................. $22,300,362 $382,550
testimonials and
endorsements.
----------------------------------------------------------------------------------------------------------------
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
[[Page 72596]]
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.
---------------------------------------------------------------------------
\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
----------------------------------------------------------------------------------------------------------------
Annual
Internal hour Wage rate \1\ Internal time external cost
burden costs burden
----------------------------------------------------------------------------------------------------------------
ESTIMATES FOR THIRD PARTY RATINGS
----------------------------------------------------------------------------------------------------------------
Update required disclosures....... 0.375 hours x $372 (compliance $139.50 ..............
manager).
0.375 hours x $440 (compliance $165 ..............
attorney).
-----------------------------------------------------------------------------
Total burden per adviser...... .75 hours ..... ..................... $304.50 ..............
Total number of affected x 2,373 ..... ..................... x 2,373 ..............
advisers.
-----------------------------------------------------------------------------
Total burden for third-party 1,780 hours ..... ..................... $722,579 ..............
ratings.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ See SIFMA Report, supra footnote 8.
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
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
[[Page 72597]]
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.
---------------------------------------------------------------------------
\19\ The burden associated with calculating net performance in
connection with presenting related performance is discussed below.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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
[[Page 72598]]
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\29\ See supra footnote 9 for a discussion of estimated mailing
costs.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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
----------------------------------------------------------------------------------------------------------------
Internal hour Internal time Annual external
burden Wage rate \1\ costs cost burden
----------------------------------------------------------------------------------------------------------------
ESTIMATES FOR NET PERFORMANCE
----------------------------------------------------------------------------------------------------------------
Updating performance............. 5.25 x $372 (compliance $1,953 ................
manager).
5.25 x $440 (compliance $2,310 ................
attorney).
------------------------------------------------------------------------------
Total burden per adviser....... 10.5 ..... ................... $4,263 ................
Total number of affected x 6,186 ..... ................... x 6,186 ................
advisers.
Sub-total burden............... 64,953 ..... ................... $26,370,918 ................
----------------------------------------------------------------------------------------------------------------
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 ..... ................... $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 ..... ................... $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 ..... ................... $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 ..... ................... $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).
------------------------------------------------------------------------------
[[Page 72599]]
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 ..... ................... $1,999,347 ................
----------------------------------------------------------------------------------------------------------------
TOTAL ESTIMATED TIME BURDEN FOR PERFORMANCE REQUIREMENTS
----------------------------------------------------------------------------------------------------------------
445,173 ..... ................... $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.
Table 5--Totals
----------------------------------------------------------------------------------------------------------------
Internal hour Internal burden External cost
burden time 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....................................... 595,210 219,833,026 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.
---------------------------------------------------------------------------
The public may view background documentation for this information
collection at the following website: www.reginfo.gov. Find this
particular information collection by selecting ``Currently under 30-day
Review--Open for Public Comments'' or by using the search function.
Written comments and recommendations for the proposed information
collection should be sent within 30 days of publication of this notice
by October 7, 2024 to (i) [email protected] and
(ii) Austin Gerig, Director/Chief Data Officer, Securities and Exchange
Commission, c/o Oluwaseun Ajayi, 100 F Street NE, Washington, DC 20549,
or by sending an email to: [email protected].
Dated: August 30, 2024.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-19959 Filed 9-4-24; 8:45 am]
BILLING CODE 8011-01-P
