Rule 204-3 (Brochure Rule) - Supporting Statement (Cyber)

OMB CONTROL NUMBER: 3235-0047
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Amendments to Rule 204-3 under the Investment Advisers Act of 1940
A. JUSTIFICATION
1.

Necessity for the Information Collection

Rule 204-3, the “brochure rule,” requires an investment adviser to deliver its
brochure and brochure supplements to its new clients or prospective clients before or
at the start of the advisory relationship and to deliver annually thereafter the full
updated brochure or a summary of material changes to its brochure. The rule also
requires that advisers deliver an amended brochure or brochure supplement (or just a
statement describing the amendment) to clients only when disciplinary information
in the brochure or supplement becomes materially inaccurate. The brochure assists
the client in determining whether to retain, or continue employing, the adviser.
Advisers registered with the Commission are required to prepare and electronically
file firm brochures through the Investment Adviser Registration Depository
(“IARD”).
Rule 204-3 contains a collection of information titled “Rule 204-3 under the
Investment Advisers Act of 1940,” found at 17 CFR 275.204-3, which is mandatory.
Its currently approved OMB control number is 3235-0047. An agency may not
sponsor, and a person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number. The likely respondents to
this information collection are investment advisers registered or required to be
registered with the Commission.

The brochure rule collection of information is necessary for several reasons. It
enables the client or prospective client to evaluate the adviser’s background and
qualifications, and to determine whether the adviser’s services and practices are
appropriate for that client. It informs the client of the nature of the adviser’s
business, which may inform or limit the client’s rights under the advisory contract. It
apprises the client of situations in which the interests of the adviser may potentially
be adverse to or in conflict with those of the client. Under some circumstances, it
enables the client to consider the financial condition of the adviser in deciding
whether to entrust funds or securities to the custody of the adviser or whether to pay
large advisory fees in advance. The information that rule 204-3 requires to be
contained in the brochure is also used by the Commission and staff in its
enforcement, regulatory, and examination programs. Responses are not kept
confidential.
On February 9, 2022, the Commission proposed rules related to cybersecurity
risk management for registered investment advisers, registered investment
companies, and business development companies as well as amendments to certain
rules that govern investment adviser and fund disclosures under the Advisers Act and
the Investment Company Act of 1940. 1 The Commission proposed amendments to
rule 204-3 would require an adviser to deliver interim brochure amendments
promptly to existing clients if the adviser adds disclosure of a cybersecurity incident
to its brochure or materially revises information already disclosed in its brochure

1

Cybersecurity Risk Governance and Incident Disclosure, Securities Act Release No. 11028 (Feb.
9, 2022) available at https://www.sec.gov/rules/proposed/2022/33-11028.pdf (“Cybersecurity Risk
Governance and Incident Disclosure Proposal”).

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about such an incident. We believe that requiring an adviser to deliver the brochure
amendment promptly would enhance investor protection by enabling clients to take
protective or remedial measures to the extent appropriate. It would also assist
investors in determining whether their engagement of that particular adviser remains
appropriate and consistent with their investment objectives.
2.

Purpose and Use of the Information Collection

Investors need accurate information about an investment adviser and its practices
in order to determine whether to retain, or to continue to employ, that adviser. The
Commission and staff need the information in its enforcement, regulatory, and
examination programs.
3.

Consideration Given to Information Technology

The Commission’s use of computer technology in connection with this
information collection, which has been previously approved by OMB, has not
changed. The Commission currently permits advisers to satisfy their obligations
under this collection of information by delivering Part 2 of Form ADV electronically
with client consent. 2
4.

Duplication

The collection of information requirements are not duplicated elsewhere.

2

See Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for
Delivery of Information, Investment Advisers Act Release No. 1562 (May 9, 1996) (61 FR 24644
(May 15, 1996)) (publishing Commission interpretive guidance with respect to use of electronic
media to fulfill investment advisers’ disclosure delivery obligations).

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5.

Effect on Small Entities

The requirements of rule 204-3 are the same for all investment advisers registered
with the Commission, including those that are small entities. 3 Some small advisers
may have lesser burdens under rule 204-3. This is because small advisers usually
have less complicated business practices, fewer employees, and fewer clients, and
therefore their brochures and brochure supplements would be shorter, and would be
delivered to fewer clients.
6.

Consequences of Not Conducting Collection

The collection of information required by the rule is necessary to protect investors
by providing clients and potential clients with information about the adviser, its
business, and its conflicts of interest. The consequences of not collecting this
information would be that clients and prospective clients may not have the
information they need in order to evaluate the adviser’s business practices and to
determine whether to select or retain that adviser and, if selected or retained, how to
manage that relationship.
7.

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

The collection of information imposes no additional requirements regarding
record retention.

3

Under Advisers Act rule 0-7, for purposes of the Regulatory Flexibility Act an investment adviser
generally is a small entity if it: (i) has assets under management of less than $25 million; (ii) did not
have total assets of $5 million or more on the last day of its most recent fiscal year; and (iii) does
not control, is not controlled by, and is not under common control with another investment adviser
that has assets under management of $25 million or more, or any person (other than a natural person)
that had total assets of $5 million or more on the last day of its most recent fiscal year.

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8.

Consultation Outside the Agency

The Commission and the staff of the Division of Investment Management
participate in an ongoing dialogue with representatives of the investment adviser
profession through public conferences, meetings, and informal exchanges. These
various forums provide the Commission and the staff with a means of ascertaining
and acting upon paperwork burdens facing the industry. In addition, the
Commission has requested public comment on the proposed amendments, including
the collection of information requirements resulting from the proposed amendments.
Before adopting these amendments, the Commission will receive and evaluate public
comments on the proposed amendments and their associated collection of
information requirements.
9.

Payment or Gift

None.
10.

Confidentiality

The information collected pursuant to rule 204-3 is by delivery of brochures and
brochure supplements to advisory clients and prospective clients. These disclosures
are not kept confidential.
11.

Sensitive Questions

No Personally Identifiable Information (PII) collected/Not applicable.
12.

Estimate of Hour and Cost Burden of Information Collection

The following estimates of average burden hours and costs are made solely for
purposes of the Paperwork Reduction Act of 1995 4 and are not derived from a

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44 U.S.C. 3501 et seq.

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comprehensive or even representative survey or study of the cost of Commission
rules and forms.
The respondents to this collection of information are investment advisers
registered or required to be registered with the Commission. As noted above, the
collection of this information is mandatory for all registered advisers. Responses are
not kept confidential. As of October 31, 2021, there were 14,774 registered advisers
that would be subject to this brochure requirement. The table below summarizes the
initial and ongoing annual burden and cost estimates associated with the proposed
amendments to rule 204-3.

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Table 1: Rule 204-3 PRA Estimates
Internal
initial
burden
hours

Internal
annual
burden hours

Wage rate

Internal time
costs

Annual external
cost burden

PROPOSED ESTIMATES
Annual delivery of brochure

1.66
hours1

1.66 hours

×

$64 (general clerk)

$106.24

Interim delivery of updates
to disciplinary action2

0.1 hour3

0.1 hour

×

$64 (general clerk)

$6.40

Interim delivery of updates
to cybersecurity incidents

0.1 hour4

0.1 hour

x

$64 (general clerk)

$6.40

200
hours6

200 hours

x

$64 (general clerk)

$12,800

Supplement tracking
systems5
Total new annual burden
per adviser

201.86 hours

$12,919.04

Number of advisers

×14,774

×14,774

Total new aggregate annual
burden

2,982,279.64
hours

$190,865,897

$0
$0
$0
$0

Notes:
1. We continue to estimate that, with a bulk mailing, an adviser will require no more than 0.02 hours to send the adviser’s brochure or
summary of material changes to each client, or an annual burden of 1.66 hours per adviser. (0.02 hours per client x 83 clients per
adviser based on IARD data as of October 31, 2021) = approximately 1.66 hours per adviser. We note that the burden for preparing
brochures is already incorporated into a separate burden estimate for Form ADV. We expect that most advisers will make their annual
delivery as part of a mailing of an account statement or other periodic report they already make to clients; therefore, we estimate that
the additional burden will be adding a few pages to the mailing.
2. See approved rule 204-3 PRA.
3. This is the previously approved burden estimate for interim delivery of updates to disciplinary action on Form ADV. We are not
changing this estimate.
4. This relates only to the amount of time it will take advisers to deliver interim updates to clients, as required by the proposed rule
amendments. The burden for preparing interim updates is already incorporated into a separate burden estimate for Form ADV. This
mailing may not be included with a mailing of a statement or other periodic report; therefore, we estimate that it will take slightly
more time to deliver interim updates than to deliver the annual brochure or summary of material changes.
5. We estimate that large advisers will need to design and implement systems to track changes in supervised persons providing
investment advice to particular clients. We do not expect that such systems will be necessary for small advisers or medium advisers.
For purposes of the estimates in this section, we have categorized small advisers as those with 10 or fewer employees, medium-sized
advisers as those with between 11 and 1,000 employees, and large advisers as those with over 1,000 employees. According to IARD
data, only 1.70% of medium advisers report in response to Form ADV, Part 1A, Item 5.B.(1) that more than 250 employees perform
investment advisory functions.
6. See approved rule 204-3 PRA. This includes estimated time for large advisers to design and implement systems to track that the
right supplements are delivered to the right clients as personnel providing investment advice to those clients change.

13.

Cost to Respondents

Cost burden is the cost of goods and services purchased to meet the requirements
of rule 204-3, such as for the services of outside counsel. The cost burden does not
include the hour burden discussed in Item 12 above. Estimates are based on the
Commission’s experience.

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As summarized in Table 1 above, we estimate that the annual external cost
associated with the proposed amendments to rule 204-3 is $0.
14.

Cost to the Federal Government

There are no costs to the government directly attributable to rule 204-3.
15.

Change in Burden

The estimated total burden hours has increased from 49,090 to 2,982,279.64
hours per year in aggregate, representing an increase of 2,933,189.64 hours per year
from the currently approved burden. The changes are due to proposed amendments,
updated data, and using a new methodology for certain estimates. The estimated
number of annual responses has increased from approximately 13,382 to 14,774,
representing an increase of 1,392 responses from the currently approved number of
responses. This revised estimate is due to, among other things, new information on
the number of SEC-registered investment advisers that we obtained from Form
ADVs filed through the IARD as of October 31, 2021. The external cost burden
associated with rule 204-3 ($0) has not changed.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exceptions to Certification Statement for Paperwork Reduction Act
Submission

Not applicable.
B. COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

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