
[Federal Register Volume 83, Number 240 (Friday, December 14, 2018)]
[Notices]
[Pages 64382-64383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27094]


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SECURITIES AND EXCHANGE COMMISSION

[SEC File No. 270-401, OMB Control No. 3235-0459]


Proposed Collection; Comment Request

Upon Written Request, Copies Available From: Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 
20549-2736

Extension:
    Rule 3a-4.

    Notice is hereby given that, pursuant to the Paperwork Reduction 
Act of 1995 (44 U.S.C. 350l-3520), the Securities and Exchange 
Commission (the ``Commission'') is soliciting comments on the 
collection of information summarized below. The Commission plans to 
submit this existing collection of information to the Office of 
Management and Budget for extension and approval.
    Rule 3a-4 (17 CFR 270.3a-4) under the Investment Company Act of 
1940 (15 U.S.C. 80a) (``Investment Company Act'' or ``Act'') provides a 
nonexclusive safe harbor from the definition of investment company 
under the Act for certain investment advisory programs. These programs, 
which include ``wrap fee'' programs, generally are designed to provide 
professional portfolio management services on a discretionary basis to 
clients who are investing less than the minimum investments for 
individual accounts usually required by the investment adviser but more 
than the minimum account size of most mutual funds. Under wrap fee and 
similar programs, a client's account is typically managed on a 
discretionary basis according to pre-selected investment objectives. 
Clients with similar investment objectives often receive the same 
investment advice and may hold the same or substantially similar 
securities in their accounts. Because of this similarity of management, 
some of these investment advisory programs may meet the

[[Page 64383]]

definition of investment company under the Act.
    In 1997, the Commission adopted rule 3a-4, which clarifies that 
programs organized and operated in accordance with the rule are not 
required to register under the Investment Company Act or comply with 
the Act's requirements.\1\ These programs differ from investment 
companies because, among other things, they provide individualized 
investment advice to the client. The rule's provisions have the effect 
of ensuring that clients in a program relying on the rule receive 
advice tailored to the client's needs.
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    \1\ Status of Investment Advisory Programs Under the Investment 
Company Act of 1940, Investment Company Act Rel. No. 22579 (Mar. 24, 
1997) [62 FR 15098 (Mar. 31,1997)] (``Adopting Release''). In 
addition, there are no registration requirements under section 5 of 
the Securities Act of 1933 for programs that meet the requirements 
of rule 3a-4. See 17 CFR 270.3a-4, introductory note.
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    For a program to be eligible for the rule's safe harbor, each 
client's account must be managed on the basis of the client's financial 
situation and investment objectives and in accordance with any 
reasonable restrictions the client imposes on managing the account. 
When an account is opened, the sponsor \2\ (or its designee) must 
obtain information from each client regarding the client's financial 
situation and investment objectives, and must allow the client an 
opportunity to impose reasonable restrictions on managing the 
account.\3\ In addition, the sponsor (or its designee) must contact the 
client annually to determine whether the client's financial situation 
or investment objectives have changed and whether the client wishes to 
impose any reasonable restrictions on the management of the account or 
reasonably modify existing restrictions. The sponsor (or its designee) 
must also notify the client quarterly, in writing, to contact the 
sponsor (or its designee) regarding changes to the client's financial 
situation, investment objectives, or restrictions on the account's 
management.
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    \2\ For purposes of rule 3a-4, the term ``sponsor'' refers to 
any person who receives compensation for sponsoring, organizing or 
administering the program, or for selecting, or providing advice to 
clients regarding the selection of, persons responsible for managing 
the client's account in the program.
    \3\ Clients specifically must be allowed to designate securities 
that should not be purchased for the account or that should be sold 
if held in the account. The rule does not require that a client be 
able to require particular securities be purchased for the account.
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    Additionally, the sponsor (or its designee) must provide each 
client with a quarterly statement describing all activity in the 
client's account during the previous quarter. The sponsor and personnel 
of the client's account manager who know about the client's account and 
its management must be reasonably available to consult with the client. 
Each client also must retain certain indicia of ownership of all 
securities and funds in the account.
    The Commission staff estimates that 19,618,731 clients participate 
each year in investment advisory programs relying on rule 3a-4.\4\ Of 
that number, the staff estimates that 3,531,372 are new clients and 
16,087,359 are continuing clients.\5\ The staff estimates that each 
year the investment advisory program sponsors' staff engage in 1.5 
hours per new client and 1 hour per continuing client to prepare, 
conduct and/or review interviews regarding the client's financial 
situation and investment objectives as required by the rule.\6\ 
Furthermore, the staff estimates that each year the investment advisory 
program sponsors' staff spends 1 hour per client to prepare and mail 
quarterly client account statements, including notices to update 
information.\7\ Based on the estimates above, the Commission estimates 
that the total annual burden of the rule's paperwork requirements is 
41,003,148 hours.\8\
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    \4\ These estimates are based on an analysis of the number of 
individual clients from Form ADV Item 5D(a)(1) and (b)(1) of 
advisers that report they provide portfolio management to wrap 
programs as indicated in Form ADV Item 5I(2)(b) and (c), and the 
number of individual clients of advisers that identify as internet 
advisers in Form ADV Item 2A(11). From analysis comparing reported 
individual client assets in Form ADV Item 5D(a)(3) and 5D(b)(3) to 
reported wrap portfolio manager assets in Form ADV Item 5I(2)(b) and 
(c), we discount the estimated number of individual clients of non-
internet advisers providing portfolio management to wrap programs by 
10%. These estimates are based on the number of new clients expected 
due to average year-over-year growth in individual clients from Form 
ADV Item 5D(a)(1) and (b)(1) (about 8%) and an assumed rate of 
yearly client turnover of 10%.
    \5\ These estimates are based on the number of new clients 
expected due to average year-over-year growth in individual clients 
from Form ADV Item 5D(a)(1) and (b)(1) (about 8%) and an assumed 
rate of yearly client turnover of 10%.
    \6\ These estimates are based upon consultation with investment 
advisers that operate investment advisory programs that rely on rule 
3a-4.
    \7\ The staff bases this estimate in part on the fact that, by 
business necessity, computer records already will be available that 
contain the information in the quarterly reports.
    \8\ This estimate is based on the following calculation: 
(16,087,359 continuing clients x 1 hour) + (3,531,372 new clients x 
1.5 hours) + (19,618,731 total clients x (0.25 hours x 4 
statements)) = 41,003,148 hours. We note that the breakdown of 
burden hours between professional and staff time discussed below may 
not equal the estimate of total burden hours due to rounding.
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    The estimate of average burden hours is made solely for the 
purposes of the Paperwork Reduction Act. The estimate is not derived 
from a comprehensive or even a representative survey or study of the 
costs of Commission rules and forms. An agency may not conduct or 
sponsor, and a person is not required to respond to a collection of 
information unless it displays a currently valid control number.
    Written comments are invited on: (a) Whether the collections of 
information are necessary for the proper performance of the functions 
of the Commission, including whether the information has practical 
utility; (b) the accuracy of the Commission's estimate of the burdens 
of the collections of information; (c) ways to enhance the quality, 
utility, and clarity of the information collected; and (d) ways to 
minimize the burdens of the collections of information on respondents, 
including through the use of automated collection techniques or other 
forms of information technology. Consideration will be given to 
comments and suggestions submitted in writing within 60 days of this 
publication.
    Please direct your written comments to Charles Riddle, Acting 
Director/Chief Information Officer, Securities and Exchange Commission, 
C/O Candace Kenner, 100 F Street NE, Washington, DC 20549; or send an 
email to: PRA_Mailbox@sec.gov.

    Dated: December 10, 2018.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27094 Filed 12-13-18; 8:45 am]
BILLING CODE 8011-01-P


