[Federal Register Volume 77, Number 231 (Friday, November 30, 2012)]
[Pages 71458-71460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-28945]



Submission for OMB Review; Comment Request

Upon Written Request Copies Available From: Securities and Exchange 
Commission, Office of Investor Education and Advocacy, Washington, DC 

Extension: Rule 3a-4.
    OMB Control No. 3235-0459, SEC File No. 270-401.

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    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'') has submitted to the Office of 
Management and Budget (``OMB'') a request for extension of the 
previously approved collection of information discussed below.
    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'' and ``mutual fund wrap'' programs, generally 
are designed to provide professional portfolio management services to 
clients who are investing less than the minimum usually required by 
portfolio managers 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. Some of these 
investment advisory programs may meet the definition of investment 
company under the Act because of the similarity of account management.
    In 1997, the Commission adopted rule 3a-4, which clarifies that 
programs organized and operated in a manner consistent with the 
conditions of rule 3a-4 are not required to register under the 
Investment Company Act or comply with the Act's requirements.\1\ These 
programs differ from investment companies because, among other things, 
they provide individualized investment advice to the client. The rule's 
provisions have the effect of ensuring that clients in a program 
relying on the rule receive advice tailored to the client's needs.

    \1\ Status of Investment Advisory Programs Under the Investment 
Company Act of 1940, Investment Company Act Release 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 these programs. See 17 CFR 270.3a-4, 
introductory note.

    Rule 3a-4 provides that each client's account must be managed on 
the basis of the client's financial situation and investment objectives 
and consistent 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.\4\

    \2\ For purposes of rule 3a-4, the term ``sponsor'' refers to 
any person who receives compensation for sponsoring, organizing or 
administering the program, or for selecting, or providing advice to 
clients regarding the selection of, persons responsible for managing 
the client's account in the program.
    \3\ Clients specifically must be allowed to designate securities 
that should not be purchased for the account or that should be sold 
if held in the account. The rule does not require that a client be 
able to require particular securities be purchased for the account.
    \4\ The sponsor also must provide a means by which clients can 
contact the sponsor (or its designee).

    The program 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 
    The requirement that the sponsor (or its designee) obtain 
information about each new client's financial situation and investment 
objectives when their account is opened is designed to ensure that the 
investment adviser has sufficient information regarding the client's 
unique needs and goals to enable the portfolio manager to provide 
individualized investment advice. The sponsor is required to contact 
clients annually and provide them with quarterly notices to ensure that 
the sponsor has current information about the client's financial 
status, investment objectives, and restrictions on management of the 
account. Maintaining current information enables the portfolio manager 
to evaluate each client's portfolio in light of the client's changing 
needs and circumstances. The requirement that clients be provided with 
quarterly statements of account activity is designed to ensure each 
client receives an individualized report, which the Commission believes 
is a key element of individualized advisory services.
    The Commission staff estimates that 11,291,005 clients participate 
each year in investment advisory programs relying on rule 3a-4. Of that 
number, the staff estimates that 903,280 are new clients and 10,387,725 
are continuing clients. The staff estimates that each year investment 
advisory program sponsors staff engage in 1.3 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. Furthermore, the staff estimates 
that each year investment advisory program staff spends 1 hour per 
client to prepare and mail quarterly client account statements, 
including notices to update information. Based on the estimates above, 
the Commission estimates that the total annual burden of the rule's 
paperwork requirements is 22,852,994 hours.
    The total annual hour burden of 22,852,994 hours represents an 
increase of 17,245,466 hours from the prior estimate of 5,607,528 
hours. This increase principally results from an increase in the 
estimated number of clients, which was due to a change in the way 
Commission staff made its estimates. The change in annual burden hours 
also reflects changes in the estimated burden hours associated with 
several collections of information required under the rule (certain 
burden estimates increased and certain burden estimates decreased). 
These changes in estimated burden hours per collection of information 
result from changes in burden hours reported by representatives of 
investment advisers that rely on rule 3a-4 that Commission staff 
    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.
    Compliance with the collection of information requirements of the 
rule is necessary to obtain the benefit of relying on the rule's safe 
harbor. Nevertheless, rule 3a-4 is a nonexclusive safe harbor, and a 
program that does not comply with the rule's collection of information 
requirements does not necessarily meet the Investment Company Act's 
definition of investment company. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it

[[Page 71460]]

displays a currently valid OMB control number.
    The public may view the background documentation for this 
information collection at the following Web site www.reginfo.gov. 
Comments should be directed to: (i) Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Office of Management and Budget, Room 10102, New Executive Office 
Building, Washington, DC 20503, or by sending an email to: Shagufta_Ahmed@omb.eop.gov; and (ii) Thomas Bayer, Director/Chief Information 
Officer, Securities and Exchange Commission, c/o Remi Pavlik-Simon, 
6432 General Green Way, Alexandria, VA 22312 or send an email to: PRA_Mailbox@sec.gov. Comments must be submitted to OMB within 30 days of 
this notice.

    Dated: November 26, 2012.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28945 Filed 11-29-12; 8:45 am]