qualified custodian, the surprise examination would have been required
to verify 100% of a client's assets, and it would have required the
independent public accountant to verify the disposition of assets from
one examination to the next. We have opted, instead, to propose
limiting the assets an adviser is not required to maintain assets with
a qualified custodian to shares of mutual funds, and certain physical
assets and privately issued securities that the adviser has determined
cannot be maintained in the possession or control of a qualified
custodian. With respect to the latter category of assets, we are also
proposing to require advisers to implement other protections to ensure
they are adequately safeguarded, including, for example, more frequent
asset verifications. We believe this approach is likely to result in
more client assets being maintained by qualified custodians and better
tailoring the protections for client assets that cannot be maintained
with a qualified custodian. For one-way transfer authority, under this
alternative, the surprise examination would have required the
independent public accountant to evaluate whether each one-way transfer
of client assets was authorized (e.g., client authorized a cash
withdrawal from the client's account to be transferred to a particular
recipient). We were uncertain whether an independent public accountant
would make such an evaluation, however, and if so, whether it would be
cost-prohibitive for them to do so. We determined, instead, to promote
transparency around all transactions for a client's evaluation in the
proposal's approach. The proposed rule would promote this by
eliminating accommodation reporting on a qualified custodian account
statement, by limiting the circumstances in which advisers are not
required to maintain client assets with a qualified custodian, by
requiring an independent public accountant to verify transactions with
respect to certain assets not maintained with a qualified custodian
more frequently, and by eliminating the possibility that assets not
kept with a qualified custodian might not be included in the sampling
of assets verified under the current rule.
5. Designating Clearing Agencies and Transfer Agents as Qualified
Custodians
    The Commission considered expanding the definition of a qualified
custodian to include clearing agencies that perform the function, under
the Exchange Act,\579\ of acting as central securities depositories
(``CSDs''), as well as transfer agents.\580\ Both CSDs and transfer
agents are functionally similar to qualified custodians in several
respects and are already subject to regulatory safeguards. These
entities safeguard a significant volume of assets and are subject to
Commission oversight through regulatory standards, registration
requirements, supervision, and examination.\581\ For example, among
other requirements, CSDs must establish, implement, maintain, and
enforce written policies and procedures reasonably designed to ensure
the integrity of securities issues, and minimize and manage the risks
associated with the safekeeping and transfer of securities; implement
internal auditing and other controls to safeguard the rights of
securities issuers and holders and prevent the unauthorized creation or
deletion of securities, and conduct periodic and at least daily
reconciliation of securities issues they maintain; and protect assets
against custody risk.\582\ Similarly, transfer agents are responsible
for countersigning securities upon issuance, monitoring to prevent
unauthorized issuance of securities, registering the transfer of
securities, and effecting the exchange, conversion, and transfer of
securities.\583\ Expanding the definition of a qualified custodian to
include CSDs and transfer agents could benefit investors by increasing
the number of potential entities that provide custodial services in
compliance with the rule, which could increase competition in the
market for such services and reduce costs. In addition, different types
of entities may be more or less suited to providing custodial services
for certain types of assets, such as privately offered securities, so
expanding the definition of a qualified custodian may reduce the costs
associated with maintaining these assets with a qualified custodian by
providing additional custodial options.
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    \579\ See Exchange Act section 3(a)(23)(A)(i), 15 U.S.C.
78c(a)(23)(A)(i); Rule 17Ad-22(a)(3), 17 CFR 240.17Ad-22(a)(3).
    \580\ See part II.C.1, Requests for Comment.
    \581\ See, e.g., Release No. 34-78963 (Sept. 28, 2016), 81 FR
70744, 70745-47 (Oct. 13, 2016) (summarizing authorities applicable
to clearing agencies); Release No. 34-76743 (Dec. 22, 2015), 80 FR
81948, 81959-69 (Dec. 31, 2015) (summarizing authorities applicable
to transfer agents).
    \582\ See Rule 17Ad-22(e)(11).
    \583\ Exchange Act section 3(a)(25), 15 U.S.C. 78c(a)(25).
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    However, CSDs currently perform many functions at an aggregate or
omnibus level for institutional participants, so they might need to
build systems to account for and interact with individual clients (to,
for example, directly furnish quarterly statements). The potential
costs CSDs would incur were they to provide services as qualified
custodians under this alternative might pose a significant barrier to
entry, which could limit the degree to which expanding the definition
of a qualified custodian would increase competition in the market for
custodial services. Moreover, providing custodial services could
significantly alter the risk management features of CSDs, which have
been tailored for other purposes and are supported by an architecture
that involves a more limited number of institutional participants.
    While some transfer agents are currently used by mutual funds in
lieu of a qualified custodian with respect to

fund shares,\584\ they might also have to develop systems and processes
to enable them to custody assets other than fund shares. Transfer
agents that are used by mutual funds may also have some systems and
processes in place to interact with clients, such as those used to
furnish quarterly statements, but other transfer agents might incur
significant costs building such systems and processes. Like CSDs, the
costs associated with providing custodial services might pose a
significant barrier to entry for transfer agents, which could limit the
degree to which expanding the definition of a qualified custodian would
increase competition in the market for custodial services. In addition,
while transfer agents are currently subject to regulatory safeguards,
they are not currently subject to individual client protections that
are as extensive as the entities we are including in the definition of
a qualified custodian under the proposed rule. For example, they are
not subject to the specific safeguarding requirements of Rule 206(4)-
2(a), and their capitalization and risk management practices are
oriented to the markets where they operate, not necessarily to the
range and variety of clients and assets contemplated by the proposed
rule.
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    \584\ See Rule 206(4)-2(b)(1).
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G. Request for Comment

    The Commission requests comment on all aspects of this initial
economic analysis, including whether the analysis has: (i) identified
all benefits and costs, including all effects on efficiency,
competition, and capital formation; (ii) given due consideration to
each benefit and cost, including each effect on efficiency,
competition, and capital formation; and (iii) identified and considered
reasonable alternatives to the proposed rule. We request and encourage
any interested person to submit comments regarding the proposed rule,
our analysis of the potential effects of the proposed rule, and other
matters that may have an effect on the proposed rule. We request that
commenters identify sources of data and information as well as provide
data and information to assist us in analyzing the economic
consequences of the proposed rule. We also are interested in comments
on the qualitative benefits and costs we have identified and any
benefits and costs we may not have discussed.
    280. The proposed rule affects banks and savings associations,
broker-dealers registered with the Commission, futures commission
merchants registered with the CFTC, and FFIs. How do rules and
regulations of other financial regulators and of self-regulatory
organizations affect these entities in their capacity as qualified
custodians? How do these existing rules and regulations affect the
benefits of the proposed rule and its costs?
    281. The proposed rule would expand the scope of assets currently
subject to the custody rule. To what extent do investors benefit from
advisers having custody of assets newly scoped in under the proposed
rule? What is the nature of those benefits? To what extent would those
benefits be lost given the requirements of the proposed rule?
    282. The proposed rule would explicitly identify discretionary
trading authority as an arrangement that triggers the rule. To what
extent do investors benefit from discretionary trading services offered
by investment advisers? What is the nature of those benefits? To what
extent would investment advisers no longer offer discretionary trading
services given the requirements of the proposed rule?
    283. The proposed rule would generally require that the investment
adviser maintain client assets with a qualified custodian pursuant to a
written agreement between the qualified custodian and the investment
adviser (or between the adviser and client if the adviser is also the
qualified custodian). To what extent are investment advisers currently
party to custodial agreements? To what extent are the required
provisions similar to, or different from, provisions in custodial
agreements between investors and qualified custodians? Have we
appropriately estimated the costs of the reasonable assurances and
written agreement requirements? Do commenters agree that qualified
custodians will have in incentive to provide written agreements that
are consistent with the requirements of the proposed rule? Have we
appropriately identified the costs of the proposed required provisions?
    284. To what extent do entities maintaining client physical assets
currently enter into written agreements obligating the entity to comply
with provisions the same as, or similar to, the provisions required
under the proposed rule?
    285. We state that existing regulatory requirements for qualified
custodians with respect to asset segregation are similar to the
requirements of the proposed rule and that, as a result, the costs of
the proposed asset segregation requirements would be mitigated. Is this
an accurate characterization of existing regulatory requirements? If
not, how do existing regulatory requirements differ from those of the
proposed rule?
    286. We state that for those qualified custodians indemnifying the
client against the risk of loss in the event of the qualified
custodian's gross negligence, the insurance requirement of the proposed
indemnification requirement would likely create a substantial increase
in the cost of liability insurance. Is this an accurate
characterization? How costly is insurance covering loss in the event of
a qualified custodian's gross negligence? How costly is insurance
covering loss in the event of a qualified custodian's simple
negligence? For example, how much does it cost to insure, per $1,000 of
covered assets, losses in the event of a qualified custodian's gross
negligence? How much does it cost to insure, per $1,000 of covered
assets, losses in the event of a qualified custodian's simple
negligence? Do the per-dollar costs change as the amount of covered
assets increases? If so, how? What other factor might affect the cost
of liability insurance for qualified custodians? What kinds of
operational burdens might be associated with purchasing and maintaining
liability insurance? To what extent do custodians currently have
systems, processes, and liability insurance that are consistent with a
simple negligence standard?

IV. Paperwork Reduction Act Analysis

A. Introduction

    Certain provisions of our proposal would result in new ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\585\ The proposed new rule 223-1 and
related amendments to rules 206(4)-2 and 204-2 under the Act and Form
ADV would have an impact on current collection of information burdens.
Specifically, we are proposing new collection of information
requirements under proposed rule 223-1 and corresponding amendments to
currently approved collection of information burdens under: (i) ``Rule
206(4)-2 under the Investment Advisers Act of 1940--Custody of Funds or
Securities of Clients by Investment Advisers'' (OMB number 3235-0241);
(ii) ``Rule 204-2 under the Investment Advisers Act of 1940'' (OMB
control number 3235-0278); and (iii) ``Form ADV'' (OMB control number
3235-0049). The Commission is submitting these collections of
information to the OMB for review and approval in accordance with 44
U.S.C. 3507(d) and 5 CFR

1320.11. 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 OMB control number.
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    \585\ 44 U.S.C. 3501 et seq.
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    We discuss below these proposed amendments and new collection of
information burdens. Responses provided to the Commission in the
context of its examination and oversight program concerning the
proposed redesignation of rule 206(4)-2 as new rule 223-1, and
corresponding amendments to rule 204-2 would be kept confidential
subject to the provisions of applicable law. Responses to the
disclosure requirements of the proposed amendments to Form ADV are not
kept confidential.

B. Rule 223-1

    Proposed rule 223-1, which will effectively replace current rule
206(4)-2 by a redesignation, states that an adviser registered or
required to be registered under section 203 of the Act, shall take
certain steps to safeguard the client assets of which the adviser has
custody, and lays out five requirements with which advisers must
comply.\586\ Paragraph (a)(1) would require advisers to maintain
client's assets at a qualified custodian in a specified manner pursuant
to a written contract that contains enumerated elements. Paragraph
(a)(1)(ii) would require an adviser to obtain reasonable assurances in
writing from a qualified custodian that such custodian will exercise
due care over client assets; will indemnify the client against risk of
loss; not excuse any obligations to the client based upon the existence
of any sub-custodial, securities depository, or other similar
arrangements with regard to the client's assets; clearly identify and
segregate client assets from the custodian's proprietary assets and
liabilities; and not subject client assets to any right, charge,
security interest, lien, or claim in favor of the qualified custodian
or its related persons or creditors. Paragraph (a)(2) would require an
investment adviser that opens an account with a qualified custodian on
a client's behalf to notify the client of the account details.
Paragraph (a)(3) would require an investment adviser to title or
register a client's assets in the client's name or otherwise hold such
assets for the benefit of that client; prohibit the commingling of
client assets with the adviser's (or its related persons') assets; and
require client assets generally to be held free of any right, charge,
security interest, lien, or claim in favor of the adviser and its
related persons or creditors. Paragraph (a)(4) would require an adviser
that maintains custody of client assets to obtain independent
verification from an independent public accountant at least once during
a calendar year pursuant to a written agreement that provides for the
filing of Form ADV-E.
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    \586\ Proposed rule 223-1.
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    Paragraph (b) lays out limited exceptions from certain requirements
of the proposed rule, some which would change the current collections
of information burdens of rule 206(4)-2. These include paragraphs
(b)(2) excepting the requirement to maintain certain privately offered
securities or physical assets with a qualified custodian in certain
circumstances; (b)(3) excepting advisers from the independent
verification of client assets maintained by a qualified custodian if an
adviser has custody solely as a consequence of the authority to deduct
advisory fees; (b)(4) exempting an adviser from the account statement
and certain notification requirements, along with the independent
verification requirement, when the advisory client undergoes a
financial statement audit annually and upon liquidation in accordance
with the rule; (b)(7) creating an exemption from the independent
verification requirement if an adviser has custody of client assets
solely because of a standing letter of authorization with the client;
and (b)(8) excepting advisers from the independent verification of
assets requirement under certain circumstances if custody exists solely
because the adviser has discretionary authority with respect to those
client assets that are maintained in accounts with a qualified
custodian where the discretionary authority is limited to transacting
in assets that settle exclusively on a delivery versus payment basis.
    Each requirement to disclose or obtain information, deliver
communications, or cause reporting by an independent public accountant
constitutes a ``collection of information'' requirement under the PRA
and is mandatory. Advisory clients would use this information to
confirm proper handling of their accounts. The Commission's staff uses
the information obtained through these collections in its enforcement,
regulatory, and examination programs. The respondents to these
collections of information requirements would be investment advisers
that are registered or required to be registered with the Commission
that have custody of client assets. As of September 2022, there were
15,160 investment advisers registered with the Commission and 8,724
advisers reported to have custody of client assets in Item 9 of Form
ADV. Although not all investment advisers would be subject to this
rule, we expect that most would be for two reasons: first, the proposed
rule would be triggered by most services advisers commonly provide to
their clients, such as trading on a discretionary basis; and second,
the proposed rule's application to ``assets'' would apply to a broad
array of client investments, not just to funds or securities as under
the current rule. We, therefore, estimate that 13,944 which is the
number of all registered advisers that currently report having
discretionary authority, would be subject to the proposed rule.\587\
The application of the provisions of the proposed rule--and thus the
extent to which there are collections of information and their related
burdens--would be contingent on a number of factors, such as the types
of services the adviser provides, the number of clients to whom it
provides those services, and the nature of the relevant assets. Because
of the wide diversity of services and relationships offered by
investment advisers, we expect that the obligations imposed by the
proposed rule would, accordingly, vary substantially among advisers.
However, we have made certain estimates of this data solely for the
purpose of this PRA analysis.
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    \587\ This estimate is based on the 14,204 advisers who answer
yes to Form ADV Item 8(C)(1) and have discretionary authority to
determine the ``securities to be bought or sold for a client's
account.'' For purposes of this estimate, we have excluded 260
advisers answering yes to Form ADV Item 8(C)(1) but reporting that
they solely advise investment company clients in response to Form
ADV Item 5.D.(1)(d).
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1. Qualified Custodian Provision
a. Written Agreement
    Under the proposed rule investment advisers would be required to
enter into a written agreement with a qualified custodian to maintain
possession or control of their clients' assets and to satisfy certain
other requirements enumerated in the rule, subject to certain
exceptions.\588\ We estimate that nearly all of the 13,944 registered
advisers that we estimate would be subject to the rule will be required
to comply with this requirement.\589\ We believe that an investment
adviser

would enter into a single agreement with each qualified custodian that
provides custodial services for the adviser's clients, regardless of
how many of the adviser's clients the qualified custodian provides
custodial services for. Based on the information currently reported by
advisers about qualified custodians on in Item 9.F of Form ADV, we
estimate that each adviser would enter into approximately 4 written
agreements.\590\ We therefore estimate that, initially, advisers would
enter into a total of 55,776 written agreements.\591\ We estimate that
each investment adviser and each qualified custodian that enters into
an agreement would incur an internal burden of 1 hour each to prepare
the written agreement, for a total initial burden hour estimate of
111,552 \592\ which we expect would mostly be attributable to the
requirement to specify the investment adviser's agreed-upon level of
authority to effect transactions in the custodial account as well as
any applicable terms or limitations. Based on our estimates, there
would be an initial cost to each respondent of this internal hour
burden of $43,951,488 to draft and finalize these written
agreements.\593\
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    \588\ Proposed rule 223-1(a)(1) (the proposed rule would require
a written agreement between the adviser and client if the adviser is
also the qualified custodian).
    \589\ While some of these advisers may have custody of certain
client assets that the proposed rule would except from the
requirement to use a qualified custodian, we assume that these
advisers likely also have at least some client assets that must be
maintained with a qualified custodian under the proposed rule.
    \590\ This estimate is based on responses to Form ADV, Part 1A,
Item 9.F, which requires advisers to report the number of persons
acting as qualified custodian. For all advisers responding to this
question, the average number of persons acting as qualified
custodians amounted to 4. We believe that it is possible that the
proposed rule could result in advisers entering into agreements with
a greater number of qualified custodians for custody services
related to assets that advisers may not currently maintain with a
custodian. At the same time, we believe that it is possible that
current custodians will expand their services in order to provide
custody services for asset types that they do not currently maintain
for advisers. As a result, for the purposes of this analysis, we
will rely on the average obtained from Form ADV Part 1A, Item 9.F.
data.
    \591\ This estimate is based on the following calculation:
13,944 advisers x 4 written agreements.
    \592\ This estimate is based on the following calculation:
55,776 written agreements x 2 hours.
    \593\ This estimate is based on the following calculation:
111,552 hours (for preparation and review of draft agreement) x $394
(blended rate for a compliance manager ($361) and a compliance
attorney ($426)). Unless otherwise indicated in this section IV, all
hourly wages used are from the Securities Industry and Financial
Markets Association's Report on Management & Professional Earnings
in the Securities Industry 2013 (``SIFMA Wage Report''), updated for
2023, modified to account for an 1800-hour work-year and inflation.
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    Once these agreements are created they will require little, if any,
modification, except in circumstances where the adviser's level of
authority changes (which we estimate would occur approximately once per
year). We estimate that these changes would take, on average, 10
minutes per written agreement. Therefore, we estimate that the yearly
total internal burden of preparing the written agreement would be 9,482
hours,\594\ and there would be an annual cost of this internal hour
burden of $3,735,908.\595\
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    \594\ This estimate is based on the following calculation:
55,776 written agreements x .17 hours.
    \595\ This estimate is based on the following calculation: 9,482
hours x $394 (blended rate for a compliance manager ($361) and a
compliance attorney ($426)).
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    The written agreement proposed by the rule would require a
qualified custodian to promptly, upon request, provide records relating
to an adviser's clients' assets held in the account at the qualified
custodian to the Commission or to an independent public accountant
engaged for purposes of complying with the rule.\596\ As noted above,
we believe that advisers would enter into approximately 4 written
agreements on average. We anticipate that 1,842 \597\ of the advisers
party to these written agreements would be subject to the surprise
examination requirement. For these advisers, we estimate that qualified
custodians would be required to provide information to an independent
public accountant once annually in connection with each adviser for
which they have a written agreement under the rule. We estimate that it
would take qualified custodians approximately 0.5 hours to provide the
required information. Therefore, we estimate the internal annual hour
burden for qualified custodians to provide this information to total
3,684 hours.\598\ Further, we anticipate that 7,018 advisers to these
written agreements would comply with the proposed rule's audit
exception.\599\ Because we estimate that 5 percent of pooled investment
vehicles are liquidated annually at a time other than their fiscal
year-end, for these advisers, we estimate that qualified custodians
would be required to provide information to an independent public
accountant 1.05 times annually. Therefore, we estimate that the total
annual burden for respondents to provide information to independent
public accountants for the audit related to these advisers would be
14,738 hours.\600\ In the aggregate, we estimate the total annual
burden for respondents to provide information to independent public
accountants for the surprise examination and audit to amount to 18,422
hours.\601\
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    \596\ See proposed rule 223-1(a)(1)(i)(A).
    \597\ See infra footnote 619and accompanying text.
    \598\ This estimate is based on the following calculation: 1,842
(advisers that we estimate will obtain a surprise examination) x 4
(average number of written agreements per adviser) x .5 hours.
    \599\ Advisers to pooled investment vehicles: 4,961. 20% of
advisers with custody that have pension and profit sharing plan
clients (3,068 x .20): 614. 20% of advisers with custody that have
charitable organization clients(3,205 x .20): 641. 20% of advisers
with custody that have state or municipal government entity clients
(986 x .20): 197. 20% of advisers with custody that have
corporations and other business entity clients (3,025 x .20): 605.
Total advisers expected to use the audit provision (4,961 + 614 +
641 + 197 + 605): 7,018 advisers; See also infra footnote 654.
    \600\ This estimate is based on the following calculation: 7,018
(number of advisers using the audit exception) x 4 (average number
of qualified custodians per adviser) x 1.05 (average number of
audits annually) x .5 hours = burden for respondents to provide
information to independent public accountants for the audit related
to these advisers.
    \601\ 3,684 + 14,738 hours.
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    We estimate that the Commission would examine approximately 2,092
of the advisers required to enter into a written agreement under the
rule, which is consistent with the number of advisers generally
examined by Commission staff over the last three fiscal years.\602\ As
noted above, because we estimate that an adviser will on average
maintain client assets with approximately four qualified custodians, we
estimate that Commission will issue approximately 8,368 requests to
qualified custodians under the rule. We believe that these information
requests may be more customized and would take custodians approximately
1.5 hours to respond to, slightly longer than it would take a custodian
to provide more standardized information requested by an independent
public accountant. Accordingly, the internal burden hours for
respondents to this collection of information would equal approximately
12,552 hours.\603\ In total, for the requirement to provide information
to accountants and the Commission, we estimate the collection of
information burden on respondents amounts to 30,974 hours
annually.\604\ Accordingly, we estimate that the annual internal
monetized cost burden amounts to approximately $12,203,756.\605\
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    \602\ This estimate is based on the following calculation:
13,944 advisers subject to the rule and required to enter into a
written agreement with a qualified custodian x 15% (the approximate
number of registered advisers the Commission examined in each of
fiscal years 2019, 2020, and 2021). See U.S. Securities and Exchange
Commission, Division of Examinations, 2022 Examination Priorities at
4 (Mar. 2022), available at https://www.sec.gov/files/2022-exam-priorities.pdf.
    \603\ This estimate is based on the following calculation: 8,368
written agreements x 1.5 hours.
    \604\ This estimate is based on the following calculation:
18,422 (hour burden to provide information to accountants) + 12,552
(hour burden to provide information to Commission).
    \605\ This estimate is based on the following calculation:
30,974 (internal annual burden hours) x $394 (blended rate for a
compliance manager ($361) and a compliance attorney ($426)).
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    The proposed rule would require that the written agreement with the
qualified

custodian provide that the qualified custodian will send account
statements (unless the client is an entity whose investors will receive
audited financial statements as part of the financial statement audit
process pursuant to the audit provision of the proposed rule), at least
quarterly, to the client and the investment adviser, identifying the
amount of each client asset in the custodial account at the end of the
period as well as all transactions in the account during that
period.\606\ We estimate that the average burden for custodians to
provide quarterly financial statements to advisers is limited. Because
qualified custodians are already sending quarterly account statements
to clients,\607\ we estimate that one additional burden incurred would
be in connection with qualified custodians adding advisers to their
distribution lists. We estimate this would aggregate approximately
14,385 hours in initial burden hours.\608\ We estimate that this
initial internal burden equates to an initial internal monetized cost
burden of approximately $4,869,322.50.\609\
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    \606\ Proposed rule 223-1(a)(1)(i)(B). The proposed requirement
is similar to the approach in the current rule with regard to the
investment adviser forming a reasonable belief after due inquiry
that the qualified custodian sends account statements, at least
quarterly, to the client. See custody rule 206(4)-2(a)(3).
    \607\ See custody rule 206(4)-2(a)(3).
    \608\ 15 hours (development of distribution list) x 959
(estimated number of qualified custodians). We believe that any
ongoing annual burden in connection with this requirement would be
de minimis.
    \609\ This estimate is based on the following calculation:
14,385 hours (estimated internal hour burden of preparing and
distributing quarterly account statements) x $338.50 (blended rate
for a programmer $316 and a compliance manager $361)).
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    We also believe that this proposed rule would result in a small
additional burden in terms of modifications to quarterly statements
related to including, at the client's request, information related to
assets not maintained by the qualified custodian,\610\ customizing the
statements for any client that requests such assets to be included, and
adding language that identifies those assets.\611\ We estimate this
would aggregate approximately 959 hours annually.\612\ We estimate that
this annual internal burden equates to an annual internal monetized
cost burden of approximately $324,621.50.\613\
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    \610\ See proposed rule 223-1(a)(1)(i)(B) (``Such account
statements shall not identify assets for which the qualified
custodian lacks possession or control, unless requested by the
client and the qualified custodian clearly identifies any such
assets that appear on the account statement'').
    \611\ See id. Since custodians are aware of the assets for which
they are providing accommodation reporting, we believe that the
custodian's removal of current accommodation reporting will be de
minimis.
    \612\ 1 hour (modifications to account statements) x 959
(estimated number of qualified custodians).
    \613\ This estimate is based on the following calculation: 959
hours (estimated internal hour burden of preparing and distributing
quarterly account statements) x $338.50 (blended rate for a
programmer $316 and a compliance manager $361)).
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    As discussed above, the proposed rule would require the written
agreement to contain a provision requiring the qualified custodian, at
least annually, to obtain and provide to the adviser a written internal
control report that includes an opinion of an independent public
accountant.\614\ We estimate that approximately 959 qualified
custodians \615\ would have to obtain an internal control report
relating to custodial services, and would have to provide the report to
the adviser. We understand that the cost to prepare an internal control
report relating to custody would vary based on the size and services
offered by the qualified custodian, but that on average an internal
control report would cost approximately $750,000 per year.\616\ We
believe that 95% of custodians currently obtain internal control
reports, and, therefore, estimate total aggregate monetized costs
attributable to this section of the proposed rule to be $35,962,500
annually.\617\
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    \614\ Proposed rule 223-1(a)(1)(i)(C).
    \615\ This estimate was obtained by the following calculation:
8,724 (advisers reporting that they have custody)/600 (total number
of custodians reported in Form ADV Part 1A, Question 9.F. = 14.54
(mathematical average number of advisers served by each custodian
obtained solely for the purpose of performing the calculation);
13,944 (advisers that we estimate would have to comply with the
proposed rule)/14.54 (average number of advisers served by each
custodian) = 959.
    \616\ We recognize, however, that as a result of the proposed
rule's expansion to cover all assets, rather than funds and
securities, the internal control reports currently obtained by
qualified custodians may not fully reflect the type of report that
would be obtained under the proposed rule.
    \617\ This estimate is based on the following calculation: 959
(estimated number of qualified custodians operating under written
agreements) x $750,000 (average cost of obtaining internal control
report) x 5% (percent of custodians that we estimate are not
currently obtaining internal control reports).
---------------------------------------------------------------------------

b. Reasonable Assurances
    The proposed rule would require an adviser to obtain reasonable
assurances in writing from a qualified custodian regarding certain
client protections.\618\ As discussed above, one way that advisers are
likely to satisfy this requirement is by seeking confirmation from a
qualified custodian that the custodial agreement with the advisory
client contains contractual language reflecting the reasonable
assurances required by the rule. We estimate the amount of time it
would take an adviser to request, and a qualified custodian to provide,
information necessary to satisfy this requirement to be approximately
15 minutes, and we expect that any related changes a qualified
custodian makes to a custodial agreement to reflect the reasonable
assurances provided to the adviser would take approximately 1 hour. We
believe this exchange is most likely to occur in the context of the
negotiation and execution of the written agreement. Therefore, we
estimate that the initial aggregate time burden for this collection of
information would amount to 69,720 hours.\619\ We believe that the
initial monetized costs imposed by the proposed rule approximate
$27,469,680.\620\ We believe that most custodial agreements change very
little from year to year, and therefore, we estimate the total annual
internal hour burden to be 13,944.\621\ We believe that the monetized
costs imposed by the proposed rule would approximate $5,493,936
annually.\622\
---------------------------------------------------------------------------

    \618\ Proposed rule 223-1(a)(1)(ii).
    \619\ 1.25 hours x 55,776 written agreements.
    \620\ 69,720 hours (estimated initial internal hour burden) x
$394 (blended rate for a compliance manager ($361) and a compliance
attorney ($426)).
    \621\ 55,776 written agreements x .25 hours.
    \622\ 13,944 (estimated annual internal hour burden) x $394
(blended rate for a compliance manager ($361) and a compliance
attorney ($426)).
---------------------------------------------------------------------------

2. Notice to Clients
    The proposed rule, like the current rule, would require an
investment adviser to notify its client in writing promptly upon
opening an account with a qualified custodian on its behalf.\623\ The
notice is designed to alert a client to the existence of the qualified
custodian that maintains possession or control of client assets and
whom to contact regarding such assets. One change from the current rule
is that the proposed rule would explicitly require that the notice
include the custodial account number, an important detail that is not
required under the current rule. However, we do not believe including a
custodial account number to the notice would significantly impact the
costs incurred by advisers as they are already required to provide a
nearly identical notice under the current rule. Therefore, we estimate
that the initial burden of updating their processes and systems to
ensure account numbers are included in the relevant notices is 1 hour
with a total estimated monetized cost of $4,720,044.\624\
---------------------------------------------------------------------------

    \623\ See proposed rule 223-1(a)(2).
    \624\ The initial burden hours are calculated as follows (14,204
advisers with discretionary authority--260 advisers to investment
company clients in response to Form ADV Item 5.D.(1)(d) = 13,944
advisers) x 1 hour x blended rate for a compliance manager ($361)
and a programmer ($316) = $338.50) = $4,720,044.

---------------------------------------------------------------------------

3. Annual Surprise Examination
    The proposed safeguarding rule does not change the current rule's
annual surprise exam requirement, but changes to other portions of the
rule that expand the application of the rule to certain advisers or
that provide exceptions to the surprise exam requirement would impact
the number of advisers subject to this requirement if adopted. The
current rule requires each registered investment adviser that has
custody of client funds or securities to undergo an annual surprise
examination by an independent public accountant to verify client assets
pursuant to a written agreement with the accountant that specifies
certain duties. We estimate that 1,842 advisers would be subject to the
surprise examination requirement upon its redesignation under the
proposal.\625\
---------------------------------------------------------------------------

    \625\ Based on data from the Investment Adviser Registration
Depository (``IARD'') of the advisers that report having discretion,
of the 1,842 advisers indicated in response to Item 9.C.(3) that an
independent public accountant conducts an annual surprise
examination of client funds and securities. The calculations in this
section regarding the annual surprise exam represent information as
of June 2022 and incorporate Form ADV filings received through the
(IARD) through August 31, 2022.
---------------------------------------------------------------------------

    For purposes of estimating the collection of information burden, we
have divided the estimated 1,842 advisers into three subgroups. First,
we estimate that 381 advisers have custody because they serve as
qualified custodians for their clients, or they have a related person
that serves as qualified custodian for clients, in connection with
advisory services the adviser provides to the clients.\626\ We estimate
that these advisers are subject to an annual surprise examination with
respect to 100 percent of their clients (or 9,006 clients per adviser)
based on the assumption that all of their clients maintain custodial
accounts with the adviser or its related person.\627\ We estimate that
each adviser will spend an average of 0.02 hours for each client to
create a client contact list for the independent public accountant. The
estimated total annual aggregate burden with respect to the surprise
examination requirement for this group of advisers is 68,626
hours.\628\
---------------------------------------------------------------------------

    \626\ Based on IARD data, 381 advisers indicated that an
independent public accountant prepares an internal control report
because the adviser or its affiliate acts as a qualified custodian
(in response to Item 9.C.(4)). Similarly, 76 advisers indicated that
they act as a qualified custodian (in response to Item 9.D.(1), and
321 advisers indicated that their related person(s) act as qualified
custodian(s) (in response to Item 9.D.(2)). 76 + 321 = 397.
    \627\ We base our estimate on IARD data of the average number of
clients of all the advisers that will be subject to the surprise
examination requirement under the rule. To derive our estimate, we
utilized the winsorization method, by setting all values for
advisers (above the 99th percentile of number of clients) at the
number of clients at the 99th percentile. The method lessens the
effect of outliers on client estimates.
    \628\ 381 advisers x 9,006 (average number of clients subject to
the surprise examination requirement) x 0.02 hour = 68,626 hours.
---------------------------------------------------------------------------

    The second group of advisers, estimated at 835, are those that have
custody because they have broad authority to access client assets held
at an independent qualified custodian, such as through a power of
attorney or acting as a trustee for a client's trust.\629\ Based on our
staff's experience, advisers that have access to client assets through
a power of attorney, acting as trustee, or similar legal authority
typically do not have access to all of their client accounts, but
rather only to a small percentage of their client accounts pursuant to
these special arrangements. We estimate that these advisers will be
subject to an annual surprise examination with respect to 5 percent of
their clients (or 450 clients per adviser) who have these types of
arrangements with the adviser.\630\ We estimate that each adviser will
spend an average of 0.02 hours for each client to create a client
contact list for the independent public accountant. The estimated total
annual aggregate burden with respect to the surprise examination
requirement for this group of advisers is 7,515 hours.\631\
---------------------------------------------------------------------------

    \629\ This estimate is based on the total number of advisers
subject to surprise examinations less those described above in the
first group (custody as a result of serving as, or having a related
person serving as, qualified custodian) less those described below
in the third group (custody as a result of solely managing private
funds). (1,842-381)-626 = 835 advisers.
    \630\ Based on the IARD data, we estimate that the average
number of clients of advisers subject to the surprise examination
requirement is 9,006. 9,006 x 0.05 = 450 clients per adviser.
    \631\ 835 advisers x 450 clients x 0.02 hours = 7, 515 hours.
---------------------------------------------------------------------------

    A third group of advisers provides advice to pooled investment
vehicles that are not undergoing an annual audit and therefore would
undergo the surprise examination with respect to those pooled
investment vehicle clients. Based on current IARD data, we estimate
that 626 advisers manage private funds and undergo surprise
examinations.\632\ We estimate that each adviser managing private funds
has an average of 6 pooled investment vehicle clients with an average
of 14 investors. We estimate that advisers to these pooled investment
vehicles will spend 1 hour for the pool and 0.02 hours for each
investor in the pool to create a contact list for the independent
public accountant, for an estimated total annual burden with respect to
the surprise examination requirement for these advisers of 4,808
hours.\633\
---------------------------------------------------------------------------

    \632\ Based on IARD data, we estimate that 626 advisers manage
private funds and undergo a surprise examination (responses to Items
7.B. and 9.C.(3)).
    \633\ ((626 advisers x 6 pools) x 1 hour = 3,756 hours) + ((626
x 6 pools x 14 investors) x .02 hours = 1,052 hours) = 4,808 hours.
---------------------------------------------------------------------------

    These estimates bring the total annual aggregate burden with
respect to the surprise examination requirement for all three groups of
advisers to 80,949 hours.\634\ This estimate does not include the
collection of information discussed below relating to the written
agreement required by paragraph (a)(4) of the rule.
---------------------------------------------------------------------------

    \634\ 68,626 hours + 7,515 hours + 4,808 hours = 80,949 hours.
---------------------------------------------------------------------------

    Related to the surprise exam, the current custody rule and the
redesignated safeguarding rule require that an adviser subject to the
surprise examination requirement must enter into a written agreement
with the independent public accountant engaged to conduct the surprise
examination and specify certain duties to be performed by the
independent public accountant.\635\ We estimate that each adviser will
spend 0.25 hour to add the required provisions to the written
agreement, with an aggregate of approximately 461 hours for all
advisers that undergo surprise examinations.\636\ Therefore the total
annual burden in connection with the surprise examination is estimated
at 81,410 hours under the rule.\637\ We estimate the monetized burden
related to the surprise exam is $27,623,345.\638\
---------------------------------------------------------------------------

    \635\ Compare 17 CFR 275.206(4)-2(a)(4) with proposed rule 223-
1(a)(4).
    \636\ 1,842 advisers would be required to obtain a surprise
examination x 0.25 = 461.
    \637\ 80,949 exam hours + 461 written agreement hours = 81,410
hours.
    \638\ 80,949 exam hours x $338.50 (blended rate for a compliance
manager ($361) and a programmer ($316) = $339) + 461 written
agreement hours x $394 (blended rate for a compliance manager ($361)
and a compliance attorney ($426) = $393.50) to amend the written
agreement = $27,623,345.
---------------------------------------------------------------------------

C. Exceptions

    The proposal contains several exceptions that will result in a new
``collection of information'' requirement within the meaning of the PRA
and would have an impact on the current collection of information
burdens of rule 206(4)-2. These exceptions are discussed below.
1. Certain Assets That Are Unable To Be Maintained With a Qualified
Custodian
    We are proposing an exception to the requirement to maintain client
assets with a qualified custodian where an adviser has custody of
privately offered securities or physical assets if the

ownership of such assets cannot be recorded and maintained (book-entry,
digital, or otherwise) in a manner in which a qualified custodian can
maintain possession or control of such assets. This exception will
allow advisers who service client accounts containing such assets to
either safeguard the assets themselves or engage another entity to
safeguard the assets subject to certain safeguarding requirements
discussed below. For the purpose of approximating the average burden
for advisers to comply with the collections of information that would
be created by this exception, we estimate that 4,961 advisers currently
have custody of privately offered securities and physical assets that
cannot be maintained with a qualified custodian.\639\
---------------------------------------------------------------------------

    \639\ Based on IARD data, 4,961 advisers with custody of client
assets provided advice to pooled investment vehicles as of June 30,
2022. We believe that this number is overinclusive of some number of
advisers solely to funds that do not hold privately offered
securities or physical assets. But we also believe that there may be
a small number of advisers who are not advisers to pooled investment
vehicles who have client assets that would be subject to the
exception. We believe that the estimate is reasonable based on the
data available.
---------------------------------------------------------------------------

(a) Written Agreement With Independent Public Accountant
    An adviser relaying on the proposed exception would be required to
enter into a written agreement with an independent public accountant
that specifies certain obligations of the accountant.\640\ We assume
that many advisers will amend agreements that they have with
accountants to perform other accounting services for the adviser, such
as a surprise examination, while some number of advisers will enter
into new agreements with accountants to perform the services required
by the proposed rule. On average, we estimate that each adviser will
spend 1.25 hours, initially, to prepare the written agreement with an
accountant. In the aggregate, we estimate that advisers will spend
6,201 hours, initially, to enter into these agreements.\641\ We
estimate the aggregate initial monetized cost burden to equal
$2,443,194.\642\
---------------------------------------------------------------------------

    \640\ See proposed rule 223-1(b)(2)(iii).
    \641\ 4,961 (estimated number of advisers with custody of
privately offered securities and physical assets that cannot be
maintained with a qualified custodian under the proposed rule) x
1.25 hours.
    \642\ 6,201 (estimated internal hour burden) x $394 (blended
rate for a compliance manager ($361) and a compliance attorney
($426)).
---------------------------------------------------------------------------

    We believe that these agreements will change minimally from year to
year and, therefore, estimate that advisers will spend approximately
2,481 aggregate hours annually amending these agreements or entering
into new agreements.\643\ The related total monetized cost burden for
these amendments would equal $977,514.\644\
---------------------------------------------------------------------------

    \643\ This estimate is based on the following calculation: 4,961
(estimated number of advisers with custody of privately offered
securities and physical assets that cannot be maintained with a
qualified custodian under the proposed rule) x .5 hours (estimate of
average amount of time to amend agreement).
    \644\ 2,481 (estimated internal hour burden) x $394 (blended
rate for a compliance manager ($361) and a compliance attorney
($426)).
---------------------------------------------------------------------------

(b) Notice to Accountant
    The proposed rule would require the adviser to notify the
accountant of any purchase, sale, or other transfer of beneficial
ownership of such assets within one business day.\645\ As discussed in
section II.C.4, above, we believe that this notice would likely be
provided by the adviser in connection with the closing of a
transaction, and could be provided to the accountant without much
additional effort beyond that required in connection with the closing
of the transaction. We estimate that this notice would take advisers
approximately one minute to deliver to the accountant. We also estimate
that advisers will send 8,000 of these notices annually.\646\
Accordingly, we estimate that these notices will take advisers
approximately 133 hours \647\ in the aggregate to send annually with an
annual monetized cost of $48,013.\648\
---------------------------------------------------------------------------

    \645\ See proposed rule 223-1(b)(2)(iv).
    \646\ This estimate is based on a review of a number of sources
of private equity transaction data in and prior to 2021. See
generally, S&P Global Market Intelligence, 2022 Global Private
Equity Outlook (Apr. 20, 2022), available at https://www.spglobal.com/marketintelligence/en/news-insights/research/2022-global-private-equity-outlook (``2021 was a record year for the PE
industry as investment activity surpassed the trillion-dollar mark
for the first time. In total, 24,520 deals globally were closed,
with an aggregate deal value worth $1.04 trillion, nearly double the
amount from the year before. At the same time, deal volume grew by
41.6% over 2020, proving that investors' predictions of improved
deal-making in 2021 came to fruition.''); Pitchbook, Data, Inc.,
2021 Annual US PE Breakdown, (Jan. 11, 2022), available at https://pitchbook.com/news/reports/2021-annual-us-pe-breakdown (``At over
8,600, [U.S.] deal count topped 2019's record by 50%.''); Statista,
Global private equity (PE) activity from 2002 to 2021 (Mar. 30,
2022) available at https://www.statista.com/statistics/1292230/private-equity-deal-activity-worldwide/ (``2021 was a record-
breaking year for private equity (PE) activity worldwide. Investment
activity grew nearly twofold compared to 2020, and reached a value
of nearly 1.2 trillion U.S. dollars from 2,616 private equity
deals.''); Bain & Co., The Private Equity Market in 2021: The Allure
of Growth (Mar. 7, 2022), available at https://www.bain.com/insights/private-equity-market-in-2021-global-private-equity-report-2022/ (``While the number of individual [buyout] deals jumped to
nearly 4,300 in 2021, up 16% from 2020 levels, that doesn't explain
the extraordinary growth in capital deployed.''). The estimate takes
into account the increasing trend in transaction volume over the
past few years, but also takes into account that registered advisers
are responsible for only a portion of these total global and total
U.S. transactions.
    \647\ 8,000 (estimated annual transactions)/60 minutes (based on
estimate of one minute per notice).
    \648\ 133 (estimated number of hours) x $361 compliance manager.
---------------------------------------------------------------------------

(c) Accountant Verification
    The written agreement would require the independent public
accountant to verify the purchase, sale, or other transfer promptly
upon receiving the required transfer notice. As discussed in section
II.C.4, above, we believe the verification process would vary
considerably depending on the asset involved. Based on our estimate of
8,000 transactions under the proposed exception annually, we believe
that these verifications will result in an aggregate monetized cost
burden to advisers of $21,000,000 annually.\649\
---------------------------------------------------------------------------

    \649\ 8,000 (estimated number of annual transactions) x 15 hours
(estimated average time to verify a transaction) x $175 (blended
rate for intermediate accountant ($200), a general accounting
supervisor ($252), and general clerk ($73)). The proposed rule
requires that an accountant report to the Commission any material
discrepancies and our estimate for those notices is included in the
estimated average time to verify a transaction.
---------------------------------------------------------------------------

(d) All Assets Verified During Surprise Examination or Annual Audit
    The proposed rule would require that the existence and ownership of
each privately offered security or physical asset of a client that is
not maintained with a qualified custodian to be verified during an
adviser's annual surprise examination or financial statement audit
under the audit provision.\650\ We estimate that 95 percent of advisers
relying on this exception, or 4,713 advisers,\651\ will obtain a
financial statement audit and 5 percent of advisers, or 248 advisers,
will obtain surprise examinations.\652\ For advisers obtaining an audit
under the audit provision, we estimate the aggregate annual cost of
asset verification to be $282,780,000.\653\ We estimate the

aggregate annual cost of asset verification for all assets during a
surprise examination to be $40,176,000.\654\ In sum, the total annual
monetized collection of information burden related to the exception for
privately offered securities and physical assets is $322,956,000.\655\
---------------------------------------------------------------------------

    \650\ See proposed rule 223-1(b)(2)(v).
    \651\ 4,961 (advisers relying on exception)/95% (estimated
number of advisers relying on the exception obtaining audits) =
4,713.
    \652\ 4,961 (advisers relying on exception)/5% (estimated number
of advisers relying on the exception obtaining surprise exams) =
248.
    \653\ 4,713 (estimated number of advisers subject to the
exception relying on the audit provision) x $60,000 (additive
estimated cost of audit). The additive costs to the audit (and
surprise examination) of full asset verification are mitigated by
proposed rule 223-1(b)(2)(iii), which requires an accountant to
verify any purchase, sale, or other transfer of beneficial ownership
of assets subject to the exception promptly after receipt of notice
from the adviser. The extent of this mitigation is hard to estimate
with certainty. We estimate that all asset verification will
approximately double the cost of an audit, estimated at $60,000 per
audit. See infra section IV.C.2.
    \654\ 248 (estimated number of advisers subject to the
exception) x $162,000. We previously estimated that advisers subject
to the surprise examination with respect to 100 percent of their
clients will each spend an average of approximately $162,000
annually. As with the cost of an audit, we estimate that full asset
verification will approximately double the cost of the surprise
examination.
    \655\ $282,780,000 + $40,176,000.
---------------------------------------------------------------------------

2. Audit Provision
    The proposed rule would expand the availability of the audit
provision from limited partnerships, limited liability companies, and
other types of pooled investment vehicle clients to any advisory client
entity whose financial statements are able to be audited. Advisers that
seek to comply with the audit provision would be required to deliver,
promptly after the completion of the audit, the financial statements of
the entity to all investors.
    The collection of information burden imposed on an adviser relating
to the distribution of audited financial statements to each investor in
a client entity that the adviser manages should be minimal, as the
financial statements could be included with account statements or other
mailings or delivered electronically. Based on our experience with the
audit provision in the current custody rule, we have estimated
previously that the average burden for advisers to deliver audited
financial statements to investors in the client entity is 1 minute per
investor.\656\ Based on our estimate of the number of advisers to
audited pooled investment vehicles,\657\ with an adjustment for our
expectation that an increasing number of advisers will obtain audits of
client entities,\658\ we estimate that the aggregate annual hour burden
in connection with the distribution of audited financial statements is
7,098 hours,\659\ and there would be an annual cost of this internal
hour burden of $1,242,150.\660\
---------------------------------------------------------------------------

    \656\ 2009 Adopting Release, supra note 11.
    \657\ Based on IARD data as of June 30, 2022, 4,961 advisers
with custody of client assets provided advice to pooled investment
vehicles. We estimate that each adviser has an average of 6 pooled
investment vehicle clients with an average of 14 investors.
    \658\ Because the proposed rule expands the types of entities
that can obtain an audit (i.e., is not limited to pooled investment
vehicles as in the current rule), we expect that an increasing
number of advisers will seek to comply with the proposed rule by
obtaining an audit. To estimate the number of entities that may
utilize the expanded availability of the audit provision, we
selected the following categories of clients with custody based on
IARD data as of June 30, 2022: Investment advisers with custody that
have pension and profit sharing plan clients: 3,068 (Average number
of pension and profit sharing clients: (6); Investment advisers with
custody that have charitable organization clients: 3,205 (Average
number of charitable organization clients: (3); Investment advisers
with custody that have state or municipal government entity clients:
986 (Average number of state or municipal government entity clients:
(3); Investment advisers with custody that have corporations and
other business entity clients: 3,025 (Average number of corporations
and other business entity clients: (5). We estimate that 20% of
advisers to these categories of clients will utilize the expanded
availability of the audit provision.
    \659\ (4,961 advisers to pooled investment vehicles x 6 pooled
investment vehicle clients x 14 investors x 1 minute)/60 minutes =
6,945 hours; (3,068 advisers to pension and profit sharing clients x
20% x 6 clients x 1 minute)/60 minutes = 61 hours; (3,205 advisers
to charitable organization clients x 20% x 3 clients x 1 minute)/60
minutes = 32 hours; (986 advisers to state or municipal government
entity clients x 20% x 3 clients x 1 minute)/60 minutes = 10 hours;
(3,025 advisers to corporations and other business entity clients x
20% x 5 clients x 1 minute)/60 minutes = 50 hours; 6,945 hours + 61
hours +32 hours +10 hours +50 hours = 7,098 hours.
    \660\ This estimate is based on the following calculation: 7,098
hours x $175 (blended rate for an intermediate accountant ($200), a
general accounting supervisor ($252), and a general clerk ($73).
---------------------------------------------------------------------------

    The proposed rule would require an adviser or the client entity to
enter into a written agreement with the independent public accountant
to ensure that the independent public accountant that audits the client
entity notifies the Commission (i) within one business day of issuing
an audit report to the entity that contains a modified opinion and (ii)
within four business days of resignation or dismissal from, or other
termination of, the engagement, or upon removing itself or being
removed from consideration for being reappointed.\661\ We assume that,
regardless of whether the adviser or the client entity enters into the
written agreement, the accountant would incur the hour burden of
preparing the agreement. We also assume that, if the client entity was
party to the agreement, the client entity would delegate the task of
reviewing the agreement to the adviser. This estimate also assumes that
the adviser would enter into a separate agreement for each client
entity, even if multiple client entities use the same auditor. We
believe that written agreements are commonplace and reflect industry
practice when a person retains the services of a professional such as
an accountant, and they are typically prepared by the independent
public accountant in advance. We therefore estimate that each adviser
will initially spend 1.25 hours to add the required provisions to, or
confirm that the required provisions are in, the written agreement,
with an initial aggregate of 48,735 hours \662\ for all advisers that
satisfy the requirements of the audit engagement. We further estimate
that each adviser will spend 0.92 hours \663\ on an annual basis to
reassess current written agreements and execute new agreements as an
adviser adds entity clients for an annual aggregate of 35,869 hours
\664\ and an annual cost of this internal hour burden of $19,476,867
\665\ for all advisers that satisfy the requirements of the audit
provision.
---------------------------------------------------------------------------

    \661\ Proposed rule 223-1(b)(4)(v).
    \662\ 4,961 advisers to pooled investment vehicles x 6 pooled
investment vehicle clients = 29,766 client written agreements; 3,068
advisers to pension and profit sharing clients x 20% x 6 clients =
3,682 client written agreements; 3,205 advisers to charitable
organization clients x 20% x 3 clients = 1,923 client written
agreements; 986 advisers to state or municipal government entity
clients x 20% x 3 clients = 592 client written agreements; 3,025
advisers to corporations and other business entity clients x 20% x 5
clients = 3,025 client written agreements; (29,766 + 3,682 + 1,923 +
592 + 3,025) x 1.25 hours per agreement = 48,735 hours.
    \663\ This includes the internal initial burden estimate
amortized over a three-year period (1.25 hours/3 years) and another
0.5 hours of additional ongoing burden hours = 0.92 hours.
    \664\ (29,766 + 3,682 + 1,923 + 592 + 3,025) x 0.92 hours per
ongoing annual burden = 35,869 hours.
    \665\ This estimate is based on the following calculation:
35,869 hours x $543 (rate for assistant general counsel).
---------------------------------------------------------------------------

D. Total Hour Burden Associated With Proposed Rule 223-1

    Accordingly, we estimate investment advisers that would be subject
to the proposed rule would incur a total annual hour burden resulting
from the collections of information discussed above of approximately
398,152 hours,\666\ at a time cost of $154,579,839.\667\ The total
external burden costs would be $378,598,500.\668\
---------------------------------------------------------------------------

    \666\ This estimate is based upon the following calculations:
111,552 + 9,482 + 12,552 + 18,422 + 14,385 + 959 + 69,720 + 13,944 +
6,201 + 2,481 + 133 + 13,944 + 80,949 + 461 + 7,098 + 35,869 hours =
398,152 hours.
    \667\ This estimate is based upon the following calculations:
$43,951,488 + $3,735,908 + $12,203,756 + $4,869,322.50 + $324,621.50
+ $27,469,680 + $5,493,936 + $4,720,044 + $27,623,345 + $2,443,194 +
$977,514 + $48,013 + $1,242,150 + $19,476,867 = $154,579,839.
    \668\ This estimate is based upon the following calculations:
$35,962,500 + $19,680,000 + $322,956,000 = $378,598,500.
---------------------------------------------------------------------------

    A chart summarizing the various proposed components of the total
annual burden for investment advisers with custody of client assets is
below.

----------------------------------------------------------------------------------------------------------------
   Rule 223-1 description of new                                                                External burden
            requirements                    Number of responses         Internal burden hours        costs
----------------------------------------------------------------------------------------------------------------
                      Final Estimates for Qualified Custodian Protections Under 223-1(a)(1)
----------------------------------------------------------------------------------------------------------------
Initial burden for drafting,         55,776 (4 per adviser with        111,552 (2 per
 negotiating, and executing new       custody).                         response).
 written custodial agreements with
 required provisions between the
 adviser and qualified custodian
 (``QC'') (IA-QC custodial
 contract).
Annual burden for drafting,          55,776 (4 per adviser with        9,482 (.17 hour per
 negotiating, and executing new       custody).                         response).
 written custodial agreements with
 required provisions between the
 adviser and qualified custodian
 (IA-QC custodial contract).
Annual burden for QC to provide      8,368 (4 per adviser examined)..  12,552 (1.5 hour per
 records relating to clients'                                           response).
 assets to the Commission *.
* This is not broken up into
 initial and ongoing burden because
 the annual burden is estimated to
 be the same each year.
Annual burden for QC to provide      36,844 (4 per adviser obtaining   18,422 (.5 hour per
 records relating to clients'         a surprise examination or         response).
 assets to an independent public      audit).
 accountant *.
* This is not broken up into
 initial and ongoing burden because
 the annual burden is estimated to
 be the same each year.
Initial burden for QC to send        959 (estimated qualified          14,385 hours (15 hours
 account statements, at least         custodians).                      per qualified
 quarterly, to the client, or its                                       custodian).
 independent representative, and to
 adviser.
Annual burden for QC to modify and   959 (estimated qualified          959 (1 hour per
 send account statements.             custodians).                      qualified custodian).
Annual burden for QC to obtain       ................................  ......................        $35,962,500
 internal control report.
Initial burden for adviser           55,776 (1 per adviser)..........  69,720 (1.25 hours per
 obtaining reasonable assurances                                        response).
 from the QC.
Annual burden for adviser obtaining  55,776 (1 per adviser)..........  13,944 (.25 hours per
 reasonable assurances from the QC.                                     response).
----------------------------------------------------------------------------------------------------------------
  Final Estimates for Exceptions for Certain Assets that are Unable to be Maintained with a Qualified Custodian
                                                Under 223-1(b)(2)
----------------------------------------------------------------------------------------------------------------
Initial burden for written           4,961 (estimated number of        6,201 (1.25 hours per
 agreement with independent public    advisers with custody of          adviser).
 accountant (IPA).                    privately offered securities
                                      and physical assets that cannot
                                      be maintained with a qualified
                                      custodian under the proposed
                                      rule).
Annual burden for written agreement  4,961...........................  2,481 (.5 hour per
 with IPA.                                                              adviser).
Annual burden to notify the IPA of   8,000 (estimated number of        133 hours (1 minute
 any purchase, sale, or other         annual transactions).             per transaction).
 transfer of beneficial ownership
 of such assets within one business
 day.
Annual burden to verify the          ................................  ......................        $19,680,000
 purchase, sale, or other transfer
 promptly upon receiving the
 required transfer notice *.
* This does not contain an internal
 burden estimate because the burden
 under this requirement is solely
 an external monetary burden.
Annual burden to verify all assets   ................................  ......................       $322,956,000
 during a surprise exam or an
 annual audit *.
* This does not contain an internal
 burden estimate because the burden
 under this requirement is solely
 an external monetary burden.
----------------------------------------------------------------------------------------------------------------
                   Final Estimates for Complying with the Notice Requirement Under 223-1(a)(2)
----------------------------------------------------------------------------------------------------------------
Initial burden for complying with    13,944 advisers (1 per adviser).  13,944 hours (1 hour
 the notice requirement*.                                               per adviser ).
* This would be a one-time burden
 to include account numbers in the
 notices.
----------------------------------------------------------------------------------------------------------------
             Final Estimates for Independent Verification or Surprise Examination Under 223-1(a)(4)
----------------------------------------------------------------------------------------------------------------
Annual burden for complying with     1,842 advisers are subject to     80,949 hours \1\......
 the independent verification/        the surprise exam.
 surprise examination of client
 assets by an IPA under a written
 agreement between the IPA and the
 adviser *.
* This is not broken up into
 initial and ongoing burden because
 the annual burden is estimated to
 be the same each year.

Annual burden to enter into a        1,842 advisers..................  461 hours (.25 per
 written agreement with an IPA                                          adviser).
 engaged to conduct the surprise
 examination and specify certain
 duties to be performed by the
 independent public accountant *.
* This is not broken up into
 initial and ongoing burden because
 the annual burden is estimated to
 be the same each year.
----------------------------------------------------------------------------------------------------------------
                         Exception for Entities Subject to the Annual Audit 223-1(b)(4)
----------------------------------------------------------------------------------------------------------------
Annual burden for distributing       7,018 advisers..................  7,098 hours...........
 audited financial statements.
Annual burden for drafting,          7,018 advisers..................  35,869 hours..........
 negotiating, and executing the
 required written agreement between
 the IPA and adviser regarding
 notifications from the IPA to the
 Commission of specified events.
----------------------------------------------------------------------------------------------------------------
                                   TOTAL ESTIMATED FINAL BURDEN FOR RULE 223-1
----------------------------------------------------------------------------------------------------------------
Total estimated burden for rule 223- 319,856.........................  398,152 hours.........       $378,598,500
 1.
Currently approved burden for rule   24,133,429......................  288,202 hours.........       $174,367,000
 206(4)-2.
Comparison of proposed rule 223-1    (23,813,573)....................  109,950 hours.........       $204,231,500
 burdens to current rule 206(4)-2
 burdens.
----------------------------------------------------------------------------------------------------------------
Notes:
1. Advisers can be subject to the surprise exam for several reasons. For a more detailed breakout of the types
  of advisers and their respective burdens see section IV.B.3.

E. Rule 204-2

    Under section 204 of the Advisers Act, investment advisers
registered or required to register with the Commission under section
203 of the Advisers Act must make and keep for prescribed periods such
records (as defined in section 3(a)(37) of the Exchange Act), furnish
copies thereof, and make and disseminate such reports as the
Commission, by rule, may prescribe as necessary or appropriate in the
public interest or for the protection of investors. Rule 204-2 sets
forth the requirements for maintaining and preserving specified books
and records. This collection of information is found at 17 CFR 275.204-
2 and is mandatory. The Commission staff uses the collection of
information in its examination and oversight program. As noted above,
responses provided to the Commission in the context of its examination
and oversight program concerning the proposed amendments to rule 204-2
would be kept confidential subject to the provisions of applicable law.
    We are proposing amendments to rule 204-2 to correspond to proposed
new rule 223-1. Specifically, we are proposing to require investment
advisers to maintain the following records for client accounts: (1)
client account identification, (2) custodian information, including
copies of qualified custodian agreements with the adviser, a record of
required reasonable assurances from the qualified custodian, and if
applicable, a copy of the adviser's written reasonable determination
that ownership of certain specified client assets cannot be recorded
and maintained under a qualified custodian's possession or control, (3)
the basis for the adviser having custody of client assets in the
account, (4) any account statements received or sent by the adviser,
(5) transaction and position information, and (6) any SLOAs and related
records to verify that an adviser can avail itself of the proposed
exception to the surprise examination requirement.\669\ The proposed
amendments also would require an adviser to maintain copies of all
written notices to clients required under proposed rule 223-1 and any
responses thereto, and copies of documents relating to independent
public accountant engagements.
---------------------------------------------------------------------------

    \669\ Proposed rule 204-2(b)(2)(vi).
---------------------------------------------------------------------------

    Each of these records would be required to be maintained in the
same manner, and for the same period of time, as other books and
records required to be maintained under rule 204-2(a). Specifically,
investment advisers would be required to maintain and preserve these
records in an easily accessible place for not less than five years from
the end of the fiscal year during which the last entry was made on such
record, the first two years in an appropriate office of the investment
adviser. Requiring maintenance of these records would facilitate the
Commission's ability to inspect and enforce compliance with proposed
rule 223-1. The information generally is kept confidential.\670\
---------------------------------------------------------------------------

    \670\ See section 210(b) of the Advisers Act (15 U.S.C. 80b-
10(b)).
---------------------------------------------------------------------------

    The respondents to this collection of information are investment
advisers registered or required to be registered with the Commission
that have custody of client assets. As noted above, based on Form ADV
filings, as of June 30, 2022, we estimate that 13,944 registered
investment advisers would have custody of client assets under proposed
rule 223-1 and would be subject to the proposed amendments to rule 204-
2.
    For the proposed retention of SLOAs and related records, however,
we believe that not every adviser with custody of client assets will
have clients that issue SLOAs. Thus, such advisers would not seek to
rely on the proposed SLOA exception. Of the 13,944 advisers with
custody of client assets, we estimate that approximately 20%, or
approximately 2,789 advisers, will have clients that issue SLOAs.
Because we believe that many such advisers already retain copies of
client SLOAs in their books and records, in our view this particular
collection of information requirement would have a negligible impact on
them. As a result, we estimate that this collection of information will
result in an increased burden of .25 hours for each adviser seeking to
rely on the proposed SLOA exception. Therefore, we estimate that the
annual total internal burden of retaining copies of, and records
relating to, client SLOAs would be approximately 697.25 hours,\671\
represented by a monetized cost of $57,174.50.
---------------------------------------------------------------------------

    \671\ This estimate is based on the following calculation: .25
hours per adviser x 2,789 advisers.
---------------------------------------------------------------------------

    The approved annual aggregate burden for rule 204-2 is currently

2,764,563 hours, based on an estimate of 13,724 registered advisers, or
201.44 hours per registered adviser.\672\ For the proposed
recordkeeping amendments that correspond to proposed changes to the
custody rule as discussed in this release, we estimate that the
proposed amendments would result in an increase in the collection of
information burden estimate by 21 hours for each of the estimated
13,944 registered advisers with custody of client assets. We,
therefore, estimate that the revised annual aggregate hourly burden for
rule 204-2 would be 3,347,352 hours, represented by a monetized cost of
$217,333,279 based on an estimate of 15,160 registered advisers, of
which we estimate 13,944 would have custody of client assets under the
proposed rule. This represents an increase of 582,789 \673\ annual
aggregate hours in the hour burden and an annual monetized cost
increase of $41,352,853 from the currently approved total aggregate
monetized cost for rule 204-2.\674\ These increases are attributable to
a larger registered investment adviser population since the most recent
approval and adjustments for inflation, as well as the proposed rule
204-2 amendments as discussed in this proposing release.
---------------------------------------------------------------------------

    \672\ 2,764,563 hours/13,724 registered advisers = 201.44 hours
per adviser.
    \673\ 3,347,352 hours-2,764,563 hours = 582,789 hours.
    \674\ $217,333,279-$175,980,426 = $41,352,853.
---------------------------------------------------------------------------

    A chart summarizing the various components of the total annual
burden for investment advisers with custody of client assets is below.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Annual
                                               Internal hour                              Wage rate \1\                     Internal time      external
                                                   burden                                                                       costs        cost burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                Final Estimates for Rule 204-2 for Client Communications
--------------------------------------------------------------------------------------------------------------------------------------------------------
Retention of written client notifications                    3      x   $82 (compliance clerk)..........................               $246  ...........
 and responses.
                                            ------------------------------------------------------------------------------------------------------------
    Total burden per adviser...............                  3  ......  ................................................               $246  ...........
    Total number of affected advisers......           x 13,944  ......  ................................................           x 13,944  ...........
                                            ------------------------------------------------------------------------------------------------------------
        Sub-total burden...................             41,832  ......  ................................................         $3,430,224  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Final Estimates for Rule 204-2 for Client Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
Creation and retention of records                            2      x   $73 (general clerk).............................               $146
 documenting client account identifying
 information, including adviser
 discretionary authority.
                                                             1      x   $82 (compliance clerk)..........................                $82  ...........
                                            ------------------------------------------------------------------------------------------------------------
    Total burden per adviser...............                  3  ......  ................................................               $228  ...........
    Total number of affected advisers......           x 13,944  ......  ................................................           x 13,944  ...........
                                            ------------------------------------------------------------------------------------------------------------
        Sub-total burden...................             41,832  ......  ................................................         $3,179,232  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Creation and retention of records                            2      x   $73 (general clerk).............................               $146  ...........
 documenting custodian identifying
 information corresponding to each client
 account, including copies of qualified
 custodian agreements with adviser, a
 record of required reasonable assurances
 from the qualified custodian, and if
 applicable, a copy of the adviser's
 written reasonable determination that
 ownership of certain specified client
 assets cannot be recorded and maintained
 under a qualified custodian's possession
 or control.
                                                             1      x   $82 (compliance clerk)..........................                $82  ...........
                                            ------------------------------------------------------------------------------------------------------------
    Total burden per adviser...............                  3  ......  ................................................               $228  ...........
    Total number of affected advisers......           x 13,944  ......  ................................................           x 13,944  ...........
                                            ------------------------------------------------------------------------------------------------------------
        Sub-total burden...................             41,832  ......  ................................................         $3,179,232  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Creation and retention of records                            2      x   $73 (general clerk).............................               $146  ...........
 documenting adviser's basis of custody of
 client assets.
                                                             1      x   $82 (compliance clerk)..........................                $82  ...........
                                            ------------------------------------------------------------------------------------------------------------
    Total burden per adviser...............                  3  ......  ................................................               $228  ...........
    Total number of affected advisers......           x 13,944  ......  ................................................           x 13,944  ...........
                                            ------------------------------------------------------------------------------------------------------------
        Sub-total burden...................             41,832  ......  ................................................         $3,179,232  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Retention of copies of account statements..                  2      x   $82 (compliance clerk)..........................               $164  ...........
                                            ------------------------------------------------------------------------------------------------------------
    Total burden per adviser...............                  2  ......  ................................................               $164  ...........
    Total number of affected advisers......           x 13,944  ......  ................................................           x 13,944  ...........
                                            ------------------------------------------------------------------------------------------------------------
        Sub-total burden...................             27,888  ......  ................................................         $2,286,816  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Creation and retention of records of                         3      x   $82 (compliance clerk)..........................               $246  ...........
 detailed transaction and position
 information for each client account.
                                            ------------------------------------------------------------------------------------------------------------
    Total burden per adviser...............                  3  ......  ................................................               $246  ...........
    Total number of advisers...............           x 13,944  ......  ................................................           x 13,944  ...........
                                            ------------------------------------------------------------------------------------------------------------
        Sub-total burden...................             41,832  ......  ................................................         $3,430,224  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Retention of copies of, and records                        .25      x   $82 (compliance clerk)..........................             $20.50  ...........
 relating to, standing letters of
 authorization.
                                            ------------------------------------------------------------------------------------------------------------
    Total burden per adviser...............                .25  ......  ................................................             $20.50  ...........

    Total number of advisers...............            x 2,789  ......  ................................................            x 2,789  ...........
                                            ------------------------------------------------------------------------------------------------------------
        Sub-total burden...................             697.25  ......  ................................................         $57,174.50  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                            Final Estimates for Rule 204-2 for Independent Public Accountant
--------------------------------------------------------------------------------------------------------------------------------------------------------
Retention of copies of all audited                           3      x   $73 (general clerk).............................               $219  ...........
 financial statements, internal control
 reports, and required written agreements
 between independent public accountant and
 adviser or its client.
                                                             1      x   $82 (compliance clerk)..........................                $82  ...........
                                            ------------------------------------------------------------------------------------------------------------
    Total burden per adviser...............                  4  ......  ................................................               $301  ...........
    Total number of affected advisers......           x 13,944  ......  ................................................           x 13,944  ...........
                                            ------------------------------------------------------------------------------------------------------------
        Sub-total burden...................             55,776  ......  ................................................         $4,197,144  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       Total Estimated Final Burden for Rule 204-2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total burden for this rulemaking...........         293,521.25  ......  ................................................     $22,939,278.50  ...........
Previously approved burden plus the                  3,053,831  ......  ................................................       $194,394,000  ...........
 additional burden due to the increase in
 the number of advisers.
                                            ------------------------------------------------------------------------------------------------------------
    Total burden...........................          3,347,352  ......  ................................................       $217,333,279  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ The Commission's estimates of the relevant wage rates are based 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 figures are modified by firm size,
  employee benefits, overhead, and adjusted to account for the effects of inflation. See the SIFMA Wage Report.

F. Form ADV

    The proposed amendments to Form ADV would increase the information
requested in Form ADV Part 1A. More specifically, we are proposing
amendments to Form ADV Part 1A, Schedule D, and the Instructions and
Glossary of Form ADV that are designed to help advisers identify when
they may have custody of client assets, to provide the Commission with
information related to advisers' practices to safeguard client assets
information about advisers' practices to safeguard client assets, to
provide the Commission with information related to these practices, and
to provide the Commission with additional data to improve our ability
to identify compliance risks.
    The estimated new burdens below also take into account changes in
the numbers of advisers since the last approved PRA for Form ADV and
increased costs due to inflation. Based on the prior amendments to Form
ADV, we estimated the annual compliance burden to comply with the
collection of information requirement of Form ADV is 433,004 burden
hours per year and an external cost burden estimate of
$14,125,083.\675\ Compliance with the disclosure requirements of Form
ADV is mandatory, and the responses to the disclosure requirements will
not be kept confidential.
---------------------------------------------------------------------------

    \675\ See Investment Adviser Marketing, Final Rule, Investment
Advisers Act Release No. 5653 (Dec. 22, 2020) [81 FR 60418 (Mar. 5,
2021)] and corresponding submission to the Office of Information and
Regulatory Affairs at Reginfo.gov (``2021 Form ADV PRA'').
---------------------------------------------------------------------------

    We propose the following changes to our PRA methodology for Form
ADV:
     Form ADV Parts 1 and 2. Form ADV PRA has historically
calculated a per adviser per year hourly burden for Form ADV Parts 1
and 2 for each of (i) the initial burden and (ii) the ongoing burden,
which reflects advisers' filings of annual and other-than-annual
updating amendments. We noted in previous PRA amendments that most of
the paperwork burden for Form ADV Parts 1 and 2 would be incurred in
the initial submissions of Form ADV. However, recent PRA amendments
have continued to apply the total initial hourly burden for Parts 1 and
2 to all currently registered or reporting SEC-registered investment
advisers (``RIAs'') and exempt reporting advisers (``ERAs''),
respectively, in addition to the estimated number of new advisers
expected to be registering or reporting with the Commission annually.
We believe that the total initial hourly burden for Form ADV Parts 1
and 2 going forward should be applied only to the estimated number of
expected new advisers annually. This is because currently registered or
reporting advisers have generally already incurred the total initial
burden for filing Form ADV for the first time. On the other hand, the
estimated expected new advisers will incur the full total burden of
initial filing of Form ADV, and we believe it is appropriate to apply
this total initial burden to these advisers. We propose to continue to
apply any new initial burdens resulting from proposed amendments to
Form ADV Parts 1 and 2, as applicable, to all currently registered or
reporting investment advisers plus all estimated expected new RIAs and
ERAs annually.
     Private fund reporting. We have previously calculated
advisers' private fund reporting as a separate initial burden. The
currently approved burden for all registered and exempt reporting
advisers, including expected new registered advisers and new exempt
reporting advisers, with respect to reported private funds, is 1 hour
per private fund reported, which we have previously amortized over
three years for all private fund advisers. We propose to continue to
calculate advisers' private fund reporting as a separate reporting
burden, but we propose to apply the initial burden only with respect to
the expected new private funds.

                                                            Table 10--Form ADV PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Internal annual
                                  Initial hours per year     amendment  burden       Wage rate \2\          Internal time costs        Annual external
                                                                 hours \1\                                                             cost burden \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             PROPOSED AMENDMENTS TO FORM ADV
                                        RIAs (burden for Parts 1 and 2, not including private fund reporting) \4\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed additions (per adviser)  1 hour for Part 1A....  0.4 hours \5\.........  $318 per hour        1.4 hours x $318 per hour =
 to Part 1A Item 9 and                                                             (blended rate for    $445.20.
 corresponding schedules.                                                          senior compliance
                                                                                examiner and
                                                                                compliance
                                                                                manager) \6\.
Current burden per adviser \7\..  29.72 hours \8\.......  11.8 hours \9\........  $273.00 per hour     (29.72 + 11.8) x $273.00 =    $2,069,250
                                                                                (blended rate for    $11,334.96.                   aggregated
                                                                                senior compliance                                  (previously
                                                                                examiner and                                       presented only in
                                                                                compliance                                         the aggregate)
                                                                                manager).                                          \10\.
Revised burden per adviser......  29.72 hours + 1 hour =  0.4 hours + 11.8 hours  $318 (blended rate   (30.72 + 12.2) x $318 =       $4,780.50 \11\.
                                   30.72 hours.            = 12.2 hours.           for senior           $13,648.56.
                                                                                compliance
                                                                                examiner and
                                                                                compliance
                                                                                manager).
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Total revised aggregate       32,117.44 \12\........  191,686.4 hours \13\..  Same as above......  (32,177,44 + 191,686.4) x     $11,162,546 \14\.
     burden estimate.                                                                                $318 = $71,169,621.12.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              RIAs (burden for Part 3) \15\
--------------------------------------------------------------------------------------------------------------------------------------------------------
No proposed changes
Current burden per RIA..........  20 hours, amortized     1.58 hours \17\.......  $273 (blended rate   $273 x (6.67 + 1.58) =        $2,433.74 per
                                   over three years =                              for senior           $2,249.52.                    adviser \18\.
                                   6.67 hours \16\.                                compliance
                                                                                examiner and
                                                                                compliance
                                                                                manager).
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Total updated aggregate       70,646.67 hours \19\..  15,646.74 hours \20\..  $318 (blended rate   $27,441,303.32 ($318 x        $9,930,272.08 \21\.
     burden estimate.                                                              for senior           (70,646.67 hours +
                                                                                compliance           15,646.74 hours).
                                                                                examiner and
                                                                                compliance manager.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                          ERAs (burden for Part 1A, not including private fund reporting) \22\
--------------------------------------------------------------------------------------------------------------------------------------------------------
No proposed changes.............
Current burden per ERA..........  3.60 hours \23\.......  1.5 hours + final       $273 (blended rate   ............................  $0
                                                           filings \24\.           for senior
                                                                                compliance
                                                                                examiner and
                                                                                compliance
                                                                                manager).
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Total revised aggregate       1,245.60 \25\.........  8,777.60 hours \26\...  $318 (blended rate   $3,187,377.60 ($318 x         $0
     burden estimate.                                                              for senior           (1,245.6 + 8,777.60 hours)).
                                                                                compliance
                                                                                examiner and
                                                                                compliance manager.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Private Fund Reporting \27\
--------------------------------------------------------------------------------------------------------------------------------------------------------
No proposed changes.............
Current burden per adviser to     1 hour per private      N/A--included in the    $273 (blended rate   ............................  Cost of $46,865.74
 private fund.                     fund \28\.              existing annual         for senior                                         per fund, applied
                                                           amendment burden.       compliance                                         to 6% of RIAs that
                                                                                examiner and                                       report private
                                                                                compliance                                         funds \29\.
                                                                                manager).
Total updated aggregate burden    1,150 hours \30\......  N/A...................  $318 (blended rate   $5,173,478.40 ($318 x 16,269  $14,856,439.58
 estimate.                                                                         for senior           \30\ hours)).                 \31\.
                                                                                compliance
                                                                                examiner and
                                                                                compliance
                                                                                manager).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      TOTAL ESTIMATED BURDENS, INCLUDING AMENDMENTS
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current per adviser burden/       23.82 hours \32\.                                                    23.82 hours x $273 =          $777 \33\.
 external cost per adviser.                                                                             $6,502.86 per adviser cost
                                                                                of the burden hour.
Revised per adviser burden/       15.62 hours \34\.                                                    15.62 hours x $318 =          $1,669.03 \35\.
 external cost per adviser.                                                                             $4,966.43 per adviser cost
                                                                                of the burden hour.
Current aggregate burden          433,004 initial and amendment hours annually \36\.                   433,004 x $273 =              $14,125,083 \37\.
 estimates.                                                                                $118,210,092 aggregate cost
                                                                                of the burden hour.
Revised aggregate burden          336,389.45 \38\ Initial and amendment hours annually.                336,389.45 x $318 =           $35,949,257.66
 estimates.                                                                                $106,971,844.04 aggregate     \39\.
                                                                                cost of the burden hour.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ This column estimates the hourly burden attributable to annual and other-than-annual updating amendments to Form ADV, plus RIAs' ongoing obligations
  to deliver codes of ethics to clients.
\2\ As with Form ADV generally, and pursuant to the currently approved PRA (see 2021 Form ADV PRA), we expect that for most RIAs and ERAs, the
  performance of these functions will most likely be equally allocated between a senior compliance examiner and a compliance manager, or persons
  performing similar functions. The Commission's estimates of the relevant wage rates are based on the SIFMA Wage Report, modified by firm size,
  employee benefits, overhead, and adjusted to account for the effects of inflation.
\3\ External fees are in addition to the projected hour per adviser burden. Form ADV has a one-time initial cost for outside legal and compliance
  consulting fees in connection with the initial preparation of Parts 2 and 3 of the form. In addition to the estimated legal and compliance consulting
  fees, investment advisers of private funds incur one-time costs with respect to the requirement for investment advisers to report the fair value of
  private fund assets.

\4\ Based on Form ADV data as of June 2022, we estimate that there are 15,160 RIAs (``current RIAs'') and 552 advisers that are expected to become RIAs
  annually (``newly expected RIAs'').
\5\ We estimate that 12,570 RIAs (80% of the total of 15,712 combined current and expected RIAs that are required to complete Parts 1 and 2) would incur
  a burden of 0.5 hour, and 3,142 RIAs (20% of 15,712 current and expected RIAs that are required to complete Parts 1 and 2) would incur a burden of 0
  hours. (12,570 RIAs x 0.5) + (3,142 RIAs x 0)/15,712 = 0.4 blended average hours per RIA.
\6\ The $318 wage rate reflects current estimates from the SIFMA Wage Report of the blended hourly rate for a senior compliance examiner ($276) and a
  compliance manager ($360). ($276 + $360)/2 = $318.
\7\ Per above, we are proposing to revise the PRA calculation methodology to apply the full initial burden only to expected RIAs, as we believe that
  current RIAs have generally already incurred the burden of initially preparing Form ADV.
\8\ See 2020 Form ADV PRA Renewal (stating that the estimate average collection of information burden per adviser for Parts 1 and 2 is 29.22 hours,
  prior to the most recent amendment to Form ADV). See also 2021 Form ADV PRA (adding 0.5 hours to the estimated initial burden for Part 1A in
  connection with the most recent amendment to Form ADV). Therefore, the current estimated average initial collection of information hourly burden per
  adviser for Parts 1 and 2 is 29.72 hours (29.22 + 0.5 = 29.72).
\9\ The currently approved average total annual burden for RIAs attributable to annual and other-than-annual updating amendments to Form ADV Parts 1 and
  2 is 10.5 hours per RIA, plus 1.3 hours per year for each RIA to meet its obligation to deliver codes of ethics to clients (10.5 + 1.3 = 11.8 hours
  per adviser). See 2020 Form ADV PRA Renewal (these 2020 hourly estimates were not affected by the 2021 amendments to Form ADV). As we explained in
  previous PRAs, we estimate that each RIA filing Form ADV Part 1 will amend its form 2 times per year, which consists of one interim updating amendment
  (at an estimated 0.5 hours per amendment), and one annual updating amendment (at an estimated 8 hours per amendment), each year. We also explained
  that we estimate in that each RIA will, on average, spend 1 hour per year making interim amendments to brochure supplements, and an additional 1 hour
  per year to prepare brochure supplements as required by Form ADV Part 2. See id.
\10\ See 2020 Form ADV PRA Renewal (the subsequent amendment to Form ADV described in the 2021 Form ADV PRA did not affect that estimate).
\11\ External cost per RIA includes the external cost for initially preparing Part 2, which we have previously estimated to be approximately 10 hours of
  outside legal counsel for a quarter of RIAs, and 8 hours of outside management consulting services for half of RIAs. See 2020 Form ADV Renewal (these
  estimates were not affected by subsequent amendments to Form ADV). The proposal does not add to this burden. This burden remains 10 hours and 8 hours,
  respectively, for \1/4\ and \1/2\ of RIAs, respectively). (((.25 x 15,160 RIAs) x ($565 x 10 hours)) + ((0.50 x 15,160 RIAs) x ($842 x 8 hours)))/
  15,160 RIAs = $4,780.50 per adviser.
\12\ Per above, we are proposing to revise the PRA calculation methodology for current RIAs to not apply the full initial burden to current RIAs, as we
  believe that current RIAs have generally already incurred the initial burden of preparing Form ADV. Therefore, we calculate the initial burden
  associated with complying with the proposed amendment of 1 initial hours x 15,160 current RIAs = 15,160, initial hours in the first year aggregated
  for current RIAs. We are not amortizing this burden because we believe current advisers will incur it in the first year. For expected RIAs, we
  estimate that they will incur the full revised initial burden, which is 30.72 hours per RIA. Therefore, 30.72 hours x 552 expected RIAs = 16,957.44
  aggregate hours for expected RIAs. We do not amortize this burden for expected new RIAs because we expect a similar number of new RIAs to incur this
  initial burden each year. Therefore, the total revised aggregate initial burden for current and expected RIAs is 15,160 hours + 16,957.44 hours =
  32,117.44 aggregate initial hours.
\13\ 12.2 amendment hours x (15,160 current RIAs + 552 expected new RIAs) = 191,686 aggregate amendment hours.
\14\ Per above, for current RIAs, we are proposing to not apply the currently approved external cost for initially preparing Part 2, because we believe
  that current RIAs have already incurred that initial external cost. For current RIAs, therefore, we are applying only the external cost we estimate
  they will incur in complying with the proposed amendment. Therefore, the revised total burden for current RIAs is (((.25 x 15,160 RIAs) x ($565 x 1
  hour)) + ((0.50 x 15,160 RIAs) x ($842 x 1 hour))) = $8,523,710 aggregated for current RIAs, We do not amortize this cost for current RIAs because we
  expect current RIAs will incur this initial cost in the first year. For expected RIAs, we apply the currently approved external cost for initially
  preparing Part 2 plus the estimated external cost for complying with the proposed amendment. Therefore, $4,780.50 per expected RIA x 552 = $2,638,836
  aggregated for expected RIAs. We do not amortize this cost for expected new RIAs because we expect a similar number of new RIAs to incur this external
  cost each year. $8,523,710 aggregated for current RIAs + $2,638,836 aggregated for expected RIAs = $11,162,546 aggregated external cost for RIAs.
\15\ Even though we are not proposing amendments to Form ADV Part 3 (``Form CRS''), the burdens associated with completing Part 3 are included in the
  PRA for purposes of updating the overall Form ADV information collection. Based on Form ADV data as of October 31, 2021, we estimate that 8,877
  current RIAs provide advice to retail investors and are therefore required to complete Form CRS, and we estimate an average of 347 expected new RIAs
  to be advising retail advisers and completing Form CRS for the first time annually.
\16\ See Form CRS Relationship Summary; Amendments to Form ADV, Investment Advisers Act Release No. 5247 (June 5, 2019) [84 FR 33492 (Sep. 10, 2019)]
  (``2019 Form ADV PRA''). Subsequent PRA amendments for Form ADV have not adjusted the burdens or costs associated with Form CRS. Because Form CRS is
  still a new requirement for all applicable RIAs, we have, and are continuing to, apply the total initial burden to all current and expected new RIAs
  that are required to file Form CRS, and amortize that initial burden over three years for current RIAs.
\17\ As reflected in the currently approved PRA burden estimate, we stated that we expect advisers required to prepare and file the relationship summary
  on Form ADV Part 3 will spend an average 1 hour per year making amendments to those relationship summaries and will likely amend the disclosure an
  average of 1.71 times per year, for approximately 1.58 hours per adviser. See 2019 Form ADV PRA (these estimates were not amended by the 2021
  amendments to Form ADV).
\18\ See 2020 Form ADV PRA Amendment (this cost was not affected by the subsequent amendment to Form ADV and was not updated in connection with that
  amendment; while this amendment did not break out a per adviser cost, we calculated this cost from the aggregate total and the number of advisers we
  estimated prepared Form CRS). Note, however, that in our 2020 Form ADV PRA Renewal, we applied the external cost only to expected new retail RIAs,
  whereas we had previously applied the external cost to current and expected retail RIAs. We believe that since Form CRS is still a newly adopted
  requirement, we should continue to apply the cost to both current and expected new retail RIAs. See 2019 Form ADV PRA.
\19\ 9,556 current RIAs x 6.67 hours each for initially preparing Form CRS = 63,706.67 aggregate hours for current RIAs initially filing Form CRS. For
  expected new RIAs initially filing Form CRS each year, we are not proposing to use the amortized initial burden estimate, because we expect a similar
  number of new RIAs to incur the burden of initially preparing Form CRS each year. Therefore, 347 expected new RIAs x 20 initial hours for preparing
  Form CRS = 6,940 aggregate initial hours for expected RIAs. 63,706.67 hours + 6,940 hours = 70,646.67 aggregate hours for current and expected RIAs to
  initially prepare Form CRS.
\20\ 1.58 hours x (9,556 current RIAs updating Form CRS + 347 expected new RIAs updating Form CRS) = 15,646.74 aggregate amendment hours per year for
  RIAs updating Form CRS.
\21\ We have previously estimated the initial preparation of Form CRS would require 5 hours of external legal services for an estimated quarter of
  advisers that prepare Part 3, and 5 hours of external compliance consulting services for an estimated half of advisers that prepare Part 3. See 2020
  PRA Renewal (these estimates were not amended by the most recent amendment to Form ADV). The hourly cost estimate of $565 and $842 for outside legal
  services and management consulting services, respectively, are based on an inflation-adjusted figure in the SIFMA Wage Report. Therefore, (((.25 x
  9,556 current RIAs preparing Form CRS) x ($565 x 5 hours)) + ((0.50 x 9,556 current RIAs preparing Form CRS) x ($842 x 5 hours))) = $26,864,305. For
  current RIAs, since this is still a new requirement, we amortize this cost over three years for a per year initial external aggregated cost of
  $8,954,768.33. For expected RIAs that we expect would prepare Form CRS each year, we use the following formula: (((.25 x 347 expected RIAs preparing
  Form CRS) x ($565 x 5 hours)) + ((0.50 x 347 expected RIAs preparing Form CRS) x ($842 x 5 hours))) = $975,503.75 aggregated cost for expected RIAs.
  We are not amortizing this initial cost because we estimate a similar number of new RIAs would incur this initial cost in preparing Form CRS each
  year, $8,954,768.33 + $975,503.75 = $9,930,272.08 aggregate external cost for current and expected RIAs to initially prepare Form CRS.
\22\ Based on Form ADV data as of June 30, 2022, we estimate that there are 5,481 currently reporting ERAs (``current ERAs''), and an average of 346
  expected new ERAs annually (``expected ERAs'').
\23\ See 2021 Form ADV PRA.
\24\ The previously approved average per adviser annual burden for ERAs attributable to annual and updating amendments to Form ADV is 1.5 hours. See
  2021 Form ADV PRA. As we have done in the past, we add to this burden the burden for ERAs making final filings, which we have previously estimated to
  be 0.1 hour per applicable adviser, and we estimate that an expected 371 current ERAs will prepare final filings annually, based on Form ADV data as
  of December 2020.
\25\ For current ERAs, we are proposing to not apply the currently approved burden for initially preparing Form ADV, because we believe that current
  ERAs have already incurred this burden. For expected ERAs, we are applying the initial burden of preparing Form ADV of 3.6 hours. Therefore, 3.6 hours
  x 346 expected new ERAs per year = 1,245.60 aggregate initial hours for expected ERAs. For these expected ERAs, we are not proposing to amortize this
  burden because we expect a similar number of new ERAs to incur this burden each year. Therefore, we estimate 1,245.60 aggregate initial annual hours
  for expected ERAs.
\26\ The previously approved average total annual burden of ERAs attributable to annual and updating amendments to Form ADV is 1.5 hours. See 2020 Form
  ADV Renewal (this estimate was not affected by the subsequent amendment to Form ADV). As we have done in the past, we added to this burden the
  currently approved burden for ERAs making final filings of 0.1 hour, and multiplied that by the number of final filings we are estimating ERAs would
  file per year (371 final filings based on Form ADV data as of December 2020). (1.5 hours x 5,481 currently reporting ERAs) + (0.1 hour x 371 final
  filings) = 8,258.60 updated aggregated hours for currently reporting ERAs. For expected ERAs, the aggregate burden is 1.5 hours for each ERA
  attributable to annual and other-than-annual updating amendments to Form ADV x 346 expected new ERAs = 519 annual aggregated hours for expected new
  ERAs updating Form ADV (other than for private fund reporting). The total aggregate amendment burden for ERAs (other than for private fund reporting)
  is 8,258.60 + 519 = 8,777.60 hours.