whose involvement would not disqualify the offering under that rule
(such as persons acting as placement agents for a private fund) will
also not be disqualified under this disqualification provision of the
final rule, which could similarly encourage the use of such agents in
connection with marketing activities for private funds.
    Finally, the final rule's disqualification provisions will not
disqualify any promoter for any matter(s) that occurred prior to the
effective date of the rule, if such matter would not have disqualified
the promoter under rule 206(4)-3, as in effect prior to the effective
date of the rule. We expect this will reduce the costs and benefits of
the disqualification provisions when the rule initially goes into
effect.
    The final rule also provides a conditional carve-out from the
definition of disqualifying event, with respect to a person that is
subject to certain Commission opinions or orders, provided certain
requirements are met. The provisions of this conditional carve-out are
similar to statements in staff no-action letters in which the staff
stated that it would not recommend enforcement action to the Commission
under section 206(4) and rule 206(4)-3 if the solicitor's practices
were consistent with certain representations made in connection with
those letters.
Diligence Standards
    In addition to changing what promoters are ineligible to be
compensated by an adviser, the final rule changes the diligence
standards of investment advisers when hiring promoters. It establishes
a knowledge or reasonable care standard for the disqualification
provisions, which replaces the current solicitation rule's absolute bar
on paying cash for solicitation activities to a person with any
disciplinary history enumerated in the rule.
    In general, we believe that the requirement to exercise reasonable
care at the time of dissemination will yield indirect benefits for
investors, because it will require advisers to help ensure that the
protections of the rule's disqualification provisions are realized for
investors. This standard will also generally impose costs on advisers
related to the necessary investigation of the promoter and to ensuring
that they remain in compliance.
    We expect that the benefits and costs of this provision may be
mitigated to the extent a solicitor is cash-compensated and previously
subject to the solicitation rule. The required diligence standard in
the final rule is formally less burdensome than was required under the
current solicitation rule, which could lower compliance costs for
advisers, including by reducing the likelihood that advisers will
inadvertently violate the provision due to disqualifying events that
they would not, even in the exercise of reasonable care, have known
existed. We do not, however, believe that this standard will
significantly affect the client and investor protections of the
disqualification provisions, because we do not believe that
investigation beyond what is reasonable under the circumstances would
yield substantial benefits. Under the final rule, an adviser will need
to inquire into the relevant facts of an engagement, with the method or
level of due diligence or other inquiry varying depending on the
circumstances of the compensated promoter and its arrangement with the
adviser.\938\ To the extent that an engagement presents greater risk,
greater screening and compliance mechanisms would be required under the
rule, which we believe would preserve these benefits. For example, to
the extent that there are indicators suggesting bad actor involvement,
increased levels of due diligence will be required. Further, we believe
that advisers will generally use many of the same mechanisms that they
use today to determine whether a disqualified person is an ineligible
person under the final rule. To the extent that the mechanisms
currently in use already resemble or satisfy the final rule's diligence
standard, the cost burden of the new standard may be mitigated.
---------------------------------------------------------------------------

    \938\ See supra section II.C.4.a.
---------------------------------------------------------------------------

5. Third-Party Ratings
    The final rule will also restrict the use of third-party ratings in
advertisements, subject to certain requirements about the structure of
the rating, and clear and prominent disclosures about the date of the
rating, the identity of the third party, and compensation provided for
obtaining or using the rating. We analyze the costs and benefits of
imposing restrictions on the use of third-party ratings on
communications subject to these restrictions below.
    While the current advertising rule does not mention third-party
ratings, it prohibits an advertisement that contains a third-party
rating if it contains an untrue statement or a material fact or is
otherwise false or misleading. Further, the current solicitation rule,
like the current advertising rule, does not expressly mention third-
party ratings.
    The staff has taken the position that certain ratings may
constitute testimonials and stated it would not recommend enforcement
action under the prohibition of testimonials if an adviser made
references in an advertisement to third-party ratings that reflect
client experiences, based on certain representations.\939\
Specifically, no-action letters have stated the staff would consider
the following when not recommending an enforcement action for
potentially false or misleading ratings in an advertisement: Whether
the advertisement disclosed the criteria on which the rating was based,
whether favorable ratings were selectively disclosed, whether there
were any untrue implications of being a top-rated adviser, the identity
of who created and conducted the rating, and whether investors can
expect similar

performance in the future from the investment adviser.\940\
---------------------------------------------------------------------------

    \939\ See DALBAR, Inc., SEC Staff No-Action Letter (Mar. 24,
1998).
    \940\ See id.; see Investment Adviser Association, SEC Staff No-
Action Letter (Dec. 2, 2005).
---------------------------------------------------------------------------

    The disclosure requirements of the final rule will provide
investors more information to judge the context of a third-party
rating, which might reduce the likelihood that investors will be misled
by an investment adviser's ratings.\941\ Additionally, the final rule
requires that the adviser have a reasonable basis for believing that
any questionnaire or survey used in the preparation of a third-party
rating be structured to make it equally easy for a participant to
provide favorable and unfavorable responses, and not designed or
prepared to produce any predetermined result, which might also reduce
the likelihood that investors will be misled. Investors will benefit
from the disclosure requirements for third-party ratings, not only
because the disclosures provide investors with additional context to
evaluate the information provided in ratings, but also because the
required disclosures may dissuade advisers from including misleading
third-party ratings.
---------------------------------------------------------------------------

    \941\ See supra section III.B.
---------------------------------------------------------------------------

    The disclosures required by the final rule might reduce the
incentives of investment advisers to include third-party ratings that
might be stale or otherwise misleading. The requirement to create these
disclosures could impose costs on advisers, including compliance costs
related to drafting these disclosures and ensuring that they comply
with the requirements of the final rule. In addition, the final rule
requires that investment advisers make certain disclosures or
reasonably believe that such disclosures have been made, which will
impose additional costs on investment advisers. Investment advisers and
the associated personnel that use third-party ratings in their
advertisements will bear costs associated with compliance with this
aspect of the final rule.\942\ These costs could entail the dedication
of personnel time and managerial resources to draft disclosures and to
satisfy due diligence requirements.
---------------------------------------------------------------------------

    \942\ Although the investment advisers bear the legal burden of
complying with third-party ratings requirement, we expect that the
costs of this requirement will be partially borne by other parties,
such as persons communicating on behalf of an investment adviser.
---------------------------------------------------------------------------

    However, these costs and benefits may be mitigated because the
third-party rating requirements of the final rule are similar to the
representations made in staff letters in which it has previously stated
that it would not recommend enforcement under section 206(4) and rule
206(4)-1. As a result, advisers may only bear the incremental costs of
modifying compliance systems to account for the differences of the
final rule requirements, though these advisers would also bear the
costs of evaluating those differences.
    We have quantified a subset of the costs associated with
requirements for the use of third-party ratings in advertisements,
specifically, the burden of information collection costs estimated for
the purposes of the Paperwork Reduction Act.\943\ The disclosure
provisions of the requirements for testimonials and endorsements will
entail information collection costs, and investment advisers will incur
initial implementation costs. We estimate that investment advisers will
incur an initial implementation cost of $1,011 for each adviser, or
$6,937,482 in total.\944\ We estimate that investment advisers will
incur an ongoing cost of $252.74 per year per adviser, or $1,734,301.88
total ongoing cost per year. We therefore estimate a total industry
cost in the first year of $8,671,783.88.\945\
---------------------------------------------------------------------------

    \943\ See infra section IV.B.3.
    \944\ Initial cost burden estimate of $1,011 from section
IV.B.3. 13,724 x \1/2\ = 6,862 affected investment advisers. $1,011
x 6,862 = $6,937,482.
    \945\ Ongoing cost estimate includes disclosure, oversight, and
annual costs from section IV.B.3. $252.74 x 6,862 = $1,734,301.88.
For the total first year cost, $6,937,482 + $1,734,301.88 =
$8,671,783.88.
---------------------------------------------------------------------------

6. Performance Advertising
    The final rule includes provisions that impose specific
requirements and prohibitions on the inclusion of performance
information in advertisements. These provisions include net performance
requirements, prescribed time period requirements, prohibitions of
statements expressing or implying Commission approval or review of the
calculation or presentation of performance results in the
advertisement, and requirements for related performance, extracted
performance, hypothetical performance, and predecessor performance. We
analyze the costs and benefits of imposing these specific requirements
on the use of performance advertising in communications below.
    We have quantified a subset of the costs associated with the
restrictions on the use of performance advertising in advertisements,
specifically, the burden of information collection costs estimated for
purposes of the Paperwork Reduction Act.\946\ The provisions of the
requirements for performance advertising will entail information
collection costs and modification of the presentation of performance.
These collection of information costs primarily entail an initial cost
to update performance calculations, and an ongoing annual cost for
investment advisers. We estimate that investment advisers will incur a
total initial implementation cost $394,998,740 \947\ and a total
ongoing cost of $273,772,232 per year.\948\ We therefore estimate the

total cost in the first year to be $672,544,972.\949\
---------------------------------------------------------------------------

    \946\ See infra section IV.B.4.
    \947\ These total cost estimates differ from those in section
IV.B.4, because the estimates in those sections amortize the initial
implementation costs over three years, while the cost estimates in
this section do not. However, both estimates make identical
assumptions about the resources required to comply with the rule.
The initial burden associated with net performance is based on 15
hours x $337 (compliance manager and compliance attorney, split
evenly) = $5,055 for each of the 13,038 investment advisers expected
to be affected, implying an initial cost of $65,907,090. The initial
burden associated with performance time periods is based on 35 hours
x $337 (compliance manager and compliance attorney, split evenly) =
$11,795 for each of the 13,038 investment advisers expected to be
affected, implying an initial cost of $153,783,210. The initial
burden associated with related performance is based on 30 hours x
$337 (compliance manager and compliance attorney, split evenly) =
$10,110 for each of the 10,979 investment advisers expected to be
affected, implying an initial cost of $110,997,690. The initial
burden associated with extracted performance is based on 10 hours x
$337 (compliance manager and compliance attorney, split evenly) =
$3,370 for each of the 686 investment advisers expected to be
affected, implying an initial cost of $2,311,820. The initial burden
associated with hypothetical performance is based on 15 hours x $337
(compliance manager and compliance attorney, split evenly) + 7 hours
x $530 (compliance officer) = $8,765 for each of the 6,862
investment advisers expected to be affected, implying an initial
cost of $60,145,430. The initial burden associated with predecessor
performance is based on 20 hours x $337 (compliance manager and
compliance attorney, split evenly) = $6,740 for each of the 275
investment advisers expected to be affected, implying an initial
cost of $1,853,500. Therefore, the total initial industry burden
associated with the final rule is $197,721,270 + $153,783,210 +
$110,997,690 + $2,311,820 + $60,145,430 + $1,853,500 = $394,998,740.
See infra section II.B.4.
    \948\ The ongoing burden associated with net performance is
based on 10.5 hours x $337 (compliance manager and compliance
attorney, split evenly) = $3,538.50 for each of the 13,038
investment advisers expected to be affected, implying an ongoing
cost of $46,134,963. The ongoing burden associated with performance
time periods is based on 28 hours x $337 (compliance manager and
compliance attorney, split evenly) = $9,436 for each of the 13,038
investment advisers expected to be affected, implying an ongoing
cost of $123,026,568. The ongoing burden associated with related
performance is based on 17.5 hours x $337 (compliance manager and
compliance attorney, split evenly) = $5,897.50 for each of the
10,979 investment advisers expected to be affected, implying an
ongoing cost of $64,748,652.50. The ongoing burden associated with
extracted performance is based on 7 hours x $337 (compliance manager
and compliance attorney, split evenly) = $2,359 for each of the 686
investment advisers expected to be affected, implying an ongoing
cost of $1,618,274. The ongoing burden associated with hypothetical
performance is based on 10.5 hours x $337 (compliance manager and
compliance attorney, split evenly) + 3.75 hours x $530 (compliance
officer) = $5,526 for each of the 6,862 investment advisers expected
to be affected, implying an ongoing cost of $37,919,412. The ongoing
burden associated with predecessor performance is based on 3.5 hours
x $337 (compliance manager and compliance attorney, split evenly) =
$1,179.50 for each of the 275 investment advisers expected to be
affected, implying an initial cost of $324,362.50. Therefore, the
total initial industry burden associated with the final rule is
$138,404,889 + $123,026,568 + $64,748,652.50 + $1,618,274 +
$37,919,412 + $324,362.50 = $273,772,232. See infra section II.B.4.
    \949\ $394,998,740 (total initial cost) + $273,772,232 (total
ongoing cost) + $3,774,000 (external cost) = $672,544,972 (total
first year cost).
---------------------------------------------------------------------------

a. Net Performance Requirement
    The final rule will prohibit any presentation of gross performance
unless the advertisement also presents net performance with at least
equal prominence to the presentation of gross performance. In addition,
the net performance must be calculated over the same time period, and
using the same type of return and methodology as, the gross
performance. While the current advertising rule does not mention
performance advertising, it prohibits any untrue statement of a
material fact and statements that are otherwise false or misleading,
which includes statements made in the context of performance
advertising. The staff has stated its views about the types of
circumstances in which it may view the presentation of performance
results as misleading, including, for example, where an adviser did not
disclose how advisory fee expenses, commissions, and reinvestment of
dividends affect the performance results.\950\
---------------------------------------------------------------------------

    \950\ See supra section III.C.1.b.
---------------------------------------------------------------------------

    This provision will likely benefit investors by providing them with
additional information about the performance generated by an investment
adviser, including the effect of fees and expenses on that performance,
and reducing the chance that they are misled by presentations of gross
performance. To the extent that investment advisers' current practices
differ from the requirements of this provision, these requirements may
impose costs on advisers, including advisers that serve private funds,
to compute and include net performance in their marketing
communications, to the extent that advisers do not currently compute
and include net performance. These costs could involve devoting
personnel time, modifying marketing materials, and devoting managerial
resources. In addition, some investors may be better able to make their
own risk adjusted return assessments, and these investors may similarly
derive fewer benefits from this requirement.
    However, these costs and benefits may be mitigated to the extent
that this requirement is similar to the circumstances under which the
staff has previously stated that it would not recommend enforcement
under section 206(4) and rule 206(4)-1. Given that many investment
advisers already provide this information in light of staff no-action
letters, there are not likely to be significant costs or benefits to
this provision.
b. Prescribed Time Periods
    The final rule prohibits the presentation of performance results of
any portfolio or any composite aggregation of related portfolios, other
than any private fund, in advertisements unless the results for one,
five, and ten year periods are presented as well. Each of the required
time periods must be presented with equal prominence and end on a date
that is no less recent than the most recent calendar-year end.\951\ If
the portfolio was not in existence for the full duration of any of
these three periods, the lifetime of the portfolio can be substituted.
Under the baseline for current advertisements, there is no such
Commission requirement relating to performance advertising.
---------------------------------------------------------------------------

    \951\ See supra section II.E.2.
---------------------------------------------------------------------------

    Requiring advertisements to include one, five, and ten year period
performance will benefit investors other than private fund investors by
giving them standardized information about the performance and limiting
the potential that an investor could be unintentionally misled about an
investment adviser's performance through the investment adviser's
selection of performance periods. The requirement will impose costs on
investment advisers, who will need to compute the performance for the
prescribed time periods, update their advertising materials, and devote
personnel time to ensure compliance with the final rule. These costs
may disincentivize the presentation of performance results of any
portfolio or any composite aggregation of related portfolios.
    However, these benefits and costs may be mitigated to the extent
that this requirement is similar to information currently collected and
provided to clients in order to comply with GIPS standards to present
performance information. In addition, to the extent that advisers
already present, for example, performance information for these time
periods, these costs and benefits may also be mitigated.
c. Statements of Commission Approval or Review
    The final rule prohibits any advertisement that includes a
statement, whether express or implied, that the calculation or
presentation of performance results has been reviewed or approved by
the Commission. This prohibition will benefit investors by preventing
misleading advertisements that could lead investors to draw false
conclusions about the Commission's approval of a presentation or
calculation of performance. Any such statement would be false, as the
Commission does not review or approve of calculations or presentations
of performance. The prohibition may likely impose costs associated with
legal review of performance presentation, but these costs are likely to
remain small. Further, such costs may be mitigated to the extent that
advisers currently have procedures to ensure compliance with section
208(a), which contains a similar prohibition from representing or
implying that an adviser's abilities or qualifications have been passed
upon by the United States or any agency thereof.
d. Related Performance
    The final rule will condition the presentation of ``related
performance'' in all advertisements on the inclusion of all related
portfolios. However, the final rule will allow related performance to
exclude related portfolios as long as the advertised performance
results are not materially higher than if all related portfolios had
been included. This exclusion will be subject to the rule's requirement
that the presentation of performance results of any portfolio include
results for one-, five-, and ten-year periods. The final rule will
allow related performance to be presented either on a portfolio-by-
portfolio basis or as a composite of all related portfolios. The
inclusion of related performance in advertisements may give investment
advisers flexibility in how they choose to advertise their performance,
such as which aspects of their performance they can advertise, and
might give investors additional information about how an investment
adviser managed portfolios having substantially similar investment
policies, objectives and strategies.
    The requirements for related performance may, however, impose costs
on investment advisers related to the creation of composites to the
extent that they do not currently create composites or create
composites using the final rule's criteria for related portfolios. For
example, the ``not materially higher than'' requirement for

excluding related portfolios may generate an additional need to
recalculate performance to verify that the related performance
satisfies the requirement. Further, as discussed above, we understand
that an adviser will likely be required to calculate the performance of
all related portfolios to ensure that any exclusion of certain
portfolios meets the rule's conditions, which may be burdensome on
advisers, particularly smaller advisers.\952\
---------------------------------------------------------------------------

    \952\ See IAA Comment Letter.
---------------------------------------------------------------------------

    However, we expect investment advisers to incur these calculation
costs only if they expect sufficient benefits from inclusion of related
performance. Further, we expect that these costs and benefits may be
mitigated to the extent that advisers currently include related
performance presentations in their advertisements that comply with the
current rule.\953\ Commenters generally described the related
performance definition that was originally proposed as being similar to
industry practice.\954\ In addition, advisers that comply with GIPS
standards are permitted to show related performance in advertisements,
and presentations that meet the GIPS standard requirements to show all
related performance will also satisfy the requirements of this
provision to show all related performance.
---------------------------------------------------------------------------

    \953\ The use by investment advisers that are also broker-
dealers of certain forms of related performance in advertisements
may be viewed by FINRA as inconsistent with the content standards in
FINRA rule 2210.
    \954\ See MFA Comment Letter I; Proskauer Comment Letter.
---------------------------------------------------------------------------

e. Extracted Performance
    The final rule will condition the presentation of extracted
performance in all advertisements on the advertisement providing, or
offering to provide promptly, the performance results of the total
portfolio from which the performance was extracted. ``Extracted
performance'' means ``the performance results of a subset of
investments extracted from a portfolio.'' \955\ While the current
advertising rule does not mention extracted performance, it prohibits
any untrue statement of a material fact and statements that are
otherwise false or misleading, which includes statements made in the
context of advertising extracted performance.
---------------------------------------------------------------------------

    \955\ Final rule 206(4)-1(e)(6).
---------------------------------------------------------------------------

    The use of extracted performance in advertisements will benefit
investors by giving them information about performance results
applicable to a particular subset of the adviser's investments, and the
accompanying disclosures could help investors contextualize the claims
of an investment adviser about its extracted performance, thereby
reducing the risk that investors might be misled by such extracted
performance.
    Investment advisers who use extracted performance in their
advertisements will likely incur costs to prepare the performance
results of the total portfolio from which the performance was
extracted, to the extent that they do not do this already. The final
rule does not prohibit an adviser from presenting a composite of
extracts, including composite performance that complies with GIPS
standards. However, any presentation of a composite of extracts is
subject to the additional protections that apply to hypothetical
performance, as discussed below, and as a result, these additional
protections may result in additional burdens for advisers that
typically present extracted performance from multiple portfolios as a
composite, and potentially limit these types of presentations of
performance to institutional investors.
    However, these benefits and costs may be mitigated to the extent
that the restrictions imposed by this provision are similar to the
manner in which advisers currently present extracted performance,
including under GIPS standard requirements applicable to similar
presentations of extracted performance, or other requirements.
f. Hypothetical Performance
    The rule also prohibits the use of hypothetical performance in
advertisements unless (i) the investment adviser adopts and implements
policies and procedures reasonably designed to ensure that the
hypothetical performance is relevant to the likely financial situation
and investment objectives of the intended audience of the
advertisement; (ii) provides sufficient information to enable the
intended audience to understand the criteria used and assumptions made
in calculating such hypothetical performance; and (iii) provides, or if
the intended audience is an investor in a private fund provides, or
offers to provide promptly, sufficient information to enable the
intended audience to understand the risks and limitations of using such
hypothetical performance in making investment decisions. The rule
defines several types of hypothetical performance--model performance,
performance derived from model portfolios; backtested performance,
performance that is backtested by the application of a strategy to data
from prior time periods when the strategy was not actually used during
those periods; and targeted or projected performance returns with
respect to any portfolio or to the investment services offered in the
advertisement.
    The current advertising rule does not explicitly address
hypothetical performance. The Commission has, however, brought
enforcement actions alleging that the presentation of performance
results that were not actually achieved would be misleading where
certain disclosures were not made, including disclosure that the
performance results were hypothetical or disclosure of the relevant
limitations inherent in hypothetical results and the reasons why actual
results would differ.\956\
---------------------------------------------------------------------------

    \956\ See supra section III.C.1.b.
---------------------------------------------------------------------------

    The final rule's imposes minimum standards for the presentation of
hypothetical performance in advertisements, which could potentially
increase the willingness of investment advisers to use hypothetical
performance. If investment advisers increase their use of hypothetical
performance in advertising, investors may benefit from the additional
information provided by hypothetical performance advertising, together
with information and context that may help investors to better
understand it. This additional information could aid an investor in the
choice of an investment adviser by helping investors find a better
match or reducing costs associated with finding an investment adviser.
    To the extent that these requirements will help ensure that
hypothetical performance is disseminated to the specific investors who
have access to the resources to independently analyze this information
and who have the financial expertise to understand the risks and
limitations of these types of presentations, these requirements on the
presentation of hypothetical performance will benefit investors.
Although investors will not face any direct costs from the inclusion of
hypothetical performance, they may face indirect costs associated with
processing and interpreting this new information if investment advisers
increase their use of hypothetical performance. Even if investors are
provided with sufficient information to contextualize hypothetical
performance, they may need time and expertise to interpret that
contextual information. Some, investors might have difficulty
interpreting the context of hypothetical performance because of a lack
of resources of financial expertise, which could lead to poorer matches
with investment advisers. However, the final

rule requires disclosures and contextual information for hypothetical
performance that are sufficient for the intended audience, which should
mitigate these costs to investors.
    Advisers may incur costs associated with complying with the three
conditions described above, such as consulting with in-house counsel,
time to draft these policies and procedures and disclosures, and
requiring firms to pay outside counsel or consultants to draft or
review these policies and procedures and disclosures. These
requirements could also entail costs such as training of staff to
comply with the policies and procedures, and demands on personnel time
and counsel to draft and review advertisements and disclosures to
ensure compliance with the policies and procedures and the rule's
requirements. We recognize that investment advisers will need to
evaluate their intended audiences, as well as ensure that the
advertisement is tailored to the audience receiving it, which will
cause advisers to incur costs. An adviser may make such evaluations
based on past experiences with investor types, including, for example,
routine requests from those types of investors in the past, or based on
information they have gathered from potential investors (e.g.,
questionnaires, surveys, or conversations) or academic research.\957\
Investment advisers are, however, unlikely to incur these costs if they
do not expect the benefits of hypothetical performance advertising to
exceed the costs associated with screening.
---------------------------------------------------------------------------

    \957\ See supra section II.E.6.b.
---------------------------------------------------------------------------

    The costs and benefits associated with these restrictions may,
however, be mitigated to the extent that advisers currently present
information that meets the final rule's definition of ``hypothetical
performance'' in circumstances consistent with the representations made
in staff no-action letters. Additionally, to the extent that some
investment advisers already maintain policies and procedures to screen
prospective clients in order to comply with the GIPS standards, the net
costs and benefits associated evaluating an ``intended audience'' for
purposes of complying with this requirement may be mitigated. Under
these circumstances, advisers may only bear the incremental costs of
modifying compliance systems and disclosures to account for the
differences of the final rule's requirements, though these advisers
would also bear the costs of evaluating those differences.
g. Predecessor Performance
    The final rule subjects the presentation of predecessor performance
to several requirements: (i) The person or persons who were primarily
responsible for achieving the prior performance results manage accounts
at the advertising adviser; (ii) the accounts managed at the
predecessor investment adviser are sufficiently similar to the accounts
managed at the advertising investment adviser that the performance
results would provide relevant information to clients or investors;
(iii) all accounts that were managed in a substantially similar manner
are advertised unless the exclusion of any such account would not
result in materially higher performance and the exclusion of any
account does not alter the presentation of any applicable time periods
required by the final rule; and (iv) the advertisement includes,
clearly and prominently, all relevant disclosures, including that the
performance results were from accounts managed at another entity.
    Under the current advertising rule, predecessor performance is not
explicitly addressed; however, the staff has stated in no-action
letters that it would not view advertisements that include predecessor
performance as misleading under certain circumstances.\958\ These
circumstances are similar to the requirements of the final rule, and
costs and benefits may flow from the extent to which the rule imposes
requirements for use of predecessor performance.
---------------------------------------------------------------------------

    \958\ See Horizon Letter.
---------------------------------------------------------------------------

    To the extent that the final rule's provisions permit the use of
predecessor performance in advertisements, predecessor performance has
the potential to provide additional information and context for
investors. This information could improve investor decisions and reduce
the costs associated with searching for an investment adviser. However,
the rule has requirements that will impose costs on investment advisers
that present predecessor performance. Determining the extent to which
the personnel and the portfolios of a predecessor adviser are
sufficiently similar under the rule can require resources, especially
when portfolios are managed by multiple people, or have long or
complicated performance histories. Additionally, investment advisers
may bear additional costs to analyze any intellectual property issues
or non-compete agreements between portfolio management personnel and
their previous firms.
7. Amendments to Form ADV
    Under the final rule, Form ADV will include additional questions
about investment advisers' advertising practices, including performance
advertising, the use of testimonials and endorsements, and compensation
for promoters. Current Form ADV does not contain any questions about
advertising practices, and the changes to Form ADV will support the
Commission's compliance oversight efforts, thus helping the Commission
monitor market practices and the effects of its rules. For example, the
changes to Form ADV will allow the Commission to understand the
relative popularity of certain advertising practices and compensation
practices for promoters. To the extent that these amendments do
facilitate compliance oversight, these changes may benefit clients.
These investors may also derive benefits from the information provided
in the Form ADV, as amended, which may help them make better decisions
with respect to which advisers' services to utilize. Additionally, it
will enable the Commission to evaluate the final rule's requirements,
and their impact on how investment advisers choose to advertise.
Investment advisers that use advertisements will likely incur
additional costs associated with collecting information to answer these
questions, as investment advisers will need to accurately track the
types of content in their advertisements.
    We have quantified a subset of the costs associated with changes to
Form ADV, specifically the burden of information collection costs
estimated for the purposes the Paperwork Reduction Act. The amendments
to Form ADV will impose additional ongoing costs for investment
advisers. We estimate the marginal increase in the aggregate cost
burden of these changes to Form ADV will be $4,355,288 per year for
RIAs not obligated to prepare and file relationship summaries,
$3,429,942 per year for RIAs obligated to prepare and file relationship
summaries, and $171,881 per year for exempt reporting advisers.\959\ We
therefore estimate the total annual cost increase for all advisers to
be $7,957,111 per year.\960\ However, we note that some portion of the
increase in costs is due to an increase in the number of RIAs that will
bear these costs, and not entirely

due to an increase in the cost burden for an individual RIA.
---------------------------------------------------------------------------

    \959\ The total cost increase for exempt reporting advisers
reflects an increase in the number of exempt reporting advisers
rather than a per adviser cost increase generated by the final rule.
    \960\ See infra section IV.E. Cost estimates were calculated by
subtracting current Form ADV cost burdens from the new Form ADV cost
burdens.
---------------------------------------------------------------------------

8. Recordkeeping
    The amendments to the recordkeeping rule will require investment
advisers to make and keep records of all advertisements they
disseminate. Generally, the amended recordkeeping rule will require
additional retention of written or distributed communications of an
investment adviser, including certain oral communications. For example,
the current recordkeeping rule requires the retention of advertisements
disseminated to ten or more individuals. In contrast, the amendments
require that advisers retain all advertisements, with the two
exceptions. First, for oral advertisements, the adviser may, instead of
recording and retaining the advertisement, retain a copy of any written
or recorded materials used by the adviser in connection with the oral
advertisement.\961\ Second, if an adviser's advertisement includes a
compensated oral testimonial or endorsement, the adviser may, instead
of recording and retaining the advertisement, make and keep a record of
the disclosures provided to investors.\962\ In addition, if the
required disclosures with respect to a testimonial or endorsement are
not included in the advertisement, then the adviser must retain copies
of such disclosures provided to investors.\963\ The recordkeeping rule
will continue to require that advisers keep a record of communications
other than advertisements (for example, notices, circulars, newspaper
articles, investment letters, and bulletins) that the investment
adviser disseminates, directly or indirectly, to ten or more persons.
Additionally, there are some types of newly required records that can
be particularly costly to retain. For example, creating and retaining
records of orally delivered disclosures will impose extra costs on
investment advisers and promoters. These requirements may result in
costs on investment advisers, such as dedicating personnel time to
capture and retain these records.
---------------------------------------------------------------------------

    \961\ See final rule 204-2(a)(11)(i)(A)(1).
    \962\ See final rule 204-2(a)(11)(i)(A)(2).
    \963\ See final rule 204-2(a)(11)(i)(A) and (15)(i).
---------------------------------------------------------------------------

    The amendments to the recordkeeping rule will also require
investment advisers to make and keep: (i) Documentation of
communications relating to predecessor performance; (ii) documentation
to support performance calculations; (iii) copies of any questionnaire
or survey used in preparation of a third-party rating (in the event the
adviser obtains a copy of the questionnaire or survey); (iv) if not
included in an advertisement, a record of disclosures provided to the
client; (v) documentation substantiating the adviser's reasonable basis
for believing that a testimonial, endorsement, or third-party rating
complies with the applicable tailored requirements of the marketing
rule and copies of any written agreement made with promoters; (vi) a
record of certain affiliated personnel of the adviser; and (vii) a
record of who the ``intended audience'' is.
    These requirements will impose compliance costs on advisers related
to the creation and retention of these records. These costs will be
associated with additional personnel time to capture or retain these
communications. Notably, retaining documents that form the basis of a
calculation could be more expensive due to the requirement that
advisers retain calculation information for portfolios (and not only
for managed accounts and securities recommendations). However, we
believe that there is overlap between accounts included in
``portfolios'' and those ``managed accounts'' already captured by the
current recordkeeping rule. Retaining these documents might require an
investment adviser to evaluate which documents are relevant for a
performance calculation, which could potentially generate costs for the
investment adviser. Similarly, advisers will incur costs related to
required records that are not communications, including a record of who
an advertisement's ``intended audience'' is, for example. Creation of
these records might involve research and collection of information
about an investment adviser's intended audience. Furthermore, the
recordkeeping rule requires advisers to retain documents that support
the inclusion of predecessor performance in an advertisement, including
a requirement to make and keep originals of all written communications
received and copies of all written communications sent by an investment
adviser relating to predecessor performance and the performance or rate
of return of any portfolios. In contrast, this provision in the current
recordkeeping rule only requires advisers to make and keep originals of
all written communications received and copies of all written
communications sent by an investment adviser relating to the
performance or rate of return of any or all managed accounts or
securities recommendations. The recordkeeping rule also requires that a
list of certain affiliated personnel be retained, to parallel the
exemption for certain affiliated personnel from the compensated
testimonials and endorsements requirements. This requirement may
generate costs for the investment adviser to retain and update this
list. Some of these costs may ultimately be passed on to clients or
investors through higher fees.
    These costs may, however, be mitigated to the extent that advisers
are already retaining similar records. Under the current recordkeeping
rule, for example, advisers are required to retain originals of
documentation supporting the calculation of performance or rate of
return of all managed accounts or securities recommendations. The
amendments to the recordkeeping rule, in contrast, will also require
documentation supporting the calculation of performance or the rate of
return for any or all portfolios. As a result, the total costs of
compliance for advisers with respect to communications previously
included in the definition of an advertisement will be mitigated
somewhat. Further, the staff has, for example, taken the position that
rule 204-2(a)(16) also applies to a successor's use of a predecessor's
performance data.\964\ As a result, retention of some documentation and
written communications required to be retained under the recordkeeping
rule will impose relatively minor costs on investment advisers with
respect to communications currently subject to the existing
recordkeeping requirements.
---------------------------------------------------------------------------

    \964\ See rule 204-2(a)(16); See Great Lakes Letter (not
recommending enforcement action and stating the staff's view that
the requirement in rule 204-2(a)(16) applies to a successor's use of
a predecessor's performance data).
---------------------------------------------------------------------------

    Under the baseline, there are no recordkeeping requirements for the
communications of solicitors, except for the disclosure documents that
solicitors are required to provide to clients pursuant to the current
solicitation rule. Investment advisers that currently use solicitors
will incur additional costs associated with the substantive changes to
the final recordkeeping requirements discussed in this section, as well
as the expansion of the definition of advertisement to include
testimonials and endorsements. In addition, given that the
recordkeeping obligations fall upon investment advisers and not their
promoters, we do not anticipate this provision will generate
substantial costs or benefits for promoters.
    We have quantified a subset of the costs associated with the
recordkeeping provisions, specifically, the burden of information
collection costs estimated for the purposes of the Paperwork Reduction
Act. The amendments to the recordkeeping requirements will cause

investment advisers to incur annual ongoing costs related to the
creation and retention of records. We estimate these costs to have a
total cost of $16,636,198 per year.\965\
---------------------------------------------------------------------------

    \965\ See infra section IV.D.
---------------------------------------------------------------------------

E. Efficiency, Competition, Capital Formation

    We believe the final amendments could have positive effects on
efficiency, competition, and capital formation. As discussed below, we
expect the amendments could improve efficiency by improving the
quantity and quality of information in advertisements. Further, if
investors are thereby able to make more informed decisions about
investment advisers and more easily learn about the ability and
potential fit of investment advisers, investment advisers might have a
stronger incentive to invest in the quality of their services, which
could promote increased competition among investment advisers. However,
if advertisements attract customers for investment advisers in a manner
unrelated to the quality of their services, competition among
investment advertisers could result in an inefficient ``arms race.'' To
the extent that the final rule results in improved matches in the
market for investment advice, potential investors may be drawn to
invest additional capital, which could promote capital formation.
1. Efficiency
    The final rules have the potential to improve the information in
investment adviser advertisements by improving the quantity and quality
of information available to investors. This in turn could improve the
efficiency of the market for investment advice in two ways.
    First, the final rule could increase the overall amount of
information in investment adviser advertisements by increasing the
types of information that investment advisers include in their
advertisements and prescribing requirements and restrictions on the
presentation of certain kinds of information in adviser and private
fund advertisements. This could either be directly through the
provisions of the rule, or indirectly, through competition among
investment advisers on how informative their advertisements are. For
example, to the extent that the rules and rescission of existing no-
action letters increase certainty for advisers and thereby reduce
compliance costs, advisers may increase their use of the types of
marketing activities covered by the final rules. This may increase
investor access to information regarding the ability and potential fit
of investment advisers, which may improve the quality of the matches
that investors make with investment advisers. In addition,
advertisements can improve the efficiency of the investment adviser
search process through the investor protections and disclosures that
the final rule will provide. On the other hand, investment advisers,
promoters, and related personnel may reduce the overall amount of
information in these communications, because of the expanded definition
of an advertisement and related costs imposed on communications newly
brought within the definition, which could reduce the overall
efficiency of an investor's investment adviser search.
    The information from testimonials, endorsements, performance data,
and third-party ratings presented in accordance with the provisions of
the rule can potentially provide valuable information for investors.
Better informed investors could improve the efficiency of the market
for investment advice by improving the matches between investors and
investment advisers and reducing search costs, as they may be better
able to evaluate investment advisers based on the information in their
advertisements.\966\ To the extent that the rule improves the
usefulness of the recommendations of non-cash compensated promoters,
another programmatic benefit of the rule is that it may improve the
efficiency of matches between investment advisers and investors.
---------------------------------------------------------------------------

    \966\ See supra section III.B.
---------------------------------------------------------------------------

    Although the final rule requires additional disclosures when
investment advisers include certain elements in their advertisements,
the value of these disclosures to investors depends on the extent to
which investors are able to utilize the disclosures to better
understand the context of an adviser's claims. By providing information
to investors in the required disclosures to aid their evaluation of an
adviser's advertisements, these disclosures could mitigate the
potential that advertisements mislead investors, and improve their
ability to find the right investment adviser for their needs.
    Second, the final rule could increase the overall quality of
information about investment advisers. To the extent that the rules
mitigate misleading or fraudulent advertising practices, investors may
be more likely to believe the claims of investment adviser
advertisements. Because information in advertisements is more likely to
increase the number of investors interested in an investment adviser,
advisers may include more information that will improve the choices of
investors. One potential consequence of modifying the regulatory
standards for advertisements provided by the final rule is that
investment advisers may increase the amount of resources they allocate
to advertising their services (including resources aimed to address
compliance with the final rule). While additional spending on
advertisements may facilitate matching between investment advisers and
investors, under some circumstances, this additional spending may be
inefficient if the benefits of better matches fall short of the
resources required to facilitate better matches.
    The final rule also merges certain solicitation activity into the
definitions of testimonials and endorsements and expands the scope by
covering all forms of compensation. The rule also includes persons
providing testimonials or endorsements to investors in a private fund.
In addition, the rule will continue to require disclosures to make
salient the nature of the relationship between a promoter and the
investment advisers. These provisions could improve the efficiency of
the market for promoters and their investment advisers by ensuring that
the provisions for testimonials and endorsements apply to all forms of
potential conflicts of interest. If investors are aware of these
conflicts of interest through disclosures, they may be better able to
interpret testimonials and endorsements and choose an investment
adviser that is of higher quality, or a better match.
2. Competition
    As discussed earlier, the final rule might result in an increase in
the efficiency of investment adviser advertisements, providing more
useful information to investors about the abilities of an investment
adviser than advertisements under the baseline, which would allow them
to make better decisions about which investment advisers to
choose.\967\ In this case, if investors make more informed decisions
about investment advisers based on the content of their advertisements,
investment advisers might have a stronger incentive to invest in the
quality of their services, as the final rule will permit them more
flexibility to communicate the higher quality of their services by
providing additional information about their services. This could
promote competition among investment advisers based on the

quality of their services, and result in a benefit for investors.
---------------------------------------------------------------------------

    \967\ See supra section III.B.
---------------------------------------------------------------------------

    However, the final rule might instead provide investment advisers
with a stronger incentive to invest in the quality of their
advertisements rather than the quality of their services. If investment
advisers increase spending on advertisements in a way that does not
improve the information quality in advertisements, but still attracts
investors, the competition could potentially be inefficient. Although
the direct costs of advertisements would be borne by the investment
adviser, it is possible that some portion of the costs of advertisement
will be indirectly borne by investors.\968\ As a result, investments in
advertisements may result in higher fees for investors.
---------------------------------------------------------------------------

    \968\ Firms that face a change in costs will bear some portion
of these costs directly, but will also pass a portion of the cost to
their consumers through the price. In a competitive market, the
portion of these costs that firms are able to pass on to consumers
depends on the relative elasticities of supply and demand. For
example, if demand for investment adviser services is elastic
relative to supply of investment adviser services, investment
advisers will be limited in their ability to pass through costs. For
more, see Mankiw, Gregory, Principles of Economics (2017).
---------------------------------------------------------------------------

    The final rule has conditions that can affect market participants
in different ways. For example, the final rule's restriction on the
presentation of performance results unless results for one, five, and
ten year periods are presented does not restrict the presentation of
performance of private funds. This could give investment advisers that
are able to advertise both private funds and general funds more options
in how they advertise performance, and provide them a competitive
advantage over investment advisers that only advertise non-fund
performance. Further, to the extent that advisers increase their usage
of compensated testimonials or endorsements as a result of the final
rule, this could provide competitive advantages to advisers who are
better able to pay fees for such testimonials or endorsements, or for
larger firms who have larger audiences with which to leverage favorable
testimonials and endorsements.\969\ In addition, provisions for
different types of performance advertising can have a disparate impact
on newer investment advisers versus older ones. Generally, newer
investment advisers have fewer performance advertising options and
shorter performance histories than older investment advisers, and might
prefer to rely on hypothetical or related performance advertising. To
the extent that the final rule's provisions place different
requirements on these types of performance, newer investment advisers
could face competitive disadvantages relative to older investment
advisers.
---------------------------------------------------------------------------

    \969\ See NAPFA Comment Letter.
---------------------------------------------------------------------------

    In addition, the final rule affects current solicitors by including
non-cash compensation in the scope of the rule's requirements for
testimonials and endorsements. The final rule could improve competition
among investment advisers and solicitors by subjecting all forms of
compensation for testimonials and endorsements to the same
requirements, and not imposing a higher regulatory burden on solicitors
compensated in cash and their respective investment advisers do not
receive a higher regulatory burden. Under the final rule, providers of
testimonials or endorsements that prefer or accept cash compensation
for their activities will not be subject to a higher burden relative to
persons that prefer or accept non-cash compensation. In addition, non-
cash compensated promoters will bear additional costs associated with
being scoped into the marketing rule. We expect that some portion of
these costs will be passed onto investors through higher fees.
    Differences in the scope of disqualification between investment
advisers subject to the disqualification provisions in this final rule,
broker-dealers, and promoters of private funds under Regulation D may
create competitive disparities in the personnel that are available to
provide testimonials or endorsements. Investment advisers that operate
as broker-dealers or advise private funds might have more flexibility
to use personnel that might be disqualified from providing testimonials
or endorsements under the final rule, but are not disqualified under
section 3(a)(39) of the Exchange Act for broker-dealers or Regulation D
for advisers of private funds. This flexibility could impose an uneven
burden on investment advisers, as those that are also registered as
broker-dealers or broker-dealer affiliates, or advise private funds,
will potentially able to draw upon a larger pool of personnel to
provide testimonials or endorsements.
3. Capital Formation
    To the extent that the final rule results in improved matches in
the market for investment advice, potential investors may be drawn to
invest additional capital, which could promote capital formation, to
the extent that the additional capital does not reduce other forms of
capital formation. However, the final rule could induce some investment
advisers to increase their advertising such that the additional
expenses of advertising may offset any gains to the quality of matches
with investors.\970\ In this case, any benefits to capital formation as
a result of the final rule could be reduced or eliminated.
---------------------------------------------------------------------------

    \970\ See supra sections III.E.1 and III.E.2.
---------------------------------------------------------------------------

    Similarly, if the costs associated with the disclosure, oversight,
and recordkeeping requirements of the final rule result in a reduction
of advertisements, the information available to investors might
decrease. This could decrease the quality of matches between investors
and investment advisers, leading investors to divert capital away from
investment to other uses, hindering capital formation.
    The final rule's expansion of the types of compensation subject to
solicitor regulation for providers of testimonials or endorsements
might improve the efficiency of the ultimate choice of investment
adviser that investors make. Improving the efficiency of the investment
adviser selection process could improve the efficiency of the investing
overall for investors, which may lead them to devote more capital
towards investment. In addition, the final rule expands the set of
disqualifying events that would bar an adviser from compensating an
individual to provide a testimonial or endorsement, which may improve
an investor's confidence in a testimonial or endorsement's
recommendation of an investment adviser, which, in turn, could lead
investors to allocate more of their resources towards investment, thus
promoting capital formation.

F. Reasonable Alternatives

1. Reduce or Eliminate Specific Limitations on Investment Adviser
Advertisements
    We could change the degree to which the marketing rule relies on
specific limitations on investment adviser marketing. One alternative
to the marketing rule would be reducing or eliminating specific
limitations on investment adviser advertising, and instead relying on
general prohibitions to achieve the programmatic benefits of the rule.
For example, such an alternative might include reducing or eliminating
the specific limitations on the different types of hypothetical
performance or testimonials and endorsements. The specific prohibitions
of the final rule are prophylactic in nature, and many of the
advertising practices described in the specific prohibitions would also
be prohibited under the general prohibition on fraud

and deceit in section 206 of the Act, among other provisions.\971\
---------------------------------------------------------------------------

    \971\ For anti-fraud provisions applicable to the marketing of
private funds, see Section 17(a) of the Securities Act, Section
10(b) of the Exchange Act, rule 10b-5, and rule 206(4)-8 under the
Advisers Act.
---------------------------------------------------------------------------

    As a consequence, advisers might bear greater compliance costs in
interpreting the rule or may otherwise restrict their advertising
activities unnecessarily, and may reduce their advertising as a result.
Alternatively, advisers may face lower compliance costs associated with
the specific prohibitions. In addition, under such an approach,
investors may also not obtain some of the benefits associated with the
final rule. For example, in the absence of a specific advertising rule,
investors would not necessarily obtain the benefits associated with the
comparability of performance presentations provided in the proposed
rule, or the requirement to provide performance over a variety of
periods (except in private fund advertisements) so that an investor may
sufficiently evaluate the adviser's performance. Investors would also
not benefit from the specific protections against the potential for
misleading hypothetical performance contained in the final rule, such
as the requirement to have policies and procedures designed to ensure
that such performance is relevant to the likely financial situation and
investment objectives of the investor and includes sufficient
disclosures to enable persons receiving it to understand how it is
calculated and the risks and limitations of relying on it. Although
some advisers might provide such information, even in the absence of
the final specific requirements to help ensure that their performance
presentations comply with section 206 of the Act or other applicable
anti-fraud provisions, others may not. As a consequence, this approach
may benefit certain advisers by allowing them to avoid the costs of the
specific requirements of the final rule, but investors would not
receive the benefit of the other protections of the rule.
    One variation of this alternative would be to eliminate the
marketing rule and instead rely solely on the general prohibitions
against fraud or deceit in section 206 of the Advisers Act and certain
rules thereunder. Under such an approach, a rule specifically targeting
adviser advertising practices might be unnecessary. In the absence of a
marketing rule, however, an adviser might have not sufficient clarity
and guidance on whether certain advertising practices would likely be
fraudulent and deceptive. As a consequence, advisers may bear costs in
obtaining such guidance or may otherwise restrict their advertising
activities unnecessarily in the absence of such clarity and guidance
that would be provided through a rule, and may reduce their advertising
as a result.
    Conversely, another alternative to the marketing rule would be to
make the rule more prescriptive, prescribing certain specific and
standardized disclosures in lieu of the principles-based approach of
the final rule. On the one hand, such an approach may provide investors
with disclosures that may be more comparable across advisers, and ease
the costs associated with interpretation and compliance. However,
standardized disclosures could both impose costs on investment advisers
by requiring disclosures when they might not provide much investor
protection benefit, and also not require disclosures when an investor
might benefit from one. The broad framework of the final rule is
designed to permit investment advisers to tailor their disclosures to
their specific marketing practices, subject to certain specific
requirements.
    A related alternative to the final rule would be to align the
marketing rule more closely with FINRA rule 2210 and related rules.
FINRA rule 2210 governs broker-dealers' communications with the public,
including communications with retail and institutional investors, and
provides standards for the content, approval, recordkeeping, and filing
of communications with FINRA.\972\ To the extent that such an
alternative resembles Rule 2210, this alternative might impose lower
compliance cost burdens for dual-registrants who are subject to Rule
2210 and related rules than under the final rule. However, as discussed
above, standardized disclosures for investment advisers could be over-
or under-inclusive given the variety of investment advisory services
and advertising practices associated with investment advisers, and we
believe that the final rule's approach of providing advisers' with a
broad framework within which to determine how best to present
advertisements so they are not false and misleading is consistent with
the features of the market for investment advice.\973\ Further, because
FINRA rule 2210 does not contain similar provisions to all of the
requirements of the final rule, this alternative would not have offered
the same investor protections of the final rule. For example, FINRA
rule 2210 does not contain a similar provision to the final rule's
requirement to disclose compensation for a solicitation or referral or
for the conflict of interest that results.\974\
---------------------------------------------------------------------------

    \972\ See supra section III.C.1.b.
    \973\ See supra footnote 279 and accompanying text for a
discussion of comments we received on this point.
    \974\ See supra section II.C.5.c.
---------------------------------------------------------------------------

2. Bifurcate Some Requirements
    One alternative to the final rule would be to separate requirements
of the originally proposed rule that currently apply to all
advertisements. For example, one alternative approach to regulation
that we considered is prohibiting hypothetical performance in
advertisements to retail investors, but not others, provided that
certain disclosures were made.
    Evidence from academic research suggests that investors are highly
segmented in their financial literacy and access to resources.\975\ The
fact that certain market segments are susceptible to misconduct
suggests that the lack of financial literacy or access to resources may
also leave them susceptible to false or misleading statements in
advertisements or solicitations.
---------------------------------------------------------------------------

    \975\ See Financial Literacy Study, supra footnote 846. See also
Mark Egan, Gregor Matvos and Amit Seru, The Market for Financial
Adviser Misconduct, 127 J. Pol. Econ. 233 (2019). The paper uses the
term ``financial advisors,'' to refer to broker-dealer
representatives. The authors argue that broker-dealer
representatives target different groups of investors and that this
segmentation permits firms with high tolerance for misconduct on the
part of their associated persons to coexist with firms maintaining
clean records in the current market. They find that misconduct is
more common among firms that advise retail investors, and in
counties with low education, elderly populations and high incomes
(when controlling for other characteristics).
---------------------------------------------------------------------------

    Tailoring requirements to suit the segmented nature of the market
for investment advice may yield benefits to investor protection for
investors with lower financial literacy or access to resources, as
advertisements directed towards these specific market segments
vulnerable to misleading statements would face additional requirements.
Similarly, advertisements not directed towards those segments would
benefit from additional flexibility and information contained in these
advertisements. However, bifurcating the requirements in the final rule
might also impose additional costs on investment advisers, who may need
to expend additional resources to create advertisements that complied
with two increasingly different sets of requirements.

3. Hypothetical Performance Alternatives
    One alternative to the final rule's treatment of hypothetical
performance would be to prohibit all forms of hypothetical performance
in all advertisements. The Commission considered this alternative
because it believes hypothetical performance generally presents a high
risk of misleading investors. This alternative would eliminate the
possibility that investors are misled by hypothetical performance, but
also eliminates the possibility that investors might gain useful
information from some types of hypothetical information. This
additional information might have been useful for improving the quality
of the matches that investors make with investment advisers. While a
prohibition on hypothetical performance might improve the efficiency of
investment adviser advertising by reducing the chance that investors
are misled by advertisements, efficiency can also be reduced if
investors are less able to receive relevant information about the
investment adviser.
    Conversely, another alternative would be to permit all hypothetical
performance in all advertisements, without any additional requirements.
This could increase the relevant hypothetical performance that reaches
investors. While such statements would still be subject to the final
rule's general prohibitions, we believe that this approach would still
pose a high risk that hypothetical performance would mislead investors.
This approach would lack the final rule's protections that are designed
to help ensure that hypothetical performance is disseminated to
investors who have access to the resources to independently analyze
this information and who have the financial expertise to understand the
risks and limitations of these types of presentations.
4. Alternatives to the Combined Marketing Rule
    In the proposal, we also considered retaining separate advertising
and solicitation rules and instead updating and clarifying each rule
separately. However, in the proposal the advertising rule was expanded
to permit advertisements containing testimonials and endorsements,
subject to certain requirements, which had the potential to subject
promoters and solicitors to duplicative requirements from both the
advertising and the solicitation rule. These duplicative requirements
would have imposed additional costs to promoters and their investment
advisers, and potentially decreased the usefulness of the disclosures
made to investors.
    We also considered the alternative of not applying the final
amended merged marketing rule to the solicitation of existing and
prospective private fund investors. Under this alternative, the rule
would apply only to the adviser's clients (including prospective
clients), which, in the case of funds, are the private funds
themselves, and would not apply to investors in private funds. However,
while investors in private funds may often be financially
sophisticated, they may not be aware that the person engaging in the
solicitation activity may be compensated by the adviser or aware of the
other disclosure items that we are requiring, and we believe investors
in such funds should be informed of that fact, those disclosure items
and the related conflicts. In addition, we believe that the application
of the final merged marketing rule to investors in private funds is
consistent with the portions of the rule that concern investment
adviser advertising. This consistency could avoid any competitive
disparities between investment advisers that advise private funds and
those that do not, and reduce the costs that investment advisers bear,
by potentially removing costs associated with identifying whether the
target of a communication is a private fund investor or not. We believe
that harmonizing the scope of the merged rule with the advertising
portions of the rule to the extent possible should ease compliance
burdens.
5. Alternatives to Disqualification Provisions
    We also considered an alternative to current rule 206(4)-3 wherein
the disqualification provisions of the rule would not apply if the
solicitor has performed solicitation activities for the investment
adviser during the preceding twelve months and the investment adviser's
compensation payable to the solicitor for those solicitation activities
was $1,000 or less (or the equivalent value in non-cash compensation).
We considered the alternative of not having any de minimis exemption in
the proposal, which would expand the set of individuals for whom the
investment adviser would need to assess for disqualification,
potentially extending the costs and benefits of the proposed
solicitation rule to these solicitation activities, we believe the
solicitor's incentives to defraud an investor are significantly reduced
when receiving de minimis compensation, and that the need for
heightened safeguards is likewise reduced.
    Conversely, we also considered the alternative of adopting a higher
threshold for a de minimis exemption. However, we believe that an
aggregate $1,000 de minimis amount over a trailing year period is
consistent with our goal of providing an exception for small or nominal
payments. Regarding the trailing period, we understand that a very
engaged solicitor who is paid even a small amount per referral could
potentially receive a significant amount of compensation from an
adviser over time even if the solicitor receives less than $1,000 per
year. Over multiple years, such an investment adviser's compensation
could accumulate to a more significant amount. In such a case we
believe that investors should be informed of the conflict of interest
and gain the benefit of the other provisions of the rule.

IV. Paperwork Reduction Act Analysis

A. Introduction

    Certain provisions of our rule amendments will result in new
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\976\ The rule amendments
will have an impact on the current collection of information burdens of
rule 204-2 under the Investment Advisers Act (``the Act'') and Form
ADV. The title of the new collection of information we are proposing is
``Rule 206(4)-1 under the Investment Advisers Act.'' The Office of
Management and Budget (``OMB'') has not yet assigned a control number
for ``Rule 206(4)-1 under the Investment Advisers Act.'' The titles for
the existing collections of information that we are amending are: (i)
``Rule 206(4)-3 under the Investment Advisers Act of 1940 (17 CFR
275.206(4)-3)'' (OMB number 3235-0242); (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 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.
---------------------------------------------------------------------------

    \976\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    We published notice soliciting comments on the collection of
information requirements in the 2019 Proposing Release and submitted
the

proposed collections of information to OMB for review and approval in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. Although we
received no comments directly on the proposed collections of
information burdens, we did receive three comments on aspects of the
economic analysis that implicated estimates we used to calculate the
collection of information burdens. Two commenters generally stated that
advisers would disseminate new advertisements and update existing
advertisements much more frequently than estimated in our proposal, due
to the proposed expanded definition of advertisement.\977\ Two other
commenters suggested that our assumptions underestimated the amount of
time and costs required to implement the proposed amendments to the
advertising and solicitation rules.\978\ We address these comments
below.
---------------------------------------------------------------------------

    \977\ Fidelity Comment Letter; IAA Comment Letter.
    \978\ MFA/AIMA Comment Letter I.
---------------------------------------------------------------------------

    We discuss below the new collection of information burdens
associated with the amendments to rule 206(4)-1, as well as the revised
existing collection of information burdens associated with the
amendments to rule 204-2 and Form ADV. There will no longer be a
collection of information burden with respect to rule 206(4)-3 because
we are rescinding this rule. Responses provided to the Commission in
the context of its examination and oversight program concerning the
amendments to rule 206(4)-1 and rule 204-2 will be kept confidential
subject to the provisions of applicable law. However, because some of
the information collection pursuant to rule 206(4)-1 requires
disclosures to investors, these disclosures will not be kept
confidential. Responses to the disclosure requirements of the
amendments to Form ADV, which are filed with the Commission, are not
kept confidential.

B. Rule 206(4)-1

    The marketing rule states that, as a means reasonably designed to
prevent fraudulent, deceptive, or manipulative acts, practices, or
courses of business within the meaning of section 206(4) of the Act, it
is unlawful for any investment adviser registered or required to be
registered under section 203 of the of the Act, directly or indirectly,
to disseminate any advertisement that violates any of paragraphs (a)
through (d) of the rule, which include the rule's general prohibitions,
as well as conditions applicable to an adviser's use of testimonials,
endorsements, third-party ratings, and performance information.\979\
---------------------------------------------------------------------------

    \979\ Final rule 206(4)-1(b), (c).
---------------------------------------------------------------------------

    Each requirement under the final rule that an adviser disclose
information, offer to provide information, or adopt policies and
procedures constitutes a ``collection of information'' requirement
under the PRA. The respondents to these collections of information
requirements will be investment advisers that are registered or
required to be registered with the Commission. As of August 1, 2020,
there were 13,724 investment advisers registered with the
Commission.\980\ Investment adviser marketing is not mandatory;
however: (i) Marketing is an essential part of retaining and attracting
clients; (ii) marketing may be conducted easily through the internet
and social media; and (iii) the definition of ``advertisement'' expands
the scope of the advertising rule. Accordingly, we estimate that all
investment advisers will disseminate at least one communication that
meets the rule's definition of ``advertisement'' and therefore be
subject to the requirements of the marketing rule.
---------------------------------------------------------------------------

    \980\ See supra section III.C.1.c.
---------------------------------------------------------------------------

    While commenters claimed that our assumptions in the proposal
significantly underestimated the scope of communications that would
constitute an advertisement under the proposed amendment to the
advertising rule, we made several modifications versus the proposal
that will reduce the amount of communications subject to the rule to
address commenters' concerns.\981\ For example, the marketing rule will
exclude certain one-on-one communications from the first prong of the
definition and communications to current clients that do not offer new
or additional advisory services. These changes from the proposal will
significantly reduce the scope of communications subject to the
marketing rule.
---------------------------------------------------------------------------

    \981\ See MFA/AIMA Comment Letter I; Fidelity Comment Letter.
---------------------------------------------------------------------------

    Because the use of testimonials, endorsements, third-party ratings,
and performance results in advertisements is voluntary, the percentage
of investment advisers that would include these items in an
advertisement is uncertain. However, we have made certain estimates of
this data, as discussed below, solely for the purpose of this PRA
analysis.
1. General Prohibitions
    The general prohibitions under the rule do not create a collection
of information and are, therefore, not discussed, with one exception.
The final rule will prohibit advertisements that include a material
statement of fact that the adviser does not have a reasonable basis for
believing that it will be able to substantiate upon demand by the
Commission. As discussed above, advisers would be able to demonstrate
this reasonable belief in a number of ways.\982\ For example, they
could make a record contemporaneous with the advertisement
demonstrating the basis for their belief. An adviser might also choose
to implement policies and procedures to address how this requirement is
met. This will create a collection of information burden within the
meaning of the PRA.
---------------------------------------------------------------------------

    \982\ See supra section II.B.2.
---------------------------------------------------------------------------

    As stated above, we estimate that all investment advisers will
disseminate at least one communication that meets the rule's definition
of ``advertisement'' and therefore be subject to the requirements of
the marketing rule. We also estimate that such advertisements will
include at least one statement of material fact that will be subject to
this general prohibition, for which an adviser will create and/or
maintain a record documenting its reasonable belief that it can
substantiate the statement. This estimate reflects that many types of
statements typically included in an advertisement (e.g. performance)
can likely be substantiated by other records that an adviser will be
required to create and maintain under the final rule.\983\ Table 1
summarizes the final PRA estimates for the internal and external
burdens associated with this requirement.
---------------------------------------------------------------------------

    \983\ See supra section II.B.2.

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

[GRAPHIC] [TIFF OMITTED] TR05MR21.001

2. Testimonials and Endorsements in Advertisements
    Under the marketing rule, investment advisers are prohibited from
including in any advertisement, or providing any compensation for, any
testimonial or endorsement unless the adviser discloses, or the
investment adviser reasonably believes that the person giving the
testimonial or endorsement discloses: (i) Clearly and prominently: (A)
That the testimonial was given by a current client or investor, or the
endorsement was given by a person other than a current client or
investor; (B) that cash or non-cash compensation was provided for the
testimonial or endorsement, if applicable; and (C) a brief statement of
any material conflicts of interest on the part of the person giving the
testimonial or endorsement resulting from the investment adviser's
relationship with such person; (ii) the material terms of any
compensation arrangement, including a description of the compensation
provided or to be provided, directly or indirectly, to the person for
the testimonial or endorsement; and (iii) a description of any material
conflicts of interest on the part of the person giving the testimonial
or endorsement resulting from the investment adviser's relationship
with such person and/or any compensation arrangement.\984\ The rule
also imposes an oversight obligation that requires that an investment
adviser have a reasonable basis to believe that the testimonial or
endorsement complies with the marketing rule and have a written
agreement with the person giving a testimonial or endorsement (except
for certain affiliated persons of the adviser) that describes the scope
of the agreed upon activities and the terms of the compensation for
those activities when making payments for compensated testimonials and
endorsements that are above the de minimis threshold.\985\ This
collection of information consists of two components: (i) The
requirement to disclose certain information in connection with the
testimonial and endorsement, and (ii) the requirement to oversee the
testimonial or endorsement, including a written agreement with certain
persons giving the testimonial or endorsement.
---------------------------------------------------------------------------

    \984\ Final rule 206(4)-1(b)(1).
    \985\ Id.
---------------------------------------------------------------------------

    The final rule's definitions of testimonials and endorsements
generally contain three elements: (i) Statements about the client's/
non-client's or investor's experience with the investment adviser or
its supervised persons, (ii) statements that directly or indirectly
solicit any prospective client or investor in a private fund for the
investment adviser, or (iii) statements that refer any prospective
client or investor in a private fund to the investment adviser. The
first element is drawn from the definitions of these terms in our
proposed advertising rule. The second and third elements are drawn from
the scope of our proposed solicitation rule.\986\ Accordingly, our PRA
analysis will be drawn from our proposed estimates and discussion of
both proposed rules in the 2019 Proposing Release.\987\
---------------------------------------------------------------------------

    \986\ Id.
    \987\ See 2019 Proposing Release, supra footnote 7, at section
IV.
---------------------------------------------------------------------------

    In our advertising rule proposal, from which the first element of
these definitions is drawn, we estimated that 50 percent of advisers
would include a testimonial or endorsement under the proposed
advertising rule. We also estimated in our advertising proposal that an
investment adviser that includes testimonials or endorsements in
advertisements would use approximately 5 testimonials or endorsements
per year, and would create new advertisements with new or updated
testimonials and endorsements approximately once per year. In the
solicitation rule proposal, from which elements two and three of the
definitions are drawn, we estimated that 47.8 percent of advisers would
compensate a solicitor for solicitation activity under the proposed
solicitation rule.\988\ We also estimated in our proposal that for each
registered investment adviser that would conduct solicitation activity,
they would use approximately 30 referrals annually, distributed by an
average of three solicitors. We did not receive comment on any of these
estimates.
---------------------------------------------------------------------------

    \988\ See 2019 Proposing Release, supra footnote 7, at section
IV.
---------------------------------------------------------------------------

    We are revising our estimates from the advertising rule proposal to
account for the merger of solicitation concepts into the definitions of
testimonial and endorsement. We continue to estimate that 50 percent of
advisers will use a testimonial or endorsement; however,

we are increasing our estimate of the amount of testimonials and
estimates each adviser will use to reflect the definitions' inclusion
of solicitation concepts.\989\ Accordingly, we estimate that each
adviser will use an average of five promoters and use 35 testimonials
or endorsements annually, which includes testimonials and endorsements
incorporated into an adviser's own advertisement and those communicated
by promoters directly. This estimate also reflects the elimination of
the proposed exemptions for solicitations for impersonal advisory
services or by non-profit referral programs, as well as the addition of
the final rule's exemptions for registered broker-dealers and ``covered
persons'' under rule 506(d) of Regulation D.
    Under the marketing rule, an adviser that uses a testimonial or
endorsement will be required to disclose certain information at the
time it is disseminated, which incorporates many of the disclosure
elements required under the proposed solicitation rule. As such, we are
drawing from the burden estimate we attributed to solicitation
disclosures in the 2019 Proposing Release in developing the burden
estimate for all testimonials and endorsements under the final rule,
not just for the types of testimonials and endorsements that were drawn
from the proposed rule. To address one commenter's contention that we
underestimated this burden, and recognizing the changes from the
proposal, we are revising this estimate upwards to 0.20 hours per
disclosure.\990\ We believe that advisers will incur this same burden
each year, since each testimonial and/or endorsement used will likely
be different and thus require updated disclosures. An investment
adviser's in-house compliance managers and compliance attorneys will
likely prepare disclosures, which will likely be included in the
advertisement.\991\
---------------------------------------------------------------------------

    \990\ MFA/AIMA Comment Letter I.
    \991\ We estimate the hourly wage rate for compliance manager is
$309 and a compliance attorney is $337. The hourly wages used are
from SIFMA's Management & Professional Earnings in the Securities
Industry 2013 (``SIFMA Report''), modified by Commission staff to
account for an 1800-hour work-year and inflation, and multiplied by
5.35 to account for bonuses, firm size, employee benefits, and
overhead.
---------------------------------------------------------------------------

    Some of these third-party testimonials and endorsements will
require delivery; thus, we estimate that 20 percent of the disclosures
would be delivered by the U.S. Postal Service, with the remaining 80
percent delivered electronically or as part of another delivery of
documents. For the 20% of advisers that will use physical mail, we
estimate that the average annual costs associated with printing and
mailing this information will be collectively $500 for all disclosure
documents associated with a single registered investment adviser.\992\
---------------------------------------------------------------------------

    \992\ We do not have specific data regarding how the cost of
printing and mailing the underlying information would differ, nor
are we able to specifically identify how the cost of printing and
mailing the underlying information might be affected by the rule.
For these reasons, we estimate $500 per year to collectively print
and mail, upon request, the underlying information associated with
hypothetical performance for purposes of our analysis. In addition,
investors may also request to receive the underlying information
electronically. We estimate that there would be negligible external
costs associated with emailing electronic copies of the underlying
information.
---------------------------------------------------------------------------

    We estimate the average burden hours each year per adviser to
oversee testimonials and endorsements will be one hour for each
promoter, or five hours in total for each adviser that is subject to
this collection of information.\993\ While the final rule provides
flexibility as to how advisers conduct this oversight, we generally
believe that this burden will include contacting solicited clients,
pre-reviewing testimonials or endorsements, or other similar methods.
Additionally, we estimate that each adviser will incur an average
burden hour of one hour for each promoter, or five hours in total, to
prepare the required written agreements. In-house compliance managers
and compliance attorneys are likely to provide oversight of the third
party testimonials and endorsements and prepare the written agreements.
---------------------------------------------------------------------------

    \993\ This estimate is based on the following calculation: 1
hour per each solicitor relationship x 5 promoter relationships.
Although in our proposal we estimated that the oversight requirement
would impose a burden of 2 hours per adviser, we believe that
because the marketing rule does not require a written agreement, the
burden to oversee the promoter relationship will be less than
proposed.
---------------------------------------------------------------------------

    Finally, in response to one commenter who argued that we did not
account for upfront implementation costs for using testimonials and
endorsements, we estimate that each adviser that uses a compensated
testimonial or endorsement will incur an initial burden of two hours to
modify its policies and procedures to reflect the adviser's oversight
of testimonials and endorsements.\994\ We believe that an adviser's
chief compliance officer will complete this task.\995\ Table 2
summarizes the final PRA estimates for the internal and external
burdens associated with these requirements.
---------------------------------------------------------------------------

    \994\ MFA/AIMA Comment Letter I. Accordingly, the amortized
average burden will be 0.67 hours for each of the first 3 years.
    \995\ We estimate that the hourly wage for a chief compliance
officer is $530. The hourly wage is from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead.

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

[GRAPHIC] [TIFF OMITTED] TR05MR21.002

3. Third-Party Ratings in Advertisements
    As discussed above, rule 206(4)-1(c) will prohibit an investment
adviser from including a third-party rating in an advertisement unless
certain conditions are met, including that the adviser must clearly and
prominently disclose (or reasonably believe that the third-party rating
clearly and prominently discloses): (i) The date on which the rating
was given and the period of time upon which the rating was based, (ii)
the identity of the third-party that created and tabulated the rating,
and (iii) if applicable, that cash or non-cash compensation has been
provided directly or indirectly by the adviser in connection with
obtaining or using the third-party rating.
    As discussed in the advertising rule proposal, we continue to
believe that approximately 50 percent of advisers will use third-party
ratings in advertisements, and that they will typically use one third-
party rating on an annual basis. We believe that advisers will incur an
initial internal burden of 3.0 hours to draft and finalize the required
disclosures for third-party ratings, which we are adjusting upwards
from 1.5 hours in the advertising rule proposal to address one
commenter's concern that we underestimated this burden.\996\ As
discussed in the advertising rule proposal, because many of these
ratings or rankings are done yearly (e.g., 2018 Top Wealth Adviser), we
continue to estimate that an adviser that continues to use a third-
party rating will incur ongoing, annual costs of 0.75 burden hours to
draft the third-party rating disclosure updates.\997\ Table 3
summarizes the final PRA estimates for the internal and external
burdens associated with these requirements.
---------------------------------------------------------------------------

    \996\ See MFA/AIMA Comment Letter I. Accordingly, we estimate
that the amortized average burden will be 1 hour for each of the
first 3 years for each investment adviser to comply with the
conditions for including third-party ratings in an advertisement
(3.0 hours/3 years = 1 hour). We believe that this burden will be
split evenly between an adviser's compliance attorney and compliance
manager.
    \997\ We believe that this burden will also be split evenly
between an adviser's compliance attorney and compliance manager.

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

[GRAPHIC] [TIFF OMITTED] TR05MR21.003

4. Performance Advertising
    The marketing rule will impose certain conditions on the
presentation of performance results in advertisements, as discussed
above. Below we discuss the conditions that create ``collection of
information'' requirements within the meaning of the PRA. First, the
rule will prohibit any presentation of gross performance unless the
advertisement also presents net performance that meets certain
criteria.\998\ Second, the rule will prohibit any presentation of
performance results of any portfolio or any composite aggregation of
related portfolios, other than any private fund, unless the
advertisement includes performance results of the same portfolio or
composite aggregation for one-, five-, and ten-year periods, except
that if the relevant portfolio did not exist for a particular
prescribed period, then the life of the portfolio must be substituted
for that period.\999\ Third, the rule will prohibit an advertisement
from including related performance, unless it includes all related
portfolios, subject to a conditional exception.\1000\ Fourth, the rule
will prohibit an advertisement from including extracted performance,
unless the advertisement provides, or offers to provide promptly, the
performance results of the total portfolio from which the performance
was extracted.\1001\ Fifth, the rule will also prohibit an
advertisement from including predecessor performance, unless certain
conditions are satisfied.\1002\ Finally, the rule will require that an
adviser that advertises hypothetical performance: (i) Adopts and
implements policies and procedures reasonably designed to ensure that
the hypothetical performance is relevant to the likely financial
situation and investment objectives of the intended audience of the
advertisement; (ii) provide reasonably sufficient information to enable
the intended audience to understand the criteria used and assumptions
made in calculating such hypothetical performance; and (iii) provide
(or, if the intended audience is an investor in a private fund provide,
or offers to provide promptly) reasonably sufficient information to
enable the intended audience to understand the risks and limitations of
using such hypothetical performance in making investment decisions.
---------------------------------------------------------------------------

    \998\ Final rule 206(4)-1(d).
    \999\ Id. at (d)(2).
    \1000\ Id. at (d)(4).
    \1001\ Id. at (d)(5).
    \1002\ Id. at (d)(7).
---------------------------------------------------------------------------

    We estimate that almost all advisers provide, or seek to provide,
performance information to their clients. Based on staff experience, we
estimate that 95 percent, or 13,038 advisers, provide performance
information in their advertisements. The estimated numbers of burden
hours and costs regarding performance results in advertisements may
vary depending on, among other things, the complexity of the
calculations, the type of performance and the risks that investors may
not understand the limitations of the information, and whether
preparation of the disclosures is performed by internal staff or
outside counsel.
a. Presentation of Net Performance in Advertisements
    We estimate that an investment adviser that elects to present gross
performance in an advertisement will incur an initial burden of 15
hours in preparing net performance for each portfolio, including the
time spent determining and deducting the relevant fees and expenses to
apply in calculating the net performance and then actually running the
calculations.\1003\ We have adjusted this estimate upwards from the
proposal to reflect one commenter's claim that we underestimated this
burden in the proposal.\1004\ Based on staff experience, we estimate
that the average investment adviser will present performance for 3
portfolios over the course of a year, excluding any related portfolios
that an adviser may need to include for purposes of presenting related
performance.\1005\ As noted above, we estimate that 95 percent, or
13,038 advisers, provide performance information in their
advertisements and

thus will be subject to this collection of information burden.
---------------------------------------------------------------------------

    \1003\ Accordingly, we estimate that the amortized initial
burden will be 5 hours for each of the first 3 years for each
investment adviser to prepare net performance (15 hours/3 years = 5
hours/year). We believe that this burden will be split evenly
between an adviser's compliance attorney and compliance manager (2.5
hours each).
    \1004\ See MFA/AIMA Comment Letter I.
    \1005\ The burden associated with calculating net performance in
connection with presenting related performance is discussed in
section IV.B.3.c. below.
---------------------------------------------------------------------------

    We expect that the calculation of net performance may be modified
every time an adviser chooses to update the advertised performance. We
estimate that after initially preparing net performance for each
portfolio, investment advisers will incur a burden of 3 hours to update
the net performance for each subsequent presentation. Again, we
adjusted this estimate upwards from the proposal to reflect one
commenter's claim that we underestimated this burden in the
analysis.\1006\ For purposes of this analysis, we estimate that
advisers will update the relevant performance of each portfolio 3.5
times each year.\1007\
---------------------------------------------------------------------------

    \1006\ See MFA/AIMA Comment Letter I.
    \1007\ We believe that this burden will be split evenly between
an adviser's compliance attorney and compliance manager (3 hours x
3.5 times per year = 10.5 hours; 10.5 hours/2 = 5.25 hours each).
---------------------------------------------------------------------------

b. Time Period Requirement in Advertisements
    We estimate that an investment adviser that elects to present
performance results in an advertisement will incur an initial burden of
35 hours in preparing performance results of the same portfolio for
one-, five-, and ten-year periods (excluding private funds), taking
into account that these results must be prepared on a net basis (and
may also be prepared and presented on a gross basis).\1008\ We estimate
that after initially preparing one-, five-, and ten-year performance
for each portfolio, investment advisers will incur a burden of 8 hours
to update the performance for these time periods for each subsequent
presentation. For purposes of this analysis, we estimate that advisers
will update the relevant performance 3.5 times each year.\1009\ We
received no comments on these estimates and continue to believe they
are appropriate.
---------------------------------------------------------------------------

    \1008\ Accordingly, we estimate that the amortized initial
burden will be 11.67 hours for each of the first 3 years for each
investment adviser to prepare performance results that comply with
this requirement (35 hours/3 years = 11.67 hours/year). We believe
that this burden will be split evenly between an adviser's
compliance attorney and compliance manager (5.83 hours each).
    \1009\ We believe that this burden will be split evenly between
an adviser's compliance attorney and compliance manager (8 hours x
3.5 times per year = 28 hours; 28 hours/2 = 14 hours each).
---------------------------------------------------------------------------

c. Related Performance
    We estimate that an investment adviser that elects to present
related performance in an advertisement will incur an initial burden of
30 hours, with respect to each advertised portfolio or composite
aggregation of portfolios, in preparing the relevant performance of all
related portfolios.\1010\ We have revised this estimate upwards to
address one commenter's claim that we underestimated this time burden
in the proposal.\1011\ This time burden will include the adviser's time
spent classifying which portfolios meet the rule's definition of
``related portfolio''--i.e., which portfolios have ``substantially
similar investment policies, objectives, and strategies as those of the
services offered in the advertisement.'' \1012\ This burden also will
include time spent determining whether to exclude any related
portfolios in accordance with the rule's provision allowing exclusion
of one or more related portfolios if ``the advertised performance
results are not materially higher than if all related portfolios had
been included'' and ``the exclusion of any related portfolio does not
alter the presentation of the time periods prescribed by paragraph
(d)(2).'' \1013\ Finally, this time burden will include the adviser's
time calculating and presenting the net performance of any related
performance presented.
---------------------------------------------------------------------------

    \1010\ Accordingly, we estimate that the amortized initial
burden will be 10 hours for each of the first 3 years for each
investment adviser to prepare related performance in connection with
this requirement (30 hours/3 years = 10 hours/year). We believe that
this burden will be split evenly between an adviser's compliance
attorney and compliance manager (5 hours each).
    \1011\ See MFA/AIMA Comment Letter I.
    \1012\ See final rule 206(4)-1(e)(16). Our estimate accounts for
advisers that may already be familiar with any composites that meet
the definition of ``related portfolio.''
    \1013\ See final rule 206(4)-1(d)(4).
---------------------------------------------------------------------------

    We continue to estimate that 80 percent of advisers (or 10,979
advisers) will have other portfolios with substantially similar
investment policies, objectives, and strategies as those offered in the
advertisement and choose to include related performance. We estimate
that after initially preparing related performance for each portfolio
or composite aggregation of portfolios, investment advisers will incur
a burden of 5 hours to update the performance for each subsequent
presentation. Although we expect that advisers might update their
performance fewer times per year than we had proposed because the final
rule permits performance to be shown as of the most recent calendar
year end, we continue to estimate that advisers will update the
relevant related performance 3.5 times each year.\1014\ We received no
comments on these estimates and continue to believe they are
appropriate.
---------------------------------------------------------------------------

    \1014\ We believe that this burden will be split evenly between
an adviser's compliance attorney and compliance manager (5 hours x
3.5 times per year = 17.5 hours; 17.5 hours/2 = 8.75 hours each).
---------------------------------------------------------------------------

d. Extracted Performance
    As in the advertising rule proposal, we estimate that an investment
adviser that elects to present extracted performance in an
advertisement will incur an initial burden of 10 hours in preparing the
performance results of the total portfolio from which the performance
is extracted in order to provide or offer to provide such performance
results to investors.\1015\ For purposes of this analysis, we continue
to assume 5 percent of advisers will include extracted performance. We
estimate that after initially preparing the performance of the total
portfolio from which extracted performance is extracted, investment
advisers will incur a burden of 2 hours to update the performance for
each subsequent presentation. For purposes of this analysis, we
estimate that advisers will update the relevant total portfolio
performance 3.5 times each year.\1016\ We also estimate that registered
investment advisers may incur external costs in connection with the
requirement to provide performance results of a total portfolio from
which extracted hypothetical performance is extracted. We estimate that
the average annual costs associated with printing and mailing this
information upon request will be collectively $500 for all documents
associated with a single registered investment adviser. We received no
comments on these estimates and continue to believe they are
appropriate.
---------------------------------------------------------------------------

    \1015\ Accordingly, we estimate that the amortized initial
burden will be 3.33 hours for each of the first 3 years for each
investment adviser to prepare the performance of the total portfolio
from which the presentation of extracted performance is extracted
(10 hours/3 years = 3.33 hours/year). We believe that this burden
will be split evenly between an adviser's compliance attorney and
compliance manager (1.67 hours each).
    \1016\ We believe that this burden will be split evenly between
an adviser's compliance attorney and compliance manager (2 hours x
3.5 times per year = 7 hours; 7 hours/2 = 3.5 hours each).
---------------------------------------------------------------------------

e. Hypothetical Performance
    We estimate that an investment adviser that elects to present
hypothetical performance in an advertisement will incur an initial
burden of 7 hours in preparing and adopting policies and procedures
reasonably designed to ensure that the hypothetical performance is
relevant to the likely financial situation and investment objectives of
the intended audience of the advertisement.\1017\ We

have revised this estimate upwards from the advertising rule proposal
to address one commenter's claim that we underestimated this time
burden.\1018\ For purposes of this analysis, we continue to estimate
that 50 percent of advisers will include hypothetical performance in
advertisements.
---------------------------------------------------------------------------

    \1017\ Accordingly, we estimate that the amortized initial
burden will be 2.33 hours for each of the first 3 years for each
investment adviser to comply with this requirement (7 hours/3 years
= 2.33 hours/year). We believe that an adviser's chief compliance
officer will complete this task.
    \1018\ See MFA/AIMA Comment Letter I.
---------------------------------------------------------------------------

    We continue to estimate that advisers that use hypothetical
performance will disseminate advertisements containing hypothetical
performance 20 times each year, including in certain one-on-one
communications that meet the final rule's definition of advertisement.
We estimate that after adopting appropriate policies and procedures, an
adviser will incur a burden of 0.25 hours to categorize investors
according to their likely financial situation and investment objectives
pursuant to the adviser's policies and procedures.\1019\
---------------------------------------------------------------------------

    \1019\ We believe that an adviser's chief compliance officer
will complete this task (20 presentations per year x 0.25 hours each
= 5 hours per year).
---------------------------------------------------------------------------

    Additionally, we estimate that an investment adviser that elects to
present hypothetical performance in an advertisement will incur an
initial burden of 20 hours in preparing the information sufficient to
understand the criteria used and assumptions made in calculating, as
well as risks and limitations in using, the hypothetical performance,
in order to provide such information, which may in certain
circumstances be upon request.\1020\ We have also revised this estimate
upwards from the proposal to address one commenter's claim that we
underestimated this time burden.\1021\ We estimate that after initially
preparing the underlying information, investment advisers will incur a
burden of 3 hours to update the information for each subsequent
presentation. For purposes of this analysis, we estimate that advisers
will update their hypothetical performance, and thus the underlying
information, 3.5 times each year.\1022\
---------------------------------------------------------------------------

    \1020\ Accordingly, we estimate that the amortized initial
burden will be 6.67 hours for each of the first 3 years for each
investment adviser to comply with this requirement (20 hours/3 years
= 6.67 hours/year). We believe that this burden will be split evenly
between an adviser's compliance attorney and compliance manager
(3.33 hours each). This estimate includes the time spent by an
adviser in preparing the information. The time spent calculating the
hypothetical performance that is based on such information is not
accounted for in this estimate, as the rule does not require that an
advertisement present hypothetical performance.
    \1021\ See MFA/AIMA Comment Letter I.
    \1022\ We believe that this burden will be split evenly between
an adviser's compliance attorney and compliance manager (3 hours x
3.5 times per year = 10.5 hours; 10.5 hours/2 = 5.25 hours each).
---------------------------------------------------------------------------

    We estimate that registered investment advisers may incur external
costs in connection with the requirement to provide this underlying
information upon the request of an investor or prospective investor in
a private fund. We estimate that the average annual costs associated
with printing and mailing this underlying information upon request will
be collectively $500 for all documents associated with a single
registered investment adviser.\1023\
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    \1023\ See supra footnote 992 for a discussion of estimated
mailing costs.
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f. Predecessor Performance
    The final rule will impose conditions on an adviser's use of
predecessor performance. We estimate that an investment adviser that
elects to present predecessor performance in an advertisement will
incur an initial burden of 10 hours in preparing the relevant
performance results and associated disclosures.\1024\ This time burden
will include the adviser's time spent classifying which performance
results are eligible to be ported--i.e., to determine whether accounts
at a predecessor adviser are ``sufficiently similar'' and the persons
are ``primarily responsible'' for the performance, or that the relevant
algorithm was responsible for achieving the prior performance
results.\1025\ This burden also will include time spent determining
whether to exclude any account in accordance with the rule's provision
allowing exclusion of one or more accounts if the advertised
performance results ``would not result in materially higher
performance.'' Finally, this time burden will include the adviser's
time calculating and presenting the net performance and appropriate
time periods of any predecessor performance presented.
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    \1024\ Accordingly, we estimate that the amortized initial
burden will be 3.33 hours for each of the first 3 years for each
investment adviser to prepare predecessor performance in connection
with this requirement (10 hours/3 years = 3.33 hours/year). We
believe that this burden will be split evenly between an adviser's
compliance attorney and compliance manager (1.67 hours each).
    \1025\ Final rule 206(4)-1(d)(7)(i)-(ii).
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    We estimate that 2% of advisers (or 275 advisers) will include
predecessor performance in an advertisement. We estimate that after
initially preparing predecessor performance, investment advisers will
incur a burden of 1 hour to update the relevant disclosures and
performance information for each subsequent presentation. For purposes
of this analysis, we estimate that advisers will update the relevant
disclosures 3.5 times each year.\1026\ Table 4 summarizes the final PRA
estimates for the internal and external burdens associated with these
requirements.
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    \1026\ We believe that this burden will be split evenly between
an adviser's compliance attorney and compliance manager (1 hour x
3.5 times per year = 3.5 hours; 3.5 hours/2 = 1.75 hours each).
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[GRAPHIC] [TIFF OMITTED] TR05MR21.005

BILLING CODE 8011-01-C
5. Total Hour Burden Associated With Rule 206(4)-1
    Accordingly, we estimate the total annual hour burden for
investment advisers registered or required to be registered with the
Commission under proposed rule 206(4)-1 to prepare testimonials and
endorsements, third-party ratings, and performance results disclosures
will be 1,414,291 hours, at a time cost of $468,287,816. The total
external burden costs would be $4,460,200. The following chart
summarizes the various components of the total annual burden for
investment advisers.

----------------------------------------------------------------------------------------------------------------
                                                              Internal hour    Internal burden    External cost
                                                                 burden           time cost          burden
----------------------------------------------------------------------------------------------------------------
General Prohibitions......................................      82,344 hours        $9,016,668  ................
Testimonials and Endorsements.............................     121,252 hours       $41,749,094          $686,200
Third-Party Ratings.......................................      12,009 hours         4,046,933  ................
Performance...............................................   1,198,686 hours       413,475,121         3,774,000
                                                           -----------------------------------------------------
    Total annual burden...................................   1,414,291 hours       468,287,121         4,460,200
----------------------------------------------------------------------------------------------------------------

C. Rule 206(4)-3

    Rule 206(4)-3 (OMB number 3235-0242) currently prohibits investment
advisers from paying cash fees to solicitors for client referrals
unless certain conditions are met. As discussed above, we are
rescinding rule 206(4)-3 and merging some of its components into the
combined marketing rule. The collection of information burden
associated with the requirements of rule 206(4)-3 has been incorporated
into the collection of information burden for rule 206(4)-1. There will
no longer be a collection of information burden associated with rule
206(4)-3.

D. 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 amendments to rule 204-2 will be
kept confidential subject to the provisions of applicable law.
    We are amending rule 204-2 to require investment advisers to retain
copies of all advertisements.\1027\ The current rule requires
investment advisers to retain copies of advertisements to 10 or more
persons.\1028\ For oral advertisements, amended rule 204-2 provides
that an adviser may instead retain a copy of any written or recorded
materials used by the adviser in connection with the oral
advertisement.\1029\ For compensated oral testimonials and
endorsements, the adviser may instead make and keep a record of the
disclosures provided to clients or investors required by the final
rule.\1030\ We are also amending the rule to require investment
advisers to retain: (i) Documentation of communications relating to
predecessor performance; (ii) copies of all information provided or
offered pursuant to the marketing rule's conditions on advertising
hypothetical performance; and (iii) records of who the ``intended
audience'' relating to the conditions of hypothetical performance. The
amendments will not require an adviser to maintain copies of written
approvals of advertisements, since we are not adopting the proposed
requirement that an adviser review and approve advertisements before
dissemination.
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    \1027\ See final rule 204-2(a)(11); see also supra section II.I
(discussing the amendments to the books and records rule).
    \1028\ Rule 204-2(a)(11).
    \1029\ See final rule 204-2(a)(11)(i)(A)(1).
    \1030\ See id.
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    Amended rule 204-2 will require registered investment advisers to
maintain a copy of any questionnaire or survey used in preparation of
the third-party rating. Advisers must also make and retain: (i) A
record of the disclosures provided to clients or investors pursuant to
the marketing rule, if not included in the advertisement, (ii)
documentation related to the adviser's determination that it has a
reasonable basis for believing that a testimonial, endorsement, or
third-party rating complies with the applicable conditions of the
marketing rule, and (iii) a record of all affiliated personnel of the
adviser.\1031\ Each of these records will 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 will be required to maintain and preserve these
records in an easily accessible place for not less than 5 years from
the end of the fiscal year during which the last entry was made on such
record, the first 2 years in an appropriate office of the investment
adviser. Requiring maintenance of these records will facilitate the
Commission's ability to inspect and enforce compliance with the