update their brochure in each instance would be burdensome and of
limited value. This approach is similar to that we currently take
with respect to advisers' obligations to update assets under
management reported in Item 5 of Form ADV, Part 1A. See Form ADV:
General Instruction 4. For similar reasons, proposed Instruction 4
to Part 2A also would state that an adviser does not need to update
its brochure solely because its fee schedule has changed. Advisers
would, however, be required to update their brochure to reflect
material changes with respect to listed assets and fee schedules if
they are otherwise updating their brochure for a separate reason.
    \151\ Proposed rule 204-1(b).
    \152\ See note 6 above. In the case of an adviser that prepares,
files and delivers to clients separate brochures for the various
different advisory services it offers, the most recent version of
each of its brochures would be available via the public disclosure
Web site.
    \153\ Advisers' historic brochure filings would be available for
public inspection and copying in the Commission's Public Reference
Room, 100 F Street, NE., Washington, DC 20549.
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    We request comment generally with respect to our proposed
requirements for updating brochures. We request comment specifically
about the proposal to require ongoing updating. Should we develop
different updating requirements for the different disclosure items of
the brochure in a manner similar to the updating requirements for Form
ADV, Part 1A (e.g., require more frequent updating with respect to
changes to an adviser's listed fee schedule)? We also request comment
about whether we should make advisers' historical brochure filings
available via the Commission's public disclosure Web site.

B. Part 2B: The Brochure Supplement

    In 2000, we expressed our concern that, because the information in
current Part 2 concerns the advisory firm, clients may not receive
information they want and need about the firm's employees with whom
they have contact and on whom they rely for investment advice.\154\ In
the case of smaller advisers, the current disclosure requirements,
which focus on the senior executives of the advisory firm, may be
adequate. But in large advisory firms, which account for a significant
number of SEC-registered advisers, clients may never meet the firm's
senior executives, who may be located in a different city and may have
only an indirect effect on the advice given to the client.\155\ We
believe clients of these firms also are interested in the background,
disciplinary record (if any), and qualifications of the individuals
with whom they are dealing.
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    \154\ For example, current Part 2 requires background
information only on firm executives and members of the firm's
``investment committee.'' Item 6 of Part 2 of Form ADV.
    \155\ Based on advisers' responses to questions on Part 1A of
Form ADV as of September 30, 2007, more than 475 of the investment
advisers registered with the Commission report on Part 1A of their
Form ADV that they have more than 50 employees who perform
investment advisory functions on behalf of the firm. (IARD Data as
of Sept. 30, 2007).
---------------------------------------------------------------------------

    Therefore, we proposed in 2000, and are today reproposing, a
requirement that adviser brochures be accompanied by brochure
supplements that provide information about the advisory personnel on
whom clients rely for investment advice. A brochure supplement
ordinarily would be less than a page long and would contain information
about the educational background, business experience, and disciplinary
history (if any) of the supervised person who provides advisory
services to that client.\156\
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    \156\ 156 Proposed rule 204-3(b)(2).
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    We received a large number of comments on the brochure supplement
proposal. Several commenters, including those representing financial
planners, investment consultants, and consumer groups, praised the
supplement as a highly practical and beneficial tool for informing
clients about the qualifications and background of the individuals on
whom they rely for investment advice.\157\ Several others, including a
number of investment advisers, argued that ensuring proper distribution
of supplements at large firms would be costly and burdensome.\158\ Some
maintained that clients do not want the information that would be
contained in a supplement.\159\ Another commenter, the IAA,
acknowledged that consumers hiring professionals in any field often
inquire about the individuals' credentials in addition to the firm's
reputation, but urged that we narrow the rule so as not to require
advisers to deliver the supplement to institutional clients.\160\
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    \157\ E.g., AIMR Letter; CFA Letter; Consortium Letter; FPA
Letter; Comment Letter of the Investment Management Consultants
Association (June 12, 2000).
    \158\ E.g., AmEx Letter; June 2000 IAA Letter; ICI Letter;
Comment Letter of Legg Mason, Inc. (June 13, 2000) (``Legg Mason
Letter''); Merrill Letter; Paine Webber Letter; Comment Letter of
Salomon Smith Barney Inc. (June 13, 2000) (``Salomon Letter'');
Schwab Letter; SIFMA Letter; TIAA-CREF Letter; T. Rowe Price Letter;
Comment Letter of United Services Planning Association, Inc. and
Independent Research Agency for Life Insurance, Inc. (June 12, 2000)
(``USPA Letter''); Wellington Letter.
    \159\ Merrill Letter; Salomon Letter; Schwab Letter; SIFMA
Letter.
    \160\ May 2001 IAA Letter.
---------------------------------------------------------------------------

    We continue to believe that information contained in the brochure
supplement may be very important to clients. In response to commenters'
concerns, however, we have made a number of changes that are intended
to reduce burdens on advisers subject to the rule. As discussed in more
detail below, we would modify the delivery requirement, reduce the
number of types of clients to whom advisers would be required to
provide supplements, clarify the format of the supplements to maximize
the amount of flexibility advisers have in preparing a supplement, and
limit the information

that would have to be included in the supplement.
1. Delivery and Updating
    We originally proposed to require that each adviser provide its
clients with a brochure supplement for each supervised person who
provides advisory services to that client.\161\ In response to
comments, we are limiting the circumstances in which an adviser would
be required to deliver the supplement.\162\
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    \161\ See Proposing Release at Section II.D.2.
    \162\ See note 158 above. A number of commenters argued that
advisers should only be required to deliver brochure supplements of
supervised persons who actually formulated investment advice. Crist
Letter; June 2000 IAA Letter; ICI Letter; TIAA-CREF Letter; T. Rowe
Price Letter. Nine commenters argued that brochure supplements
should not be required of supervised persons who act as solicitors.
Crist Letter; DP&W Letter; Comment Letter of Federated Investors
Inc. (June 13, 2000) (``Federated Letter''); FPA Letter; June 2000
IAA Letter; ICI Letter; TIAA-CREF Letter; T. Rowe Price Letter; USPA
Letter. Some commenters urged limiting delivery to certain types of
clients, such as ``retail'' clients, but not to sophisticated or
institutional clients.
---------------------------------------------------------------------------

    The proposed amendments would require that a client be given a
brochure supplement for each supervised person who (i) formulates
investment advice for that client and has direct client contact,\163\
or (ii) makes discretionary investment decisions for that client's
assets, even if the supervised person has no direct client
contact.\164\ We believe that requiring supplements for these
categories of supervised persons would provide clients with the
information they want and need about the particular individuals on whom
they will rely for investment advice. We originally proposed, but have
eliminated, a provision requiring delivery of a supplement for a
supervised person who merely communicates investment advice. Commenters
pointed out that our original proposal would have required disclosure
of the backgrounds of client service representatives who transmit
investment advice to clients, but who have no influence on the advice
given. To limit disclosure about employees with whom a client may have
no contact or about employees who do not influence the advice given to
the client, we have more narrowly tailored the proposed supplement
delivery requirements so that a particular client would receive
disclosure specifically about those persons on whom he relies for
investment advice.
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    \163\ An adviser would not have to provide a supplement for a
third-party solicitor because solicitors already must deliver a
disclosure document to potential advisory clients. Rule 206(4)-3 [17
CFR 275.206(4)-3].
    \164\ An adviser would not, however, have to provide a
supplement for a supervised person who provides discretionary advice
only as part of a team and has no direct client contact as we
believe that when investment advice is formulated by a team,
specific information about each individual team member takes on less
importance. Proposed Instruction 1 to Part 2B.
    The supervised person's supplement must be given to the client
at or before the time that supervised person begins to provide
advisory services to that client. Proposed rule 204-3(b)(2) and
proposed Instruction 3 to Part 2B. Although the amendments we are
proposing today would require the advisory firm to deliver the
brochure supplement, we recognize that in most cases advisers'
supervised persons will actually deliver the required supplements to
clients on behalf of the advisory firm.
---------------------------------------------------------------------------

    As reproposed, an adviser generally would be required to provide
its clients with a brochure supplement for each supervised person who
provides advisory services as described above. However, advisers would
not be required to deliver supplements to four types of clients: (i)
Clients to whom an adviser is not required to deliver a firm brochure
(e.g., registered investment companies and business development
companies); (ii) clients who receive only impersonal investment advice;
\165\ (iii) clients who are ``qualified purchasers;'' \166\ and (iv)
certain ``qualified clients'' who also are officers, directors,
employees and other persons related to the adviser.\167\ An adviser
that does not have any clients to whom a supplement would have to be
delivered would not have to prepare any supplements. Similarly, an
adviser would not have to prepare a supplement for any supervised
person who does not have clients to whom the adviser must deliver a
supplement.
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    \165\ This exception from the supplement delivery requirement
differs slightly from the exception from the brochure delivery
requirement, in that it does not depend on the cost of the
impersonal advisory services involved. This is because in situations
involving impersonal advisory services, the nature of the services
are such that supervised persons of the adviser are unlikely to be
directly providing advisory services to clients. As a result, we
believe that in such situations requiring supplement delivery would
result in an unnecessary expense with little appreciable benefit. We
believe, however, that delivery of a firm brochure would be useful
where the cost of the impersonal advisory services is significant,
that is $500 or above.
    \166\ ``Qualified purchasers,'' as defined under section
2(a)(51)(A) of the Investment Company Act of 1940 [15 U.S.C. 80a-
2(a)(51)(A)], include, among others, natural persons who own $5
million or more in investments and persons who manage $25 million or
more in investments for their account or other accounts of other
qualified purchasers.
    \167\ Rule 205-3(d)(1)(iii) defines certain related persons of
an adviser as ``qualified clients,'' including: (i) Any executive
officers, directors, trustees, general partners, or persons serving
in a similar capacity, of the advisory firm; and (ii) any employees
of the advisory firm (other than employees performing solely
clerical, secretarial or administrative functions) who, in
connection with their regular functions or duties, participate in
the investment activities of the firm and have been performing such
functions or duties for at least 12 months.
---------------------------------------------------------------------------

    The first two categories of clients were included in our 2000
proposal. Commenters did not address these exceptions to the supplement
delivery requirement. We propose to add the latter two exceptions in
response to several commenters' arguments that certain institutional
and sophisticated clients do not need the protections of the brochure
supplement requirement because they are in a position to obtain, and
frequently do obtain, information about the advisory personnel on whom
they rely for investment advice.\168\
---------------------------------------------------------------------------

    \168\ See DE Shaw; Federated Letter; June 2000 IAA Letter; T.
Rowe Price Letter; Wellington Letter.
---------------------------------------------------------------------------

    We request comment on our assumption that some clients do not need
the protections afforded by a requirement that an adviser deliver a
brochure supplement even though we would continue to require delivery
of the brochure. Should we use a higher threshold to exclude clients,
such as ``Qualified Institutional Buyers?'' \169\ Should we use a lower
one, and exclude all clients who are ``qualified clients'' under rule
205-3, rather than just those qualified clients that are officers,
directors and employees of the adviser? \170\ In December 2006, the
Commission proposed, but has not adopted, new rules 509 and 216 under
the Securities Act of 1933, that would define the term ``accredited
natural person.'' \171\ We ask for comment on whether we should create
an exclusion from supplement delivery for accredited natural persons.
In particular, with respect to natural persons, we request comment on
whether ``accredited

natural person'' or ``qualified client'' is the appropriate standard to
use or whether it would be more appropriate to use the higher
``qualified purchaser'' standard.\172\
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    \169\ ``Qualified Institutional Buyer,'' as defined under rule
144a of the Securities Act of 1933 [17 CFR 230.144a], includes
entities that own and invest on a discretionary basis at least $100
million in securities.
    \170\ ``Qualified client,'' as defined under rule 205-3 of the
Advisers Act [17 CFR 275.205-3], includes natural persons with
$750,000 under management with the adviser and individuals who have
a net worth of $1.5 million.
    \171\ Proposed new rules 509 and 216 under the Securities Act of
1933 would add to the existing definition of ``accredited investor''
and apply to private offerings of certain unregistered investment
pools. As proposed, these rules would define the term ``accredited
natural person'' under Regulation D and Section 4(6) of the
Securities Act. ``Accredited natural person'' would be any natural
person who meets either the net worth or income test specified in
rule 501(a) or rule 215, as applicable, and who owns at least $2.5
million in investments. See Prohibition of Fraud by Advisers to
Certain Pooled Investment Vehicles; Accredited Investors in Certain
Private Investment Vehicles, Investment Advisers Act Release No.
2576 (Dec. 27, 2006) [72 FR 400 (Jan. 4, 2007)]. In August 2007, we
proposed further general amendments to the definition of accredited
investor. See Revisions of Limited Offering Exemptions in Regulation
D, Securities Act Release No. 8828 (Aug. 3, 2007) [72 FR 45116 (Aug.
10, 2007)].
    \172\ See note 166 above.
---------------------------------------------------------------------------

    In 2000, we proposed to require that advisers promptly deliver to
existing clients a revised supplement (or a sticker) whenever
information in the supplement became materially inaccurate.\173\ Today,
we propose to reduce the frequency with which advisers would have to
deliver clients an updated supplement so that they would only deliver
them to existing clients when new disclosure of a disciplinary event,
or a material change to disciplinary information already disclosed, in
response to proposed Part 2B, Item 3, which we believe is critical
information for clients. As we noted above, we believe disciplinary
information is important because it reflects upon the supervised
person's integrity and may affect a client's trust and confidence in
that person.
---------------------------------------------------------------------------

    \173\ Proposing Release at n. 215.
---------------------------------------------------------------------------

    As with the brochure, advisers would have to amend a brochure
supplement promptly if information in it becomes materially inaccurate,
and any new clients who would be required to receive that supplement
must be given the amended version (or the ``old'' supplement and a
sticker). Supplements, like brochures, could be delivered on paper or
electronically.\174\ However, unlike the delivery requirement for firm
brochures, and because we believe most information in the supplement is
less likely to become materially inaccurate over time, advisers would
not be required to deliver supplements to existing clients annually. We
request comment generally on the proposed updating and delivery
requirements for brochure supplements. We also request comment on our
proposal to require advisers to deliver updated supplements to clients
describing changes to disciplinary information. Should we also require
updated supplements to be delivered if other information changes?
---------------------------------------------------------------------------

    \174\ Proposed Instruction 4 to Part 2B.
---------------------------------------------------------------------------

2. Format
    The proposed amendments would require advisers to write their
supplements in plain English, but would give advisers considerable
flexibility in presenting information in a format that best suits their
firms.\175\ This flexibility is designed to reduce the cost of
preparing and delivering supplements. Advisers would be permitted to
include supplement information in the firm's brochure, an approach that
may be attractive to smaller firms with few persons for whom they would
be required to prepare supplements.\176\ Advisers could also elect to
prepare a supplement for each supervised person, or alternatively, they
could prepare separate supplements for different groups of supervised
persons (e.g., all supervised persons in a particular office or work
group). We request comment generally on the proposed format for
brochure supplements.
---------------------------------------------------------------------------

    \175\ See Proposed Instruction 6 to Part 2B.
    \176\ IARD data as of September 30, 2007 indicate that nearly 82
percent of advisers registered with us have 10 or fewer employees
performing investment advisory functions on their behalf. Over 67
percent have five or fewer employees performing advisory functions.
---------------------------------------------------------------------------

3. Supplement Items
    Most commenters who addressed the proposed items supported the
proposed content of the brochure supplements.\177\ As we are proposing
it today, Part 2B would consist of six items. We are proposing to omit
two that we originally proposed in 2000. We would omit originally
proposed Item 7, which would have required disclosure if the supervised
person had been the subject of a bankruptcy petition during the past 10
years.\178\ Commenters asserted that a personal bankruptcy is not
necessarily indicative of a supervised person's investment advisory
skills and thus need not be disclosed in the brochure supplement. In
light of these comments, we have eliminated this item. Should we
require disclosure of personal bankruptcies in supplements and, if so,
why? We are proposing most of the other items, each of which we discuss
below, as originally proposed. In addition to our specific requests for
comment, we request comment generally on each of these items.
---------------------------------------------------------------------------

    \177\ E.g., AIMR Letter; CFA Letter; CFP Board Letter.
    \178\ In 2000, we proposed disclosure of bankruptcy filings of
supervised persons. We are, as discussed above, proposing Item 18 of
Part 2A, which would require the firm's brochure to disclose whether
the advisory firm has been the subject of a bankruptcy petition
during the past 10 years.
---------------------------------------------------------------------------

    Item 1. Cover Page. The supplement's cover page would include
information identifying the supervised person and the advisory firm.
    Item 2. Educational Background and Business Experience. Item 2
would require the supplement to describe the supervised person's formal
education and his or her business background for the past five
years.\179\ If the supervised person either has no formal education
after high school or has no business background, the adviser would have
to disclose this fact in the supplement.
---------------------------------------------------------------------------

    \179\ Currently, Item 6 of Part 2 of Form ADV requires this
information about the adviser's principal executive officers and
about individuals who determine general investment advice on behalf
of the adviser.
---------------------------------------------------------------------------

    We are not, as originally proposed, including the requirement to
describe professional designations or attainments. Advisers would be
permitted, however, to include information about professional
designations and attainments in the supplement if they so choose.\180\
We are concerned that in light of the already large number and variety
of existing designations, requiring such information may encourage the
proliferation of fictitious and meaningless designations. In addition,
our staff and other securities regulators have warned that investors
may be confused by some professional designations, such as those that
imply expertise in providing services to seniors.\181\ We request
comment about this approach. Should we require disclosure about
professional designations and attainments? Are there additional items
related to educational background and business experience that we
should include? Have we included disclosure items that are not
relevant?
---------------------------------------------------------------------------

    \180\ Some commenters, however, supported disclosure of
professional designations (AIMR Letter; CFP Board Letter; FPA
Letter).
    \181\ See Protecting Senior Investors: Report of Securities
Firms Providing ``Free Lunch'' Sales Seminars, Joint Report by the
Staff of the Commission's Office of Compliance Inspections and
Examinations, NASAA, and FINRA (available at http://www.sec.gov/
spotlight/seniors/freelunchreport.pdf); Staff Update, ``Senior''
Specialists and Advisors: What You Should Know About Professional
Designations (available at http://www.sec.gov/investor/pubs/senior-
profdes.htm). While we acknowledge that a number of well-regarded
professional designations and attainments exist, the required
credentials, training, and experience associated with different
designations varies widely.
---------------------------------------------------------------------------

    Item 3. Disciplinary Information. Item 3 would require disclosure
of any legal or disciplinary event that is material to a client's
evaluation of the supervised person's integrity. Many commenters
supported our 2000 proposal.\182\ One commenter, the United Services
Planning Association, opposed it, saying that such disclosure would be
punitive and unnecessary. Some others suggested that the scope of the
required disciplinary disclosure be narrowed, or that advisers might
not have the information about their supervised persons' disciplinary
history.\183\ Two

commenters, SIFMA and the FPA, recommended limiting the disclosure to
events that are the subject of a final order or judgment, and not
requiring disclosure if the supervised person is named in a pending
criminal proceeding. Four commenters supported our proposal to require
disclosure if a supervised person's professional designations are
suspended or revoked, arguing that consumers would benefit from having
full disclosure of all relevant information.\184\ Three commenters
opposed that disclosure, arguing among other things, that suspension or
revocation proceedings do not ``guarantee due process'' and could occur
for ``mundane'' reasons (e.g., failure to pay dues).\185\
---------------------------------------------------------------------------

    \182\ AIMR Letter; CFA Letter; CFP Board Letter; FPA Letter.
    \183\ E.g., AmEx Letter; ICI Letter; Greenville Letter; Legg
Mason Letter; Securities America Letter.
    \184\ AIMR Letter; CFA Letter; CFP Board Letter; FPA Letter.
    \185\ AmEx Letter; June 2000 IAA Letter; T. Rowe Price Letter.
---------------------------------------------------------------------------

    In general, we believe that advisory clients would consider the
listed disciplinary events critically important in determining whether
to hire or retain an adviser or any specific supervised person of that
adviser. We believe it is important that clients have information
concerning disciplinary events that involve the persons who are
substantially responsible for the investment advice that clients
receive. Thus, we are proposing Item 3 largely as we proposed it in
2000 to require substantially the same disclosure requirements for the
supervised person's disciplinary history as we are proposing for the
firm's disciplinary history.\186\
---------------------------------------------------------------------------

    \186\ As in proposed Item 9 of Part 2A, proposed Item 3 of Part
2B would include a list of events that are presumptively material if
they occurred in the prior 10 years. The list parallels the proposed
list of legal and disciplinary events in Item 9 of Part 2A that must
be disclosed in the firm brochure and which are derived from the
existing disclosure requirements set out in rule 206(4)-4. The list
also is substantially similar to the list of disciplinary events
advisers are already required to disclose in response to Item 11 of
Form ADV, Part 1A. With respect to commenter's concerns regarding
the burdens of requiring disclosure of ``pending criminal
proceedings,'' the required disclosure is narrow, as it would not
include other investigations, or arrests or similar charges effected
in the absence of a formal criminal indictment or information (or
equivalent formal charge). See Form ADV: Glossary.
    As under proposed Item 9 of Part 2A, proposed Item 3 of Part 2B
would permit an adviser to rebut the presumption with respect to a
particular event, in which case no disclosure to clients about the
event would be required. We would, however, require an adviser
rebutting a presumption of materiality to document that
determination in a memorandum and retain that record in order to
better permit our staff to monitor compliance with this important
disclosure requirement. The same standard as under Item 9 would
apply, and similarly, a note in Item 3 would explain four factors
the adviser should consider when assessing whether the presumption
can be rebutted.
---------------------------------------------------------------------------

    In response to comments, we have clarified that an adviser would be
required to disclose a proceeding that revoked or suspended the
supervised person's professional attainment, designation, or license
only if the action was a result of a violation of rules relating to
professional conduct.\187\ We also added a proposed requirement that
the supplement describe any event over which the supervised person has
ever resigned or otherwise relinquished a professional attainment,
designation or license in anticipation of it being suspended or revoked
(other than for suspensions or revocations for failure to pay
membership dues). We believe clients would wish to know about these
kinds of events as they may reflect on the integrity of the supervised
person.
---------------------------------------------------------------------------

    \187\ See CFP Board Letter; T. Rowe Price Letter.
---------------------------------------------------------------------------

    We believe our proposal strikes an appropriate balance among the
concerns raised by commenters. We request comment on whether it does.
Are there listed disciplinary events that we should remove or modify?
Are there additional types of disciplinary events that we should list?
For example, should we require disclosure of all cease and desist and
censure orders? Are there other events, such as arbitration claims or
awards, which could be characterized as disciplinary and should be
disclosed in a supplement? If we were to require advisers to make
disclosure regarding arbitration claims or awards, should we require
such disclosure only if the award or claim exceeds a specified amount?
If so, what should that amount be? \188\ Is any of the proposed
information not useful to advisory clients?
---------------------------------------------------------------------------

    \188\ Determining whether to include disclosure of arbitration
proceedings in brochure supplements raises the same issues as would
be involved in requiring such disclosure in firm brochures. See
discussion above at notes 69-70 and accompanying text.
---------------------------------------------------------------------------

    Item 4. Other Business Activities. Item 4 would require an adviser
to describe other business activities of its supervised person. The
item specifically would require disclosure with respect to other
capacities in which the supervised person participates in any
investment-related business and any conflicts of interest such
participation may create.\189\ In addition, we would require the
supplement to include information about any compensation, including
bonuses and non-cash compensation, the supervised person receives based
on the sales of securities as well as an explanation of the incentives
this type of compensation creates.\190\ As we noted in the Proposing
Release, this practice creates an incentive for the supervised person
to base investment recommendations on his own compensation rather than
on clients' best interests.\191\ We are also proposing, with some
revisions, a requirement to disclose other business activities or
occupations that the supervised person engages in for pay.\192\ Clients
may have different expectations of an individual whose sole business is
providing investment advice than of an individual who is engaged in
other substantial business activities.
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    \189\ Proposed Item 4.A of Part 2B.
    \190\ Proposed Item 4.A.2 of Part 2B.
    \191\ See Proposing Release at n. 219 and accompanying text.
    \192\ Proposed Item 4.B of Part 2B.
---------------------------------------------------------------------------

    One commenter, the CFA, enthusiastically supported our proposal,
stating that clients would benefit greatly from disclosures about a
supervised person's other business activities. Two others, T. Rowe and
the IAA, argued that disclosure of other business activities should be
limited to substantial investment-related activities that provide a
major source of that person's income. We would continue to require
disclosure of other business activities because we believe that, as
reflected in the CFA's comments, investors would find this information
helpful in assessing the conflicts created by those activities. We are
not limiting the proposed disclosure of other investment-related
activities to those characterized as ``substantial,'' because we
believe the client is in the best position to assess the significance
of any other business activities and the impact that they may have on
their advisory relationship.
    We are, however, proposing to require disclosure about only those
non-investment-related business activities or occupations that provide
a substantial source of the supervised person's income or that involve
a substantial amount of the supervised person's time. We believe this
responds to commenters' concerns by eliminating unnecessary disclosure
about relatively insignificant other business activities, while still
requiring important disclosures that inform clients of the supervised
person's primary business activities. We request comment as to this
approach. We request comment specifically with regard to whether this
information would be useful to a client's evaluation of a supervised
person's competence. Further, we have not defined ``substantial'' for
purposes of this item, preferring instead to leave some flexibility for
advisers to determine whether their supervised person's non-investment-
related business provides a substantial source

of income or involves a substantial amount of time. Is our approach
appropriate?
    Item 5. Additional Compensation. This proposed item would require
that the supplement describe arrangements in which someone other than a
client gives the supervised person an economic benefit (such as a sales
award or other prize) for providing advisory services.\193\ The
proposed item would specify that regular salary need not be disclosed.
---------------------------------------------------------------------------

    \193\ Bonuses based (in part or whole) on sales, client
referrals or new accounts would trigger required disclosure, but
other bonuses would not.
---------------------------------------------------------------------------

    One commenter, the CFA, strongly supported this proposed item,
while two others objected, arguing that it would require disclosure of
confidential and proprietary business information of the adviser.\194\
While we understand that firms may wish to keep sales awards or prizes,
and similar incentive structures, confidential, these types of
arrangements can create significant and material conflicts of interest
that may bias the advice being presented. We believe clients need to
know about these arrangements in order to assess the advisory services
of a firm's supervised person. Are we correct? In addition, we request
comment on alternatives that might strike a different balance between
concerns about disclosure of advisers' confidential and proprietary
business information with clients' need to be informed of material
conflicts of interest.
---------------------------------------------------------------------------

    \194\ DE Shaw Letter; DP&W Letter.
---------------------------------------------------------------------------

    Item 6. Supervision. This item would require an adviser to explain
how the firm monitors the advice provided by its supervised
person.\195\ It also would require a firm to provide the client with
the name, title and telephone number of the person responsible for
supervising the advisory activities of the supervised person. This
information would permit the client to contact other advisory personnel
when necessary to address any problems in the advisory relationship. We
are proposing this item in the same form as we proposed it in 2000.
Commenters who addressed the item supported disclosure of information
on the supervision of the individual that is the subject of the
supplement.\196\
---------------------------------------------------------------------------

    \195\ As we discuss in more detail above in Section II.B.1 of
this Release, we have narrowed the scope of supervised persons who
would need a supplement. As a result, we do not believe it is
necessary to propose, as we did in 2000, to require the supplement
to discuss who formulates the advice a supervised person gives to
clients.
    \196\ See AIMR Letter; CFA Letter.
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C. Filing Requirements, Public Availability, and Transition

    We propose to amend our rules to require advisers to file their new
brochures with us electronically through the IARD system, which would
permit us to make them publicly available through our Web site.\197\
Part 1 of Form ADV has been filed electronically and the information
contained in it publicly available since 2001. At the time we adopted
the amendments to Part 1, we exempted advisers from submitting Part 2
to us because the IARD was not ready to accept those filings.\198\ The
required system functionality is now available, and we therefore
propose to reinstate the filing requirement so that we, and members of
the public, may have ready access to adviser brochures.
---------------------------------------------------------------------------

    \197\ Proposed rule 204-1(b). In some cases an adviser will not
have to file a brochure because it is not required to deliver one.
See above Section II.A.3 of this Release. When an adviser has not
submitted a brochure as part of its Form ADV filing, the IARD system
will generate an automated message asking an adviser that has not
attached a brochure to its filing to confirm that it is not required
to prepare a brochure.
    \198\ See Note to current rule 204-1(c).
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    The IARD is able to accept brochure filings using the Adobe
Portable Document Format (``PDF''), which would allow advisers to
capture information from any application on any computer system.\199\
Utilizing PDF format would promote accessibility to brochure filings by
enabling users of our public disclosure Web site to access and read
brochures filed on IARD without having to possess the particular
software used by each adviser to prepare its brochure.\200\ The PDF
format, which limits transferability of computer viruses, also permits
full-text search features that make it easy to locate words, bookmarks,
and data fields within a brochure, and it permits the IARD to accept
brochures that include graphics and charts, so that advisers who choose
to use more elaborate brochures need not also prepare a plain text
version solely for purposes of filing it with the Commission. We
believe that the ability to accept PDF filings presents the most
flexible and cost-efficient approach.\201\ We request comment about
whether advisers currently have access to PDF conversion software. We
also request comment, however, on whether we should permit advisers to
file their brochures in other electronic formats. If so, which ones and
why? Should we consider requiring advisers to file brochure information
that makes use of data tagging technologies and taxonomies such as
eXtensible Business Reporting Language (``XBRL'')? \202\
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    \199\ IARD system functionality for electronic filing of
brochures is currently operational and the state securities
regulators have been running a voluntary pilot program for advisers
to file the current version of Part 2 using PDF.
    \200\ PDF reader software is widely available and is a standard
feature on most word processing software. Additionally, users may
download this software for free from the Internet.
    \201\ PDF converter software is already widely available and in
many cases comes as a standard feature on word processing software.
We anticipate that most, if not all, investment advisers will have
access to such software, and thus would not need to incur additional
expense associated with filing their brochure in PDF format were we
to adopt this proposal. We are currently exploring options with the
FINRA for making PDF converter software available to those
investment advisers that do not already have it.
    \202\ Data tagging uses standard definitions (or data tags) to
translate text-based information into data that is interactive,
i.e., data that can be retrieved, searched, and analyzed through
automated means. XBRL is a language for the electronic communication
of business and financial data that was developed as an open source
specification that describes a standard format for tagging financial
and other information to facilitate the preparation, publication,
and analysis of that information by software applications. In 2005
we adopted rules instituting a program that permits certain filers,
on a voluntary basis, to submit specified, supplemental disclosure
tagged in XBRL format as an exhibit to certain filings on the
Commission's Electronic Data Gathering, Analysis and Retrieval
System (``EDGAR''). See XBRL Voluntary Financial Reporting Program
on the EDGAR System, Securities Act Release No. 8529 (Feb. 3, 2005)
[70 FR 6556 (Feb. 8, 2005)]. In July 2007, we extended the voluntary
reporting program to enable mutual funds to submit supplemental
tagged information contained in the risk/return summary section of
their prospectuses. Extension Of Interactive Data Voluntary
Reporting Program On The EDGAR System To Include Mutual Fund Risk/
Return Summary Information, Securities Act Release No. 8823 (July
11, 2007) [72 FR 39290 (July 17, 2007)].
---------------------------------------------------------------------------

    The IARD will provide advisers with access to the Part 2 Items and
instructions. Instead of completing Part 2 on-line, advisers will
create their brochure on their own computers and then attach the
completed document to their filing on IARD, much like attaching a
document to an e-mail. To update brochures, advisers will make the
necessary changes on their own computers and then attach the revised
versions to an IARD filing. The IARD will not accept an annual updating
amendment without an updated brochure. However, if no changes are
necessary when an adviser is submitting its annual updating amendment,
an adviser will have the option of indicating on IARD that its current
brochure does not contain any materially inaccurate information. If an
adviser ceases to use a particular brochure, it will be able to
eliminate it from its current filing. Our Web site will make only the
firm's current filings publicly available because that filing

should contain the most up-to-date information about the adviser.\203\
---------------------------------------------------------------------------

    \203\ As discussed above, historical filings would nonetheless
be available for public inspection and copying in the Commission's
Public Reference Room. See above note 153.
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    As proposed, advisers would not be required to file brochure
supplements or supplement amendments with the Commission and therefore
they will not be available on the Commission's public disclosure Web
site.\204\ We are not proposing to require filing of supplements so as
to reduce the potential burdens on advisers and because the supplement
disclosure requirement is designed primarily to provide advisers'
clients with background information about the particular supervised
persons with whom they are dealing. We believe this information is less
likely to be of interest to the general investing public.\205\ Advisers
would be required, however, to maintain copies of all supplements and
amendments in their files.\206\ We request comment on our approach.
Should we require brochure supplements and amendments to brochure
supplements to be filed with us through the IARD system and be made to
available to the public through our Web site?
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    \204\ Proposed rules 203-1(b) and 204-1(c) and proposed
Instruction 8 to Part 2B of Form ADV. Because brochure supplements
would not be filed with us, they would not be required as part of
any state notice filing. Section 307(a) of the National Securities
Market Improvement Act of 1996, Public Law 104-290, 110 Stat. 3416
(1996) (state securities authorities may only require SEC-registered
advisers to file with the states copies of those documents advisers
have filed with the Commission).
    \205\ We note that the disciplinary history of an adviser's
supervised persons is required to be reported as part of the
adviser's filing of Part 1 of Form ADV, and is available to the
Commission through the IARD and to the public via the Commission's
public disclosure Web site.
    \206\ Proposed rules 203-1(b) and 204-1(c) and proposed
Instruction 8 to Part 2B of Form ADV.
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    To provide adequate notice and opportunity to comply with the
proposed brochure filing requirements, new applicants for registration
with us as investment advisers would not be required to include their
brochures as part of their initial application for registration until
the date six months after the effective date of the amendments. After
that date, however, the Commission would not accept any initial
application for registration as an investment adviser that does not
include a brochure that satisfies the requirements of Part 2A of Form
ADV.\207\
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    \207\ Proposed rule 203-1(a)(2).
---------------------------------------------------------------------------

    Similarly, we believe it would be helpful to provide sufficient
time for advisers already registered with us to prepare the new
brochure and brochure supplements. Accordingly, we propose to implement
a transition schedule requiring advisers to comply with the new Part 2
requirements by the date they must make their next annual updating
amendment to Form ADV following the date the revised form becomes
effective. In no case, however, would any adviser be required to comply
with the new requirements earlier than six months after they become
effective.\208\ We request comment on our proposed implementation plan.
Would a six-month period from the effective date of the revised form
provide enough time for advisers to complete their new brochures? If
not, please explain why and how much time advisers would need to
complete their new brochures. Should implementation of the brochure
requirements be on a separate timetable from implementation of the
brochure supplement requirements?
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    \208\ Proposed rule 204-1(b)(2).
---------------------------------------------------------------------------

III. Amendments to Form ADV Instructions and Glossary

    In conjunction with the proposed Part 2 amendments, we are also
proposing to make conforming amendments to the General Instructions and
the Glossary of Terms for Form ADV. We propose amending the General
Instructions to Form ADV to include instructions regarding brochure
filing requirements. Similarly, we would amend the Glossary of Terms to
add the following five terms that are used in proposed Part 2: (i)
``Brochure;'' \209\ (ii) ``brochure supplement;'' \210\ (iii)
``investment adviser representative;'' \211\ (iv) ``supervised
person;'' \212\ and (v) ``wrap brochure or wrap fee program brochure.''
\213\ We also would update the Glossary to reflect cross-references to
these new terms, and cross-references to existing Glossary entries used
in the revised portions of the Form.
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    \209\ ``Brochure'' would mean: ``A written disclosure statement
that your firm is required to provide to clients and prospective
clients.'' See Form ADV: Glossary.
    \210\ ``Brochure supplement'' would mean: ``A written disclosure
statement containing information about certain of your supervised
persons that your firm is required by Part 2B of Form ADV to provide
to clients and prospective clients.'' See Form ADV: Glossary.
    \211\ ``Investment adviser representative'' would mean:
    Any of your firm's supervised persons (except those that provide
only impersonal investment advice) is an investment adviser
representative, if --
     the supervised person regularly solicits, meets with,
or otherwise communicates with your firm's clients,
     the supervised person has more than five clients who
are natural persons and not high net worth individuals, and
     more than ten percent of the supervised person's
clients are natural persons and not high net worth individuals. See
Form ADV: Glossary.
    \212\ ``Supervised person'' would mean: ``Any of your officers,
partners, directors (or other persons occupying a similar status or
performing similar functions), or employees, or any other person who
provides investment advice on your behalf and is subject to your
supervision or control.'' See Form ADV: Glossary.
    \213\ ``Wrap brochure or wrap fee program brochure'' would mean:
``The written disclosure statement that sponsors of wrap fee
programs are required to provide to each of their wrap fee program
clients.'' See Form ADV: Glossary.
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    We also are proposing to update the Glossary to correct a
discrepancy in the definition of ``Non-Resident'' to make it consistent
with the definition in rule 0-2, the Advisers Act rule related to the
procedures for serving process, pleadings, and other papers on non-
resident investment advisers, and advisers' non-resident general
partners and managing agents. This proposed revision would properly
effect the Commission's intent at the time the Glossary was originally
adopted, that the definition of ``Non-Resident'' in the Glossary be the
same as that in rule 0-2.\214\ Although technical in nature, this
amendment may potentially result in an increased number of corporate
entities qualifying as non-resident general partners or managing agents
of SEC-registered advisers. Certain entities would be required to file
Form ADV-NR with the Commission to appoint agents for service of
process because they relied on the glossary definition and did not
previously file the form.
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    \214\ This proposed amendment would change the definition of
``Non-Resident'' to include ``a corporation incorporated in or
having its principal place of business in any place not subject to
the jurisdiction of the United States.'' (Emphasis added). See rule
0-2(b)(2) [17 CFR 275.0-3(b)(2)]. The current Glossary definition
includes a ``corporation incorporated in and having its principal
place of business in any place not subject to the jurisdiction of
the United States.'' (Emphasis added). See Form ADV: Glossary.
Inclusion in the current Glossary definition of the conjunctive
``and'' rather than the disjunctive ``or'' was unintentional.
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    We request comment on these proposed amendments.

IV. Amendments to Rule 204-2

    We also are proposing conforming amendments to Advisers Act rule
204-2, the rule that sets forth the requirements for maintaining and
preserving specified books and records, to require SEC-registered
investment advisers to retain copies of each brochure, brochure
supplement, and each amendment to the brochure and supplements that are
prepared as required under the rule 204-3.\215\ This

proposed change is designed to update the books and records rule in
light of our proposed changes to Part 2.\216\ Additionally, the
proposed amendments would require SEC-registered advisers to prepare
and preserve documentation of the method they use to compute managed
assets for purposes of Item 4.E in Part 2A of Form ADV, if that method
differs from the method used to calculate ``assets under management''
in Part 1A of Form ADV.\217\ The amendments also would require advisers
to prepare and preserve a memorandum describing any legal or
disciplinary event listed in Item 9 in Part 2A and Item 3 in Part 2B of
Form ADV for the period the event is presumed material, if the event is
not disclosed in the adviser's brochure or the relevant brochure
supplement.\218\ These records would be required to be maintained in
the same manner, and for the same period of time, as other books and
records required to be maintained under rule 204-2(a). We request
comment on these proposed amendments.
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    \215\ Proposed rule 204-2(a)(14)(i). The proposed rule also
would require advisers to keep and maintain a copy of any summary of
material changes that is not included in the brochure or brochure
supplements, as well as a record of the dates that each brochure,
supplement, amendment, and summary of material change was given to
any client. See discussion above at notes 27-29 and accompanying
text.
    \216\ Currently, rule 204-2(a)(14) requires advisers to maintain
copies of written statements and amendments given or delivered to
any client or prospective client under existing rule 204-3. Thus,
advisers already are required to maintain copies of their brochures.
    \217\ See discussion above at note 33.
    \218\ See discussion above at notes 65-66 and accompanying text,
and note 186.
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V. General Request for Comment

    The Commission requests comment on the amendments proposed in this
Release, suggestions for other additions to the amendments, and comment
on other matters that might have an effect on the proposals contained
in this Release. For purposes of the Small Business Regulatory
Enforcement Fairness Act of 1996, the Commission also requests
information regarding the potential impact of the proposed amendments
on the economy on an annual basis. Commenters should provide empirical
data to support their views.

VI. Paperwork Reduction Act

    Certain provisions of the rule and form amendments that we are
proposing today contain ``collection of information'' requirements
within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\219\ The Commission is submitting these proposed amendments
to the Office of Management and Budget (``OMB'') for review in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The titles for
these collections of information are ``Form ADV,'' ``Rule 204-2,''
``Rule 204-3,'' and ``Rule 206(4)-4,'' all under the Advisers Act.
These rules and forms contain currently approved collection of
information numbers under OMB control numbers 3235-0049, 3235-0278,
3235-0047, and 3235-0345, respectively. An agency may not sponsor,
conduct, or require response to an information collection unless it
displays a currently valid OMB number.
---------------------------------------------------------------------------

    \219\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The respondents to the collections of information are investment
advisers registered or applying for registration with us. We use the
information to determine eligibility for registration with us and to
manage our regulatory and examination programs. Clients use certain of
the information to determine whether to hire or retain an adviser.
    The amendments to Form ADV we are proposing involve three distinct
``collections of information'' for purposes of the Paperwork Reduction
Act. The first is the collection of information connected with Form ADV
itself, specifically our proposed amendments to Part 2 of Form ADV. The
second collection of information involved is that under the proposed
amendment to rule 204-2, which requires advisers to maintain and
preserve specified books and records. The third collection involved is
that related to a proposed amendment to rule 204-3, which requires
advisers to deliver certain of the information required under Form ADV
to their clients.
    In addition, we are proposing to withdraw rule 206(4)-4, the rule
requiring advisers to disclose certain disciplinary and financial
information, because that rule will become duplicative if the
amendments to Part 2 of Form ADV are adopted. We incorporate the
discussion of our proposed withdrawal of rule 206(4)-4 into the
discussion of Part 2 of Form ADV below.

A. Amendments to Form ADV (17 CFR 275.203-1, 275.204-1, and 279.1)

    We are proposing amendments to Part 2 of Form ADV to provide
advisory clients with clear, current, and more meaningful disclosure in
a narrative, plain English format. Rules 203-1 and 204-1 already
require every applicant for investment adviser registration with us to
file Form ADV through the IARD and require every investment adviser
registered with us to file amendments to Form ADV through the IARD at
least annually.\220\ As proposed, the amendments to rules 203-1 and
204-1 and to Part 2 of Form ADV also would require advisers registered
with us to prepare and electronically file firm brochures required by
Part 2A, and to maintain copies of brochure supplements that they
deliver to clients.
---------------------------------------------------------------------------

    \220\ Presently, advisers must submit Part 1 of Form ADV to us
through the IARD system, but are not required to submit a copy of
current Part 2 of Form ADV to the Commission if they maintain in
their files a copy of their Part 2 (and of any brochure they deliver
to clients). The copy they maintain in their files is considered
filed with the Commission.
---------------------------------------------------------------------------

    The information required by the proposed amendments to Form ADV is
mandatory. Responses are not kept confidential. Under section 204 of
the Advisers Act, investment advisers required to register with the
Commission must make and keep certain records, including those related
to Form ADV, for prescribed periods, generally for a period of at least
five years, and must make and disseminate certain reports. In 2000,
when we originally proposed revisions to Form ADV (including Part 2),
we sought OMB approval of the increased burden stemming from the
revised form.\221\ The collection of information was approved and has
subsequently been amended. The currently approved total annual burden
for all advisers completing, amending, and filing revised Form ADV
(Parts 1 and 2) with us, is 109,678 hours.\222\ Because of the passage
of time and modifications to the original proposal, we intend to
resubmit the collection of information under Form ADV to OMB for
approval.
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    \221\ See Proposing Release, above note 5.
    \222\ The paperwork burdens associated with rules 203-1 and 204-
1 are included in the approved annual burden associated with Form
ADV and thus, do not entail a separate collection of information.
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1. Part 2 of Form ADV
    In the Proposing Release, we acknowledged that the proposed
amendments to Form ADV (including those to Part 2) would at first
increase the then-current paperwork burden because most advisers would
have to redraft and disseminate a narrative brochure and brochure
supplements. We noted that most of the new paperwork burden would be
incurred in this initial preparation, specifically in drafting the
narrative text. We further observed that once the adviser has redrafted
its narrative brochure, proposed Parts 2A and 2B were not expected to
result in any significant burden increase over time (except for changes
to the brochure that are necessitated by changes in the adviser's
business). We continue to believe that the initial paperwork burden
will be

higher and that the efficiencies of filing through IARD, over time, are
expected to reduce the initial burdens associated with completing the
revised Form ADV.
    The Commission staff previously estimated that during the first
year that an adviser responds to Form ADV, including amended Part 2, an
average investment adviser's total collection of information burden
would be 22.25 hours per adviser.\223\ We estimated that this average
annual burden per adviser would apply to both new registrants applying
for registration with us, as well as to current registrants required to
amend their Form ADVs as a result of the proposed revisions. This
estimate included time for preparation of brochures and brochure
supplements in addition to the burden of preparing Part 1A. A few
commenters, particularly those representing large advisory firms,
disagreed with the Commission staff's estimate, arguing that it would
take advisers much more time to complete and distribute their new
narrative brochure and brochure supplements.\224\ Large firms asserted
that they would have ``thousands'' of employees for whom supplements
would have to be prepared.
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    \223\ In the Proposing Release we estimated that during the
first year, advisers' use of the revised form would result in an
average annual collection burden of 22 hours per adviser. See
Section IV of the Proposing Release. In conjunction with adoption of
our rule requiring advisers to adopt codes of ethics, we amended
this estimated burden by adding 0.25 hours to reflect the
requirement that an adviser's Part 2 contain a description of its
code of ethics and a statement that a copy of the code is available
upon request. See Code of Ethics Adopting Release above note 78.
    \224\ See, e.g., Crist Letter; SIFMA Letter; Comment Letter
Dechert Price and Rhoads (June 14, 2000).
---------------------------------------------------------------------------

    We appreciate the different costs that small versus large firms may
experience, and so we have made it clear that our estimate is an
average that takes into consideration the thousands of advisers that
have a small number of employees as well as the few advisers that have
thousands of employees. As of September 30, 2007, there were 10,817
investment advisers registered with the Commission, and nearly 82
percent of these advisers have 10 or fewer employees performing
advisory functions on their behalf compared to less than one third of
one percent of advisers who have more than 1,000 employees.\225\
Moreover, the paperwork burden of preparing a narrative firm brochure
is likely to vary substantially among advisers, in part because
proposed Part 2A would give an adviser considerable flexibility in
structuring its disclosure, and also because the amount of disclosure
required would vary among advisers.\226\ The burdens associated with
preparing the new brochures will depend on the size of the adviser, the
complexity of its operations, and the extent to which its operations
present conflicts of interest with clients. Many of the new items
imposing the most rigorous disclosure requirements may not apply to
certain small advisers because, for example, those advisers may not
have soft dollar or directed brokerage arrangements, or may not have
custody of client assets. Accordingly, based on our consultations with
industry representatives, we estimate that the average initial annual
burden associated with Form ADV may range from as little as 5 hours for
smaller advisers, to approximately 50 hours for medium-sized advisers,
to as much as nearly 3,300 hours for larger advisers.\227\ Based on
IARD data, we estimate that there are approximately 8,835 small
advisers, 1,952 medium-sized advisers, and 30 large advisers.\228\ As
such, we believe that 22.25 hours remains an accurate reflection of the
time that it will take the average adviser to complete revised Form ADV
(including both Parts 1 and 2).\229\
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    \225\ See note 176 above.
    \226\ Additionally, since the 2000 proposal, we have made
certain revisions to the proposed form that scale back the types of
clients for whom brochures and supplements must be delivered. These
revisions should actually have the effect of reducing the number of
advisers who are required to prepare and update brochures, and thus
may actually reduce somewhat the burden of the revised Form ADV from
what was originally proposed.
    \227\ For purposes of this estimate, we have categorized small
advisers as those with 10 or fewer employees, medium-sized advisers
as those with between 11 and 999 employees, and large advisers as
those with 1,000 or more employees.
    \228\ Unless otherwise noted, the IARD data cited below is based
on advisers' responses to questions on Part 1A of Form ADV as of
September 30, 2007.
    \229\ [8,835 small advisers x an estimated 5 hours/adviser] +
[1,952 medium-sized advisers x an estimated 50 hours/adviser] + [30
large advisers x an estimated 3,296 hours/adviser] = 240,655 hours
total. 240,655 hours/10,817 total advisers = 22.25 hours/adviser.
---------------------------------------------------------------------------

    As under the currently approved collection, the estimated initial
burdens associated with using the revised form would be amortized over
the estimated period that advisers would use their revised brochure.
Thus, we have amortized the paperwork burdens of the revised form over
a three-year period.\230\ Respondents under this collection of
information would be advisers currently registered with the Commission
as well as new applicants for investment adviser registration with the
Commission. We estimate that approximately 1,000 new applicants apply
for registration as investment advisers each year. Thus, in combination
with the approximately 10,817 existing investment advisers registered
with the Commission, we estimate that the total number of respondents
under this collection of information would be 11,817 advisers. Based on
the estimated average collection of information burden of 22.25 hours
per adviser, the total initial collection of information would amount
to 22,250 hours for new registrants and 240,678.25 hours for currently
registered advisers that re-file Form ADV (including Part 2) through
the IARD system, for a total of 262,928.25 hours.\231\ Amortizing this
total burden imposed by Form ADV over a three-year period would result
in an average burden of an estimated 87,643 hours per year,\232\ or of
7.42 hours per year for each new applicant and for each adviser
currently registered with the Commission that would re-file through the
IARD.\233\
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    \230\ In the Proposing Release, the Commission staff chose a
fifteen-year amortization period to reflect the anticipated period
of time that advisers would use the revised form. However, for
purposes of our current proposal, we are amortizing the estimated
burden over a shorter period of time--three years--and have
submitted to OMB an amendment to this collection of information to
reflect this approach.
    \231\ Based on historic IARD registration data, we estimate that
approximately 1,000 new applicants for registration with the
Commission each year. (10,817 current registrants x 22.25 hours) +
(1,000 new applicants x 22.25 hours) = 240,678.25 hours + 22,250
hours = 262,928.25 hours.
    \232\ 262,928.25 hours/3 years = 87,642.75 hours/year.
    \233\ 87,643 hours/11,817 advisers = 7.42 hours/adviser.
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    We further estimate that some advisers may incur a one-time initial
cost including outside legal fees in connection with preparation of
Form ADV (including preparation of Part 2). As we discuss above,
advisers subject to the Form ADV requirements vary widely in terms of
the size, complexity and nature of their advisory business, and thus,
the amount of disclosure required, would vary substantially among
advisers. Accordingly, the amount of time, and thus cost, required for
outside legal review is likely to vary substantially among those
advisers who elect to obtain outside legal assistance. We estimate that
the initial per adviser cost related to preparation of Form ADV may
range from as little as $1,200 for smaller advisers, to $4,400 for
medium-sized advisers, to as much as $10,400 for larger advisers.\234\
Similarly, whether an

adviser even seeks outside legal services in drafting their Form ADV
will depend on the size, complexity and nature of their advisory
business. We believe that a substantial percentage of advisers,
particularly smaller advisers, are unlikely to seek such outside legal
services. We estimate that only a quarter of smaller advisers, or about
2,209 advisers, are likely to seek outside legal services. Similarly,
we estimate that approximately half of medium-sized advisers, or 976
advisers, are likely to seek such services.\235\ On the other hand,
advisers with more significant conflicts are more likely to engage
outside legal services to assist in preparation of Form ADV. On this
basis we estimate that all of the 30 larger advisers registered with
the Commission are likely to incur costs related to such outside legal
services. Thus, we estimate that approximately 3,215 advisers, will
elect to obtain outside legal assistance, for a total cost among all
respondents of $7,257,200.\236\
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    \234\ Outside legal fees are in addition to the projected hourly
per adviser burden discussed above. $400 per hour for legal services
x 3.0 hours per small adviser = $1,200. $400 per hour for legal
services x 11 hours per medium-sized adviser = $4,400. $400 per hour
for legal services x 26 hours per large adviser = $10,400. The
hourly cost estimate of $400 is based on our consultation with
advisers and law firms who regularly assist them in compliance
matters.
    \235\ 8,835 small advisers x 0.25 = 2,208.75. 1,952 medium-sized
advisers x 0.5 = 976.
    \236\ ($1,200 x 2,209 advisers) + ($4,400 x 976 advisers) +
($10,400 x 30 advisers) = $7,257,200.
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    In addition to the burdens associated with initial completion and
filing of the revised form, we estimate that on average, each adviser
filing Form ADV through the IARD system will likely amend its form 1.5
times during the year.\237\ We estimate that the collection of
information burden for amendments would be 0.75 hours per amendment.
Thus, we estimate that advisers will file an estimated total of
17,725.5 amendments per year for an estimated total paperwork burden of
13,294 hours per year.\238\
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    \237\ This estimate is based on IARD system data regarding the
number of filings of Form ADV amendments.
    \238\ 11,817 advisers x 1.5 amendments per year = 17,725.5
amendments per year. 17,725.5 amendments x 0.75 hours = 13,294.125
hours.
---------------------------------------------------------------------------

    Therefore the total annual collection of information burden for
advisers to file and complete the revised Form ADV (Parts 1 and 2),
including the initial burden for both existing and anticipated new
registrants plus the burden associated with amendments to the form, is
estimated to be approximately 100,976 hours per year.\239\ In addition
to these estimated burdens, under this collection of information there
is also a burden of 11,971 hours associated with advisers' obligations
to deliver to clients copies of their adviser codes of ethics.\240\
Thus, the estimated revised total annual hourly burden under this
collection of information would be 112,947 hours.\241\ This represents
an increase of 3,269 hours per year from the currently approved
burden.\242\
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    \239\ 13,294 hours per year attributable to amendments + (1,000
new registrants each year x 7.42 hours) + (10,817 currently-
registered advisers x 7.42 hours) = 13,294 hours + 7,420 hours +
80,262.14 hours = 100,976.14 hours.
    \240\ See Code of Ethics Adopting Release, above note 78. The
current approval of this collection estimates that ten percent of an
adviser's clients would make such requests, however, subsequently
obtained information based on discussions with the industry
regarding actual practice indicates that such requests occur
significantly less frequently than previously estimated, thus, we
have modified our estimate. We now estimate that only one percent of
an adviser's clients actually request a copy the adviser's code of
ethics. 0.01 x 1,013 (the estimated average number of clients per
adviser) = 10.13 requests per registrant. See note 258 below
regarding the estimated average number of clients. We continue to
estimate that responding to each such request involves a burden of
0.10 hours, amounting to an annual burden of 1.013 hours for each
adviser stemming from the obligation to deliver copies of their
codes of ethics to clients. 10.13 requests per adviser x 0.10 hours
= 1.013 hours/adviser. This obligation applies to both currently-
registered (10,817 respondents) and newly-registered advisers (1,000
respondents), for a total annual burden of 11,971 hours. 11,817
respondents x 1.013 hours = 11,970.621 hours.
    \241\ 11,971 hours + 100,976 hours = 112,947 hours.
    \242\ Revised burden 112,947 hours - currently approved burden
of 109,678 hours = 3,269 hours. As discussed above, the currently
approved burden includes the estimated paperwork burdens associated
with all the revisions to Form ADV that were proposed in 2000.
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2. Rule 206(4)-4
    Rule 206(4)-4 currently requires advisers to disclose certain
disciplinary and financial information to clients. We are proposing to
rescind rule 206(4)-4 and to incorporate its substantive provisions
into Part 2A of Form ADV. The collection of information burden
associated with the requirements of rule 206(4)-4 has been incorporated
into the collection of information requirements for Form ADV, discussed
above. Thus, the currently approved burden estimate for Form ADV
already includes an estimate of the burdens associated with the
disclosure of disciplinary and financial information connected with
proposed Part 2.

B. Rule 204-2

    This requirement 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, and the information generally is kept
confidential.\243\ The likely respondents to this collection of
information requirement are all of the approximately 10,817 advisers
currently registered with the Commission.
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    \243\ See section 210(b) of the Advisers Act (15 U.S.C. 80b-
10(b)).
---------------------------------------------------------------------------

    Under section 204 of the Advisers Act, investment advisers required
to register with the Commission must make and keep certain records for
prescribed periods, generally for a period of at least five years, and
must make and disseminate certain reports. Rule 204-2 sets forth the
requirements for maintaining and preserving specified books and
records.
    The amendments to rule 204-2 that we are proposing today would
require SEC-registered advisers to prepare and preserve a memorandum
describing any legal or disciplinary event listed in Item 9 in Part 2A
and Item 3 in Part 2B of Form ADV, if the event is not disclosed in the
adviser's brochure or the relevant brochure supplement. This revision
is the same as originally proposed. Additionally, the amendments would
also require SEC-registered investment advisers to prepare and preserve
documentation of the method they use to compute managed assets for
purposes of Item 4.E. in Part 2 of Form ADV, if that method differs
from the method used to calculate ``assets under management'' in Part
1A of Form ADV. These records would be required to be maintained in the
same manner, and for the same period of time, as other books and
records required to be maintained under rule 204-2(a).
    As discussed in the Proposing Release, Commission staff had
estimated that the proposed amendments to rule 204-2 would result in a
burden increase of four hours for each of the then estimated 110
Commission-registered advisers that would be required to prepare and
preserve additional records as a result of the amendments. We continue
to believe that the proposed amendments to rule 204-2 will result in an
increased burden of four hours for each adviser subject to the
additional requirements.\244\
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    \244\ The proposed rule did not require documentation for Item
4.E computations that differed from Part 1A, Item 5.F of Form ADV.
We estimate that the additional recordkeeping requirement applicable
to advisers who use an alternative method of asset calculation will
take approximately the same amount of time (4.0 hrs) as that
required by advisers who compose memoranda with respect to
undisclosed legal/disciplinary events.
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    We estimate that 325 advisers will use a method for computing
managed assets in Part 2 that differs from the method used to compute
assets under management in Part 1A and thus would be required to
prepare and preserve documentation describing the method used in Part
2.\245\ We also estimate that

162 advisers will conclude that the materiality presumption in Part 2
is overcome with respect to a legal or disciplinary event, will
determine not to disclose that event, and therefore would be required
to prepare and preserve a memorandum describing the event.\246\
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    \245\ Based on the Commission staff's conversations with
industry professionals, we anticipate that approximately three
percent of the 10,817 advisers registered with us as of September
30, 2007 will use a method for computing managed assets in Part 2 of
Form ADV that differs from the method used to compute assets under
management in Part 1A of Form ADV. 10,817 advisers x 0.03 = 324.51
advisers.
    \246\ Approximately 1,620 advisers registered with the
Commission report disciplinary information in Part 1A of their Form
ADV as of September 30, 2007. We anticipate that most of these
advisers will include all disciplinary information in their
brochures and supplements, but that approximately 10 percent of
these advisers, or 162, will need to prepare and preserve a
memorandum explaining their basis for not disclosing a legal or
disciplinary event listed in Part 2 that is not disclosed in their
brochures and supplements. 1,620 advisers x 0.10 = 162 advisers.
---------------------------------------------------------------------------

    As discussed earlier, in the Proposing Release Commission staff had
estimated that 110 advisers would have to prepare and preserve
additional records in accordance with the amendments to rule 204-2.
However, we now estimate that a total of 487 advisers will have to
prepare and preserve additional records in accordance with amendments
to rule 204-2.\247\ Only 110 of these are already accounted for in the
currently approved burden estimate. We estimate that the additional 377
advisers whom we anticipate will be subject to the amended provisions
of rule 204-2, will yield a 1,508 hour burden increase under rule.\248\
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    \247\ 325 advisers that we estimate would prepare memoranda
regarding alternative method for calculating assets under management
+ 162 advisers that we estimate would prepare memoranda regarding
unreported nonmaterial disciplinary events = 487 advisers.
    \248\ 487 advisers - 110 advisers = 377 advisers. 377 advisers x
4.0 hours = 1,508 hours.
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    The approved annual aggregate burden for rule 204-2 is currently
1,762,267 hours based on an estimate of 9,728 registered advisers, or
181.15 per registered adviser.\249\ Taking into account the estimated
increased burden of 1,508 hours as discussed above, as well as an
increase of 1,089 registered advisers,\250\ the revised annual
aggregate burden for all respondents to the recordkeeping requirements
under rule 204-2 is therefore estimated to be 1,961,048 total
hours.\251\
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    \249\ 1,762,267 hours / 9,728 registered advisers = 181.15 hours
per adviser.
    \250\ As stated above, our IARD data show that as of September
30, 2007 there were 10,817 advisers registered with the SEC. 10,817
- 9,728 = 1,089.
    \251\ 1,762,267 current burden hours + 1,508 hours due to an
increase in the estimated number of registered advisers subject to
additional recordkeeping under the amendments + (1,089 due to an
increase of total number of registered advisers x 181.15 hours per
adviser) = 1,961,048. The annual average burden per SEC-registered
adviser is therefore 181.29 hours. 1,961,048 total hours / 10,817
advisers = 181.29 hours per adviser.
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    We further estimate that some advisers may incur a one-time cost
including outside legal fees in connection with preparation of a
memorandum explaining their basis for not disclosing a legal event
listed in Part 2 in their brochures or supplements. We estimate this
one-time cost would include fees for approximately three hours of
outside legal review and would amount on average to approximately
$1,200 per adviser.\252\ We believe that approximately 80 percent of
the advisers preparing such memoranda would likely to engage outside
legal services to assist in their preparation. Thus, we estimate that
approximately 130 advisers, will incur these costs, for a total cost
among all respondents of $156,000.\253\
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    \252\ Outside legal fees are in addition to the projected hourly
per adviser burden discussed above. $400 per hour for legal services
x 3 hours per adviser = $1,200. The hourly cost estimate is based on
our consultation with advisers and law firms who regularly assist
them in compliance matters.
    \253\ 162 advisers x 0.80 = 129.6. $1,200 x 130 = $156,000.
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C. Rule 204-3

    Rule 204-3 contains a collection of information requirement. This
collection of information is found at 17 CFR 275.204-3 and is
mandatory. Responses are not kept confidential. The likely respondents
to this information collection are the approximately 10,817 investment
advisers registered with the Commission.
    Rule 204-3 currently requires an investment adviser to deliver to
clients, at the start of an advisory relationship, a copy of Part 2 of
Form ADV or a written document containing at least the information
required by Part 2 of Form ADV. The rule currently requires no further
brochure delivery unless the client accepts the adviser's required
annual offer. The brochure assists the client in determining whether to
hire or retain an adviser.
    The amendments to rule 204-3 would require advisers registered with
us to deliver their brochures and brochure supplements at the start of
an advisory relationship and to deliver their firm brochure annually
thereafter.\254\ The amendments also would require that advisers
deliver updates of the brochure and brochure supplements to clients
only when disciplinary information in the brochure or supplements
becomes materially inaccurate.\255\ The updates could take the form of
a revised brochure (or supplement) or a ``sticker'' containing the
updated information. This represents a departure from the originally
proposed requirements which would have required an ongoing obligation
to deliver updates involving any material information in the brochure
or supplement, not just disciplinary information.
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    \254\ Proposed rule 204-3(b).
    \255\ Proposed rule 204-3(e). We received comments that were
critical of that proposal and that also suggested alternative
approaches. In response to those comments, we are now proposing a
narrower scope of the updating requirement.
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    The total annual burden currently approved by OMB for rule 204-3 is
6,902,278 hours and is based on the requirements of the rule as
proposed in 2000.\256\ This currently approved burden is based on each
adviser having, on average, an estimated 670 clients.\257\ Our records
now currently indicate that the 10,817 advisers registered with the
Commission have, on average, 1,013 clients.;\258\ These changes, along
with our proposal to require annual brochure delivery along with
interim delivery only of brochure and supplement updates that involve
disciplinary information (in lieu of the originally proposed ongoing
delivery obligation)

alter the collection of information burden from that currently
approved.
---------------------------------------------------------------------------

    \256\ Following issuance of the Proposing Release, OMB approved
a burden of 411,075 hours. That estimate assumed, in part, that
approximately 8,100 advisers were registered with us and that each
adviser had, on average, 49 clients. OMB subsequently approved an
increase in the annual burden to 6,902,278 hours to reflect
assumptions regarding an increased number of SEC-registered advisory
firms and an increased estimate with respect to the average number
of clients per adviser. This currently approved burden is based on
the proposed delivery requirements (initial delivery plus interim
stickering) and assumptions (an initial bulk mailing at 0.25 hours
and 2 stickers per year for each SEC-registered firm at 0.5 hours
per sticker) that were discussed in the Proposing Release.
    \257\ This average was based on advisers' responses to Item 5.C
of Part 1A of Form ADV as of October 5, 2001.
    \258\ This average is based on advisers' responses to Item 5.C
of Part 1A of Form ADV as of September 30, 2007, excluding the two
advisers that reported the largest number of clients. Those advisers
account for over 43 percent of all advisory clients of SEC
registrants and not excluding them would raise the average client
count to 1,778 clients. These two firms provide advisory services
primarily over the Internet and currently meet their brochure
obligations electronically, thus essentially entirely eliminating
for these advisers any PRA burden associated with delivery under
this rule. Therefore, we believe that it is appropriate to exclude
these firms from our calculations. Even removing these advisers
discussed above, the ``typical'' adviser registered with the
Commission, has far fewer clients than suggested by this average.
The average is still heavily weighted by the responses received from
the few largest advisers. We note that the next five advisory firms
with the largest numbers of clients account for more than an
additional 15 percent of all clients. In contrast, the majority
(over 60 percent) of advisers registered with us have 100 or fewer
clients, and the vast majority (over 90 percent) have 500 or fewer.
Based on a median, we estimate that the ``typical'' adviser
registered with us has approximately 63 clients--that is, half of
Commission-registered advisers have more than 63 clients and half
have fewer. This median is consistent with advisers' modal response
(the most common response) to Item 5.C of Part 1A, which was ``26 to
100 clients.''
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    We expect that advisers will send their brochures annually in a
``bulk mailing'' to clients. We estimate that, with a bulk mailing, an
adviser will require no more than 0.25 hours to send the adviser's firm
brochure to each client, or an annual burden of 253.25 hours per
adviser.\259\ Thus, we estimate the total burden hours for 10,817
advisers to distribute their firm brochure to existing clients
initially and annually thereafter to be 2,739,405 hours per year.\260\
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    \259\ (0.25 hours per client x 1,013 clients per adviser) =
253.25 hours per adviser. This is the same estimate we made in the
2000 proposal and for which we received no comment. We note that the
burden for preparing brochures is already incorporated into the
burden estimate for Form ADV discussed above. We anticipate that
most advisers will make their annual delivery of their brochure as
part of the annual bulk mailings they already make to clients.
    \260\ (0.25 hours per client x 1,013 clients per adviser) x
10,817 advisers = 2,739,405.25 hours.
---------------------------------------------------------------------------

    Advisers also will be required to distribute interim updates
disclosing new or revised disciplinary information in their brochure or
supplements. We anticipate that in any given year, the number of such
interim updates that advisers will be required to deliver is
approximately 541.\261\ We further estimate that an adviser will
require no more than 0.5 hours per client for delivery of each such
update.\262\ This represents about 507 hours per interim update.\263\
Thus, the aggregate annual hour burden for affected advisers to deliver
interim updates to their brochures and supplements will be
approximately 274,287 hours per year.\264\
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    \261\ Just under fifteen percent of the advisers currently
registered with the Commission report any disciplinary events at all
on their Form ADVs (as of September 30, 2007, only 1,620 of all
10,817 registered advisers indicated at least one ``yes'' answer to
a question related to disciplinary events in Form ADV, Part 1A, Item
11). Thus, we anticipate that a correspondingly small number of
advisers will be required to disclose new or updated disciplinary
information. The Commission staff estimates that in any given year,
five percent of advisers, will be required to deliver a single
interim update to each of their clients, resulting in a total of
approximately 522 interim updates per year. 0.05 x 10,817 x 1 update
= 540.85 updates.
    \262\ This burden estimate relates only to the amount of time it
will take advisers to deliver interim updates to clients, as
required by the rule amendments. The burden for preparing interim
updates is already incorporated into the burden estimate for Form
ADV discussed above.
    \263\ 0.5 hours per client x 1,013 clients per adviser = 506.5
hours per update.
    \264\ 541 updates x 507 hours = 274,287 hours.
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    Thus, the rule amendments requiring annual delivery and interim
updating of advisers' brochures and supplements yields a total
collection of information burden for rule 204-3 of 3,013,692 hours per
year, or 279 hours per respondent.\265\ This represents a decrease of
3,888,586 hours from the currently approved PRA burden.\266\ The
reduced burden results primarily from our proposal to replace the
originally proposed requirement to deliver brochure and supplement
updates on an ongoing basis, with a requirement to only deliver
brochure updates once annually and interim amendments to brochures and
supplements only when such updates involve disciplinary information.
This change thus significantly reduces the estimated total number of
updates advisers will be required to deliver annually.\267\
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    \265\ 2,739,405 hours (initial and annual delivery) + 274,287
hours (interim delivery of updates to disciplinary information) =
3,013,692 hours. 3,013,692 hours / 10,817 advisers = 278.61 hours
per adviser.
    \266\ 6,902,278 hours - 3,013,692 hours = 3,888,586 hours.
    \267\ This reduction in hours is offset somewhat by the fact
that we have increased the estimated number of clients per adviser
who will receive brochures and supplements and interim updates to
these.
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D. Request for Comment

    With respect to the above-described collections of information and
pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
to: (i) Evaluate whether the proposed collections of information is
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility; (ii)
evaluate the accuracy of the Commission's estimates of the burdens of
the proposed collections of information; (iii) determine whether there
are ways to enhance the quality, utility, and clarity of the
information to be collected; and (iv) evaluate whether there are ways
to minimize the burdens of the collections of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
    Persons submitting comments on these collections of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-10-00.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, with
reference to File No. S7-10-00, and be submitted to the Securities and
Exchange Commission, Records Management, Office of Filings and
Information Services, 100 F Street, NE., Washington, DC 20549-1090. As
OMB is required to make a decision concerning the collections of
information between 30 and 60 days after publication, a comment to OMB
is best assured of having its full effect if OMB receives it within 30
days of publication.

VII. Cost-Benefit Analysis

A. Background

    The Commission is sensitive to the costs and benefits of its rules.
As proposed, this rulemaking would revise Part 2 of Form ADV to require
advisers to prepare plain English narrative brochures discussing their
business practices and conflicts of interest and to prepare brochure
supplements discussing the background and disciplinary history of
certain supervised persons who formulate investment advice or exercise
investment discretion for clients. The revisions to the form would
essentially move into the form itself existing rule provisions that
require advisers to disclose certain disciplinary and financial
information. In conjunction with these revisions the Commission is
proposing to withdraw rule 206(4)-4 as duplicative.
    The proposed rulemaking would require advisers to deliver the
narrative brochures to clients at the outset of the advisory
relationship and annually thereafter, and to deliver to each client an
initial brochure supplement for each supervised person who provides
advisory services to that client. Advisers would be required to deliver
to clients interim updates to their brochure and brochure supplements
that involve a change to certain disciplinary information required by
Part 2. The rules would provide exceptions to the brochure and
supplement delivery requirements for certain types of clients, and
would excuse the adviser from preparing a brochure or supplement if
there is no client to whom it must be delivered. The proposed rule
amendments would also require advisers to file their narrative
brochures electronically through the IARD, and to keep certain records
relating to the brochures and supplements.
    We have identified certain costs and benefits, discussed below,
that may result from the proposed rule and form amendments. In the
Proposing

Release,\268\ we analyzed costs and benefits of the proposed amendments
to Part 2 and the related rules and requested comment and data on the
effect they would have on individual investment advisers and on the
advisory industry as a whole. We are now able to make more detailed
estimates of costs, based on data available through the IARD system,
and we provide those below.\269\ We request comment on the costs and
benefits of the proposed amendments. We encourage commenters to
identify, discuss, analyze, and supply relevant data regarding these or
any additional costs and benefits.
---------------------------------------------------------------------------

    \268\ See above note 5.
    \269\ As discussed above in note 2 of this Release and unless
otherwise noted, the IARD data cited below is based on advisers'
responses to questions on Part 1A of Form ADV as of September 30,
2007.
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B. Form ADV Part 2 and IARD Filing

    As discussed above, the proposed revisions to Part 2 would require
most advisers to prepare plain English narrative brochures.\270\
Advisers would file their brochures electronically through the IARD in
a process much like attaching a file to an e-mail.
---------------------------------------------------------------------------

    \270\ Under the amendments, advisers that are not required to
deliver a brochure to clients would not be required to prepare one.
Advisers that provide only impersonal advice costing less than $500
per year per client, and advisers only to registered investment
companies, would therefore not be required to prepare a brochure. We
estimate, based on information filed with us on Form ADV, that
approximately 295 advisers provide their services only to registered
investment companies and therefore would not need to prepare a
brochure. Based on Form ADV filings, we estimate that less than 10
advisers offer advisory services only by publishing periodicals and
newsletters; we estimate that approximately half of these charge
less than $500 per year per client and would not need to prepare a
brochure. Moreover, because advisers need not deliver supplements to
clients that do not receive a brochure, these advisers would also be
excused from preparing any brochure supplements.
---------------------------------------------------------------------------

    The new narrative brochures and electronic filing would provide
substantial benefits to advisory clients. The brochures would present
clients with critically important information they need to determine
whether to hire or continue the services of a particular adviser. This
information would be presented in a format easy for most investors to
understand. Investors searching for an adviser would be able to access
the firm's brochures through our public disclosure Web site even before
contacting the firm, and thus would be in a better position to know
whether they wish to inquire further about the services the firm is
offering. We believe these benefits to advisory clients will be a
significant enhancement to the adviser disclosure regime. These
benefits, while substantial, are difficult to quantify. Most commenters
strongly supported the narrative, plain English format, and viewed it
as an improvement over the current form. They agreed that the new
brochures would greatly benefit clients by requiring advisers to
present important information about their firms in a clear and more
meaningful way. They observed that the enhanced disclosure required by
the revised form would benefit clients by better equipping them with
the knowledge to make informed decisions about whether to hire or
retain a particular adviser.
    Advisers themselves would also benefit from the flexibility the new
narrative brochures would give them. Advisers would be able to organize
their brochures in the manner that they believe best communicates the
required disclosure to their clients. Advisers would also only be
required to respond to items that apply to their business, thus
substantially enhancing the efficiency and minimizing the costs of
preparing brochures and supplements. Moreover, the new amendments
provide significant guidance to advisers in terms of highlighting the
types of disclosures they, as fiduciaries, are already required to
make. We believe the flexibility created by the revisions, as well as
the enhanced clarity the new form provides will yield substantial
benefits for advisers.
    We recognize, however, that revised Part 2 would also impose costs
on advisers. Advisers would be required to replace their current Part 2
with the new narrative brochure and supplements, and would be required
to file their brochures with us. In addition, the disclosure in the new
brochure may be more complete than that existing Form ADV Part 2
currently requires. Thus, drafting the new narrative brochure will
likely entail additional expenses. As discussed in the Proposing
Release, we believe that most of the costs that advisers will incur in
connection with preparation of the new narrative firm brochure and
brochure supplements will be in the initial drafting of these
documents.\271\ We do not expect that revised Part 2 would result in a
significant cost increase on a long-term basis.
---------------------------------------------------------------------------

    \271\ Proposing Release at Section III.B.2. We do not, however,
expect advisers to face substantial costs in gathering the required
disclosure. Advisers already are required to provide us and/or their
clients with much of the information required in the new narrative
brochure. In addition, much of the information needed for the
brochure supplements can be found in an adviser's current Form ADV
or an investment adviser representative's registration application
(i.e., Form U-4) filed with state securities authorities.
---------------------------------------------------------------------------

    The cost of preparing a narrative brochure likely would vary
significantly among advisers, depending on the complexity of their
operations and because Part 2 would give advisers considerable
flexibility in structuring their disclosure. Some firms may choose to
prepare multiple brochures for several different services. These firms
likely would face only incrementally higher drafting costs than an
advisory firm that uses a single brochure to make the required
disclosure about the services it provides.
    Similarly, the costs of preparing brochure supplements would vary
from one adviser to the next. Costs would vary most significantly
depending on the number of supervised persons for whom an adviser must
provide disclosure.\272\ An adviser with very few supervised persons
for whom a supplement must be prepared would incur lower costs than a
large adviser. Costs associated with preparing supplements also would
vary greatly depending on the amount of disciplinary information, if
any, required to be disclosed about a particular supervised person. The
preparation of brochure supplements would be most demanding for those
few advisers whose supervised persons have lengthy disciplinary records
that must be disclosed, and less taxing for the vast majority of
advisers, whose supervised persons have no disciplinary records and
whose supplements would therefore likely be a page or less in
length.\273\
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    \272\ In response to comments we received, we narrowed the scope
of supervised persons for whom a brochure supplement must be
delivered. In addition, an adviser that is not required to deliver a
brochure supplement for a particular supervised person is not
required to prepare a supplement for that individual. See Section
II.B of this Release.
    \273\ IARD data indicate that in response to Item 11 in Part 1A
of Form ADV, only 1,620, or just under 15 percent, of the 10,817
advisers registered with us report any disciplinary information
about their firms or advisory affiliates, including their advisory
employees.
---------------------------------------------------------------------------

    We expect that only a few advisers would incur substantial costs in
preparing supplements. Although some commenters representing large
advisers argued that the supplement proposal would unduly burden
advisers that have ``thousands'' of employees, IARD data indicate that
fewer than one third of one percent of advisers registered with us have
over 1,000 employees performing investment advisory functions on their
behalf.\274\ Indeed, less than five percent of our registrants have
over 50 employees performing investment advisory functions. The vast
majority of

SEC-registered advisers--nearly 82 percent--have 10 or fewer employees
performing advisory functions on their behalf. We believe most, if not
all, of these firms may choose to incorporate required information
about their supervised persons into their firm brochures instead of
preparing separate brochure supplements, thus reducing costs of
preparation. We request comment on the number of supplements that
advisers of varying sizes would need to prepare, and how that number
compares to the number of advisory employees at the firm.
---------------------------------------------------------------------------

    \274\ Moreover, it may not be necessary to prepare a brochure
supplement for all of these employees.
---------------------------------------------------------------------------

    For purposes of the Paperwork Reduction Act and taking into account
the widely varying numbers of advisory employees among the thousands of
different advisory firms registered with us, we have estimated the
number of hours the average adviser would spend in the initial
preparation of their brochures and supplements.\275\ Based on those
estimates, we estimate that advisers would incur costs of approximately
$14,723,982 in drafting these documents in the first year.\276\
Furthermore, for Paperwork Reduction Act purposes we also have
estimated that advisers may incur approximately costs of $7,257,200 in
connection with their use of outside legal services to assist in
preparation of their Form ADV.
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    \275\ See Section VI.A of this Release.
    \276\ We expect that this function will most likely be performed
by compliance professionals. Data from SIFMA's Report on Office
Salaries in the Securities Industry 2006, modified to account for an
1,800-hour work-year and multiplied by 2.93 to account for bonuses,
firm size, employee benefits and overhead, suggest that cost for a
Compliance Clerk is approximately $56 per hour. 262,928.25 hours x
$56 per hour = $14,723,982.
---------------------------------------------------------------------------

    Advisers would incur annual expenses in addition to the initial
costs of preparing firm brochures and brochure supplements, but we
believe these costs would be modest and similar to current costs. The
rule amendments, similar to the current requirements, would require
advisers to revise their disclosure documents promptly when any
information in them becomes materially inaccurate, and would require
advisers to update their brochures and brochure supplements each year
at the time of their required annual updating amendment. For Paperwork
Reduction Act purposes, we have estimated that advisers would need to
prepare brochure amendments, on average, one and one half times per
year, and spend three quarters of an hour on each amendment. We
estimate that advisers would incur annual costs of $744,471 in meeting
these requirements.\277\
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    \277\ Similarly, we expect that amendments to Part 2 will also
most likely be performed by compliance professionals at an estimated
cost for a Compliance Clerk of $56 per hour. 17,725.5 amendments x
0.75 hours per amendment x $56 = $744,471.
---------------------------------------------------------------------------

    Finally, advisers would incur some costs in filing their brochures
with us through the IARD. Advisers would prepare their brochures on
their own computers, and as noted earlier, the filing of a brochure
would be similar to attaching a file to an e-mail.\278\ We believe
conversion of an adviser's brochure to PDF format and filing of that
brochure through the IARD would impose minimal costs on advisers.
---------------------------------------------------------------------------

    \278\ We note that all advisers registered with the Commission
currently file Form ADV electronically via the IARD system and that
since implementation of the electronic filing requirements in 2000
no adviser has applied for a permanent hardship exemption available
to advisers for whom filing electronically would constitute an undue
hardship. See rule 203-3(b) [17 CFR 275.203-3(b)].
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C. Brochure and Supplement Delivery

    Advisers would be required to deliver their revised brochures to
existing clients annually.\279\ The amended rules would require that,
between annual deliveries, advisers deliver brochure and supplement
amendments to existing clients only if there is an addition or change
to disciplinary disclosure. Advisers already are required to deliver a
copy of Part 2 to new clients. Thus, this requirement should present no
new costs to advisers. Moreover, we believe that because advisers must
deliver brochures to new clients, the cost of delivering brochure
supplements to new clients should increase the existing cost of
delivery only incrementally. New clients would receive brochures and
supplements that are current as of the time of delivery.
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    \279\ Currently, an adviser must offer its brochure to clients
annually, and must deliver a revised brochure only if the client
accepts the adviser's offer.
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    Annual brochure delivery would benefit advisory clients by ensuring
that they are kept apprised of their advisers' business practices and
procedures for managing conflicts and enable clients to make decisions
with respect to the adviser with the most currently available
information. Changes to disciplinary information disclosed in the
brochure and supplement are of such importance to clients that we
believe interim delivery of these amendments is necessary. Moreover,
advisers currently are already required to make disclosures regarding
disciplinary information under existing rule 206(4)-4. Based on the
experiences of examination staff, we believe that most advisers likely
already make these disclosures in writing so that they can demonstrate
compliance with the requirements of rule 206(4)-4. Thus, we believe
that it is unlikely that there will be any new costs associated with
delivery of this information.
    As discussed above, delivery of the new narrative brochures would
provide substantial benefits to advisory clients. The brochures would
present clients with important information they need to determine
whether to hire or continue the services of a particular adviser.
Currently, advisers must annually offer to deliver their brochure to
existing clients, however, clients who never request a brochure may not
necessarily see important amendments. Under the proposed approach, each
year clients would automatically receive advisers' brochures and the
valuable information contained therein. Although we believe these
benefits to advisory clients will be substantial, they are difficult to
quantify.
    Although advisers are already currently required to deliver a
revised brochure to clients upon request, advisers would incur
additional delivery costs under the amended rule (particularly in
connection with the initial and annual delivery obligations). We expect
these additional costs, however, to be less than under the original
proposal.\280\ Certain commenters raised particular concerns about the
scope of the brochure supplement and its delivery, and the costs
associated with ensuring proper distribution of supplements. In
response to comments, we have both proposed to narrow the group of
supervised persons who would need a brochure supplement, and to
eliminate the need to send supplements to certain institutional or
sophisticated clients. For Paperwork Reduction Act Purposes, we have
estimated that the total annual paperwork burden associated with annual
and interim delivery of brochures and supplements is approximately
3,013,692 hours. We estimate this would represent an annual cost of
$168,766,752.\281\
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    \280\ We are proposing the annual brochure delivery requirement
(and the requirement that advisers deliver any interim amendments
that disclose additional or revised disciplinary information) in
lieu of our original proposal, which would have required advisers to
deliver all brochure and supplement updates to clients on a
continuous basis whenever any information in their brochures or
supplements became materially inaccurate.
    \281\ We expect that delivery of amendments to Part 2 will also
most likely be performed by compliance professionals at an estimated
cost for a Compliance Clerk of $56 per hour. 3,013,692 hours x $56 =
$168,766,752.
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    Advisers may significantly minimize the costs associated with
annual delivery of their brochures and supplements by arranging to
deliver

their brochures and supplements to some or all clients by electronic
media.\282\ Advisers also may minimize delivery costs by mailing their
brochures and supplements along with quarterly statements or other
routine mailings they already send to clients.\283\ The extent to which
advisers will take advantage of these and other techniques to reduce
costs is difficult to predict but we believe it will be significant. We
request comment about the percentage of clients to whom advisers are
likely to make electronic delivery. We also request comment about the
extent to which advisers may minimize delivery costs by mailing their
brochures and supplements along with quarterly statements or other
routine mailings.
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    \282\ Proposed Instruction 3 for Part 2A of Form ADV expressly
notes that Commission interpretive guidance permits advisers to
deliver their brochures electronically upon client consent.
    \283\ As noted above, annual brochure delivery must be made
within 120 days of the adviser's fiscal year end. We have designed
this deadline so that advisers can include the brochure in a routine
mailing to clients.
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D. Amendments to Rule 204-2

    The proposed amendments to rule 204-2 would require SEC-registered
advisers to retain certain records relating to brochures and
supplements. One of the proposed revisions to the rule would require
advisers to retain copies of brochures and supplements prepared as
required by Part 2. This provision is designed to conform that rule to
our proposed changes to Form ADV and generally would impose no
additional costs because advisers are already currently required to
retain records relating to materials they distribute to their clients.
Other proposed revisions to the rule would require advisers to maintain
certain records in the event they use an alternative method to
calculate assets under management in response to Item 4.E of Part 2A
and if they do not disclose in their brochure any legal or disciplinary
event listed in Part 2. These provisions would benefit advisers by
permitting them flexibility in drafting their firm brochures while
providing for maintenance of records needed by our examination staff.
Moreover, because we anticipate that only a relatively small number of
advisers would be subject to these provisions we expect that the cost
of maintaining these records will be relatively minimal.\284\
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    \284\ For Paperwork Reduction Act purposes we estimate that only
487 advisers would be required to prepare additional records in
accordance with the amendment to rule 204-2 and that each adviser
would spend approximately four hours to satisfy the obligation for a
total burden of 1,948 hours per year.
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E. Total Estimated Costs and Benefits of This Rulemaking

    As discussed above, the proposed rule and form amendments are
expected to have both benefits and costs for investors and the advisory
industry as a whole. We believe the benefits to advisory clients in the
form of significant enhancements to the adviser disclosure regime will
be quite substantial, but are difficult to quantify. Similarly
difficult to quantify are the expected benefits to the advisory
industry that we believe would result from the proposed rules in the
form of enhanced flexibility with respect to their obligations to
prepare and deliver brochures and supplements. Moreover, not all of the
costs we anticipate to result from this rulemaking are quantifiable.
Based on the figures discussed above, however, we estimate that the
first year quantifiable costs related to this proposed rulemaking to be
approximately $191,492,405.\285\
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    \285\ Estimated costs related to initial preparation of Form ADV
(including Part 2) of $14,723,982 + estimated one-time outside legal
costs associated with this initial preparation of $7,257,200 +
estimated costs of $744,471 related to annual updating of Form ADV
(including Part 2) + estimated costs associated with delivery of
brochures and supplements of $168,766,752 = $191,492,405.
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VIII. Initial Regulatory Flexibility Analysis

    We have prepared this Initial Regulatory Flexibility Analysis
(IRFA) in accordance with section 3(a) of the Regulatory Flexibility
Act (RFA).\286\ It relates to proposed amendments to rules 203-1, 204-
1, 204-2, 204-3, and 206(4)-4, and Form ADV under the Advisers Act. The
rule and form amendments are designed to improve the disclosure that
investment advisers provide to their clients. These proposed amendments
would also revise the instructions for updating and filing Form ADV
(including adviser brochures). We also are proposing conforming rule
amendments that would revise the recordkeeping requirements relating to
Part 2 of Form ADV.
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    \286\ 5 U.S.C. 603(a).
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    We prepared an IRFA in conjunction with the release proposing
amendments to Part 2 of Form ADV in April 2000, and made it available
to the public. A summary of that IRFA was published with the Proposing
Release.\287\ We received no comments specifically on that IRFA.
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    \287\ See above note 5.
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A. Need for the Rule and Form Amendments

    The proposed rule and form amendments are necessary to improve the
quality of disclosure that advisers provide to their clients.\288\ Form
ADV was adopted by the Commission in 1985 \289\ and advisers currently
use it to register with the Commission (Part 1) and to provide clients
disclosure about their advisory firm and personnel (Part 2). Over the
years, however, experience has shown that the format and content of
current Part 2 of Form ADV do not lend themselves to disclosure that is
easy for clients to understand. Clients need clearer information about
an adviser's services, fees, business practices, and conflicts of
interests to be able to make an informed decision about whether to hire
or retain that adviser.
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    \288\ Sections I through IV, above, of this Release, describe in
more detail the reasons for the proposed amendments.
    \289\ Uniform Investment Adviser Registration Application Form,
Investment Advisers Act Release No. 991 (Oct. 15, 1985) [50 FR 42903
(Oct. 23, 1985)].
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B. Objectives and Legal Basis

    The primary objective of the proposed form and rule amendments is
to provide advisory clients and prospective clients with access to
meaningful and up-to-date disclosure, as well as to provide for filing
of this disclosure with the Commission.\290\ By requiring advisers to
provide current narrative brochures and brochure supplements written in
plain English, the amendments are intended to improve the quality of
information investors receive from advisers about their services, fees,
business practices and conflicts of interest. Also, by requiring
advisers to file their brochures (and any amendments) with the
Commission electronically using IARD, the proposal would make full use
of existing and new information technologies to aid the Commission
staff in its oversight efforts and provide ready public access to
advisers' brochures.
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    \290\ Sections I through IV, above, of this Release, describe in
more detail the objectives of the proposed amendments.
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    We are proposing these amendments under section 19(a) of the
Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) and 28(e)(2)
of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) and
78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15
U.S.C. 77sss(a)], section 38(a) of the Investment Company Act of 1940
[15 U.S.C. 78a-37(a)], and sections 203(c)(1), 204, 206(4), and 211(a)
of the Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4,
80b-6(4), and 80b-11(a)].

C. Small Entities Subject to the Rules

    In developing the proposals, we have considered their potential
impact on small entities that may be affected. The proposed rule and
form amendments would affect all advisers registered with the
Commission, including small entities. Under Commission rules, for
purposes of the Regulatory Flexibility Act, an investment adviser
generally is a small entity if it: (i) Has assets under management
having a total value of less than $25 million; (ii) did not have total
assets of $5 million or more on the last day of its most recent fiscal
year; and (iii) does not control, is not controlled by, and is not
under common control with another investment adviser that has assets
under management of $25 million or more, or any person (other than a
natural person) that had $5 million or more on the last day of its most
recent fiscal year.\291\
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    \291\ Rule 0-7 [17 CFR 275.0-7].
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    Our rule and form amendments would not affect most advisers that
are small entities (``small advisers'') because they are generally
registered with one or more state securities authorities and not with
us. Under section 203A of the Advisers Act, most small advisers are
prohibited from registering with the Commission and are regulated by
state regulators.\292\ Those small advisers that register with us are
located in Wyoming (which does not have an investment adviser statute),
or are eligible for an exemption that permits SEC registration. The
Commission estimates that as of September 30, 2007, of the 10,449
registered with us, there were approximately 634 that were small
entities that would be affected by the proposed amendments.\293\ We
request comment on the effect and costs of the proposed amendments on
small entities.
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    \292\ National Securities Markets Improvement Act of 1996 (Pub.
L. 104-290, 110 Stat. 3438) (1996) (``NSMIA''). As a result of
NSMIA, advisers with less than $25 million of assets under
management generally are regulated by one or more state securities
authority, while the Commission generally regulates those advisers
with at least $25 million of assets under management. See section
203A of the Advisers Act [15 U.S.C. 80b-3a].