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Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations
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suggested may no longer be necessary for investor protection.
2. Final Rule 2042
We are also adopting related amendments to rule 2042, the books and records rule, which sets forth requirements for maintaining, making, and retaining advertisements. We are amending the rule to require investment advisers to make and keep records of all advertisements they disseminate. In addition, we are adopting the provisions to the books and records rule that will explicitly require investment advisers:
i That use third-party ratings in an advertisement to record and keep a copy of any questionnaire or survey used in the preparation of the third-party rating;
and ii to maintain documentation of communications relating to predecessor performance and to support performance calculations. We are also adopting the recordkeeping requirement that corresponds to the amendments related to testimonials, endorsements, and third-party ratings under the final rule such that advisers must retain: i If not included in the advertisement, a record of the disclosures provided to clients or investors pursuant to final rule 20641; ii documentation substantiating the advisers reasonable basis for believing that the testimonial or endorsement complies with the final rule and that the third-party rating complies with the final rule 2064
1c1; and iii a record of the names of all persons who are an investment advisers partners, officers, directors, or employees, or a person that controls, is controlled by, or is under common control with the investment adviser, or is a partner, officer, director or employee of such a person.
As discussed above, we are adopting these amendments to rule 2042 to: i Conform the books and records rule to the final rule; ii help ensure that an investment adviser retains records of all its advertisements; and iii facilitate the Commissions inspection and enforcement capabilities. The reasons for and objectives of, the final amendments to the books and records rule are discussed in more detail in section II.I above. The burdens of these requirements on small advisers are discussed below as well as above in our Economic Analysis and Paperwork Reduction Act Analysis, which discuss the burdens on all advisers. The professional skills required to meet these specific burdens are also discussed in Section IV.
3. Final Amendments to Form ADV
We are also adopting amendments to Item 5 of Part 1A of Form ADV to
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improve information available to us and to the general public about advisers advertising practices. We will be adding a subsection L Marketing Activities to require information about an advisers use in its advertisements of performance results, its previous investment advice, testimonials, endorsements, and third-party ratings.
Specifically, we will require an adviser to state whether any of its advertisements includes testimonials, endorsements, or a third-party rating, and if so, whether the adviser pays cash or non-cash compensation, directly or indirectly, in connection with their use.
We will also require an adviser to state whether any of its advertisements includes performance results or a reference to specific investment advice provided by the adviser. Finally, we will require an adviser to state whether any of its advertisements include hypothetical or predecessor performance. Our staff will use this information to help prepare for examinations of investment advisers.
This information will be particularly useful for staff in reviewing an advisers compliance with the final rule, including the restrictions and conditions on advisers use in advertisements of performance presentations, testimonials and endorsements, and third-party ratings.
The reasons for and objectives of, the final amendments to Form ADV are discussed in more detail in section II.A.8 above. The burdens of these requirements on small advisers are discussed below as well as above in our Economic Analysis and Paperwork Reduction Act Analysis, which discuss the burdens on all advisers. The professional skills required to meet these specific burdens are also discussed in Section IV.
B. Significant Issues Raised by Public Comments In the 2019 Proposing Release, we requested comment on the matters discussed in the IRFA, including the number of small entities subject to the proposed amendments to rules 2064
1, 20643, and 2042, and Form ADV, as well as the potential impacts discussed in this analysis; and whether the proposal could have an effect on small entities that has not been considered. We requested that commenters describe the nature of any impact on small entities and provide empirical data to support the extent of such impact. In addition, we included in the proposal a Feedback Flyer as Appendix C thereto. The Feedback Flyer solicited feedback from smaller advisers on the effects on small entities
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subject to our proposal, and the estimated compliance burdens of our proposal and how they would affect small entities.
After consideration of the comments we received on the proposed rules and amendments, we are adopting the amendments with several modifications that are designed to reduce certain operational challenges that commenters identified, while maintaining protections for investors and providing investors with useful and important disclosures. However, none of the modifications was significant to the small-entity cost burden estimates discussed below. Revisions to the estimates are instead based on updated figures regarding the number of small entities affected by the new rule and amendments and updated estimated wage rates.
C. Legal Basis The Commission is adopting amendments to rule 20641 under the Advisers Act under the authority set forth in sections 203d, 2064, 211a and 211h of the Investment Advisers Act of 1940 15 U.S.C. 80b3d, 10b 64 and 80b11a and h. The Commission is adopting amendments to rule 2042 under the Advisers Act under the authority set forth in sections 204 and 211 of the Investment Advisers Act of 1940 15 U.S.C. 80b4 and 80b 11. The Commission is adopting amendments to Form ADV under section 19a of the Securities Act of 1933 15 U.S.C. 77sa, sections 23a and 28e2 of the Securities Exchange Act of 1934 15 U.S.C. 78wa and 78bbe2, section 319a of the Trust Indenture Act of 1939 15 U.S.C.
7sssa, section 38a of the Investment Company Act of 1940 15 U.S.C. 80a 37a, and sections 203c1, 204, and 211a of the Investment Advisers Act of 1940 15 U.S.C. 80b3c1, 80b4, and 80b11a.
D. Small Entities Subject to the Rule and Rule Amendments In developing these amendments, we have considered their potential impact on small entities that would be subject to the final amendments. The final amendments will affect many, but not all, investment advisers registered with the Commission, including some small entities.
Under Commission rules, for the purposes of the Advisers Act and the RFA, an investment adviser generally is a small entity if it: 1 Has assets under management having a total value of less than $25 million; 2 did not have total assets of $5 million or more on the last day of the most recent fiscal year; and
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