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Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 3 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 total assets of $5 million or more on the last day of its most recent fiscal year.1055
Our final amendments will not affect most investment advisers that are small entities small advisers because they are generally registered with one or more state securities authorities and not with the Commission. Under section 203A of the Advisers Act, most small advisers are prohibited from registering with the Commission and are regulated by state regulators. Based on IARD data, we estimate that as of August 1, 2020, approximately 545 SEC-registered advisers are small entities under the RFA.1056
1. Small Entities Subject to Amendments to Marketing Rule As discussed above in section III. the Economic Analysis, the Commission estimates that based on IARD data as of August 1, 2020, approximately 13,724
investment advisers would be subject to the final amendments to rule 20641
under the Advisers Act and the related final amendments to rule 2042 under the Advisers Act.1057
All of the approximately 545 SECregistered advisers that are small entities under the RFA will be subject to the amended rule 20641 and corresponding amendments to rule 204
2. This is because, as discussed above in the PRA, we estimate that all investment advisers will disseminate at least one communication meeting the final rules definition of advertisement and therefore be subject to the requirements of the final rule.1058 Furthermore, the rules additional conditions and 1055 Advisers
Act rule 07a.
on SEC-registered investment adviser responses to Items 5.F. and 12 of Form ADV. Only SECregistered investment advisers with RAUM of less than $25 million, as indicated in Form ADV
Item 5.F.2c are required to respond to Form ADV
Item 12. For purposes of this analysis, a registered investment adviser is classified as a small business or small organization if they respond No to Form ADV Item 12.A., 12.B.1, 12.B.2, 12.C.1, and 12.C.2. These responses indicate that the registered investment adviser had RAUM of less than $25 million, did not have total assets of $5
million or more on the last day of the most recent fiscal year; and does not control, is not controlled by, and is not under common control with another investment adviser that has RAUM of $25 million or more, or any person other than a natural person that had total assets of $5 million or more on the last day of the most recent fiscal year, consistent with the definition of a small entity under the Advisers Act for purposes of the RFA.
1057 See supra footnote 1038 and accompanying text.
1058 See PRA discussion, above, at sections IV.A
and B.

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restrictions on testimonials, endorsements, and third-party ratings, as well as certain presentations of performance, will apply to many advertisements under the rule.1059
2. Small Entities Subject to Amendments to the Books and Records Rule 2042
As discussed above, there are approximately 545 small advisers currently registered with us, and we estimate that 100 percent of advisers registered with us will be subject to amendments to the books and records rule.
3. Small Entities Subject to Amendments to Form ADV
As discussed above, there are approximately 545 small advisers currently registered with us, and we estimate that 100 percent of advisers registered with us will be subject to amendments to Form ADV.
E. Projected Reporting, Recordkeeping and Other Compliance Requirements 1. Final Rule 20641
Final rule 20641 will impose certain reporting and compliance requirements on certain investment advisers, including those that are small entities. All registered investment advisers that distribute advertisements under the rule, which we estimate to be all advisers, will be required to comply with the final rules general prohibition of fraudulent or misleading advertisements. In addition, all advisers that use testimonials, endorsements, and third-party ratings will be required to include disclosures and comply with other conditions. Small entity advisers will be required to comply with restrictions and other conditions related to the presentation of certain performance results in advertisements.
The final amendments, including compliance and recordkeeping requirements, are summarized in this FRFA section V.A., above. All of these final requirements are also discussed in detail, above, in sections I and II, and these requirements and the burdens on respondents, including those that are small entities, are discussed above in sections III and IV the Economic Analysis and Paperwork Reduction Act Analysis, respectively and below. The 1059 As discussed above, the use of testimonials, endorsements, and third-party ratings in advertisements is voluntary but we estimate that approximately 50% of registered investment advisers would use testimonials or endorsements in advertisements, and approximately 50% of registered investment advisers would use thirdparty ratings in advertisements. See PRA
discussion, above, at sections IV.A and B.

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professional skills required to meet these specific burdens are also discussed in section IV.
As discussed above, there are approximately 545 small advisers currently registered with us, and we estimate that 100 percent of advisers registered with us will be subject to amendments to the marketing rule. As discussed above in our Paperwork Reduction Act Analysis in section III
above, we estimate that the final amendments to rule 20641 under the Advisers Act, which will require advisers to prepare disclosures for testimonials and endorsements, thirdparty ratings, and performance results, will create a new annual burden of approximately 98 hours per adviser, or 56,135 hours in aggregate for small advisers.1060 We therefore expect the annual monetized aggregate cost to small advisers associated with our final amendments to be $18,596,390.1061
2. Final Amendments to Rule 2042
The final amendments to rule 2042
will require investment advisers to retain records of all advertisements they disseminate. 1062 We are also requiring investment advisers that use a thirdparty rating in an advertisement to retain a copy of any questionnaire or survey used in preparation of the thirdparty rating, as well as documentation of communications relating to predecessor performance and supporting performance calculations.1063 To correspond to the provisions with respect to testimonials, endorsements, and third-party ratings, we are amending the books and records rule to require investment advisers to make and keep records of: i If not included in the advertisement, a record of the disclosures provided to clients or investors pursuant to the 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 rule 20641c1; 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, pursuant to 1060 1,414,291 hours/13,724 advisers = 103 hours per adviser. 103 hours 545 small advisers = 56,135
hours.
1061 $468,287,816 total cost 545 small advisers/
13,724 advisers = $18,596,390.
1062 See final rule 2042a11iA.
1063 See final rule 2042a7iv, 11ii, and 16.

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