Rule 482 SUPPORTING STATEMENT 2010-12-29

SUPPORTING STATEMENT
FOR THE PAPERWORK REDUCTION ACT SUBMISSION
for an EXTENSION of a CURRENT INFORMATION COLLECTION
Rule 482
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Like most issuers of securities, when an investment company1 (“fund”) offers its
shares to the public, its promotional efforts become subject to the advertising restrictions
of the Securities Act of 1933 (“Securities Act”). In recognition of the particular problems
faced by funds that continually offer securities and wish to advertise their securities, the
Securities and Exchange Commission (“Commission”) has previously adopted
advertising safe harbor rules. The most important of these is rule 482 adopted under the
Securities Act, which, under certain circumstances, permits funds to advertise investment
performance data, as well as other information (17 CFR 230.482). Rule 482
advertisements are deemed to be “prospectuses” under Section 10(b) of the Securities
Act.2
Rule 482 contains certain requirements regarding the disclosure that funds are
required to provide in qualifying advertisements. These requirements are intended to
encourage the provision to investors of information that is balanced and informative,
particularly in the area of investment performance. For example, a fund is required to
include disclosure advising investors to consider the fund’s investment objectives, risks,
charges, and expenses, and other information described in the fund’s prospectus, and
highlighting the availability of the fund’s prospectus. In addition, rule 482
advertisements that include performance data of open-end funds or insurance company
1

“Investment company” refers to both investment companies registered under the Investment
Company Act of 1940 (“Investment Company Act”) and business development companies.

2

15 U.S.C. 77j(b).

separate accounts offering variable annuity contracts are required to include certain
standardized performance information, information about any sales loads or other
nonrecurring fees, and a legend warning that past performance does not guarantee future
results. Such funds including performance information in rule 482 advertisements are
also required to make available to investors month-end performance figures via Web site
disclosure or by a toll-free telephone number, and to disclose the availability of the
month-end performance data in the advertisement. The rule also sets forth requirements
regarding the prominence of certain disclosures, requirements regarding advertisements
that make tax representations, requirements regarding advertisements used prior to the
effectiveness of the fund’s registration statement, requirements regarding the timeliness
of performance data, and certain required disclosures by money market funds.
2.

Purpose of the Information Collection

Rule 482 advertisements must be filed with the Commission or, in the alternative,
with the Financial Industry Regulatory Authority (“FINRA”).3 This information
collection differs from many other federal information collections that are primarily for
the use and benefit of the collecting agency.
Rule 482 contains requirements that are intended to encourage the provision to
investors of information that is balanced and informative, particularly in the area of
investment performance. The Commission is concerned that in the absence of such
provisions fund investors may be misled by deceptive rule 482 advertisements and may
rely on less-than-adequate information when determining in which funds they should
invest money. As a result, the Commission believes it is beneficial for funds to provide

3

See rule 24b-3 under the Investment Company Act (17 CFR 270.24b-3), which provides that any
sales material, including rule 482 advertisements, shall be deemed filed with the Commission for
purposes of Section 24(b) of the Investment Company Act upon filing with FINRA.
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investors with balanced information in fund advertisement in order to allow investors to
make better-informed decisions.
3.

Role of Improved Information Technology

The Commission’s electronic filing system (Electronic Data Gathering, Analysis
and Retrieval or “EDGAR”) automates the filing, processing and dissemination of full
disclosure filings. The system permits public companies to transmit filings to the
Commission electronically. This automation has increased the speed, accuracy, and
availability of information, generating benefits to investors and financial markets.
The vast majority of fund advertisements are filed with FINRA under Investment
Company Act rule 24b-3, which allows any sales material filed with FINRA to be
deemed to be filed with the Commission.4 Rule 482 advertisements that are required to
be filed with the Commission are to be filed electronically on EDGAR (17 CFR
232.101(a)(1)(i) and (iv)). The public may access filings on EDGAR through the
Commission’s Internet web site (http://www.sec.gov) or at EDGAR terminals located at
the Commission’s public reference rooms.
4.

Effort to Identify Duplication

The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication and reevaluates them whenever it proposes a rule or a
change in a rule.
5.

Effect on Small Entities

The Commission reviews all rules periodically, as required by the Regulatory
Flexibility Act, to identify methods to minimize recordkeeping or reporting requirements
affecting small businesses. The current disclosure requirements for fund advertisements

4

17 CFR 270.24b-3.
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do not distinguish between small entities and other entities. To the extent smaller funds
advertise, their burden to prepare advertisements may be greater than for larger funds due
to economies of scale. This burden would include the cost of reviewing an advertisement
to confirm that it meets the requirements of rule 482.
The Commission considered special requirements for small entities. The
Commission believes, however, that imposing different requirements on smaller fund
companies would not be consistent with investor protection. The use of different
standards for small entities may create a risk that investors may receive false or
misleading information. In addition, the Commission believes that uniform disclosure
standards for all fund advertisements should allow investors to compare funds more
easily when making an investment decision. Allowing different standards for small
entities may create confusion for investors who wish to compare funds.
6.

Consequences of Less Frequent Collection

Since fund advertising is voluntary, the Commission does not determine the
frequency with which funds advertise pursuant to rule 482. Therefore, short of not
requiring any collection for advertisements governed by rule 482, the Commission cannot
require less frequent collection. Not requiring disclosure of the information required by
rule 482 would harm investors by denying them information that may be useful in
making investment decisions. If such advertisements did not contain this disclosure,
investors could receive inadequate information or could receive confusing, false, or
misleading information. As a result, investor confidence in the securities industry could
be adversely affected.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

This collection is not inconsistent with 5 CFR 1320.5(d)(2).
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8.

Consultation Outside the Agency

Rule 482 has previously been amended through rulemaking actions pursuant to
the Administrative Procedures Act. In these rulemaking actions, comments are generally
received from registrants, trade associations, the legal and accounting professions, and
other interested persons. In addition, the Commission and the Division staff also
participate in an ongoing dialogue with representatives of the fund industry through
public conferences, meetings, and informal exchanges. These various forums provide the
Commission and the staff with a means of ascertaining and acting upon paperwork
burdens that may confront the industry.
The Commission requested public comment on the collection of information
required by rule 482, before it submitted this request for extension and approval to the
Office of Management and Budget. The Commission received no comments in response
to this request.
9.

Payment or Gift to Respondents

No payment or gift to respondents were provided.
10.

Assurance of Confidentiality

No assurance of confidentiality was provided. Rule 482 advertisements that are
required to be filed with the Commission by investment companies will be available to
the public.
11.

Sensitive Questions

No questions of a sensitive nature are involved.
12.

Estimate of Hour Burden

The burden hour estimate for complying with rule 482 is based on consultations
with industry representatives and on the Commission’s experience with the contents of
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disclosure documents. The number of burden hours may vary depending on, among
other things, the complexity of the document, the number of funds included in a single
document, and whether preparation of the document is performed by fund staff or outside
counsel. The number of funds used to estimate the burden hours is an estimate based on
the Commission’s statistics. The estimates of average burden hours are made solely for
purposes of the Paperwork Reduction Act of 1995 (“PRA”)5 and are not derived from a
comprehensive or even representative survey or study of the cost of Commission rules
and forms.
Rule 482 is part of Regulation C under the Securities Act (17 CFR 230.400-498).
Regulation C describes the disclosure that must appear in the registration statements
under the Securities Act and Investment Company Act. However, the burden associated
with rule 482 is included within the collection entitled rule 482, and rule 482 is not
considered part of Regulation C for information collection purposes.
The Commission estimates that 58,3686 responses to rule 482 are filed annually
by 3,540 investment companies offering approximately 16,225 portfolios, or
approximately 3.6 responses per portfolio annually.7 The burden associated with rule 482
is presently estimated to be 5.16 hours per response. The annual hourly burden is
therefore approximately 301,179 hours.8

5

44 U.S.C. 3501 et seq.

6

This estimated number of responses to rule 482 is composed of 58,093 responses filed with
FINRA and 275 responses filed with the Commission in 2009.

7

58,368 responses ÷ 16,225 portfolios = 3.6 responses per portfolio.

8

58,368 responses x 5.16 hours per response = 301,179.
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Based on a Commission estimate of 301,179 hours and an estimated wage rate of
approximately $260.75 per hour,9 the total cost to the industry of the hour burden for
complying with the requirements of rule 482 is approximately $78,532,424.10
13.

Estimate of Total Annual Cost Burden

Cost burden is the cost of services purchased to comply with rule 482, such as for
the services of computer programmers, outside counsel, financial printers, and
advertising agencies. The cost burden does not include the cost of the hour burden
discussed in Item 12 above. Estimates are based on the Commission’s experience with
advertisements and sales literature. The Commission currently attributes no external cost
burden to rule 482.
14.

Estimate of Cost to the Federal Government

Advertising regulation affects costs incurred by the federal government. 58,368
responses are filed annually pursuant to rule 482; however these responses are generally
filed with FINRA and are generally not reviewed by the Commission. The annual cost of
reviewing and processing disclosure documents, including new registration statements,
post-effective amendments, proxy statements, and shareholder reports of investment
companies, amounted to approximately $20.4 million in fiscal year 2009, based on the
Commission’s computation of the value of staff time devoted to this activity and related
overhead.
9

The estimated wage rate figure is based on published hourly wage rates for compliance attorneys,
paralegals and senior compliance examiners, from SIFMA’s Management & Professional
Earnings in the Securities Industry 2010, modified by Commission staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits
and overhead, yielding effective hourly rates of $320, $168, and $235, respectively. The
estimated wage rate is further based on the estimate that attorneys would handle 50% of hours
spent on advertising regulation and that paralegals and compliance examiners would handle the
remaining 50% in equal parts, yielding a weighted wage rate of $238.25 (($320 x .50) + ($168 x
.25) + ($235 x .25) = $260.75).

10

301,179 hours x $260.75 per hour = $78,532,424.
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15.

Explanation of Changes in Burden

Previously, we had estimated an annual total hour burden of 459,637 hours for
rule 482. This number was based on a yearly estimate of 89,077 responses filed by 4,106
investment companies offering approximately 37,265 portfolios with an estimated burden
of 5.16 hours per response. We estimate a net decrease of 158,458 burden hours per year
for rule 482 from the previous PRA submission.11 This change is due to a decrease in the
estimated number of annual responses from 89,077 to 58,368 (resulting in a decrease of
158,458 burden hours based on the estimate of 5.16 hours per response).12
16.

Information Collection Planned for Statistical Purposes

The results of any information collected will not be published.
17.

Approval to not Display Expiration Date

The Commission is not seeking approval to not display the expiration date for
OMB approval.
18.

Exception to Certification Statement

The Commission is not seeking an exception to the certification statement.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS

The collection of information will not employ statistical methods.

11

301,179 burden hours estimated in the current PRA submission – 459,637 burden hours estimated
in previous PRA submission = -158,458 burden hours.

12

(58,368 responses x 5.16 hours per response) - (89,077 responses x 5.16 hours per response) =
-158,458 burden hours.
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