Rule 19b-1 SUPPORTING STATEMENT-2011

SUPPORTING STATEMENT
FOR THE PAPERWORK REDUCTION ACT SUBMISSION FOR A CURRENT
INFORMATION COLLECTION
“Rule 19b-1”

A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 19(b) of the Investment Company Act of 1940 (the “Act”) (15 U.S.C.
80a-19(b)) authorizes the Commission to regulate registered investment company
(“fund”) distributions of long-term capital gains made more frequently than once every
twelve months. Rule 19b-1 under the Act1 prohibits funds from distributing long-term
capital gains more than once every twelve months unless certain conditions are met.
Rule 19b-1(c) permits unit investment trusts (“UITs”) engaged exclusively in the
business of investing in certain eligible fixed-income securities to distribute long-term
capital gains more than once every twelve months, if: (i) the capital gains distribution
falls within one of several categories specified in the rule2 and (ii) the distribution is
accompanied by a report to the unitholder that clearly describes the distribution as a
capital gains distribution (the “notice requirement”).3 Rule 19b-1(e) permits a fund to
apply to the Commission for permission to distribute long-term capital gains more than
once a year if the fund did not foresee the circumstances that created the need for the
distribution. The application must set forth the pertinent facts and explain the
1

17 CFR 270.19b-1.

2

17 CFR 270.19b-1(c)(1).

3

The notice requirement in rule 19b-1(c)(2) supplements the notice requirement of section
19(a) [15 U.S.C. 80a-19(a)] and rule 19a-1 [17 CFR 270.19a-1], which requires any
distribution in the nature of a dividend payment made by a fund to its investors to be
accompanied by a notice disclosing the source of the distribution.

circumstances that justify the distribution.4 An application that meets those requirements
is deemed to be granted unless the Commission denies the request within 15 days after
the Commission receives the application.
2.

Purpose of the Information Collection

Section 19(b) of the Act reflects Congress’s concern that investors could confuse
regular distributions of capital gains with distributions of investment income.5 The
purpose of the notice requirement in rule 19b-1(c)(2) is to ensure that investors are aware
that a distribution consists of long-term capital gains.
Paragraph (e) of rule 19b-1 allows a fund, in unforeseen circumstances, to request
timely authorization to make a distribution that would not otherwise be permitted by the
rule.6 The Commission uses the information required by paragraph (e) to determine
whether a request should be granted under this paragraph.
3.

Role of Improved Information Technology

The Commission’s Electronic Data Gathering, Analysis and Retrieval System
(“EDGAR”) provides for the automated filing, processing, and dissemination of full
disclosure filings. The automation provides for speed, accuracy and public availability of
information, generating benefits to investors and financial markets. Effective
4

Rule 19b-1(e) also requires that the application comply with rule 0-2 [17 CFR 270.02],
which sets forth the general requirements for papers and applications filed with the
Commission.

5

See Report of the Committee on Banking and Currency, S. Rep. No. 184, 91st Cong., 1st
Sess. 29 (May 21, 1969); see also SEC, Public Policy Implications of Investment Company
Growth, H. Rep. No. 2337, 89th Cong., 2d Sess. 191-96 (Dec. 2, 1966); Rule Proposal for
Unit Investment Trusts Start-Up Exemptions and Proposed Revision of Rule Regarding
Pricing of Investment Company Shares Generally, Investment Company Act Release No.
10545 (Jan. 8, 1979) [44 FR 3376, 3379 (Jan. 16, 1979)].

6

See Adoption of Rule 19b-1 Under the Investment Company Act of 1940 Limiting the
Frequency of Distributions of Capital Gains by Registered Investment Companies,
Investment Company Act Release No. 6834 (Nov. 23, 1971) [36 FR 232 (Dec. 2, 1971)].

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January 1, 2009 applications for orders under any section of the Investment Company
Act are required to be filed electronically on EDGAR.
4.

Efforts to Identify Duplication

The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication, and reevaluates those requirements whenever it proposes a
rule or form, or a change in either. Rule 19b-1 does not require duplicative reporting.
5.

Effect on Small Entities

The information collection requirements of rule 19b-1 apply to all funds that rely
on paragraphs (c) or (e) of the rule to distribute long-term capital gains more than once a
year. The notice requirement of rule 19b-1(c) is necessary to ensure that a unitholder of a
UIT is aware that a distribution is a capital gains distribution. The paperwork burdens
that rule 19b-1(e) imposes are essential to facilitate review by Commission staff of
requests made pursuant to that paragraph. The Commission believes that compliance
with these collection of information requirements is not unduly burdensome for either
large or small entities, and that the shareholders of small entities, along with the
shareholders of large entities, are entitled to the protections that give rise to the
paperwork burdens.
6.

Consequences of Less Frequent Collection

Rule 19b-1(c)(2) requires each distribution of capital gains made pursuant to the
rule to be accompanied by a notice explaining that the distribution contains capital gains.
If the notice were not required to accompany each distribution made in reliance on
paragraph (c)(2) of the rule, unitholders might not be aware of the source of the
distribution.

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Likewise, the collection of information requirements of rule 19b-1(e) occur only
when a fund needs to request permission to distribute long-term capital gains due to
unforeseen circumstances.
7.

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

Not applicable.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 19b-1 before it submitted this request for extension and approval to
the Office of Management and Budget (“OMB”). The Commission received no
comments in response to this request. The Commission and the staff of the Division of
Investment Management participate in an ongoing dialogue with representatives of the
fund industry through public conferences, meetings and informal exchanges. These
forums provide the Commission and the staff useful means to identify and address
paperwork burdens that may confront the industry.
9.

Payment or Gift to Respondents

Not applicable.
10.

Assurance of Confidentiality

Not applicable.
11.

Sensitive Questions

Not applicable.
12.

Estimate of Hour Burden

Commission staff estimates that, on average, each year six funds file an
application under rule 19b-1(e). The staff understands that funds that file an application
generally use outside counsel to prepare the application. The cost burden of using

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outside counsel is discussed in Item 13 below. The staff estimates that, on average, the
fund’s investment adviser spends approximately 4 hours to review an application,
including 3.5 hours by an assistant general counsel, at a cost of $354 per hour, 0.5 hours
by an administrative assistant, at a cost of $66 per hour, and the fund’s board of directors
spends an additional 1 hour, at a cost of $4,000 per hour, for a total of 5 hours.7 Thus, the
Commission staff estimates that the annual hour burden of the collection of information
imposed by rule 19b-1 is approximately five hours per fund, at a cost of $5,272, for a
total burden of 30 hours at a cost of $31,632.8
The Commission staff estimates that there is no hour burden associated with
complying with the collection of information component of rule 19b-1(c).
The estimate of average burden hours is made solely for purposes of the
Paperwork Reduction Act. The estimate is not derived from a comprehensive or even a
representative survey or study of the costs of Commission rules.
13.

Estimate of Total Annual Cost Burden

As noted above, the Commission staff understands that funds that file an
application under rule 19b-1(e) generally use outside counsel to prepare the application.9
The staff estimates that, on average, outside counsel spends 10 hours preparing a rule
19b-1(e) application, including eight hours by an associate and two hours by a partner.
7

Estimates for attorneys and administrative assistants are 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. The estimate of $4000 per hour for the board of
directors as a whole is based on a staff review and analysis and conversations with
industry participants

8

This estimate is based on the following calculations: $1239 (3.5 hours × $354 = $1239)
plus $33 (0.5 hours × $63 = $33) plus $4000 equals $5272 (cost of one application);
$5272 × 6 applications = $31,632 total cost.

9

This understanding is based on conversations with representatives from the fund industry.

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Outside counsel billing arrangements and rates vary based on numerous factors, but the
staff has estimated the average cost of outside counsel as $400 per hour, based on
information received from funds, intermediaries, and their counsel. The staff therefore
estimates that the average cost of outside counsel preparation of the 19b-(e) exemptive
application is $4,000.10 Thus, the staff estimates that the total annual cost burden
imposed by the exemptive application requirements of rule 19b-1(e) is $24,000.11
The Commission staff estimates that there are approximately 3,759 UITs12 that
may rely on rule 19b-1(c) to make capital gains distributions. The staff estimates that, on
average, these UITs rely on rule 19b-1(c) once a year to make a capital gains
distribution.13 In most cases, the trustee of the UIT is responsible for preparing and
sending the notices that must accompany a capital gains distribution under
rule 19b-1(c)(2). These notices require limited preparation, the cost of which accounts
for only a small, indiscrete portion of the comprehensive fee charged by the trustee for its
services to the UIT. The staff believes that as a matter of good business practices, and for
tax preparation reasons, UITs would collect and distribute the capital gains information
required to be sent to unitholders under rule 19b-1(c) even in the absence of the rule. The
staff estimates that the cost of preparing a notice for a capital gains distribution under rule
10

This estimate is based on the following calculation: 10 hours multiplied by $400 per hour
equals $4,000.

11

This estimate is based on the following calculation: $4,000 multiplied by 6 (funds) equals
$24,000.

12

The Investment Company Institute, Unit Investment Trust Data, (January 2011).

13

The number of times UITs rely on the rule to make capital gains distributions depends on
a wide range of factors and, thus, can vary greatly across years. A number of UITs are
organized as grantor trusts, and therefore do not generally make capital gains
distributions under rule 19b-1(c), or may not rely on rule 19b-1(c) as they do not meet the
rule’s requirements. Other UITs may distribute capital gains biannually, annually,
quarterly, or at other intervals.

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19b-1(c)(2) is approximately $50. There is no separate cost to mail the notices because
they are mailed with the capital gains distribution. Thus, the staff estimates that the
capital gains distribution notice requirement imposes an annual cost on UITs of
approximately $187,950.14 The staff therefore estimates that the total cost imposed by
rule 19b-1 is $211,950 ($187,950 plus $24,000 equals $211,950). This cost estimate is
made solely for purposes of the Paperwork Reduction Act. The estimate is not derived
from a comprehensive or even a representative survey or study of the costs of
Commission rules.
14.

Estimate of Cost to the Federal Government
This rule does not impose any additional costs on the Federal Government.

15.

Explanation of Changes in Burden
The estimated burden hours associated with rule 19b-1 have increased from the

current allocation of 20 hours to 30 hours, an increase of 10 hours. This increase in the
time burden is due to an increase in the number of funds filing applications for exemptive
orders (from 5 to 6 per year), and a slight increase in the staff’s estimate of hours required
to prepare an exemptive application (from 4 to 5).
The estimated cost burden of $326,500 has decreased to $211,950, a reduction of
$114,550. The decrease in the cost burden is largely due to a decrease in the estimated
total number of respondents to the rule from 6,035 (6,030 UITs plus 5 funds filing an
application under rule 19b-1(e)) to 3,765 (3759 UITs plus 6 funds filing an application
under rule 19b-1(e)). The cost burden has also been adjusted to reflect the staff’s updated
estimates of hourly salary rates and cost of preparation of applications.

14

This estimate is based on the following calculation: 3759 UITs multiplied by $50 equals
$187,950.

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16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to not Display Expiration Date

We request authorization to omit the expiration date on the electronic version of
the information collection for design and project scheduling reasons. The OMB control
number will be displayed.

18.

Exceptions to Certification Statement

Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS

Not applicable.

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