Form N-18F-1, Rule 18f-1 Supporting Statement-FIN

SUPPORTING STATEMENT
for the Paperwork Reduction Act Submission for
Rule 18f-1 and Form N-18f-1
A.

JUSTIFICATION
1.

Information Collection Necessity

An open-end investment company is a managed investment company that offers for sale
or has outstanding any redeemable security of which it is the issuer. Section 2(a)(32) of the
Investment Company Act (the “Act”) [15 U.S.C. 80a-2(a)(32)] defines a “redeemable security”
as any security (other than short-term paper) under the terms of which the holder, upon
presentation to the issuer, is entitled to a proportionate share of the issuer’s current net assets or
the cash equivalent thereof. Because the assets of an investment company consist primarily of
the securities of other companies, satisfaction of a redemption request could be made by delivery
of a portion of those securities (“redemption in-kind”). Although redemptions in-kind are rarely
made, the ability of an investment company to make redemptions in this manner is important
because the sale of sizable blocks of securities to effect redemptions in cash would have the
tendency to depress the market price of those securities.
The securities administrators of several states (as well as those of certain foreign
countries) in the past have required or have considered requiring, as a condition to doing business
in their respective jurisdictions, that open-end investment companies that have the right to
redeem in-kind file an undertaking that, as to residents within their respective jurisdictions,
redemptions will be effected in cash only, or that redemptions in-kind will not be effected unless
specific approval for such redemption is first obtained from the securities regulator. Under
section 22(e) of the Act [15 U.S.C. 80a-22(e)], however, an open-end investment company may
not postpone the payment of redemptions beyond seven days after the date of tender of securities

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for payment, except in extraordinary circumstances. In addition, an agreement by an open-end
investment company to make payments to certain of its shareholders in a manner different from
payments to other shareholders (e.g., cash only rather than cash or in-kind) would be deemed to
be the creation of a class of senior securities with priority as to the distribution of an investment
company’s assets. Section 18(f)(1) of the Act [15 U.S.C. 80a-18(f)(1)] expressly prohibits the
creation of classes of senior securities. Therefore, absent exemptive relief from the requirements
of the Act, an open-end investment company could not retain the ability to redeem in-kind and
also sell its securities in jurisdictions that require limitations on in-kind redemptions.
Rule 18f-1 [17 CFR 270.18f-1] enables funds to limit redemptions in-kind, in the manner
prescribed by the rule. In brief, a fund may elect to commit to pay in cash all requests for
redemptions by any shareholder of record, limited in amount during any 90-day period to the
lesser of $250,000 or one percent of the net asset value of the fund at the beginning of such
period. The fund must file Form N-18F-1 [17 CFR 274.51] to notify the Commission of its
election to limit redemptions in-kind. The rule also requires the fund to disclose that election in
either its prospectus or Statement of Additional Information. 1
2.

Purpose of the Information Collection

Rule 18f-1 provides investment companies that wish to limit redemptions in-kind with an
exemption from section 18 of the Act, which would otherwise prohibit them from doing so.
Form N-18F-1 notifies the Commission that a fund has elected to limit redemptions in-kind. The
Commission does not review the Form, but uses it as appropriate to monitor compliance with the
Investment Company Act.
1

See Form N-1A, Item 18 (OMB No. 3234-0307). The burdens associated with this collection of
information requirement have been addressed separately in the Paperwork Reduction Act submissions
relating to Form N-1A.

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3.

Role of Improved Information Technology

The Commission’s Electronic Data Gathering, Analysis, and Retrieval system
(“EDGAR”) is designed to automate the filing, processing, and dissemination of full disclosure
filings. The system permits publicly held companies to transmit their filings to the Commission
electronically. This automation has increased the speed, accuracy, and public availability of
information, generating benefits to investors and financial markets. Form N-18F-1 is filed with
the Commission electronically on EDGAR. 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.

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 18f-1 requires a fund that elects to use the exemption provided
by the rule to file Form N-18F-1 and subsequently disclose that election in either its prospectus
or Statement of Additional Information. 2 Neither of these reporting requirements is duplicated in
other rules or forms.
5.

Effect on Small Entities

The Commission believes that compliance with rule 18f-1 is not unduly burdensome for
large or small entities. Rule 18f-1 gives funds, including those that are small entities, the
flexibility to elect to limit redemptions in-kind. Although the rule imposes certain notification
requirements on funds that elect to rely on the rule, as discussed in Item 12 below, those
notification requirements are minimal.
2

See Form N-1A, Item 18 (“Purchase, Redemption and Pricing of Shares”).

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6.

Consequences of Less Frequent Collection

The collection of information requirements of rule 18f-1 do not recur periodically, but
only once, when a fund elects to limit redemptions in-kind. Failure to collect this information
could harm the Commission’s ability to determine whether a fund is in compliance with the Act
and could make it difficult for shareholders to learn of a fund’s election to limit redemptions inkind.
7.

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

Not applicable.
8.

Consultations Outside the Agency

The Commission requested public comment on the collection of information requirement
of rule 18f-1 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.
The Commission and the staff of the Division of Investment Management participate in an
ongoing dialogue with representatives of the investment company industry through public
conferences, meetings, and informal exchanges. These forums provide the Commission and the
staff with a means of ascertaining and acting upon paperwork burdens confronting the industry.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

There are no sensitive questions asked. The form does not collect any
Personally Identifiable Information (PII). The collection is covered under the Systems of

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Records Notice (SORN) SEC-6 Periodic Reports Filed under the Securities Act of 1933, Securities
Exchange. The Privacy Impact Assessment (PIA) is provided as a supplemental document.

12.

Time Burden Estimate

The Commission staff estimates that Form N-18F-1 takes approximately one hour to
complete. Based on the number of investment companies that filed Form N-18F-1 from 2011
through 2013, Commission staff estimates that 26 investment companies file Form N-18F-1
annually for an estimated 26 responses each year. At an estimated cost of $53.00 per hour for
clerical or administrative costs associated with preparing and filing the Form, the total cost of the
Form is estimated to be $53.00 per respondent. 3 This cost is nonrecurring because each
investment company must file Form N-18F-1 only once with the Commission. 4 The total annual
burden estimate is 26 hours annually. The total estimated annual cost associated with the
estimated burden hours is $1378.00.
13.

Total Annual Cost Burden

Rule 18f-1 does not appear to impose any paperwork related cost burden that is not
described above in Item 12.
14.

Cost to the Federal Government

Form N-18F-1 is required to be filed with the Commission, but the staff does not
generally review the Form. The rule and Form do not entail any costs on the federal government.

3

The $53 per hour figure for a General Clerk is from SIFMA’s Office Salaries in the Securities Industry
2012, modified by Commission staff to account for an 1800-hour work-year and multiplied by 2.93 to
account for bonuses, firm size, employee benefits, and overhead.

4

As noted above, the hour burdens associated with the rule’s requirement that a fund disclose its election to
limit redemptions in kind in either its prospectus or Statement of Additional Information have been
addressed separately in the Paperwork Reduction Act submissions relating to Form N-1A. See supra note 1.

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15.

Changes in Burden

The estimated burden hours associated with rule 18f-1 have decreased by 26 hours from
the current allocation. This decrease is due to a decrease in the estimated number of investment
companies filing Form N-18F-1 annually.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

We request authorization to omit the expiration date on the electronic version of the form.
Including the expiration date on the electronic version of the form will result in increased costs,
because the need to make changes to the form may not follow the application’s scheduled version
release dates. The OMB control number will be displayed.
18.

Exceptions to Certification Statement

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.