Rule 32a-4 Supporting Statement 2013

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
FOR RULE 32a-4

A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 32(a)(2) of the Investment Company Act of 1940 (15 U.S.C.
80a-31(a)(2)) (“Act”) requires that the selection of a registered management investment
company’s or registered face-amount certificate company’s (collectively, “funds”)
independent public accountant be submitted to shareholders for ratification or rejection.
Rule 32a-4 under the Investment Company Act (17 CFR 270.32a-4) exempts a fund from
this requirement if the fund has an audit committee consisting entirely of independent
directors to oversee the fund’s auditor. The rule permits continuing oversight of a fund’s
accounting and auditing processes by an independent audit committee in place of a
shareholder vote.
Under the rule, a fund is exempt from having to seek shareholder approval of its
independent public accountant, if (i) the fund’s board of directors establishes an audit
committee composed solely of independent directors with responsibility for overseeing
the fund’s accounting and auditing processes, 1 (ii) the fund’s board of directors adopts an
audit committee charter setting forth the committee's structure, duties, powers and
methods of operation, or sets forth such provisions in the fund’s charter or bylaws, 2 and

1

Rule 32a-4(a).

2

Rule 32a-4(b).

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(iii) the fund maintains and preserves permanently in an easily accessible place a copy of
the audit committee charter, and any modifications to the charter. 3
2.

Purpose of the Information Collection

In order to rely on rule 32a-4, a fund’s board of directors must adopt an audit
committee charter and must preserve that charter, and any modifications to the charter,
permanently in an easily accessible place. The purpose of these conditions is to ensure
that Commission staff will be able to monitor the duties and responsibilities of an
independent audit committee formed by a fund relying on the rule.
3.

Consideration Given to Information Technology

Rule 32a-4 does not require funds to file any documents with the Commission,
but does require funds to retain and preserve an audit committee charter if they adopt one.
Rule 31a-2(f) under the Act permits funds to maintain many types of records on
micrographic and electronic storage media.
4.

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. Rule 32a-4 does not require duplicative reporting or recordkeeping.
5.

Effect on Small Entities

The recordkeeping requirements of rule 32a-4 do not distinguish between large
and small entities. The Commission does not believe that compliance with rule 32a-4 is
unduly burdensome for small funds.
6.

3

Consequences of Not Conducting Collection

Rule 32a-4(c).

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Rule 32a-4 includes as a condition to the exemption provided by the rule the
requirement that the fund’s board of directors adopt an audit committee charter and
preserve that charter, and any modifications to the charter, permanently in an easily
accessible place. If funds relying on the exemption were not required to adopt and
preserve an audit committee charter, Commission staff would not be able to monitor the
duties and responsibilities of an audit committee formed as a condition of the exemption,
nor would it be able to determine fund compliance with the conditions of the rule for
reliance on the exemption.
7.

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

Rule 32a-4 requires, as a condition to the exemption provided by the rule, that the
fund permanently preserve the audit committee charter, and any modifications to the
charter. The Commission believes that long-term retention of the charter is necessary
because funds may rely on the exemption provided by the rule for indefinite periods of
time. Commission staff thus may need to review the information available in the audit
committee charter many years after its adoption or modification.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 32a-4 before it submitted this request for extension and approval to
OMB. The Commission received no comments in response to this request.
The Commission and staff of the Division of Investment Management also
participate in an ongoing dialogue with representatives of the fund industry through
public conferences, meetings, and informal exchanges. These forums provide the

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Commission and the staff useful means to identify and address paperwork burdens that
may confront the industry.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

No PII collected/Not applicable.
12.

Burden of Information Collection

Each fund that chooses to rely on rule 32a-4 incurs two collection of information
burdens. The first, related to the board of directors’ adoption of the audit committee
charter, occurs once, when the committee is established. The second, related to the
fund’s maintenance and preservation of a copy of the charter in an easily accessible
place, is an ongoing annual burden. Commission staff estimates that on average the
board of directors takes 15 minutes to adopt the audit committee charter. Commission
staff has estimated that with an average of 8 directors on the board, 4 total director time to
adopt the charter is 2 hours. Combined with an estimated 1 hour of paralegal time to
prepare the charter for board review, the staff estimates a total one-time collection of
information burden of 3 hours for each fund. Once a board adopts an audit committee
charter, the charter is preserved as part of the fund’s records. Commission staff estimates

4

This estimate is based on staff discussions with a representative of an entity that surveys
funds and calculates fund board statistics based on responses to its surveys.

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that there is no annual hourly burden associated with preserving the charter in accordance
with this rule. 5
Because virtually all existing funds have now adopted audit committee charters,
the annual one-time collection of information burden associated with adopting audit
committee charters is limited to the burden incurred by newly established funds.
Commission staff estimates that fund sponsors establish approximately 139 new funds
each year, 6 and that all of these funds will adopt an audit committee charter in order to
rely on rule 32a-4. Thus, Commission staff estimates that the annual one-time hour
burden associated with adopting an audit committee charter under rule 32a-4 going
forward will be approximately 417 hours. 7
As noted above, all funds that rely on rule 32a-4 are subject to the ongoing
collection of information requirement to preserve a copy of the charter in an easily
accessible place. This ongoing requirement, which Commission staff estimates has no
hourly burden, applies to new funds that adopt an audit committee charter each year and
to all of the funds that have previously adopted the charter and continue to maintain it.
Funds incur internal costs associated with the one-time collection of information
burden related to adopting an audit committee charter. As noted above, Commission
staff estimates that it takes approximately 2 hours of aggregate directors’ time at $4000

5

No hour burden related to such maintenance of the charter was identified by the funds the
Commission staff surveyed.

6

This estimate is based on the average number of notifications of registration on Form N8A filed from January 2011 through December 2013.

7

This estimate is based on the following calculation: (3.0 burden hours for establishing
charter × 139 new funds = 417 burden hours).

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per hour, and 1 hour of paralegal time at $175 per hour, 8 to adopt an audit committee
charter. Thus, Commission staff estimates a total internal cost of $8175 per fund to adopt
the charter 9 and a total annual cost of $1,136,325. 10
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 the rule.
13. Costs to Respondents
When funds adopt an audit committee charter in order to rely on rule 32a-4, they
also may incur one-time costs related to hiring outside counsel to prepare the charter.
Commission staff estimates that those costs average approximately $1500 per fund. 11
As noted in the previous section, Commission staff estimates that approximately
139 new funds each year will adopt an audit committee charter in order to rely on rule
32a-4. Thus, Commission staff estimates that the ongoing annual cost burden associated
with rule 32a-4 in the future will be approximately $208,500. 12

8

The $175/hour figure for a paralegal is from SIFMA’s Management & Professional
Earnings in the Securities Industry 2012, 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.

9

This estimate is based on the following calculations: ($4000 per hour for directors’ time
× 2 hours = $8000); ($8000 + $175 = $8175).

10

This estimate is based on the following calculations: ($8175 cost of hour burden per fund
× 139 new funds = $1,136,325).

11

Costs may vary based on the individual needs of each fund. However, based on the staff’s
experience and conversations with outside counsel that prepare these charters, legal fees
related to the preparation and adoption of an audit committee charter usually average
$1500 or less. The Commission also understands that the Investment Company Institute
has prepared a model audit committee charter, which most legal professionals use when
establishing audit committees, thereby reducing the costs associated with drafting a
charter.

12

This estimate is based on the following calculations: ($1500 cost of adopting charter
× 139 newly established funds = $208,500).

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These estimates of average costs are made solely for the purposes of the
Paperwork Reduction Act. The estimates are not derived from a comprehensive or even
a representative survey or study of the costs of Commission rules.
14.

Cost to Federal Government

There are no costs to the Federal Government associated with the collection of
information requirements of rule 32a-4.

15.

Changes in Burden
The increase in the number of burden hours associated with the rule arises from

an increase in the estimated number of funds that will rely on the rule each year. As
noted above, because virtually all existing funds have now adopted audit committee
charters, the annual one-time collection of information burden associated with adopting
audit committee charters is limited to the burden incurred by newly established funds.
Our estimate of the number of new funds formed each year has increased from 117 funds
(as estimated in the last collection of information submission for rule 32a-4) to 139 funds.
As noted above, the ongoing collection of information requirement to preserve a copy of
the charter, while applying to all existing funds and new funds, is estimated by
Commission staff to have no hourly burden. Therefore, existing funds are not included
within the estimate of the number of respondents or responses to the collection of
information requirements of rule 32a-4.
16.

Information Collection Planned for Statistical Purposes

Not applicable.

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17.

Approval to not Display Expiration Date
The Commission is not seeking approval to omit the expiration date.

18.

Exceptions to Certification Statement
Not applicable.

B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS

Not applicable.