PRA_Supporting_Statement_2014__Rpts_of_Evidence_of_Material_Violations

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
“REPORTS OF EVIDENCE OF MATERIAL VIOLATIONS”
This submission is pursuant to the Paperwork Reduction Act of 1995, 44 U.S.C. Section 3501 et
seq.
A.

Justification
1, 2.

Necessity of Information Collection, Purpose and Use

On February 6, 2003, the Commission published final rules, effective August 5, 2003,
entitled “Standards of Professional Conduct for Attorneys Appearing and Practicing Before the
Commission in the Representation of an Issuer” (17 CFR 205.1-205.7). The information
collection embedded in the rules is necessary to implement the Standards of Professional
Conduct for Attorneys prescribed by the rule and required by Section 307 of the Sarbanes-Oxley
Act of 2002 (15 U.S.C. 7245). The rules impose an “up-the-ladder” reporting requirement when
attorneys appearing and practicing before the Commission become aware of evidence of a
material violation by the issuer or any officer, director, employee, or agent of the issuer. An
issuer may choose to establish a qualified legal compliance committee (“QLCC”) as an
alternative procedure for reporting evidence of a material violation. In the rare cases in which a
majority of a QLCC has concluded that an issuer did not act appropriately, the QLCC may
communicate that information to the Commission. The collection of information is, therefore, an
important component of the Commission’s program to discourage violations of the federal
securities laws and promote ethical behavior of attorneys appearing and practicing before the
Commission.
The collection of information provides a means for issuers to make sure that they are
apprised of necessary information concerning evidence of violations by officers, directors,
employees or agents of the issuer. If the information collection were not required, issuers might
not have access to as much of this information. Consequently, corporate fraud might not be
discovered as rapidly. This could have negative effects on the issuer, as well as on the economy
as a whole.
The rules were promulgated under the authority set forth in Section 19 of the Securities
Act of 1933, Sections 3(b), 4C, 13, and 23(a) of the Securities Exchange Act of 1934, Sections
38 and 39 of the Investment Company Act of 1940, Section 211 of the Investment Advisers Act
of 1940, and Sections 3(a), 307 and 404 of the Sarbanes-Oxley Act of 2002.

3.

Consideration Given to Information Technology

The rule does not require or prohibit the use of any particular technology to fulfill the
collection of information requirements.

4.

Duplication

The collection of information will not duplicate existing information.
5.

Effect on Small Entities

The information collection will affect small as well as larger entities. As described
below, we believe that the burden of complying with the collection of information will be very
low for all entities, regardless of size.
6.

Consequences of Not Conducting Collection

The rules do not require periodic disclosures. Whether an issuer must comply with some
aspect of the collection of information depends entirely upon the issuer as well as on external
circumstances.
7.

Inconsistencies with Guidelines in 5 CFR 1320.8(d)

The collection of information required by Rule 15c2-7 is conducted in a manner
consistent with the guidelines of 5 CFR 1320.8(d).
8.

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.
9.

Payment or Gift to Respondents

Not applicable.
10.

Confidentiality

No assurance of confidentiality is provided.
11.

Sensitive Questions

No questions of a sensitive nature are asked. No PII is collected.
12, 13. Reporting Time Burden and Total Annualized Cost Burden
The rules impose an “up-the-ladder” reporting requirement when attorneys appearing and
practicing before the Commission become aware of evidence of a material violation by the issuer
or any officer, director, employee, or agent of the issuer. An attorney must report such evidence

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to the issuer’s chief legal officer (“CLO”) or to both the chief legal officer and chief executive
officer (“CEO”). 1
The chief legal officer (or the equivalent thereof) shall cause such inquiry into the
evidence of a material violation as he or she reasonably believes is appropriate to determine
whether the material violation described in the report has occurred, is ongoing, or is about to
occur. If the CLO, after investigation, reasonably believes that there is no violation, he or she
must so advise the reporting attorney. If the CLO reasonably believes that there is a violation, he
or she shall take all reasonable steps to cause the issuer to adopt an appropriate response, and
shall advise the reporting attorney thereof. In lieu of causing an inquiry, a chief legal officer (or
the equivalent thereof) may refer a report of evidence of a material violation to a QLCC if the
issuer has established a QLCC prior to the report of evidence of a material violation. The rules
also require attorneys to take certain steps if the CLO or CEO does not provide an appropriate
response to a report of evidence of a violation, including reporting the evidence to the audit
committee, another committee of independent directors, or the full board of directors.
The respondents to this collection of information are attorneys who appear and practice
before the Commission and, in certain cases, the issuer, and/or officers, directors and committees
of the issuer. We believe that, in providing quality representation to issuers, attorneys report
evidence of violations to others within the issuer, including the CLO, the CEO, and, where
necessary, the directors. In addition, officers and directors investigate evidence of violations and
report within the issuer the results of the investigation and the remedial steps they have taken or
sanctions they have imposed. Except as discussed below, we therefore believe that the reporting
requirements imposed by the rules are “usual and customary” activities that do not add to the
burden that would be imposed by the collection of information.
Certain aspects of the collection of information, however, may impose a burden. For an
issuer to establish a QLCC, the QLCC must adopt written procedures for the confidential receipt,
retention, and consideration of any report of evidence of a material violation. We estimate for
purposes of the PRA that there are approximately 11,396 issuers that are subject to the rules. 2 Of
these, we estimate that approximately 3.3 percent, or 373, have established or will establish a
QLCC. 3 Establishing the written procedures required by the rule should not impose a significant
burden. We assume that an issuer would incur a greater burden in the year that it first establishes
the procedures than in subsequent years, in which the burden would be incurred in updating,
reviewing, or modifying the procedures. For purposes of the PRA, we assume that an issuer
would spend 6 hours every three-year period on the procedures. This would result in an average
1

A subordinate attorney complies with the proposed rules if he or she reports evidence of a material
violation to his or her supervisory attorney (who is then responsible to comply with the rules’ requirements). A
subordinate attorney may also take the other steps described in the rules if the supervisor fails to comply.

2

This figure is based on the estimated 8,145 operating companies that filed annual reports on Form 10-K,
Form 20-F, or Form 40-F during the 2013 fiscal year (the most recent data currently available), and the estimated
3,251 investment companies that filed periodic reports on Form N-SAR between June 1, 2013 and May 31, 2014
(the most recent data currently available).

3

This estimate is based on the issuer filings made with the Commission during the past three years that
include a reference to the issuer’s QLCC.

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burden of 2 hours per year. Thus, we estimate for purposes of the PRA that the total annual
burden imposed by the collection of information would be 746 hours. Assuming half of the
burden hours will be incurred by outside counsel at a rate of $500 per hour would result in a cost
of $186,500.
14.

Cost to the Federal Government
De minimis.

15.

Changes in Burden

Indications are that since the 2011 estimate of the percentage of issuers that would
establish QLCCs (3.8 percent), a slightly smaller percentage of additional issuers have
established QLCCs. Our updated estimate in the percentage of QLCCs (3.3 percent)
results in a decreased burden estimate as compared to the previously-approved collection.
16.

Information Collections Planned for Statistical Purposes

There are no plans to require the publication of these records in the future.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the OMB expiration date.
B.

Collection of Information Employing Statistical Methods
Not applicable.

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