17a-7 Supporting Statement-2 2014

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Investment Company Act Rule 17a-7
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 17(a) of the Investment Company Act of 1940 (the “Act”) generally prohibits an
affiliated person 1 (“first-tier affiliate”) of a registered investment company (“fund”) or an
affiliated person of that person (“second-tier affiliate”) from engaging in a purchase, sale, or loan
transaction with the fund (or any company controlled by the fund). Section 17(b) of the Act
authorizes the Commission to exempt proposed transactions from the prohibitions of section
17(a) when it finds that the terms of the transaction are fair and reasonable and do not involve
overreaching on the part of any person involved, the transaction is consistent with the policy of
each fund, and the transaction is consistent with the purposes of the Act.
In 1966, the Commission exercised its exemptive rulemaking authority by adopting rule
17a-7 [17 CFR. § 270.17a-7]. 2 Rule 17a-7, as subsequently amended on several occasions,
provides an exemption from section 17(a) of the Act for purchases and sales of securities

1

Under section 2(a)(3) of the Act, “affiliated person” of another person means:
(A) any person directly or indirectly owning, controlling, or holding with power to vote,
5 per centum or more of the outstanding voting securities of such other person; (B) any
person 5 per centum or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by such other person; (C) any
person directly or indirectly controlling, controlled by, or under common control with,
such other person; (D) any officer, director, partner, copartner, or employee of such other
person; (E) if such other person is an investment company, any investment adviser
thereof or any member of an advisory board thereof; and (F) if such other person is an
unincorporated investment company not having a board of directors, the depositor
thereof.

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between funds that are first- or second-tier affiliates, or between a fund and a first- or second-tier
affiliate other than another fund, when the affiliation arises solely because of a common
investment adviser (or advisers that are affiliated persons of each other), director, or officer. The
exemption is subject to conditions intended to eliminate the likelihood of overreaching. The rule
permits funds and other companies under common management to trade securities with each
other and thus to avoid brokerage commissions. The rule also limits the prices at which purchase
and sale transactions may occur, to prevent inequitable pricing practices that could harm a
participating fund.
Rule 17a-7(e) requires the board of directors of a fund to establish procedures reasonably
designed to ensure that the conditions of the rule have been satisfied for purchases and sales
effected in reliance on the rule, and to make changes to these policies as neccesary. In addition,
the rule requires that the fund maintain and preserve a written copy of the procedures adopted by
the board. Under the rule, the board is required to determine, at least on a quarterly basis, that all
affiliated transactions effected during the preceding quarter in reliance on the rule were made in
compliance with these established procedures. If a fund enters into a purchase or sale transaction
with an affiliated person, the rule requires the fund to maintain written records of the transaction
for a period of not less than six years. 3 In order to rely on the rule, the fund also must comply
with certain fund governance standards – including requirements that independent directors must

2

Investment Company Act Release No. 4697 (Sept. 8, 1966).

3

Rule 17a-7(g) requires the written record of the affiliated transaction to include the following
information: a description of the security purchased or sold, the identity of the person on the
other side of the transaction, the terms of the purchase or sale transaction, and the information or
materials upon which the board determined that the purchase or sale complied with the
procedures set by the board.

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select and nominate other independent directors, independent directors must be affirmatively
authorized to hire their own staff, and any person who acts as legal counsel for the independent
directors must be an independent legal counsel. 4
2.

Purpose of the Information Collection

The records maintained under the rule are not submitted to the Commission, but may be
reviewed by Commission staff on request to ensure compliance with the rule. Fund directors use
the records to evaluate procedures and transactions executed pursuant to the rule.
If maintenance of these records were not required, the Commission and fund directors
could not readily monitor or evaluate potentially unfair or unreasonable transactions between
funds and their affiliates. The rule’s requirement to maintain such records avoids the need for
potentially more burdensome requirements such as mandatory filings of similar information with
the Commission.
3.

Consideration Given to 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. Although rule 17a-7 does not require the
filing of any documents with the Commission, the Commission in the future may use its EDGAR
facility to improve the examination of records the rule requires funds to keep. Under rule
31a-2(f) [17 CFR 270.31a-2(f)], the Commission permits funds to maintain (and produce as

4

See Rule 0-1(a)(7) [17 CFR § 270.0-1(a)(7)].

4
necessary) on magnetic tape, disk or other electronic storage media, many types of records,
including records like those maintained under rule 17a-7.
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. Section 31(a) of the Act [15 U.S.C. 80a-31(a) and rules 31a-1 and
31a-2 thereunder [17 CFR 270.31a-1, 17 CFR 270.31a-2] require funds to maintain and preserve
records similar to those required to be kept pursuant to rule 17a-7. Rule 17a-7 does not require
that duplicate records be kept, but reiterates the requirement to maintain and preserve such
records.
5.

Effect on Small Entities

The recordkeeping requirements of rule 17a-7 are the same for all funds subject to the
rule, including small entities. The Commission believes that compliance with rule 17a-7 is not
unduly burdensome for large or small entities, and that the minimal costs of complying with the
rule are justified by the benefits it affords.
6.

Consequences of Not Conducting Collection

Rule 17a-7 requires fund directors to establish and maintain written procedures for review
of pertinent transactions, and requires funds to maintain records concerning each transaction
undertaken pursuant to the rule. Less frequent collection of this information would make it
difficult for fund directors to evaluate transactions executed pursuant to the rule, and could
hamper the ability of the Commission’s examination staff to ensure compliance with the rule.

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7.

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

Rule 17a-7 requires funds to retain certain records for more than three years. The fund
must maintain and preserve permanently a written copy of the procedures (and any modifications
thereto) established by the board of directors to ensure that all conditions of the rule have been
satisfied. Additionally, the fund must maintain and preserve for a period of six years from the
end of the fiscal year in which any transactions occurred a written record of each such transaction
setting forth a description of the security purchased or sold, the identity of the person on the other
side of the transaction, the terms of the purchase or sale transaction, and the information or
materials upon which the board of directors’ determination that the transaction was in
compliance with the procedures was made.
The long-term retention of records required under rule 17a-7 is necessary to carry out the
Commission’s examination and enforcement responsibilities, and its mandate to ensure that the
Act’s provisions are legally enforceable. The Commission periodically inspects the operations of
funds to ensure compliance with the rules and regulations under the Act. Each fund, however,
may only be inspected at intervals of several years due to the Commission’s limited resources.
For this reason, the Commission often needs information relating to events or transactions which
occurred years ago. Moreover, in section 31(a) of the Act, Congress specifically empowered the
Commission to require funds to “maintain and preserve” books and records “for such period or
periods as the Commission may prescribe by rules.” Electronic record storage has made longterm retention of records less burdensome.
8.

Consultations Outside the Agency

Rule 17a-7 was adopted in 1966 and amended several times since then. Prior to its
adoption, and before adoption of each amendment, the Commission sought, received, and

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considered public comment. The Commission requested public comment on the collection of
information requirements in rule 17a-7 before it submitted this request for extension and
approval to the Office of Management and Budget. The Commission received no comments in
response to its request.
The Commission and 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 affect the industry.
9.

Payment or Gift

Not applicable.
10.

Assurance of Confidentiality

Not applicable.
11.

Sensitive Questions

No questions of a sensitive nature are asked. The information collection does not collect
any Personally Identifiable Information (PII).
12.

Burden of Information Collection

While most funds do not commonly engage in transactions covered by rule 17a-7, the
Commission staff estimates that nearly all funds have adopted procedures for complying with the
rule. 5 Of the approximately 3318 currently active funds, the staff estimates that virtually all have
already adopted procedures for compliance with rule 17a-7. This is a one-time burden, and the
staff therefore does not estimate an ongoing burden related to the policies and procedures

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requirement of the rule for funds. 6 The staff estimates that there are approximately 150 new
funds that register each year, and that each of these funds adopts the relevant polices and
procedures. The staff estimates that it takes approximately 4 hours to develop and adopt these
policies and procedures, as follows; 3 hours spent by a compliance attorney at a rate of $320 per
hour, and 1 hour collectively spent by the board of directors at a rate of $4000 per hour, for a
total cost of $4960. 7 Therefore, the total annual burden related to developing and adopting these
policies and procedures would be approximately 600 hours at a cost of $744,000. 8
Of the 3318 existing funds, the staff assumes that approximately 25%, (or 830) enter into
transactions affected by rule 17a-7 each year (either by the fund directly or through one of the
fund’s series), and that the same percentage (25%, or 38 funds) of the estimated 150 funds that
newly register each year will also enter into these transactions, for a total of 868 9 companies that
are affected by the recordkeeping requirements of rule 17a-7. These funds must keep records of
each of these transactions, and the board of directors must quarterly determine that all relevant
5

Unless stated otherwise, these estimates are based on conversations with the examination and
inspections staff of the Commission and fund representatives.

6

Based on our reviews and conversations with fund representatives, we understand that funds
rarely, if ever, need to make changes to these policies and procedures once adopted, and
therefore we do not estimate a paperwork burden for such updates.

7

This estimate is based on the following calculations: (3 hours × $320 = $960); ($960 + $4000 =
$4960). The estimate for compliance attorney pay rates is 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 staff has estimated the average cost of board of director time as
$4000 per hour for the board as a whole, based on information received from funds, fund
intermediaries, and their counsel.

8

This estimate is based on the following calculations: (4 hours × 150 = 600 hours); ($4960 × 150
= $744,000).

9

This estimate is based on the following calculation: (830 + 38 = 868).

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transactions were made in compliance with the company’s policies and procedures. The rule
generally imposes a minimal burden of collecting and storing records already generated for other
purposes. 10 The staff estimates that the burden related to making these records and for the board
to review all transactions would be 3 hours annually for each respondent, (2 hours spent by
compliance attorneys and 1 hour spent by the board of directors) at a cost of $4640 per fund. 11
Thus, the total of the rule’s recordkeeping requirements for all funds is approximately 2604 total
hours each year at cost of $4,027,520. 12
Based on these estimates, the staff estimates the combined total annual burden hours
associated with rule 17a-7 is 3204 hours at a cost of $4,771,520. 13 The staff also estimates that
there are approximately 1018 respondents and 7094 total responses. 14 The estimate of average
burden hours is made solely for the purposes of the Paperwork Reduction Act. The estimate is

10

Commission staff believes that rule 17a-7 does not impose any costs associated with record
preservation in addition to the costs that funds already incur to comply with the record
preservation requirements of rule 31a-2 under the Act. Rule 31a-2 requires companies to
preserve certain records for specified periods of time.

11

The staff estimates that funds that rely on rule 17a-7 annually enter into an average of 8 rule
17a-7 transactions each year. The staff estimates that the compliance attorneys of the companies
spend approximately 15 minutes per transaction on this recordkeeping, and the board of directors
spends a total of 1 hour annually in determining that all transactions made that year were done in
compliance with the company’s policies and procedures. This estimate is based on the following
calculations: (2 hours × $320 = $640); ($640 + $4000 = $4640).

12

This estimate is based on the following calculations: (3 hours × 868 companies = 2604 hours).
($4640 × 868 companies = $4,027,520).

13

This estimate is based on the following calculations: (600 hours + 2604 hours = 3204 total
hours); ($744,000 + $4,027,520 = $4,771,520).

14

This estimate is based on the following calculations: (150 newly registered funds + 868 funds
that engage in rule 17a-7 transactions = 1018); (868 funds that engage in rule 17a-7 transactions
× 8 times per year = 6944); (6944 + 150 = 7094 responses).

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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

The commission staff estimates that there is no cost burden of rule 17a-7 other than the
cost of the burden identified in Item 12 of this Supporting Statement.
14.

Estimate of Cost to the Federal Government

There are no costs to the Federal Government associated with rule 17a-7.
15.

Explanation of Changes in Burden

The estimated burden hours associated with rule 17a-7 has decreased from 3633 burden
hours to 3204 burden hours. This decrease of 429 hours is primarily due to a decrease in the
number of existing funds.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

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

Exceptions to Certification Statement

Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.