Rule 154 Supporting Statement

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 154
A.

JUSTIFICATION
1.

Necessity for the Information Collection

The federal securities laws generally prohibit an issuer, underwriter, or dealer from
delivering a security for sale unless a prospectus meeting certain requirements accompanies or
precedes the security. Rule 154 (17 CFR 230.154) under the Securities Act of 1933 (15 U.S.C.
77a) (the “Securities Act”) permits, under certain circumstances, delivery of a single prospectus
to investors who purchase securities from the same issuer and share the same address
(“householding”) to satisfy the applicable prospectus delivery requirements. 1 The purpose of
rule 154 is to reduce the amount of duplicative prospectuses delivered to investors sharing the
same address.
Under rule 154, a prospectus is considered delivered to all investors at a shared address,
for purposes of the federal securities laws, if the person relying on the rule delivers the
prospectus to the shared address and the investors consent to the delivery of a single prospectus.
The rule applies to prospectuses and prospectus supplements. Currently, the rule permits
householding of all prospectuses by an issuer, underwriter, or dealer relying on the rule if, in
addition to the other conditions set forth in the rule, the issuer, underwriter, or dealer has

1

The Securities Act requires the delivery of prospectuses to investors who buy securities
from an issuer or from underwriters or dealers who participate in a registered distribution
of securities. See Securities Act sections 2(a)(10), 4(1), 4(3), 5(b) (15 U.S.C. 77b(a)(10),
77d(1), 77d(3), 77e(b)); see also rule 174 under the Securities Act (17 CFR 230.174)
(regarding the prospectus delivery obligation of dealers); rule 15c2-8 under the Securities
and Exchange Act of 1934 (17 CFR 240.15c2-8) (prospectus delivery obligations of
brokers and dealers).

2
obtained from each investor written or implied consent to householding. 2 The rule requires
issuers, underwriters, or dealers that wish to household prospectuses with implied consent to
send a notice to each investor stating that the investors in the household will receive one
prospectus in the future unless the investors provide contrary instructions. In addition, at least
once a year, issuers, underwriters, or dealers relying on rule 154 for the householding of
prospectuses relating to open-end management investment companies that are registered under
the Investment Company Act of 1940 (“mutual funds”) must explain to investors who have
provided written or implied consent how they can revoke their consent. Preparing and sending
the notice and the annual explanation of the right to revoke are collections of information.
2.

Purpose of the Information Collection

The rule allows issuers, underwriters, or dealers to household prospectuses if certain
conditions are met. Among the conditions with which a person relying on the rule must comply
are providing notice to each investor that only one prospectus will be sent to the household and,
in the case of issuers that are mutual funds, providing to each investor who consents to
householding an annual explanation of the right to revoke consent to the delivery of a single
prospectus to multiple investors sharing an address. The purpose of the notice and annual
explanation requirements of the rule is to ensure that investors who wish to receive individual
copies of prospectuses are able to do so.

2

Rule 154 permits the householding of prospectuses that are delivered electronically to
investors only if delivery is made to a shared electronic address and the investors give
written consent to householding. Implied consent is not permitted in such a situation.
See rule 154(b)(4).

3
3.

Consideration Given to Information Technology

The Commission’s electronic filing project (Electronic Data Gathering, Analysis and
Retrieval System or “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. Such automation has increased the speed, accuracy and
availability of information, generating benefits to investors and financial markets. Prospectuses
are required to be filed with the Commission electronically on EDGAR. (17 CFR 232.101(a)(i)).
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.
Prospectuses may be sent to investors by electronic means if the investors consent. 3 The
Commission has no information concerning the percentage of prospectuses that are sent
electronically, but believes it is a small percentage. For the purposes of Part II of Form 83-I, the
Commission estimates 2% of these documents are sent electronically.
4.

Duplication

The requirements of rule 154 are not duplicated elsewhere in federal securities laws, and
similar information is not available from other sources.

3

See Use of Electronic Media for Delivery Purposes, Securities Act Rel. No. 7233;
Exchange Act Rel. No. 36345; Investment Company Act Rel. No. 21399 (Oct. 6, 1995)
(60 FR 53458 (Oct. 13, 1995)). In addition, rule 172 under the Securities Act allows
certain issuers to satisfy the prospectus delivery obligations of Section 5(b)(2) of that Act
through electronic delivery, if certain specified conditions are met. (17 CFR 230.172).
However, the electronic delivery provisions of rule 172 do not apply to registered
management investment companies or business development companies. See 17 CFR
230.172(d)(1) and (2).

4
5.

Effect on Small Entities

Rule 154 is available to any issuer, underwriter, or dealer, including those that are small
entities, that wishes to meet its prospectus delivery requirements by transmitting a single
prospectus to multiple investors sharing an address. Any issuer, underwriter, or dealer that
wishes to rely on rule 154 must comply with its information collection requirements. These
requirements are necessary for investor protection.
6.

Consequences of Not Conducting Collection

Rule 154 requires issuers, underwriters, or dealers that wish to household prospectuses
with implied consent to send a notice to each investor stating that the investors in the household
will receive one prospectus in the future unless the investors provide contrary instructions. In
addition, at least once a year, issuers, underwriters, or dealers relying on rule 154 for the
householding of mutual fund prospectuses must explain to investors who have provided written
or implied consent how they can revoke their consent. Less frequent collection would result in
investors who wish to receive individual copies of prospectuses not being able to do so unless the
investors remember without any reminders to inform the issuer, underwriter, or dealer of such a
wish. The purpose of the notice and annual explanation requirements associated with the rule is
to ensure that investors who wish to receive individual copies of prospectuses are able to do so.
In addition, the rule only requires the notice informing investors of the householding of
prospectuses to be sent once, before householding begins.
7.
None.

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

5
8.

Consultation Outside the Agency

The Commission and the staff of the Division of Investment Management participate in
an ongoing dialogue with representatives of the investment company industry and through public
conferences, meetings, and informal exchanges. These various forums provide the Commission
and staff with a means of ascertaining and acting upon paperwork burdens confronting the
industry. The Commission also requested public comment on the collection of information
requirements with respect to rule 154 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.
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

The purpose of the notice and annual explanation requirements is to give reasonable
assurance that all investors have access to the prospectus. Preparing and sending the notice and
the annual explanation of the right to revoke consent are collections of information. The notices
are typically short, one-page statements that are enclosed with other written materials sent to
shareholders, such as annual shareholder reports or account statements. The Commission

6
estimates that the annual burden associated with the notice requirement of the rule is 20 hours per
respondent. In addition, the Commission estimates that the annual burden for preparing and
delivering the annual explanation of the right to revoke is 1 hour per respondent.
Although rule 154 is not limited to mutual funds, the Commission believes that it will be
used mainly by mutual funds and by broker-dealers that deliver mutual fund prospectuses. The
Commission estimates that, as of March 2015, there are approximately 1,640 mutual funds,
approximately 410 of which engage in direct marketing and therefore deliver their own
prospectuses. Of the approximately 410 mutual funds that engage in direct marketing, the
Commission estimates that approximately half of these mutual funds (205) (i) do not send the
implied consent notice requirement because they obtain affirmative written consent to household
prospectuses in the fund’s account opening documentation; or (ii) do not take advantage of the
householding provision because of electronic delivery options which lessen the economic and
operational benefits of rule 154 when compared with the costs of compliance. Therefore, the
Commission estimates that each direct-marketed fund will spend an average of 20 hours per year
complying with the notice requirement of the rule, for a total of 4,100 hours at a cost of
$657,367. 4 Of the 410 mutual funds that engage in direct marketing, the Commission estimates
4

Calculated as follows: 205 mutual funds x 20 hours per annum = 4,100 hours per annum;
the staff estimates that two-thirds of each fund’s annual hourly burden is performed by
clerical staff preparing and mailing notices (4,100 hours x 2/3 x $57 per hour for a
General Clerk = $155,800) and the remaining one-third is performed evenly by
compliance personnel using a blended average hourly rate of $367 for the Chief
Compliance Officer, Compliance Attorney and Compliance Manager (4,100 hours x 1/3 x
$367 per hour = $501,567). Therefore, the total cost for 4,100 burden hours is $657,367
($155,800+ $501,567). All hourly rates in this Supporting Statement are derived from the
average annual salaries reported in the Securities Industry and Financial Markets
Association (SIFMA), Management & Professional Earnings in the Securities Industry
(2013) and SIFMA, Office Salaries in the Securities Industry (2013).

7
that approximately seventy-five percent (308) of these funds will each spend 1 hour complying
with the annual explanation of the right to revoke requirement of the rule, for a total of 308 hours
at a cost of $17,556. 5
The Commission estimates that there are approximately 200 broker-dealers that carry
customer accounts for the remaining mutual funds and therefore may be required to deliver
mutual fund prospectuses. The Commission estimates that each affected broker-dealer will
spend, on average, 20 hours complying with the notice requirement of the rule, for a total of
4,000 hours at a cost of $641,333. 6 Each broker-dealer will also spend one hour complying with
the annual explanation of the right to revoke requirement, for a total of 200 hours at a cost of
$11,400. 7 Therefore, the total number of respondents for rule 154 is 507 (307 8 mutual funds
plus 200 broker-dealers), and the estimated total hour burden is approximately 8,608 hours
(4,408 hours for mutual funds plus 4,200 hours for broker-dealers). The Commission estimates

5

6

7

8

The Commission estimates that approximately 25 percent (102) of the 410 mutual funds
that engage in direct marketing do not take advantage of the householding provision (and
therefore do not prepare annual notices to shareholders), because, as discussed above, the
benefits of the rule do not outweigh the costs of compliance. The staff has estimated the
burden hour cost to be $17,556 (308 burden hours x $57 per hour for a General Clerk).
Calculated as follows: 200 broker-dealers x 20 hours per annum = 4,000 hours per
annum; the staff estimates that two-thirds of each broker-dealer’s annual hourly burden is
performed by clerical staff preparing and mailing notices (4,000 hours x 2/3 x $57 per
hour for a General Clerk = $152,000) and the remaining 1/3 is performed evenly by
compliance personnel using a blended average hourly rate of $367 for the Chief
Compliance Officer, Compliance Attorney and Compliance Manager (4000 hours x 1/3 x
$367 per hour = $489,333). Therefore, the total cost for 4,000 burden hours is $ 641,333
($152,000+ $489,333).
The staff has estimated the burden hour cost to be $11,400 (200 burden hours x $57 per
hour for a General Clerk).
The Commission estimates that 205 mutual funds prepare both the implied consent notice
and the annual explanation of the right to revoke consent + 102 mutual funds that prepare
only the annual explanation of the right to revoke.

8
the cost of the hourly burden to be $1,327,656. 9
13.

Cost to Respondents

The Commission believes there will be no other financial costs since much of the delivery
process has been automated by the industry, the householding notice usually accompanies other
documents transmitted to shareholders (e.g., the annual shareholder report), and the required
notices are generally short in length.
14.

Costs to Federal Government

The rule does not impose any additional costs on the Federal government.
15.

Changes in Burden

The decrease in burden from 10,180 hours to 8,608 hours (a decrease of 1,572 hours) is
due to an increase in the number of direct-marketed mutual funds and a decrease in the number
of broker-dealers that carry customer accounts and therefore, may be required to deliver mutual
fund prospectuses.
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 expiration date.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

9

This estimate is based on the following calculation: ($657,367 + $17,556 + $641,333 +

(continued . . .)

9

$11,400 = $1,327,656).