Rule 17e-1 Supporting Statement

A.

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 17e-1
JUSTIFICATION
1.

Necessity for the Information Collection

Section 17(e)(2)(A) of the Investment Company Act of 1940 (the “Investment Company
Act”) 1 limits the remuneration a broker affiliated with a registered investment company (“fund”)
may receive in connection with the sale of securities to or by the fund or controlled company
thereof, to no more than “the usual and customary broker’s commission if the sale is effected on
a securities exchange.” 2 Rule 17e-1 under the Investment Company Act deems a remuneration
as “not exceeding the usual and customary broker’s commission” for purposes of Section
17(e)(2)(A) if, among other things, the fund’s board of directors has adopted procedures
reasonably designed to provide that the remuneration to the affiliated broker is reasonable and
fair amount compared to that received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a securities exchange during
a comparable period of time and the board makes and approves such changes as it deems
necessary. 3 In addition, each quarter, the board must determine that all transactions effected
under the rule during the preceding quarter complied with the established procedures (“review
requirement”). Rule 17e-1(d) also requires the fund to (i) maintain permanently a written copy
of the procedures adopted by the board for complying with the requirements of the rule; and (ii)
maintain for a period of six years, the first two in an easily accessible place, a written record of

1

15 U.S.C. 80a-1 et seq.

2

15. U.S.C. 80a-17(e)(2)(A).

3

17 CFR 270.17e-1.

each transaction subject to the rule setting forth the amount and source of the commission, fee, or
other remuneration received; the identity of the broker; the terms of the transaction; and the
materials used to determine that the transactions were effected in compliance with the procedures
adopted by the board (“recordkeeping requirement”).
Rule 17e-1 conditionally exempts funds from having to comply with the review
requirement and the recordkeeping requirement when an affiliated subadviser that serves as a
broker is not in a position to influence the fund’s decision to participate in the transaction. To
qualify for this exemption, rule 17e-1 requires, in part, that the advisory contracts of both the
subadviser that enters into the transaction, and the subadviser that recommends that the fund
engage in the transaction prohibit the subadvisers from consulting with one another concerning
securities transactions of the fund. 4 The rule’s conditions are designed to limit the exemptions to
those transactions in which the transacting subadviser has neither the ability nor the incentive to
influence the investment decision of the participating fund. 5
2.

Purpose of the Information Collection

The recordkeeping requirements under rule 17e-1 enable the Commission to ensure that
affiliated brokers receive compensation that does not exceed the usual and customary broker’s
commission. Without the recordkeeping requirements, Commission inspectors would have
difficulty ascertaining whether funds were complying with rule 17e-1. Commission rules also
require funds to amend their subadvisory contracts before they can rely on rule 17e-1’s
exemption to ensure that the subadviser that engages in the transaction does not influence the
fund’s decision to participate in the transaction.
4

See 17 CFR 270.17a-10(a)(2); 17 CFR 270.17e-1(b)(3); 17 CFR 270.17e-1(d)(2).

5

See Investment Company Act Release 25,888 (Jan. 14, 2003) [68 FR 3142, 3144 (Jan. 22, 2003)].

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3.

Role of Improved Information Technology

To the extent the rule includes recordkeeping requirements, the Electronic Signatures in
Global and National Commerce Act 6 and the conforming amendments to recordkeeping rules
under the Investment Company Act permit funds to maintain records electronically.
4.

Duplication

Section 31(a) of the Investment Company Act and rules 31a-1 and 31a-2 thereunder,
require investment companies to maintain and preserve records similar to those required to be
kept under rule 17e-1. Rule 17e-1 does not require that duplicate records be kept, but reiterates
the requirement to maintain and preserve such records. The requirements regarding limitations
in the subadvisers’ contracts are similar to conditions in exemptive rules 10f-3, 7 12d3-1, 8 and
17a-10. 9 To the extent that a fund relies on any one of these rules, its subadviser may use the
same contract language to satisfy the comparable condition in the other rules.
5.

Effect on Small Entities

The recordkeeping requirements of rule 17e-1 apply equally to all funds subject to the
rule, regardless of size. The burden on smaller investment companies may be greater than for
larger investment companies. This burden includes the cost of amending subadvisory contracts,
reviewing transactions, and maintaining records. The Commission believes, however, that
imposing different requirements on smaller investment companies would not be consistent with
investor protection and the purposes of the rule’s requirements. The Commission reviews all

6

P.L. 106-229, 114 Stat. 464 (June 30, 2000).

7

17 CFR 270.10f-3.

8

17 CFR 270.12d3-1.

9

17 CFR 270.17a-10.

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rules periodically, as required by the Regulatory Flexibility Act, to identify methods to minimize
recordkeeping or reporting requirements affecting small businesses.
6.

Consequences of Less Frequent Collection

Rule 17e-1(c) requires the investment company to (i) maintain permanently a written
copy of the procedures adopted by the board for complying with the requirements of the rule;
and (ii) maintain for a period of six years a written record of each transaction subject to the rule
setting forth the amount and source of the commission, fee, or other remuneration received; the
identity of the broker; the terms of the transaction; and the materials used to determine that the
transactions were effected in compliance with the procedures adopted by the board. Less
frequent recordkeeping requirements would impair the Commission's ability to ascertain
compliance with the rule. Rule 17e-1 also requires that a fund’s subadvisory contract either be
initially drafted or amended to qualify for the rule’s exemption. This is not a recurring
requirement; less frequent collection is not possible.
7.

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

Rule 17e-1 requires funds to preserve certain records for six years and other records
permanently. We believe that the long-term retention of records is necessary to carry out our
examination and enforcement responsibilities, and our mandate to ensure that the Investment
Company Act's provisions are legally enforceable. We periodically inspect the operations of
funds to ensure compliance with the rules and regulations under the Investment Company Act;
however, each fund may be inspected only at intervals of several years due to limits on our
resources. Furthermore, Congress has placed no time limit on the prosecution of persons
engaged in certain types of conduct that violate the securities laws. For these reasons, we often

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need information relating to events or transactions that occurred years ago. In Section 31(a) of
the Investment Company Act, Congress specifically authorized the Commission to require funds
to maintain and preserve books and records for such periods as the Commission may prescribe
by rules. 10 Computerized record storage has made long-term retention of records less
burdensome.
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 through public
conferences, meetings, and informal exchanges. These various forums provide the Commission
and the staff with a means of ascertaining and acting upon paperwork burdens confronting the
industry. The Commission requested public comment on the collection of information
requirements in rule 17e-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.
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Confidentiality

No assurance of confidentiality was provided.
11.

Sensitive Questions

No questions of a sensitive nature are involved. No PII is collected.

10

15 U.S.C. 80a-30(a).

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12.

Estimate of Time Burden

The following estimates of average burden hours and costs are made solely for purposes
of the Paperwork Reduction Act of 1995 11 and are not derived from a comprehensive or even
representative survey or study of the costs of Commission rules and forms.
Based on an analysis of fund filings, the staff estimates that approximately 320 funds
enter into subadvisory agreements each year. 12 Based on discussions with industry
representatives, the staff estimates that it will require approximately 3 attorney hours to draft and
execute additional clauses in new subadvisory contracts in order for funds and subadvisers to be
able to rely on the exemptions in rule 17e-1. Because these additional clauses are identical to the
clauses that a fund would need to insert in their subadvisory contracts to rely on rules 12d3-1,
10f-3, and 17a-10, and because we believe that funds that use one such rule generally use all of
these rules, we apportion this 3 hour time burden equally to all four rules. Therefore, we
estimate that the burden allocated to rule 17e-1 for this contract change would be 0.75 hours. 13
Assuming that all 320 funds enter into new subadvisory contracts each year make the
modification to their contract required by the rule, we estimate that the rule’s contract
modification requirement will result in 240 burden hours annually, with an associated cost of
approximately $91,200. 14

11

4 U.S.C. 3501 et seq.

12

Based on data from Morningstar, as of September, 2015, there are 12,426 registered funds (openend funds, closed-end funds, and exchange-traded funds), 4,683 funds of which have subadvisory
relationships (approximately 38%). Based on data from the 2015 ICI Factbook, 843 new funds
were established in 2014 (654 open-end funds + 176 exchange-traded funds + 13 closed-end
funds (from the ICI Research Perspective, April 2015)). 843 new funds x 38% = 320 funds.

13

3 hours ÷ 4 rules = 0.75 hours.

14

These estimates are based on the following calculations: (0.75 hours × 320 funds = 240 burden

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Based on an analysis of fund filings, we estimate that approximately 1,696 funds use at
least one affiliated broker. Based on staff experience and conversations with fund
representatives, the staff estimates approximately 40 percent of transactions (and thus, 40% of
funds) that occur under the rule 17e-1 would be exempt from its recordkeeping and review
requirements. This would leave approximately 1,018 funds 15 still subject to the rule’s
recordkeeping and review requirements. Based on staff experience and conversations with fund
representatives, we estimate that the burden of compliance with rule 17e-1 is approximately 50
hours per fund per year. This time is spent, for example, reviewing the applicable transactions
and maintaining records. Accordingly, we calculate the total estimated annual internal burden of
complying with the review and recordkeeping requirements of rule 17e-1 to be approximately
50,900 hours. 16
Of the 50,900 hours spent annually to comply with the review and recordkeeping
requirements of rule 17e-1, the Commission estimates that:
•

60 percent (30,540 hours) are spent by senior accountants, at an estimated hourly
wage of $198, 17 for a total of approximately $6,046,920 per year; 18

hours); ($380 per hour × 240 hours = $91,200 total cost). The Commission’s estimates
concerning the wage rates for attorney time are based on salary information for the securities
industry compiled by the Securities Industry and Financial Markets Association. The estimated
wage figure is based on published rates for in-house attorneys, modified to account for an 1,800hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and
overhead, yielding an effective hourly rate of $379. See Securities Industry and Financial
Markets Association, Report on Management & Professional Earnings in the Securities Industry
2013.
15

1,696 funds x 0.6 = 1,018 funds.

16

1,018 funds x 50 hours per fund = 50,900 hours.

17

The Commission’s estimates concerning the allocation of burden hours and the relevant wage
rates are based on consultations with industry representatives and on salary information for the
securities industry compiled by the Securities Industry and Financial Markets Association. The

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•

30 percent (15,270 hours) are spent by in-house attorneys at an estimated hourly
wage of $379, for a total of approximately $5,802,600 per year; 19 and

•

10 percent (5,090 hours) are spent by the funds’ board of directors at an hourly
cost of $4,400, for a total of approximately $22,396,000 per year. 20

Based on these estimated wage rates, the total cost to the industry of the hour burden for
complying with the review and recordkeeping requirements of rule 17e-1 is approximately
$34,245,520. 21 Accordingly, annual burden of the rule’s paperwork requirements is 51,140
hours, 22 at an estimated cost of $34,336,720. 23
13.

Estimate of Total Annual Cost Burden

There is no annual cost burden associated with complying with the information collection
requirements in rule 17e-1. The cost burden does not include the cost of the hour burden
discussed in Item 12 above.

estimated wage figures are also based on published rates for senior accountants and in-house
attorneys, modified to account for an 1800-hour work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits, and overhead, yielding effective hourly rates of $198 and
$380, respectively. See Securities Industry and Financial Markets Association, Report on
Management & Professional Earnings in the Securities Industry 2013.
18

30,540 hours x $198 per hour = $6,046,920.

19

15,270 hours x $380 per hour = $5,802,600.

20

5,090 hours x $4,400 per hour = $22,396,000. The estimate for the cost of board time as a whole
is derived from estimates made by the staff regarding typical board size and compensation that is
based on information received from fund representatives and publicly available sources.

21

$6,046,920 + $5,802,600 + $22,396,000 = $34,245,520.

22

240 hours + 50,900 hours = 51,140 hours.

23

$91,200 + $34,245,520 = $34,336,720.

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14.

Cost to the Federal Government

The rule does not require anything to be filed with the Commission. Commission staff
may, in the course of routine fund inspections, monitor compliance with the rule.
15.

Changes in Burden

The estimated hourly burden associated with rule 17e-1 has increased from 43,021 hours
to 51,140 hours (an increase of 8,119 hours). The net increase is due to an increase in the
estimated average annual hourly burden per fund, partially offset by (i) a decrease in the number
of funds estimated to enter into subadvisory agreements each year; and (ii) a decrease in the
number of funds estimated to use an affiliated broker.
16.

Information Collection Planned for Statistical Purposes

The results of any information collected will not be published.
17.

Approval to Omit OMB Expiration Date

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

Exceptions to Certification Statement

The Commission is not seeking an exception to the certification statement.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
The collection of information will not employ statistical methods.

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