Rule 482 Supporting Statement (2017)

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 482
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Like most issuers of securities, when an investment company 1 (“fund”) offers its shares
to the public, its promotional efforts become subject to the advertising restrictions of the
Securities Act of 1933 (“Securities Act”). In recognition of the particular problems faced by
funds that continually offer securities and wish to advertise their securities, the Securities and
Exchange Commission (“Commission”) has previously adopted advertising safe harbor rules.
The most important of these is rule 482 adopted under the Securities Act, which, under certain
circumstances, permits funds to advertise investment performance data, as well as other
information (17 CFR 230.482). Rule 482 advertisements are deemed to be “prospectuses” under
Section 10(b) of the Securities Act. 2
Rule 482 contains certain requirements regarding the disclosure that funds are required to
provide in qualifying advertisements. These requirements are intended to encourage the
provision to investors of information that is balanced and informative, particularly in the area of
investment performance. For example, a fund is required to include disclosure advising
investors to consider the fund’s investment objectives, risks, charges, and expenses, and other
information described in the fund’s prospectus, and highlighting the availability of the fund’s
prospectus. In addition, rule 482 advertisements that include performance data of open-end
funds or insurance company separate accounts offering variable annuity contracts are required to

1

“Investment company” refers to both investment companies registered under the Investment Company Act
of 1940 (“Investment Company Act”) and business development companies.

2

15 U.S.C. 77j(b).

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include certain standardized performance information, information about any sales loads or other
nonrecurring fees, and a legend warning that past performance does not guarantee future results.
Such funds including performance information in rule 482 advertisements are also required to
make available to investors month-end performance figures via Web site disclosure or by a tollfree telephone number, and to disclose the availability of the month-end performance data in the
advertisement. The rule also sets forth requirements regarding the prominence of certain
disclosures, requirements regarding advertisements that make tax representations, requirements
regarding advertisements used prior to the effectiveness of the fund’s registration statement, and
requirements regarding the timeliness of performance data. In addition, rule 482(b) describes the
information that is required to be included in an advertisement, including a cautionary statement
under rule 482(b)(4) disclosing the particular risks associated with investing in a money market
fund.
2.

Purpose and Use of the Information Collection

Rule 482 advertisements must be filed with the Commission or, in the alternative, with
the Financial Industry Regulatory Authority (“FINRA”). 3 This information collection differs
from many other federal information collections that are primarily for the use and benefit of the
collecting agency.
Rule 482 contains requirements that are intended to encourage the provision to investors
of information that is balanced and informative, particularly in the area of investment
performance. The Commission is concerned that in the absence of such provisions fund

3

See rule 24b-3 under the Investment Company Act (17 CFR 270.24b-3), which provides that any sales
material, including rule 482 advertisements, shall be deemed filed with the Commission for purposes of
Section 24(b) of the Investment Company Act upon filing with FINRA.

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investors may be misled by deceptive rule 482 advertisements and may rely on less-thanadequate information when determining in which funds they should invest money. As a result,
the Commission believes it is beneficial for funds to provide investors with balanced information
in fund advertisement in order to allow investors to make better-informed decisions.
3.

Consideration Given to Information Technology

The Commission’s Electronic Data Gathering, Analysis and Retrieval System
(“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. EDGAR has increased the speed, accuracy and availability of information,
generating benefits to investors and financial markets. All funds have been required to use
EDGAR for their disclosure filings since November 6, 1995. The vast majority of fund
advertisements are filed with FINRA under Investment Company Act rule 24b-3, which allows
any sales material filed with FINRA to be deemed to be filed with the Commission. 4 Rule 482
advertisements that are required to be filed with the Commission are to be filed electronically on
EDGAR (17 CFR 232.101(a)(1)(i) and (iv)). 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.
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. The requirements of rule 482 are not generally duplicated elsewhere.

4

17 CFR 270.24b-3.

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5.

Effect on Small Entities

The Commission reviews all rules periodically, as required by the Regulatory Flexibility
Act, to identify methods to minimize recordkeeping or reporting requirements affecting small
businesses. The current disclosure requirements for fund advertisements do not distinguish
between small entities and other entities. To the extent smaller funds advertise, their burden to
prepare advertisements may be greater than for larger funds due to economies of scale. This
burden will include the cost of reviewing an advertisement to confirm that it meets the
requirements of rule 482.
The Commission considered special requirements for small entities. The Commission
believes, however, that imposing different requirements on smaller fund companies will not be
consistent with investor protection. The use of different standards for small entities may create a
risk that investors may receive false or misleading information. In addition, the Commission
believes that uniform disclosure standards for all fund advertisements allows investors to
compare funds more easily when making an investment decision. Allowing different standards
for small entities may create confusion for investors who wish to compare funds.
6.

Consequences of Not Conducting Collection

Since fund advertising is voluntary, the Commission does not determine the frequency
with which funds advertise pursuant to rule 482. Therefore, short of not requiring any collection
for advertisements governed by rule 482, the Commission cannot require less frequent collection.
Not requiring disclosure of the information required by rule 482 will harm investors by denying
them information that may be useful in making investment decisions. If such advertisements did
not contain this disclosure, investors could receive inadequate information or could receive
confusing, false, or misleading information. As a result, investor confidence in the securities
industry could be adversely affected.
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7.

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

This collection is not inconsistent with 5 CFR 1320.5(d)(2).
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 requirements in rule 482
before it submitted this request for revision 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.

Confidentiality

Not applicable.
11.

Sensitive Questions

No PII collected/not applicable.
12.

Burden of Information Collection

The burden hour estimate for complying with rule 482 is based on consultations with
industry representatives and on the Commission’s experience with the contents of disclosure
documents. The number of burden hours may vary depending on, among other things, the
complexity of the document, the number of funds included in a single document, and whether
preparation of the document is performed by fund staff or outside counsel. The number of funds
used to estimate the burden hours is an estimate based on the Commission’s statistics. The
estimates of average burden hours are made solely for purposes of the Paperwork Reduction Act
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of 1995 (“PRA”) 5 and are not derived from a comprehensive or representative survey or study of
the cost of Commission rules and forms.
Rule 482 is part of Regulation C under the Securities Act (17 CFR 230.400-498).
Regulation C describes the disclosure that must appear in the registration statements under the
Securities Act and Investment Company Act. However, the burden associated with rule 482 is
included within the collection entitled rule 482, and rule 482 is not considered part of Regulation
C for information collection purposes.
The Commission estimates that 53,907 6 responses to rule 482 are filed annually by 3,278
investment companies offering approximately 15,494 portfolios, or approximately 3.5 responses
per portfolio annually. 7 The burden associated with rule 482 is presently estimated to be 5.16
hours per response. The annual hourly burden is therefore approximately 278,161 hours. 8
Based on a Commission estimate of 278,161 hours and an estimated wage rate of
approximately $275.75 per hour, 9 the total cost to the industry of the hour burden for complying
with the requirements of rule 482 is $76,702,895.

5

44 U.S.C. 3501 et seq.

6

This estimated number of responses to rule 482 is composed of 53,746 responses filed with FINRA and
161 responses filed with the Commission in 2016.

7

53,907 responses ÷ 15,494 portfolios = 3.5 responses per portfolio.

8

53,907 responses x 5.16 hours per response = 278,161 hours.

9

This estimate is based on the hourly wage rates published in SIFMA’s Office Salaries in the Securities
Industry 2013 for compliance attorneys, paralegals, and senior compliance examiners, modified to account
for an 1800 hour work-year, multiplied by 5.35 to account for bonuses, firm size, employee benefits, and
overhead, and adjusted for inflation, yielding effective hourly rates of $340 for a compliance attorney, $202
for a paralegal, and $221 for a senior compliance examiner. The estimated wage rate is further based on
the estimate that attorneys would handle 50% of hours spent on advertising regulation and that paralegals
and compliance examiners would handle the remaining 50% in equal parts, yielding a weighted wage rate
of $275.75. ($340 x .50) + ($202 x .25) + ($221 x .25) = $275.75.

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13.

Cost to Respondents

Cost burden is the cost of services purchased to comply with rule 482, such as for the
services of computer programmers, outside counsel, financial printers, and advertising agencies.
The cost burden does not include the cost of the hour burden discussed in Item 12 above.
Estimates are based on the Commission’s experience with advertisements and sales literature.
The Commission currently attributes no external cost burden to rule 482.
14.

Cost to the Federal Government

Advertising regulation affects costs incurred by the federal government. Annually,
approximately 53,907 responses are filed annually pursuant to rule 482; however these responses
are generally filed with and reviewed by FINRA and are generally not reviewed by the
Commission.
15.

Change in Burden

Currently, the approved annual hour burden for rule 482 is 305,705 hours. The new
estimate of the total annual hour burden is 278,161 hours. This decrease of 27,544 hours is due
to a decrease in the number of annual responses pursuant to rule 482. There is no annual
external cost burden attributed to rule 482.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exception to Certification Statement for Paperwork Reduction Act
Submission

Not applicable.

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B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

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