38a-1 Supporting Statement (2017-06-01)

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 38a-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 38a-1 under the Investment Company Act of 1940 (“Investment Company Act”) 1 is
intended to protect investors by fostering better fund compliance with securities laws. 2 The rule
requires every registered investment company and business development company (“fund”) to:
(i) adopt and implement written policies and procedures reasonably designed to prevent
violations of the federal securities laws by the fund, including procedures for oversight of
compliance by each investment adviser, principal underwriter, administrator, and transfer agent
of the fund; (ii) obtain the fund board of directors’ approval of those policies and procedures and
the policies and procedures of each investment adviser, principal underwriter, administrator, and
transfer agent of the fund; (iii) annually review the adequacy of those policies and procedures
and the policies and procedures of each investment adviser, principal underwriter, administrator,
and transfer agent of the fund, and the effectiveness of their implementation; (iv) designate a
chief compliance officer to administer the fund’s policies and procedures and prepare an annual
report to the board that addresses certain specified items relating to the policies and procedures;
and (v) maintain for five years the compliance policies and procedures and the chief compliance
officer’s annual report to the board.

1

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

2

17 CFR 270.38a-1.

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2.

Purpose and Use of the Information Collection

The purpose of the information collection requirements in rule 38a-1 is to ensure that
funds maintain comprehensive, written internal compliance programs that promote compliance
with the federal securities laws. The information collections also assist the Commission’s
examination staff in assessing the adequacy of funds’ compliance programs.
3.

Consideration Given to Information Technology

Rule 38a-1 does not require the reporting of any information or the filing of any
documents with the Commission. Rule 38a-1 does require funds to maintain written policies and
procedures. Each fund also is required to maintain for at least five years a copy of the annual
compliance report provided to the fund’s board of directors. The Electronic Signatures in Global
and National Commerce Act 3 and the conforming amendments to rules under the Investment
Company Act permit funds to maintain records electronically.
4.

Duplication

Rule 38a-1 imposes a broad requirement that funds have in place written compliance
policies and procedures. Funds also are subject to certain requirements elsewhere in the federal
securities laws that require them to maintain written policies and procedures. The staff believes,
however, that any duplication of recordkeeping requirements is limited. Moreover, rule 38a-1
does not require funds to maintain duplicate copies of records covered by these more targeted
requirements, and a firm’s compliance policies and procedures are not required to be maintained
in a single location. The staff believes, therefore, that any duplication of regulatory requirements
does not impose significant additional costs on funds. The Commission periodically evaluates

3

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

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rule-based recordkeeping requirements for duplication and reevaluates them whenever it
proposes a rule or a change in a rule.
5.

Effect on Small Entities

Funds, regardless of their size, are subject to the requirements of rule 38a-1. Effective
internal compliance programs are essential for firms of all sizes. Rule 38a-1 affords funds the
flexibility to tailor their compliance program to the nature of their business. Small firms, which
generally have less complex and more limited operations, would likely need less extensive
compliance programs than their larger counterparts. Thus, rule 38a-1 does not inappropriately
burden small entities. The Commission believes that it could not adjust the rule to lessen the
burden on small entities of complying with the rule without jeopardizing the interests of
investors in small funds. 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.
6.

Consequences of Not Conducting Collection

Less frequent information collection would be incompatible with the objectives of rule
38a-1. The annual reviews required under rule 38a-1 are integral to detecting and correcting any
gaps in the program before irrevocable or widespread harm is inflicted upon investors, and
extending the time between reviews increases the likelihood that such harm could go unchecked.
7.

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

Rule 38a-1 would require funds and advisers to maintain their internal compliance
policies and procedures and documents related to the annual review of those policies and
procedures for at least five years. Although this period exceeds the three-year guideline for most
kinds of records under 5 CFR 1320.5(d)(2)(iv), the staff believes that this is warranted because

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the rule contributes to the effectiveness of the Commission’s examination and inspection
program. Because the period between examinations may be as long as five years, it is important
that the Commission have access to records that cover the entire period between examinations.
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 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
38a-1 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

No payment or gift to respondents was provided.
10.

Confidentiality

If information collected pursuant to rule 38a-1 is reviewed by the Commission’s
examination staff, it will be accorded the same level of confidentiality accorded to other
responses provided to the Commission in the context of its examination and oversight program.
11.

Sensitive Questions

No information of a sensitive nature will be required under this collection of information.
The information collection does not collect personally identifiable information (PII). The agency
has determined that a system of records notice (SORN) and privacy impact assessment (PIA) are
not required in connection with the collection of information.

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12.

Burden of Information Collection

The following estimates of average burden hours and costs are made solely for purposes
of the Paperwork Reduction Act of 1995 and are not derived from a comprehensive or even
representative survey or study of the costs of Commission rules. Compliance with rule 38a-1 is
mandatory for funds.
While rule 38a-1 requires each fund to maintain written policies and procedures, most
funds are located within a fund complex. The experience of the Commission’s examination and
oversight staff suggests that each fund in a complex is able to draw extensively from the fund
complex’s “master” compliance program to assemble appropriate compliance policies and
procedures. Many fund complexes already have written policies and procedures documenting
their compliance programs. Further, a fund needing to develop or revise policies and procedures
on one or more topics in order to achieve a comprehensive compliance program can draw on a
number of outlines and model programs available from a variety of industry representatives,
commentators, and organizations.
There are currently approximately 4,029 registered investment companies and 104
business development companies. 4 Thus, approximately 4,133 funds are currently subject to rule
38a-1. Among these funds, approximately 97 funds were newly registered in the past year.
These 97 funds, therefore, were required to adopt and document the policies and procedures that
make up their compliance programs. Commission staff estimates that the average hour burden
for a newly-registered fund to adopt and document these policies and procedures is 105 hours:
the fund board of directors, at an hourly rate of $4,500 for the board as a whole, performs an

4

These numbers are based on Commission filings and are current as of March 2017.

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estimated 4 burden hours; a chief compliance officer, at an hourly rate of $501, performs an
estimated 79 burden hours; and compliance clerks, at an hourly rate of $64, perform the
remaining 22 burden hours. 5 Thus, assuming that 97 funds register with the Commission each
year, the staff estimates that the aggregate annual hour burden associated with the adoption and
documentation requirement for newly-registered funds is 10,185 hours, 6 and the aggregate
annual cost of the burden hours associated with the adoption and documentation requirement is
$5,721,739. 7
All funds are required to conduct an annual review of the adequacy of their existing
policies and procedures and the policies and procedures of each investment adviser, principal
underwriter, administrator, and transfer agent of the fund, and the effectiveness of their
implementation. In addition, each fund chief compliance officer is required to prepare an annual
report that addresses the operation of the policies and procedures of the fund and the policies and
procedures of each investment adviser, principal underwriter, administrator, and transfer agent of
the fund, any material changes made to those policies and procedures since the date of the last
report, any material changes to the policies and procedures recommended as a result of the
annual review, and certain compliance matters that occurred since the date of the last report. The
staff estimates that each fund spends 49 hours per year, on average, conducting the annual
5

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, based on information received from fund
representatives and publicly-available sources. The rates for all the other occupations in this
statement are derived from the SIFMA Report on Management & Professional Earnings in the
Securities Industry 2013, modified to account for an 1800-hour work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead, and adjusted for inflation.

6

This estimate is based on the following calculation: 97 funds x 105 hours = 10,185 hours.

7

This estimate is based on the following calculations: (97 funds x 4 hours by board of directors for
adoption of policies and procedures x $4,500 per hour = $1,746,000) + (97 funds x 79 hours by
chief compliance officer for adoption and documentation of policies and procedures x $501 per
hour = $3,839,163) + (97 funds x 22 hours by clerical staff for adoption and documentation of
policies and procedures x $64 per hour = $136,576) = $5,721,739.

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review and preparing the annual report to the board of directors. The staff estimates that the
chief compliance officer performs 32 of these burden hours, at an hourly rate of $501.
Compliance clerks perform the remaining 17 hours of work, at an estimated hourly rate of $64.
Thus, the staff estimates that the aggregate annual hour burden associated with the annual review
and annual report requirements is 202,517 hours, 8 and the aggregate annual cost of the burden
hours associated with the annual review and annual report requirements is $70,756,960. 9
In addition, the staff estimates that each fund spends 6 hours annually maintaining the
records required by rule 38a-1. 10 Thus, the aggregate annual hour burden associated with the
recordkeeping requirement is 24,798 hours. 11 The staff estimates that the chief compliance
officer performs 2 of these burden hours, at an hourly rate of $501. Compliance clerks perform
the remaining 4 hours of work, at an estimated hourly rate of $64 per hour. Thus, the aggregate
annual cost of the burden hours associated with the recordkeeping requirement is $5,199,314. 12
In total, the staff estimates that the information collection under rule 38a-1 entails
237,500 aggregate annual burden hours. 13 The staff further estimates the aggregate annual cost

8

This estimate is based on the following calculation: 4,133 funds x 49 hours = 202,517 hours.

9

This estimate is based on the following calculations: (4,133 funds x 32 hours by chief compliance
officer for review and documentation of policies and procedures x $501 per hour = $66,260,256)
+ (4,133 funds x 17 hours by clerical staff for review and documentation of policies and
procedures x $64 per hour = $4,496,704) = $70,756,960.

10

These records are copies of the fund’s compliance policies and procedures and the annual report
provided to the fund board.

11

This estimate is based on the following calculation: 4,133 funds x 6 hours = 24,798 hours.

12

This estimate is based on the following calculations: (4,133 funds x 2 hours by chief compliance
officer for maintaining records x $501 per hour = $4,141,266) + (4,133 funds x 4 hours by
clerical staff for maintaining records x $64 per hour = $1,058,048) = $5,199,314.

13

This estimate is based on the following calculation: 10,185 hours adopting and documenting
policies and procedures + 202,517 hours reviewing policies and procedures and preparing annual
report + 24,798 hours maintaining records = = 237,500 hours.

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of those burden hours is $81,678,013. 14
13.

Cost to Respondents

The staff estimates that rule 38a-1 does not impose any material cost burdens on funds,
apart from the cost of the burden hours discussed above. Although rule 38a-1 requires funds to
maintain certain records for five years, these records may be maintained electronically and, even
if maintained in hard copy, are unlikely to be voluminous. The staff has not estimated a capital
cost in connection with the recordkeeping requirements because funds and their advisers likely
use existing recordkeeping systems to maintain the required compliance records.
14.

Cost to the Federal Government

Rule 38a-1 does not impose a cost on the federal government. Rule 38a-1 does not
require funds to file any documents with the Commission. Commission staff may, however,
review records produced pursuant to the rule in order to assist the Commission in carrying out its
examination and oversight program.
15.

Change in Burden

The estimated total annual burden hours decreased 26,131 hours, from 263,631 hours to
237,500 hours. This decrease in burden hours is attributable to changes in the number of
registrants and the completion of certain one-time compliance burdens.
16.

Information Collection Planned for Statistical Purposes
Not applicable.

17.

Approval to Omit OMB Expiration Date
Not applicable.

14

This estimate is based on the following calculation: $5,721,739 (cost of adopting policies and
procedures) + $70,756,960 (cost of reviewing policies and procedures and preparing annual
report) + $5,199,314 (cost of maintaining records) = $81,678,013.

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18.

Exceptions to Certification Statement for Paperwork Reduction Act

Submission
Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.