Supporting_Statement_2018__Rpts_of_Evidence_of_Material_Violations

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
“REPORTS OF EVIDENCE OF MATERIAL VIOLATIONS”
This submission is pursuant to the Paperwork Reduction Act of 1995, 44 U.S.C. Section 3501 et
seq.
A.

Justification
1, 2.

Necessity of Information Collection, Purpose and Use

On February 6, 2003, the Commission published final rules, effective August 5, 2003,
entitled “Standards of Professional Conduct for Attorneys Appearing and Practicing Before the
Commission in the Representation of an Issuer” (17 CFR 205.1-205.7). The information
collection embedded in the rules is necessary to implement the Standards of Professional
Conduct for Attorneys prescribed by the rule and required by Section 307 of the Sarbanes-Oxley
Act of 2002 (15 U.S.C. 7245). The rules impose an “up-the-ladder” reporting requirement when
attorneys appearing and practicing before the Commission become aware of evidence of a
material violation by the issuer or any officer, director, employee, or agent of the issuer. An
issuer may choose to establish a qualified legal compliance committee (“QLCC”) as an
alternative procedure for reporting evidence of a material violation. In the rare cases in which a
majority of a QLCC has concluded that an issuer did not act appropriately, the information may
be communicated to the Commission. The collection of information is, therefore, an important
component of the Commission’s program to discourage violations of the federal securities laws
and promote ethical behavior of attorneys appearing and practicing before the Commission.
The collection of information provides a means for issuers to make sure that they are
apprised of necessary information concerning evidence of violations by officers, directors,
employees or agents of the issuer. If the information collection were not required, issuers might
not have access to as much of this information. Consequently, corporate fraud might not be
discovered as rapidly. This could have negative effects on the issuer, as well as on the economy
as a whole.
The rules were promulgated under the authority set forth in Section 19 of the Securities
Act of 1933, Sections 3(b), 4C, 13, and 23(a) of the Securities Exchange Act of 1934, Sections
38 and 39 of the Investment Company Act of 1940, Section 211 of the Investment Advisers Act
of 1940, and Sections 3(a), 307 and 404 of the Sarbanes-Oxley Act of 2002.

3.

Consideration Given to Information Technology

The rule does not require or prohibit the use of any particular technology to fulfill the
collection of information requirements.

4.

Duplication

The collection of information will not duplicate existing information.
5.

Effect on Small Entities

The information collection will affect small as well as larger entities. As described
below, we believe that the burden of complying with the collection of information will be very
low for all entities, regardless of size.
6.

Consequences of Not Conducting Collection

The rules do not require periodic disclosures. Whether an issuer must comply with some
aspect of the collection of information depends entirely upon the issuer as well as on external
circumstances.
7.

Inconsistencies with Guidelines in 5 CFR 1320.8(d)

The collection of information required by Rule 15c2-7 is conducted in a manner
consistent with the guidelines of 5 CFR 1320.8(d).
8.

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.
9.

Payment or Gift to Respondents

Not applicable.
10.

Confidentiality

Not applicable. No assurance of confidentiality is provided.
11.

Sensitive Questions

Not applicable. No questions of a sensitive nature are asked.
12, 13. Reporting Time Burden and Total Annualized Cost Burden
The rules impose an “up-the-ladder” reporting requirement when attorneys appearing and
practicing before the Commission become aware of evidence of a material violation by the issuer
or any officer, director, employee, or agent of the issuer. An attorney must report such evidence
to the issuer’s chief legal officer (“CLO”) or to both the chief legal officer and chief executive
officer (“CEO”). 1
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A subordinate attorney complies with the proposed rules if he or she reports evidence of a material

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The chief legal officer (or the equivalent thereof) shall cause such inquiry into the
evidence of a material violation as he or she reasonably believes is appropriate to determine
whether the material violation described in the report has occurred, is ongoing, or is about to
occur. If the CLO, after investigation, reasonably believes that there is no violation, he or she
must so advise the reporting attorney. If the CLO reasonably believes that there is a violation, he
or she shall take all reasonable steps to cause the issuer to adopt an appropriate response, and
shall advise the reporting attorney thereof. In lieu of causing an inquiry, a chief legal officer (or
the equivalent thereof) may refer a report of evidence of a material violation to a QLCC if the
issuer has established a QLCC prior to the report of evidence of a material violation. The rules
also require attorneys to take certain steps if the CLO or CEO does not provide an appropriate
response to a report of evidence of a violation, including reporting the evidence to the audit
committee, another committee of independent directors, or the full board of directors.
The respondents to this collection of information are attorneys who appear and practice
before the Commission and, in certain cases, the issuer, and/or officers, directors and committees
of the issuer. We believe that, in providing quality representation to issuers, attorneys report
evidence of violations to others within the issuer, including the CLO, the CEO, and, where
necessary, the directors. In addition, officers and directors investigate evidence of violations and
report within the issuer the results of the investigation and the remedial steps they have taken or
sanctions they have imposed. Except as discussed below, we therefore believe that the reporting
requirements imposed by the rules are “usual and customary” activities that do not add to the
burden that would be imposed by the collection of information.
Certain aspects of the collection of information, however, may impose a burden. For an
issuer to establish a QLCC, the QLCC must adopt written procedures for the confidential receipt,
retention, and consideration of any report of evidence of a material violation. We estimate for
purposes of the PRA that there are approximately 10,712 issuers that are subject to the rules. 2 Of
these, we estimate that approximately 319, which is approximately 3 percent, have established or
will establish a QLCC. 3 Establishing the written procedures required by the rule should not
impose a significant burden. We assume that an issuer would incur a greater burden in the year
that it first establishes the procedures than in subsequent years, in which the burden would be
incurred in updating, reviewing, or modifying the procedures. For purposes of the PRA, we
assume that an issuer would spend 6 hours every three-year period on the procedures. This
would result in an average burden of 2 hours per year. Thus, we estimate for purposes of the
PRA that the total annual burden imposed by the collection of information would be 638 hours.
Assuming half of the burden hours will be incurred by outside counsel at a rate of $500 per hour
would result in a cost of $159,500.
violation to his or her supervisory attorney (who is then responsible to comply with the rules’ requirements). A
subordinate attorney may also take the other steps described in the rules if the supervisor fails to comply.
2

This figure is based on the estimated 7,625 operating companies that filed annual reports on Form 10-K,
Form 20-F, or Form 40-F during the 2017 calendar year, and the estimated 3,087 investment companies that filed
periodic reports on Form N-SAR during that same time period.

3

This estimate is based on issuer-filings made with the Commission between January 1, 2015 and March 18,
2018 that include a reference to the issuer’s QLCC.

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14.

Cost to the Federal Government
De minimis.

15.

Changes in Burden

Indications are that since the 2014 estimate of the percentage of issuers that would
establish QLCCs (3.3 percent), a slightly smaller percentage of additional issuers have
established QLCCs. Our updated estimate in the percentage of QLCCs (approximately 3
percent) results in a decreased burden estimate as compared to the previously-approved
collection.
16.

Information Collections Planned for Statistical Purposes

Not applicable. There are no plans to require the publication of these records in
the future.
17.

Approval to Omit OMB Expiration Date

Not applicable. The Commission is not seeking to omit the display of the OMB
expiration date.
B.

Collection of Information Employing Statistical Methods
Not applicable.

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