2018 Rule 10f-3 Supporting Statement

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 10f-3
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 10(f) of the Investment Company Act of 1940 (the “Act”) prohibits a registered
investment company (“fund”) from purchasing any security during an underwriting or selling
syndicate if the fund has certain relationships with a principal underwriter for the security. 1
Congress enacted this provision in 1940 to protect funds and their shareholders by preventing
underwriters from “dumping” unmarketable securities on affiliated funds.
Rule 10f-3 permits a fund to engage in a securities transaction that otherwise would
violate Section 10(f) if, among other things: (i) the fund’s directors have approved procedures
for purchases made in reliance on the rule, regularly review fund purchases to determine whether
they comply with these procedures, and approve necessary changes to the procedures; and (ii) a
written record of each transaction effected under the rule is maintained for six years, the first two
of which in an easily accessible place. 2
Rule 10f-3 also conditionally allows managed portions of fund portfolios to purchase
securities offered in otherwise off-limits primary offerings. To qualify for this exemption, rule
10f-3 requires that the subadviser that is advising the purchaser be contractually prohibited from
providing investment advice to any other portion of the fund’s portfolio and consulting with any

1

15 U.S.C. 80a-10(f).

2

17 CFR 270.10f-3. On June 1, 2018, Rule 10f-3 was amended to eliminate the requirement that
funds provide the Commission with reports on Form N-SAR regarding any transactions effected
pursuant to the rule. See Investment Company Reporting Modernization, Rel. No. IC-32314 (Oct.
13, 2016) ((https://www.sec.gov/rules/final/2016/33-10231.pdf).

other of the fund’s advisers that is a principal underwriter or affiliated person of a principal
underwriter concerning the fund’s securities transactions.
These requirements provide a mechanism for fund boards to oversee compliance with the
rule. The required recordkeeping facilitates the Commission staff’s review of Rule 10f-3
transactions during routine fund inspections and, when necessary, in connection with
enforcement actions.
2.

Purpose and Use of the Information Collection

The collection of information requirements of Rule 10f-3 are designed to limit
transactions under the rule to purchases that are consistent with the rule’s conditions for relief
and the board’s procedures governing such purchases. The purpose of requiring specific
subadvisory contract provisions is to ensure that the exemptive relief in the rule is limited to
circumstances when the subadviser that engages in the transaction does not influence the
investment decision of the fund to engage in the transaction. The records required to be
maintained are reviewed by the Commission in the course of its compliance and examination
program and are used by fund directors to evaluate transactions executed pursuant to the rule.
3.

Consideration Given to Information Technology
To the extent the rule includes recordkeeping requirements, the Electronic Signatures in

Global and National Commerce Act 3 and the conforming amendments to recordkeeping rules
under the Act permit funds to maintain records electronically.

3

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

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4.

Duplication

Rule 31a-1 under the Act requires the retention of ledger accounts for each portfolio
security and each person through which a portfolio transaction is effected. Although some of the
identifying information contained in the Rule 10f-3 transaction records may overlap with
information in the ledgers, the Rule 10f-3 records contain additional information specifically
related to the concerns underlying Section 10(f). The requirements regarding limitations in the
subadvisers’ contracts are similar to conditions in exemptive Rules 12d3-1, 4 17a-10, 5 and 17e-1. 6
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 Commission does not believe that compliance with Rule 10f-3 is unduly burdensome
for large or small entities. The information collection requirements of the rule apply to all funds
that rely on Rule 10f-3 to purchase securities regardless of whether they are small entities. The
requirements help to protect small and large funds alike from potential overreaching by affiliated
underwriters by aiding fund boards in overseeing Rule 10f-3 transactions and enabling the
Commission to fulfill its statutory mandate. 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 holders of securities of the small entities.
6.

Consequences of Not Conducting Collection

Records of transactions subject to Rule 10f-3 are created only when transactions take
place in reliance on the rule.

4

17 CFR 270.12d3-1.

5

17 CFR 270.17a-10.

6

17 CFR 270.17e-1.

The rule also requires the board of directors to adopt procedures

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for making purchases in reliance upon the rule, to review and change such procedures as
necessary, and to review Rule 10f-3 transactions quarterly for compliance with the rule. Less
frequent review could hinder a fund’s ability to take timely action to correct violations of the
Rule 10f-3 procedures adopted by the fund’s board.
7.

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

Rule 10f-3 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 Act's
provisions are legally enforceable. We periodically inspect the operations of funds to ensure
compliance with the rules and regulations under the 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 need information relating to events or
transactions that occurred years ago. In section 31(a) of the Act, 7 Congress specifically
authorized the Commission to require funds to “maintain and preserve” books and records “for
such period or periods as the Commission may prescribe by rules.” 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

7

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

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industry. The Commission requested public comment on the collection of information
requirements in rule 10f-3 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.

Confidentiality

Not applicable.
11.

Sensitive Questions

No information of a sensitive nature, including social security numbers, 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.
12.

Burden of Information Collection

The following estimates of average internal burden hours are made solely for the
purposes of the Paperwork Reduction Act. The estimates are not derived from a comprehensive
or even a representative survey or study of the costs of Commission rules.
The staff estimates that approximately 236 funds engage in a total of approximately 2,928
Rule 10f-3 transactions each year. 8 Rule 10f-3 requires that the purchasing fund create a written
record of each transaction that includes, among other things, information about from whom the

8

These estimates are based on staff extrapolations from filings with the Commission.

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securities were purchased and the terms of the transaction. The staff estimates 9 that it takes an
average fund approximately 30 minutes per transaction at a time cost of $123 per transaction to
document each transaction. 10 Thus, annually funds spend approximately 1464 hours 11 at a cost of
$360,144 documenting these transactions. 12
The funds also must maintain and preserve these transactional records in accordance with
the rule’s recordkeeping requirement, and the staff estimates that it takes a fund approximately
20 minutes per transaction at a time cost of $22 per transaction to comply with this part of the
rule. 13 The staff estimates that annually, in the aggregate, funds spend approximately 976 hours 14
at a cost of $65,392 to comply with Rule 10f-3’s recordkeeping requirements. 15
In addition, fund boards must, no less than quarterly, examine each of these transactions
to ensure that they comply with the fund’s policies and procedures. The information or materials
upon which the board relied in making its determination also must be maintained. The staff
estimates that it takes a fund 1 hour per quarter at a cost of $210 per quarter to comply with the

9

Unless stated otherwise, the information collection burden estimates contained in this Supporting
Statement are based on conversations between the staff and representatives of funds.

10

Typically, personnel from several departments, including portfolio management and compliance,
share this task. The staff estimates that the average hourly rate for a compliance clerk is $67, the
average hourly rate for an assistant compliance director is $353, and the average hourly rate for a
senior portfolio manager is $317, for a blended average hourly rate of $246. All hourly rates for
the occupations in this statement are from SIFMA's Management & Professional Earnings in the
Securities Industry (2013), modified by Commission staff to account for an 1800-hour work-year
and inflation and multiplied by 5.35 to account for bonuses, firm size, employee benefits and
overhead.

11

This estimate is based on the following calculation: (0.5 hours x 2,928 = 1,464 hours).

12

This estimate is based on the following calculation: (2,928 transactions x $123 = $360,144).

13

The wage figure of $22 is one third of an average compliance clerk’s salary of $67 per hour.

14

This estimate is based on the following calculations: (20 minutes x 2,928 transactions = 58,560
minutes; 58,560minutes / 60 = 976 hours).

15

This estimate is based on the following calculation: (976 hours x $67 = $65,392).

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maintenance requirement of the rule. 16 Thus annually, in the aggregate, funds spend
approximately 944 hours 17 at a cost of $198,240 to comply with this recordkeeping
requirement. 18
The staff further estimates that reviewing and revising as needed written procedures for
Rule 10f-3 transactions takes, on average for each fund, two hours of a compliance attorney’s
time at a cost of approximately $704 19 per year. 20 Thus, annually, in the aggregate, the staff
estimates that funds spend a total of approximately 472 hours 21 at a cost of approximately
$166,144 22 on monitoring and revising Rule 10f-3 procedures.
Based on an analysis of fund filings, the staff estimates that approximately 299 new fund
portfolios enter into subadvisory agreements each year. 23 Based on discussions with industry
representatives, the staff estimates that it will require approximately 3 attorney hours 24 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 10f-3. Because these additional clauses are identical to
16

The staff estimates that a compliance clerk spends half an hour, at $67 per hour, preparing the
report and a compliance attorney spends half an hour, at $352 per hour, reviewing the report for
an average wage figure of $210 per hour.

17

This estimate is based on the following calculation: (1 hour per quarter x 4 quarters x 236 funds =
944 hours).

18

This estimate is based on the following calculation: (944 hours x $210 = $198,240).

19

This estimate is based on the following calculation: (2 hours x $352 = $704).

20

These averages take into account the fact that in most years, fund attorneys and boards spend
little or no time modifying procedures and in other years, they spend significant time doing so.

21

This estimate is based on the following calculation: (236 funds x 2 hours = 472 hours).

22

This estimate is based on the following calculation: (236 funds x $704 = $166,144).

23

Industry data provides that on average, 808 new fund portfolios were created each year for the
past 3 years. Based on information in Commission filings, we estimate that 37 percent of funds
are advised by subadvisers. Assuming that the number of new funds that use the services of
subadvisers is proportionate to the number of funds that currently use the services of subadvisers,
approximately 299 new funds enter into subadvisory agreements each year. We understand that
existing funds may also enter into new subadvisory agreements, but in many cases would benefit
from having previously drafted rule 10f-3 clauses in prior or existing subadvisory contracts.

24

The staff estimates that the average hourly rate for an attorney is $401.

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the clauses that a fund would need to insert in their subadvisory contracts to rely on Rules 12d31, 17a-10, and 17e-1, 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 10f-3 for this contract change would be 0.75 hours. 25
Assuming that all 299 funds that 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 224 burden hours annually, with an associated cost of
approximately $89,824. 26
The staff estimates, therefore, that Rule 10f-3 imposes an annual information collection
burden of 4,080 hours 27 at a cost of $879,744. 28
13.

Cost to Respondents

Cost burden is the cost of services purchased to comply with rule 10f-3, such as for the
services of compliance personnel or counsel. The cost burden does not include the cost of the
internal hour burden discussed in Item 12 above. The Commission currently attributes no
external cost burden to rule 10f-3.
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.

25

This estimate is based on the following calculation (3 hours ÷ 4 rules = .75 hours).

26

These estimates are based on the following calculations: (0.75 hours × 299 portfolios = 224
burden hours); ($401 per hour × 224 hours = $89,824 total cost).

27

This estimate is based on the following calculation: (1,464 hours + 976 hours + 944 hours + 472
+ 224 hours = 4,080 total burden hours).

28

This estimate is based on the following calculation: ($360,144 + $65,392 + $198,240 + $166,144
+ $89,824 = $879,744).

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15.

Changes in Burden

The estimated annual burden hours increased by 20 hours (from 4,060 hours to 4,080
hours). The increase in hours reflects revised estimates, including an increase in the estimated
number of new fund portfolios entering into subadvisory agreements each year.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

No applicable.
18.

Exception to Certification Statement for Paperwork Reduction Act

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

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable because the collection of information will not employ statistical methods.

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