Rule 17f-7 Supporting Statement (2019)

OMB Control Number: 3235-0529
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 17f-7
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 17f-7 under the Investment Company Act of 1940 (the “Act”) 1 governs the custody
of the assets of registered management investment companies (“funds”) with a foreign securities
depository outside the United States. 2 Rule 17f-7 permits a fund under certain conditions to
maintain its foreign assets with an eligible securities depository, which has to meet minimum
standards for a depository. The fund or its investment adviser generally determines whether the
depository complies with those requirements based on information provided by the fund’s
primary custodian (a bank that acts as global custodian). The depository custody arrangement
also must meet certain conditions. The fund or its adviser must receive from the primary
custodian (or its agent) an initial risk analysis of the depository arrangements, and the fund’s
contract with its primary custodian must state that the custodian will monitor risks and promptly
notify the fund or its adviser of material changes in risks. The primary custodian and other
custodians also are required to agree to exercise at least reasonable care, prudence, and diligence.
2.

Purpose and Use of the Information Collection

The collection of information requirements in rule 17f-7 are intended to provide workable
standards that protect funds from the risks of using foreign securities depositories while assigning
appropriate responsibilities to the fund’s primary custodian and investment adviser based on their
capabilities. The requirement that the foreign securities depository meet specified minimum
1

15 U.S.C. 80a.

2

17 CFR 270.17f-7.

standards is intended to ensure that the depository is subject to basic safeguards deemed
appropriate for all depositories. The requirement that the fund or its adviser must receive from
the primary custodian (or its agent) an initial risk analysis of the depository arrangements, and
that the fund’s contract with its primary custodian must state that the custodian will monitor risks
and promptly notify the fund or its adviser of material changes in risks, is intended to provide
essential information about custody risks to the fund’s investment adviser as necessary for it to
approve the continued use of the depository. The requirement that the primary custodian agree to
exercise reasonable care is intended to provide assurances that its services and the information it
provides will meet an appropriate standard of care.
3.

Consideration Given to Information Technology

Although rule 17f-7 does not require the filing of any documents with the Commission,
rule 31a-2(f) under the Act permits funds to maintain many types of records on micrographic and
electronic storage media.
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. Rule 17f-7 does not require duplicative reporting or recordkeeping.
5.

Effect on Small Entities

The current requirements do not distinguish between small entities and other entities.
The proportionate burden on small entities may be greater than for larger entities due to
economies of scale. This burden would include, for example, the preparation of a risk analysis
and ongoing risk monitoring. The Commission considered special requirements for small
entities. The Commission believes, however, that imposing different requirements on smaller

entities would not be consistent with investor protection. 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

Rule 17f-7’s reporting requirements apply only upon the occurrence of material changes
in the custody risks associated with maintaining the fund’s assets with a foreign securities
depository. Some custody arrangements, such as arrangements with less established foreign
depositories, may require more frequent reporting than other arrangements. Less frequent
collection could lead to increased risks related to foreign custody arrangements.
7.

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

The 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 fund 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 of rule
17f-7 before it submitted this request for extension and approval to the Office of Management
and Budget (“OMB”). The Commission received no comments in response to its 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 PII collected/Not applicable. A System of Records Notice for applications under the
Investment Company Act can be found at https://www.sec.gov/about/privacy/sorn/secsorn2.pdf.
12.

Burden of Information Collection

The following estimates of average burden hours are made solely for the purposes of the
Paperwork Reduction Act of 1995 3 and are not derived from a comprehensive or even
representative survey or study of the costs of Commission rules and forms. Compliance with the
collection of information requirements of rule 17f-7 is necessary to obtain the benefit of relying
on the rule’s permission for funds to maintain their assets in foreign custodians. No assurance of
confidentiality is provided.
The burden hour estimate is based on consultations with industry representatives and on
the Commission’s experience. The number of burden hours may vary depending on, among
other things, the number of foreign custodians. The staff estimates that each of approximately
960 investment advisers 4 will make an average of 8 responses annually under the rule to address
depository compliance with minimum requirements, any indemnification or insurance
arrangements, and reviews of risk analyses or notifications. The staff estimates each response
will take 6 hours, requiring a total of approximately 48 hours for each adviser. 5 Thus the total
annual burden associated with these requirements of the rule is approximately 46,080 hours. 6
Based on a Commission estimate of 46,080 hours and an estimated wage rate of approximately
3

44 U.S.C. 3501 – 3521.

4

In October 2019, Commission staff estimated that 960 investment advisers managed or sponsored
open-end registered funds (including exchange-traded funds) and closed-end registered funds.

5

8 responses per adviser x 6 hours per response = 48 hours per adviser.

6

960 advisers x 48 hours per adviser = 46,080 hours.

$309 per hour, 7 the total cost to the industry of this hour burden is approximately $14,238,720. 8
The staff further estimates that during each year, each of approximately 40 global
custodians will make an average of 4 responses to analyze custody risks and provide notice of
any material changes to custody risk under the rule. The staff estimates that each response will
take 260 hours, requiring approximately 1,040 hours annually per global custodian. 9 Thus the
total annual burden associated with these requirements is approximately 41,600 hours. 10 Based
on this estimate of 41,600 hours and an estimated wage rate of approximately $233 per hour, the
total cost to the industry of this hour burden is approximately $9,692,800. 11
The total annual hour burden associated with all collection of information requirements of
the rule is therefore 87,680 hours, 12 and the total cost to the industry of the hour burden is
approximately $23,931,520. 13 Information related to the estimated total burden is also
summarized in the table below.

7

The Commission’s estimated relevant wage rates are from SIFMA’s Management & Professional
Earnings in the Securities Industry 2013, modified to account for an 1800-hour work-year and
inflation (as of January 2019) and multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead. These estimates yield effective hourly wage figures for compliance
managers and trust administrators of $309 and $233, respectively.

8

46,080 hours x $309 per hour = $14,238,720.

9

260 hours per response x 4 responses per global custodian = 1,040 hours per global custodian.

10

40 global custodians x 1,040 hours per global custodian = 41,600 hours.

11

41,600 hours x $233 per hour = $9,692,800.

12

46,080 hours + 41,600 hours = 87,680 hours.

13

$14,238,720 + $9,692,800= $23,931,520.

Summary of Revised Annual Responses, Burden Hours, and Cost Estimates
IC Title

Annual No. of Responses
Previously Requested
Change
approved

Annual Time Burden (Hrs.)
Previously Requested
Change
approved

External Cost to Respondents ($)
Previously
Requested
Change
approved

Rule 17f-7

8 per
investment
adviser;
4 per
global
custodian

63,216

0

13.

8 per
investment
adviser;
4 per
global
custodian

0

87,680

+24,464

0

0

Cost to Respondents

Cost burden is the cost of services purchased to comply with rule 17f-7, such as for the
services of computer programmers or outside legal counsel. 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. The Commission currently attributes no external cost burden to rule
17f-7.
14.

Cost to the Federal Government

The rule imposes no costs associated with filing reports or any other costs to the Federal
government.
15.

Change in Burden

The estimated hourly burden associated with rule 17f-7 has increased from 63,216 to
87,680 (an increase of 24,464 hours). The increase is due to an increase in the estimate of the
number of global custodians making responses under rule 17f-7.
16.

Information Collection Planned for Statistical Purposes

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

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to not display the expiration date for OMB

approval.
18.
Submission

Exceptions to Certification Statement for Paperwork Reduction Act

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.