Derivatives Proposal - Rule 6c-11 PRA Supporting Statement

OMB CONTROL NUMBER: 3235-0764

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 6c-11
A. JUSTIFICATION
1. Necessity for the Information Collection
Rule 6c-11 1 under the Investment Company Act of 1940 (the “Act”) permits
exchange-traded funds (“ETFs”) that satisfy certain conditions to operate without
first obtaining an exemptive order from the Commission. The rule was designed to
create a consistent, transparent, and efficient regulatory framework for ETFs and
facilitate greater competition and innovation among ETFs. Rule 6c-11 requires an
ETF to disclose certain information on its website, to maintain certain records, and
to adopt and implement written policies and procedures governing its constructions
of baskets, as well as written policies and procedures that set forth detailed
parameters for the construction and acceptance of custom baskets that are in the best
interests of the ETF and its shareholders. These requirements are “collection of
information” within the meaning of the Paperwork Reduction Act of 1995 (“PRA”). 2
The information collection is integral to the framework of rule 6c-11 and therefore
necessary to help further the rule’s aforementioned goals. The information collection
also will assist the Commission’s examination staff in assessing ETFs’ compliance
with the conditions of rule 6c-11. Rule 6c-11 includes a provision excluding
“leveraged/inverse ETFs” from the scope of ETFs that may rely on the rule. The
rule defines “leveraged/inverse ETF” to mean an ETF that seeks, directly or
indirectly, to provide investment returns over a predetermined period of time that: (i)
correspond to the performance of a market index by a specified multiple; or (ii) have
an inverse relationship to the performance of a market index (including by an inverse
multiple).
On November 25, 2019, the Commission proposed rule 18f-4 under the Act. 3
The proposed rule would apply to mutual funds (other than money market funds),
ETFs, registered closed-end funds, and companies that have elected to be treated as
business development companies under the Act (collectively, “funds”). It would
1

17 CFR 270.6c-11.

2

See 44 U.S.C. 3501 through 3521.

3

See Use of Derivatives by Registered Investment Companies and Business Development
Companies; Required Due Diligence by Broker-Dealers and Registered Investment
Advisers Regarding Retail Customers’ Transactions in Certain Leveraged/Inverse
Investment Vehicles, Investment Company Act Release No. 33704 (Nov. 25, 2019)
(“Derivatives Proposing Release”).

permit these funds to enter into derivatives transactions and certain other
transactions, notwithstanding the restrictions under sections 18 and 61 of the Act,
provided that the funds comply with the conditions of the rule.
Funds that are not “limited derivatives users” under the proposed rule would be
required to comply with an outer limit on fund leverage risk. Most leveraged/inverse
ETFs would not be able to satisfy the limit on fund leverage risk due to their
investment strategies. Proposed rule 18f-4 would not require a leveraged/inverse
ETF (or certain other leveraged/inverse funds) to comply with the limit on fund
leverage risk, provided that the fund satisfies an alternative set of conditions under
the proposed rule. Specifically, such a fund would have to: (i) meet the definition of a
“leveraged/inverse investment vehicle” in proposed rules 15l-2 under the Securities
Exchange Act of 1934 or 211(h)-1 under the Investment Advisers Act of 1940, as
applicable (together, the “sales practices rules”), which the Commission also
proposed on November 25, 2019; (ii) limit the investment results in seeks to 300% of
the return (or inverse of the return) of the underlying index; and (iii) disclose in its
prospectus that it is not subject to the proposed rule 18f-4 limit on fund leverage risk.
In view of proposed rule 18f-4 and the proposed sales practice rules, which are
designed to create an updated and more comprehensive regulatory framework for the
use of derivatives by funds, including provisions specifically applicable to
leveraged/inverse ETFs, the Commission also proposed to amend rule 6c-11 to
remove the provision excluding leveraged/inverse ETFs from the scope of that rule
one year following the publication of the final amendments in the Federal Register. 4
Accordingly, leveraged/inverse ETFs would be permitted to rely on rule 6c-11 and,
in turn, be subject to the rule’s requirements, including the collections of information
under the rule.
2. Purpose and Use of the Information Collection
The collection of information under rule 6c-11 is integral to the framework of rule
6c-11 and therefore necessary to help further the rule’s goals of creating a consistent,
transparent, and efficient regulatory framework for ETFs, including
leveraged/inverse ETFs, and facilitating greater competition and innovation among
ETFs. The information collection also will assist the Commission’s examination staff
in assessing ETFs’ compliance with the conditions of rule 6c-11. The respondents to
rule 6c-11 are ETFs registered as open-end management investment companies other
than share-class ETFs, leveraged/inverse ETFs, or non-transparent ETFs.

4

See id.

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3. Consideration Given to Information Technology
Rule 6c-11 does not require the reporting of any information or the filing of any
documents with the Commission. The Electronic Signatures in Global and National
Commerce Act 5 and conforming amendments to rules under the Investment
Advisers Act of 1940 permit ETF advisers to maintain records electronically.
4. Duplication
The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication and reevaluates them whenever it adopts a new rule or
a change to a rule. The information collection that is required by the proposed
amendment to rule 6c-11 is not duplicated elsewhere.
5. Effect on Small Entities
The information collection requirements of rule 6c-11 do not distinguish between
small entities and other entities. We do not believe that exempting any subset of
ETFs, including small entities, from rule 6c-11 would permit the Commission to
achieve its stated objectives. Similarly, the Commission does not believe that it can
establish simplified or consolidated compliance requirements for small entities under
the rule without compromising its objectives. The conditions necessary to rely on
rule 6c-11 are designed to provide investor protection benefits. These benefits should
apply to investors in smaller funds as well as investors in larger funds.
Finally, the Commission believes that rule 6c-11 appropriately uses a
combination of performance and design standards. Rule 6c-11 provides ETFs that
satisfy the requirements of the rule with exemptions from certain provisions of the
Act necessary for ETFs to operate. Because the provisions of the Act from which
ETFs would be exempt provide important investor and market protections, the
conditions of the rule must be specifically designed to ensure that these investor and
market protections are maintained. However, where the Commission believes that
flexibility is beneficial, it adopted performance-based standards that provide a
regulatory framework, rather than prescriptive requirements, to give funds the
opportunity to adopt policies and procedures tailored to their specific needs without
raising investor or market protection concerns.
6. Consequences of Not Conducting Collection
The collection of information under rule 6c-11 is integral to the framework of rule
6c-11 and therefore necessary to help further the rule’s goals of creating a consistent,
5

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

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transparent, and efficient regulatory framework for such ETFs and facilitating greater
competition and innovation among ETFs. Thus, not requiring this collection of
information would be incompatible with the goals of rule 6c-11.
7. Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)
Rule 6c-11 requires ETFs to preserve and maintain copies of all written
authorized participant agreements ETFs. Additionally, rule 6c-11 requires ETFs to
maintain records setting forth the following information for each basket exchanged
with an authorized participant: (i) the names and quantities of the positions
composing the basket; (ii) identification of the basket as a “custom basket” and a
record stating that the custom basket complies with the ETF’s custom basket policies
and procedures (if applicable); (iii) cash balancing amounts (if any); and (iv) the
identity of the authorized participant conducting the transaction. ETFs have to
maintain these records for at least five years, the first two years in an easily accessible
place. Although this five-year period exceeds the three-year guideline for most kinds
of records under 5 CFR 1320.5(d)(2), the Commission believes that this is warranted
because 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
various forums provide the Commission and the staff with a means of ascertaining
and acting upon paperwork burdens confronting the industry. Before adopting the
proposed amendment to rule 6c-11, the Commission will receive and evaluate public
comments on the proposal and its collection of information requirements.
9. Payment or Gift
No payment or gift to respondents was provided.
10. Confidentiality
Responses provided to the Commission in connection with staff examinations or
investigations would be kept confidential subject to the provisions of applicable law.
If information collected pursuant to rule 6c-11 is reviewed by the Commission’s
examination staff, it will be accorded the same level of confidentiality accorded to

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other responses provided to the Commission in the context of its examination and
oversight program.
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. Estimate of Hour Burden
The following estimates of average burden hours and costs are made solely for
purposes of the Paperwork Reduction Act and are not derived from a comprehensive
or even representative survey or study of the cost of Commission rules and forms. 6
Rule 6c-11 requires an ETF to disclose certain information on its website, to
maintain certain records, and to adopt and implement written policies and
procedures governing its constructions of baskets, as well as written policies and
procedures that set forth detailed parameters for the construction and acceptance of
custom baskets that are in the best interests of the ETF and its shareholders. These
requirements are collections of information under the PRA.
The current respondents to rule 6c-11 are ETFs registered as open-end
management investment companies other than share-class ETFs, leveraged/inverse
ETFs, or non-transparent ETFs. This collection is not mandatory, but is necessary
for those ETFs seeking to operate without individual exemptive orders.
Under current PRA estimates, 1,735 ETFs would be subject to these
requirements. The current PRA estimates for rule 6c-11 include 74,466.2 total
internal burden hours, $24,771,740.10 in internal time costs, and $1,735,000 in
external time costs.
The Commission believes that the current annual burden and cost estimates for
rule 6c-11 are appropriate, but estimates that the proposed amendment to rule 6c-11
6

The Commission’s estimates of the relevant wage rates in the tables below are based on
salary information for the securities industry compiled by the Securities Industry and
Financial Markets Association’s Office Salaries in the Securities Industry 2013. The
estimated wage figures are modified by Commission staff to account for an 1,800-hour
work-year and multiplied by 2.93 to account for bonuses, firm size, employee benefits,
overhead, and adjusted to account for the effects of inflation. See Securities Industry and
Financial Markets Association, Report on Management & Professional Earnings in the
Securities Industry 2013.

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would result in an increase in the number of respondents. Specifically, the
Commission estimates that an additional 164 ETFs (all leveraged/inverse ETFs)
would rely on rule 6c-11, resulting in an increase in the number of respondents to
1,899 ETFs. 7 Table 1 below summarizes these revisions to the estimated annual
responses, burden hours, and burden-hour costs based on the proposed amendment
to rule 6c-11.

7

See Derivatives Proposing Release, supra note 3, at n.467 and accompanying text.

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Table 1: Rule 6c-11 PRA Estimates
Previously estimated

Updated estimated

Previously estimated

Updated estimated

Previously estimated

Updated estimated

annual internal hour

annual internal hour

annual internal burden

annual internal time

annual external cost

annual external cost

burden1

burden2

time cost

burden cost

burden

burden

Website disclosure

33,398.75 hours

36,555.75 hours

$10,717,945.15

$11,731,053.51

$1,735,000

$1,899,000

Recordkeeping

8,675 hours

9,495 hours

$680,987.50

$745,357.50

$0

$0

Policies and
procedures

32,392.45 hours

35,454.33 hours

$13,372,807.45

$14,636,865.33

$0

$0

Total annual burden

74,466.2 hours

81,505.08 hours

$24,771,740.10

$27,113,276.34

$1,735,000

$1,899,000

÷ 1,735

÷ 1,899

÷ 1,735

÷ 1,899

÷ 1,735

÷ 1,899

42.92 hours

42.92 hours

$14,277.66

$14,277.66

$1,000

$1,000

Number of affected
ETFs
Average annual
burden per ETF

Notes:
1. The previously estimated burdens and costs in this table are based on an estimate of 1,735 ETFs relying on rule 6c-11.
2. The updated estimated burdens and costs in this table are based on an estimate of 164 leveraged/inverse ETFs that would rely on rule 6c-11 pursuant to the proposed amendment to
that rule, for a total estimate of 1,899 ETFs that would rely on rule 6c-11.

13. Cost to Respondents
As shown in Table 1 above, the estimated external cost burden is the estimated
cost associated with ETFs consulting outside professionals to assist with website
development relating to new website disclosures. The current estimate of the initial
external cost is $3,000 for an external website developer to develop the webpage.
Commission staff does not believe there will be any ongoing external costs related to
the website disclosure requirements. Amortized over a 3-year period, the external
cost is approximately $1,000. The Commission estimates that an additional 164
ETFs would rely on rule 6c-11, resulting in an increase in the number of respondents
to 1,899 ETFs from 1,735 ETFs. Accordingly, the Commission estimates that the
total external cost related to the website disclosures would be $1,899,000. We
estimate that the costs related to rule 6c-11’s recordkeeping and policies and
procedures requirements are fully captured as internal hour burdens in Item 12.
14. Costs to Federal Government
The annual cost of reviewing and processing disclosure documents, including
new registration statements, post-effective amendments, proxy statements,
shareholder reports, and other filings of investment companies amounted to
approximately $22.2 million in fiscal year 2018, based on the Commission’s
computation of the value of staff time devoted to this activity and related overhead.
15. Changes in Burden
The total annual hour burden of 81,505.08 hours represents an increase of
7,038.99 hours over the previous burden hour estimate of 74,466.2 hours. In
addition, the annual external cost burden of $1,899,000 represents an increase of
$164,000 over the previous annual external cost burden estimate of $1,735,000. The
changes in burden hours and external cost burdens are due to the staff’s estimates of
the time costs and external costs that would result from the proposed amendment to
rule 6c-11.
16. Information Collection Planned for Statistical Purposes
Not applicable.
17. Approval to Omit OMB Expiration Date
The Commission is not seeking approval to not display the expiration date for
OMB approval.
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18. Exceptions to Certification for Paperwork Reduction Act Submissions
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.

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