PRA Supporting Statement (Rule 2a-5)

PRA Supporting Statement (Rule 2a-5).pdf

Rule 2a-5 under the Investment Company Act of 1940, Fair Value

OMB: 3235-0779

⚠️ Notice: This form may be outdated. More recent filings and information on OMB 3235-0779 can be found here:

Document [pdf]

Download: pdf | pdf

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 2a-5
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 2(a)(41) of the Investment Company Act of 1940 (“Investment Company Act”) 1
requires funds to value their portfolio investments using the market value of their portfolio
securities when market quotations for those securities are “readily available,” and, when a
market quotation for a portfolio security is not readily available, by using the fair value of that
security, as determined in good faith by the fund’s board. 2 The aggregate value of a fund’s
investments is the primary determinant of the fund’s net asset value (“NAV”), which for many
funds determines the price at which their shares are offered and redeemed (or repurchased). 3
Accordingly, proper valuation, among other things, promotes the purchase and sale of fund
shares at fair prices, and helps to avoid dilution of shareholder interests. 4
On April 21, 2020, the Commission issued a release proposing new rule 2a-5, which
would provide requirements for determining in good faith the fair value of the investments of a
registered investment company or companies that have elected to be treated as business
development companies under the Investment Company Act (“BDCs” and, collectively, “funds”)

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

15 U.S.C. 80a-2(a)(41). See also 17 CFR 270.2a-4.

See 15 U.S.C. 80a-22(c) and 23(c). See also 17 CFR 270.22c-1(a).

See Investment Company Liquidity Risk Management Programs, Investment Company Act
Release No. 32315 (Oct. 13, 2016) (“Liquidity Risk Management Release”) (adopting rule 22e-4
under the Investment Company Act and noting “the risk of shareholder dilution associated with
improper fund pricing”). See generally Investment Trusts and Investment Companies: Hearings
on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d
Sess. 136-38 (1940) (discussing the effect of dilution on fund shareholders).

for purposes of section 2(a)(41) of the Investment Company Act. 5 Under proposed rule 2a-5, the
determination of fair value in good faith would require the performance of certain functions,
which are: (1) assessing and managing material risks associated with fair value determinations;
(2) selecting, applying, and testing fair value methodologies; (3) overseeing and evaluating any
pricing services used; and (4) adopting and implementing policies and procedures (collectively,
the “Fair Value Functions”); as well as maintaining certain records. Proposed rule 2a-5 also
would permit a fund’s board of directors to assign the fair value determination for some or all of
the fund’s investments to an investment adviser to the fund. Upon such assignment by the board
of directors, the fund’s investment adviser would carry out the Fair Value Functions, subject to
board oversight and certain additional reporting, recordkeeping, and other requirements. These
requirements are designed to facilitate the board’s ability to oversee effectively the adviser’s fair
value determinations and satisfy the board’s obligation under the Act. The proposed rule also
would tailor its requirements to unit investment trusts, which do not have boards of directors.
Finally, the rule would define when market quotations are “readily available” under the Act, and
thus when securities must be fair valued.
Compliance with rule 2a-5 would be mandatory for any fund that would need to
determine fair value under the Act. To the extent that records would be required to be created
and maintained under the rule are provided to the Commission in connection with examinations
or investigations, such information would be kept confidential subject to the provisions of
applicable law.

See Good Faith Determinations of Fair Value, Investment Company Act Release No. 33845 (Apr.
21, 2020) (“Proposing Release”).

Purpose and Use of the Information Collection

Certain of the provisions of the proposed rule contain “collection of information”
requirements within the meaning on the Paperwork Reduction Act of 1995 (“Paperwork
Reduction Act”), 6 and the Commission is submitting the collection of information to the Office
of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d) and 5
CFR 1320.11. The proposed rule is designed to specify how a board or adviser must make good
faith determinations of fair value as well as when the board can assign this function to an adviser
to the fund, while still ensuring that fund investments are valued in a way consistent with the
Investment Company Act.
The information collection requirements of proposed rule 2a-5 are designed to protect
investors from improper valuations, reflect our view of current market best practices, and help
ensure compliance with other requirements. The information collection requirements are also
designed to ensure that the board effectively oversees an assigned adviser, including receiving
sufficient information to do so.
3.

Consideration Given to Information Technology

44 U.S.C. 3501 et seq.

whose fair value determination has been assigned to the adviser. The Electronic Signatures in
Global and National Commerce Act 7 and the conforming amendments to rules under the
Investment Company Act permit funds to maintain records electronically.
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. Proposed rule 2a-5 would provide requirements for determining fair value in good faith for
purposes of section 2(a)(41) and rule 2a-4 thereunder. This determination would involve
assessing and managing material risks associated with fair value determinations; selecting,
applying, and testing fair value methodologies; evaluating any pricing services used; adopting
and implementing policies and procedures; and maintaining certain records. The proposed rule
would permit a fund’s board of directors to assign the fair value determination relating to any or
all fund investments to an investment adviser of the fund, which would carry out all of these
requirements, subject to board oversight and certain reporting, recordkeeping, and other
requirements designed to facilitate the board’s ability effectively to oversee the adviser’s fair
value determinations. As relevant here, the rule would require, on a per fund basis, the adoption
and implementation of certain policies and procedures designed to address the process for
determining fair value in good faith, keeping of certain records regarding the fair value process,
and, if the board assigns the adviser to determine fair value, adviser reporting to the board in
both periodic and as needed reports with some extra recordkeeping. The information required by
proposed rule 2a-5 is not generally duplicated elsewhere.

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

Effect on Small Entities

The information collection requirements of proposed rule 2a-5 do not distinguish
between small entities and other funds. The burden of the conditions on smaller funds may be
proportionally greater than for larger funds. The Commission believes, however, that imposing
different requirements on smaller investment companies would not be consistent with investor
protection and the purposes of the rule’s conditions and could potentially jeopardize the interests
of investors in small funds. Further, the board reporting and additional recordkeeping provisions
of proposed rule 2a-5 only affect fund boards that assign fair value determinations to a fund
adviser and, therefore, the rule would require funds to comply with these specific requirements
only if they assigned responsibilities to their adviser. However, we expect that most funds
holding securities that must be fair valued will do so. Therefore if a board to a small entity does
not do this and instead performs its statutory function directly, then the small entity would not be
subject to these provisions of proposed rule 2a-5. 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

Proposed rule 2a-5 would impose information collection requirements for funds that need
to fair value under the Investment Company Act relating to adopting and implementing policies
and procedures, board reporting, and recordkeeping.
Not collecting information or collecting such information less frequently would be
incompatible with the objectives of rule 2a-5. These requirements are integral parts to ensuring
compliance with the proposed rule and detecting and correcting any violations or potential
violations.

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

Proposed rule 2a-5 would require a fund to maintain (1) appropriate documentation to
support fair value determinations, including information regarding the specific methodologies
applied and the assumptions and inputs considered when making fair value determinations, as
well as any necessary or appropriate adjustments in methodologies, for at least five years from
the time the determination was made, the first two years in an easily accessible place; and (2) a
copy of policies and procedures as required under the proposed rule that are in effect, or were in
effect at any time within the past five years, in an easily accessible place. 8 The proposed rule
would also require, should the board assign the functions that would be required under the rule to
an adviser to the fund, that the fund maintain, for at least five years after the end of the fiscal
year in which the documents were created, (1) copies of the reports and other information
provided to the board under the proposed rule and (2) a specified list of the investments or
investment types whose fair value determination has been assigned to the adviser pursuant to the
proposed rule. 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.
The five-year retention period in proposed rule 2a-5 is consistent with that in rules
38a-1(d) and 22e-4 under the Investment Company Act. We believe that consistency in these
retention periods is appropriate because funds currently have program-related recordkeeping
procedures in place incorporating a five-year retention period. Furthermore, we believe that a

See proposed rule 2a-5(a)(6).

five-year retention period would lessen the compliance burden of proposed rule 2a-5 slightly,
compared to choosing a different, longer retention period (such as the six-year recordkeeping
retention period under rule 31a-2 of the Investment Company Act).
8.

Consultation Outside the Agency

Before adopting proposed rule 2a-5, the Commission will receive and evaluate public
comments on the proposal and its collection of information requirements. Moreover, 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 information exchanges. These various forums provide the Commission and staff
with a means of ascertaining and acting upon the paperwork burdens confronting the industry.
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Confidentiality

No information would be submitted directly to the Commission under proposed rule 2a-5.
Other information 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 proposed rule 2a-5 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, 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
7

(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. 9
The respondents to proposed rule 2a-5 would be registered investment companies and
companies that have elected to be treated as business development companies under the
Investment Company Act.10 We estimate that 9,986 funds would be affected by rule 2a-5, of
which 9,501 are not unit investment trusts as defined in the Investment Company Act (“UITs”). 11
Compliance with rule 2a-5 would be mandatory for any fund that would need to determine fair
value under the Act. To the extent that records would be required to be created and maintained

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 (“SIFMA Report”).

See proposed rule 2a-5(e)(1) (defining “fund”).

13,733 registered investment companies that filed Form N-CEN – 3,845 registered investment
companies that filed Form N-CEN and are estimated to hold securities that would not need to be
fair valued under the Investment Company Act + 98 BDCs estimated to exist. 3,845 = 28% *
13,733 registered investment companies that filed Form N-CEN.
28% = (3,209 open-end funds without securities that would need to be fair valued according to
disclosures on Form N-PORT + 29 closed-end funds without securities that would need to be fair
valued according to disclosures on Form N-PORT + 5 ETFs registered as UITs without securities
that would need to be fair valued according to disclosures on Form N-PORT + 3 variable annuity
separate accounts registered as management companies without securities that would need to be
fair valued according to disclosures on Form N-PORT) / 11,436 funds that filed Form N-PORT.

under the rule are provided to the Commission in connection with examinations or
investigations, such information would be kept confidential subject to the provisions of
applicable law.
A.

Policies and Procedures

Proposed rule 2a-5 would require the adoption and implementation of fair value policies
and procedures, which would address the process for the determination of the fair value of the
fund’s investments under the proposed rule. 12 The fair value policies and procedures are
designed to help ensure that the determination of fair value is carried out effectively and to
facilitate board oversight. The policies and procedures, as proposed, must be reasonably
designed to achieve compliance with the certain requirements of the proposed rule, which are:
(1) periodically assessing any material risks associated with the determination of the fair value,
including material conflicts of interest, and managing those identified valuation risks; (2)
selecting and applying in a consistent manner methodologies for determining and calculating the
fair value; (3) testing the appropriateness and accuracy of the fair value methodologies that have
been selected; and (4) selecting and overseeing pricing service providers, if used.
We believe that the fund’s board or adviser likely would establish the fair value policies
and procedures by adjusting the current systems for implementing and enforcing the compliance
policies and procedures of the fund (if the requirements are not assigned) or the adviser’s (if the
requirements are assigned). While funds and advisers have policies and procedures in place to
address compliance with the federal securities laws (among other obligations), including fair
value determinations, they would need to update their existing policies and procedures to account
for the specific requirements of proposed rule 2a-5. To comply with this obligation, we believe

See proposed rule 2a-5(a)(5).

that fund boards or advisers (by assignment by the board) would use in-house legal and
compliance counsel to update existing policies and procedures to account for the requirements of
proposed rule 2a-5. For purposes of these PRA estimates, we assume that either the fund or the
adviser would review the fair value policies and procedures annually (for example, to assess
whether the fair value methodology requires adjustments). We therefore have estimated initial
and ongoing burdens associated with the proposed policies and procedures requirement. As
discussed above, we estimate that approximately 9,986 funds may rely on the proposed rule and
therefore would require these funds or their advisers to adopt and implement fair value policies
and procedures. 13
Table 1 below summarizes the proposed PRA initial and ongoing burden estimates
associated with the policies and procedures requirements under proposed rule 2a-5.

See Proposing Release, supra footnote 5, at n.215 and accompanying text.

Table 1: Fair Value Policies and Procedures Estimates

Establishing and implementing rule 2a-5 policies
and procedures

Internal initial burden
hours

Internal annual
burden hours1

Wage rate2

Internal time
costs

Initial external
cost burden

Annual external
cost burden

6 hours

2 hours

$329 (senior manager)

$658.00

$3,000.00

$1,000.00

6 hours

2 hours

$466 (ass’t general counsel)

$932.00

3 hours

1 hour

$530 (chief compliance officer)

$530.00

3 hours

1 hour

$365 (compliance attorney)

$365.00

3 hours

$329 (senior manager)

$987.00

3 hour

$466 (ass’t general counsel)

$1,398.00

1 hour

$530 (chief compliance officer)

$530.00

Reviewing and updating rule 2a-5 policies and
procedures

$1,000.00

Total annual burden per fund

13 hours

$5,400.00

$2,000.00

Number of affected funds

9,986

Total annual burden

129,818 hours

$53,924,400

$19,972,000

Notes:
1. Includes initial burden estimates annualized over a three-year period.
2. See SIFMA Report, supra footnote 9.

Board Reporting

The proposed rule would require, if the board assigns the fair value determinations to an
adviser of the fund, that the adviser report to the fund’s board in writing (1) a quarterly report
containing an assessment of the adequacy and effectiveness of the adviser’s process for
determining the fair value of the assigned portfolio of investments and (2) promptly (but in no
event later than three business days after the adviser becomes aware of the matter) on matters
associated with the adviser’s process that materially affect or could have materially affected the
fair value of the assigned portfolio of investments. These reports would be required to include
such information as may be reasonably necessary for the board to evaluate the matters covered in
the report. The periodic reports that would be required by the proposed rule would have a
minimum of five items required as part of the report, and the prompt reports must include
material weaknesses in the design or implementation of the adviser’s fair value determination
process or material changes in the fund’s risks as would be required elsewhere under the
proposal. 14 UITs could not assign fair value determinations to an adviser under the proposed
rule because they are unmanaged and therefore would not be subject to this collection of
information. 15 We estimate that 9,501 funds would utilize the proposed rule and therefore be
subject to these requirements. 16
Table 2 below summarizes the proposed PRA initial and ongoing burden estimates
associated with the board reporting requirements under proposed rule 2a-5.

See proposed rule 2a-5(b)(1).

See proposed rule 2a-5(d).

See Proposing Release, supra footnote 5, at n.215 and accompanying text.

Table 2: Board Reporting Estimates
Internal
initial
burden
hours

Internal annual
burden hours

Wage rate1

Internal time costs

Initial external
cost burden

Annual external
cost burden

$2,000

PROPOSED ESTIMA TES

Adviser written
reports2

0 hours

8 hours

$329 (senior manager)

$2,632

0 hours

1 hour

$17,860 (combined rate for
4 directors)

$17,860

O hours

1 hour

$365 (compliance attorney)

$365

Total annual
burden per fund

10 hours

$20,857

$2,000

Number of funds

× 9,501

Total annual
burden

95,010 hours

$198,162,357

$19,002,000

Notes:
1. See SIFMA Report, supra footnote 9.
2. See supra Proposing Release, supra footnote 5, at nn. Error!
Bookmark not defined.-Error! Bookmark not defined. and
accompanying text.

Recordkeeping

Proposed rule 2a-5 would require the maintenance of certain records, specifically (1)
appropriate documentation to support fair value determinations, including information regarding
the specific methodologies applied and the assumptions and inputs considered when making fair
value determinations and (2) copies of the policies and procedures as required elsewhere under
the proposed rule. 17 Further, if the board assigns fair value determinations to an adviser, the
fund must maintain copies of (3) the reports and other information provided to the board as
required elsewhere under the proposed rule and (4) a specified list of the investments or
investment types whose fair value determination has been assigned to the adviser. 18 We estimate
that 9,986 funds would be subject to the proposed rule and therefore to these requirements. 19
Table 3 below summarizes the proposed PRA initial and ongoing burden estimates
associated with the recordkeeping requirements under proposed rule 2a-5.

See proposed rule 2a-5(a)(6).

See proposed rule 2a-5(b)(3).

While only 9,501 of these 9,986 funds would be subject to the last two of these
recordkeeping requirements, we believe that this distinction is immaterial for this purpose
and would result in only a de minimis lowering of the estimate. See also Proposing
Release, supra footnote 5, at n.215 and accompanying text.

Table 5: Recordkeeping Estimates
Internal
initial
burden
hours

Internal
annual burden
hours1

Wage rate2

Internal time
costs

Initial external
cost burden

Annual
external cost
burden

$1,800

PROPOSED ESTIMA TES
Establishing recordkeeping
policies and procedures

1.5

$62 (general clerk)

$31

1.5

$95 (senior computer operator)

$47.50

Recordkeeping

0 hours

2 hours

$62 (general clerk)

$31

0 hours

2 hours

$95 (senior computer operator)

$47.50

Total annual burden per
fund

5 hours

$157

$600

Number of funds

× 9,986

x 9,986

Total annual burden

49,930 hours

$1,567,802

$5,991,600

Notes:
1. For “Establishing Recordkeeping Policies and Procedures,” these estimates
include initial burden estimates annualized over a three-year period.
2. . See SIFMA Report, supra footnote 9.

Proposed Rule 2a-5 Total Estimated Burden

As summarized in Table 4 below, we estimate that the total hour burdens and time
costs associated with proposed rule 2a-5, including the burden associated with the
adoption and implementation of fair value policies and procedures, board reporting, and
recordkeeping requirements, amortized over three years, would result in an average
aggregate annual burden of 274,758 hours and an average aggregate annual monetized
time cost of $253,654,559. We also estimate that, amortized over three years, there
would be external costs of $44,965,600 associated with this collection of information.
Therefore, each fund required to comply with the rule would incur an average annual
burden of approximately 27.51 hours, at an average annual monetized time cost of
approximately $25,401, and an external cost of $4,503 to comply with proposed rule 2a5.
Table 4: Proposed Total Burden Estimates

13.

Internal
hour burden

Internal
burden time cost

Policies and Procedures

129,818 hours

$53,924,400

Board reporting

95,010 hours

$198,162,357

Recordkeeping requirements

49,930 hours

$1,567,802

Total annual burden

274,758

$253,654,559

Number of funds

÷ 9,986

Average annual burden per fund

27.51 hours

$25,401

Cost to Respondents

As summarized in Table 5 below, we estimate that, amortized over three years,
there would be external costs of $44,965,600 associated with this collection of
information. Therefore, each fund subject to proposed rule 2a-5 would incur an
annualized external cost of $4,503 to comply with the proposed rule. The cost burden is
16

the cost associated with a fund meeting the policies and procedures, board reporting, and
recordkeeping requirements under rule 2a-5. The cost burden does not include the hour
burden discussed in Item 12 above.
Table 5: Proposed Total Cost Estimates
External
cost burden

14.

Policies and Procedures

$19,972,000

Board reporting

$19,002,000

Recordkeeping requirements

$5,991,600

Total annual burden

$44,965,600

Number of funds

÷ 9,986

Average annual burden per fund

$4,503

Costs to Federal Government

Proposed rule 2a-5 does not impose a cost to the federal government. 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.

Changes in Burden

This is the first request for approval of the collection of information for this rule.
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.
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
17

The collection of information will not employ statistical methods.

File Type	application/pdf
Author	Nixon, Naseem
File Modified	2020-05-14
File Created	2020-05-14