Supporting Statement - Rule 17f-1 2021 Extension

OMB CONTROL NUMBER: 3235-0222

SUPPORTING STATEMENT

For the Paperwork Reduction Act Information Collection Submission for

RULE 17F-1

A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 17(f) of the Investment Company Act of 1940 ("Act") (15 U.S.C. 80a-17(f))
provides in part that a registered management investment company ("fund") may maintain its
securities and similar investments in the custody of a "company which is a member of a national
securities exchange as defined in the Securities Exchange Act of 1934, subject to such rules and
regulations as the Commission may from time to time prescribe for the protection of investors."
Rule 17f-1 (17 CFR 270.17f-1) under the Act, entitled “Custody of Securities with
Members of National Securities Exchanges,” sets forth the conditions under which a fund may
place its assets in the custody of a member of a national securities exchange. Rule 17f-1 permits a
fund to place its assets in the custody of a member of a national securities exchange only under a
written contract approved by a majority of the fund's board of directors. The rule requires the
contract to contain certain provisions, and requires the fund’s board to ratify the contract at least
once a year thereafter. In addition, the fund must submit a copy of the custodial contract to the
Commission. This requirement assures that Commission staff can review the contract for
compliance with the Act.
Rule 17f-1 also requires, among other things, that an independent public accountant verify
the fund's assets at the end of every annual and semi-annual fiscal period, and at least one other
time during the fiscal year as chosen by the independent accountant. Requiring an independent
accountant to examine the fund's assets in the custody of a member of a national securities

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exchange assists Commission staff in its inspection program and helps to ensure that the fund
assets are subject to proper auditing procedures. The accountant's certificate stating that it has
made an examination, and describing the nature and the extent of the examination, must be
attached to Form N-17f-1 and filed with the Commission promptly after each examination. 1
2.

Purpose and Use of the Information Collection

The requirements of rule 17f-1 are designed to ensure safekeeping of fund assets and to
assist Commission staff in monitoring funds' compliance with federal securities laws. Requiring a
copy of the custodial contract to be submitted to the Commission assures that Commission staff
can review the contract for compliance with the Act. Although Commission inspections staff
conducts periodic reviews of all funds, due to staffing constraints, funds are not inspected
annually. Thus, the periodic examination by the accountants required by rule 17f-1 helps to
ensure that the fund’s assets are continuously subject to proper auditing procedures. Less
frequent periodic examinations by a fund’s accountants could impair the ability of the
Commission’s examination staff to ascertain a fund’s compliance with the rule.
3.

Consideration Given to Information Technology

The Commission’s Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”)
provides for the automated filing, processing, and dissemination of full disclosure filings. The
automation provides for speed, accuracy and public availability of information, generating benefits
to investors and financial markets. Currently, the accountant's certificates are required to be filed
electronically. Rule 17f-1 requires the custody agreement to be filed as an
1

Form N-17f-1 is entitled “Certificate of Accounting of Securities and Similar Investments of a
Management Investment Company in the Custody of Members of National Securities Exchanges.”
The form serves as a cover sheet to the accountant’s certificate, and does not require any
additional information to be gathered or filed with the Commission.

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exhibit to a fund’s registration statement under the Act, and each form of registration statement
must be filed electronically through EDGAR.
4.

Duplication

Rule 17f-1 does not impose any duplicative requirements, and the information collected
under the rule is not available elsewhere.
5.

Effect on Small Entities

The requirements of rule 17f-1 apply to all funds, including funds that are small entities,
that maintain their assets in the custody of a member of a national securities exchange. Rule 17f-1
is not mandatory, and funds may choose alternative custody arrangements. If a fund chooses to
maintain its assets in the custody of a national securities exchange member, then regardless of its
size, it must comply with rule 17f-1.
6.

Consequences of Not Conducting Collection

The requirements of rule 17f-1 are designed to ensure the safekeeping of fund assets and
assist Commission staff in monitoring fund custodial arrangements. Less frequent collection of
the information required by the rule would inhibit the dissemination of timely information that
enables Commission staff to ensure the safekeeping of client funds and investment company
securities.
7.

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

Not applicable.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information requirements
of rule 17f-1 before it submitted this request for extension and approval to the Office of
Management and Budget. The Commission received no comments in response to this request.

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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.
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 estimate of average burden hours is made solely for the purposes of the Paperwork
Reduction Act and is not derived from a comprehensive or even representative survey or study of
the cost of Commission rules and forms. Commission staff estimates that each fund makes 1
response and spends an average of 3.5 hours annually in complying with the rule's requirements. 2
Commission staff estimates that on an annual basis it takes: (i) 0.5 hours for the board of

2

The 1 response is the board’s approval of the contract.

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directors 3 at a total cost of approximately $2,385 4 to review and ratify the custodial contracts;
and (ii) 3 hours for the fund’s controller or administrator at a total cost of approximately $1,476
to assist the fund’s independent public auditors in verifying the fund’s assets, for a total of 3.5
hours at a cost of $3,861. 5 Commission staff estimates that 6 funds rely on the rule annually, with
a total of 6 responses. 6 Thus, the staff estimates that the total annual hour burden for rule 17f-1 is
21 hours. 7 Based on the total costs per fund listed above, the staff estimates that the total cost of

3

Estimates of the number of hours are based on conversations with representatives of mutual funds
that comply with the rule. The actual number of hours may vary significantly depending on
individual fund assets. The hour burden for rule 17f-1 does not include preparing the custody
contract because that would be part of customary and usual business practice.

4

The staff has estimated the average cost of board of director time as $4,770 per hour for the board
as a whole, based on information received from funds and their counsel.

5

These estimates are based on the following calculations: (3 x $492 = $1,476); ($2,385 + $1,476 =
$3,861). The estimated costs for professional staff time is based on SIFMA’s Management &
Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for
an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead, and adjusted for inflation.

6

This estimate is based on a review of Form N-17f-1 filings over the last three years.

7

This estimate is based on the following calculation: (6 respondents x 3.5 hours = 21 hours). The
annual burden for rule 17f-1 does not include time spent preparing Form N-17f-1. The burden for
Form N-17f-1 is included in a separate collection of information.

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rule 17f-1’s collection of information requirement is $23,166. 8
Table 1: Summary of Revised Annual Responses, Burden Hours, and Burden Hour
Costs Estimates for Each Information Collection
IC

IC Title

IC1

Board
Review of
Custodial
Contract
IC2
Verification
of Fund
Assets
Total for all ICs

13.

Annual No. of Responses
Previously Requested
Change
approved

Annual Time Burden (Hrs.)
Previously Requested
Change
approved

Cost Burden ($)
Previously
Requested
approved

Change

6

6

0

3

3

0

13,398

14,310

+912

6

6

0

18

18

0

8,280

8,856

+576

12

12

0

21

21

0

21,678

23,166

+1,488

Cost to Respondents

Funds that rely on rule 17f-1 generally use outside counsel to prepare the custodial
contract for the board’s review and to transmit the contract to the Commission. Commission staff
estimates the cost of outside counsel to perform these tasks for a fund each year is $978. 9 Funds
also must have an independent public accountant verify the fund’s assets three times each year and
prepare the certificate of examination. Commission staff estimates the annual cost for an
independent public accountant to perform this service is $9,050. 10 Therefore, the total annual

8

This estimate is based on the following calculation: (6 funds x $3,861 (total annual cost per fund)
= $23,166).

9

This estimate is based on the following calculation: (2 hours of outside counsel time x $489 =
$978). The staff has estimated the average cost of outside counsel at $489 per hour, based on
information received from funds and their counsel.

10

This estimate is based on information received from fund representatives estimating the aggregate
annual cost of an independent public accountant’s periodic verification of assets and preparation of
the certificate of examination.

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cost burden for a fund that relies on rule 17f-1 would be approximately $10,028. 11 As noted
above, the staff estimates that 6 funds rely on rule 17f-1 each year, for an estimated total
annualized cost burden of $60,168. 12
14.

Cost to the Federal Government

The federal government does not incur any direct costs in connection with the
requirements of rule 17f-1.
15.

Change in Burden

The estimated total annual burden has remained the same at 21 hours. Based on a review
of filings, the number of funds relying on rule 17f-1 has remained approximately the same and the
time to prepare the filings has not changed. The annual cost burden has increased from $55,800
to $60,168. This $4,368 increase is attributable to changes in the costs of (i) outside counsel’s
preparation of the custodial contract for the board’s review and their transmission of the contract
to the Commission; and (ii) an independent public accountant’s verification of the fund’s assets
three times each year and their preparation of the certificate of examination.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exceptions to Certification Statement for Paperwork Reduction Act
Submissions

Not applicable.

11

This estimate is based on the following calculation: ($978 + $9,050= $10,028).

12

This estimate is based on the following calculation: (6 funds x $10,028= $60,168).

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B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.