Supporting Statement (2a-5)

OMB CONTROL NUMBER: 3235-0779

A.

JUSTIFICATION
1.

SUPPORTING STATEMENT
RULE 2a-5

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 December 3, 2020, the Commission issued a release adopting new rule 2a-5, which
will 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”)
1

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

2

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

3

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

4

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).

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for purposes of section 2(a)(41) of the Investment Company Act and rule 2a-4 thereunder. 5
Under the final rule, fair value as determined in good faith will require assessing and managing
material risks associated with fair value determinations; selecting, applying, and testing fair
value methodologies; and overseeing and evaluating any pricing services used. The final rule
also permits a fund’s board to designate a “valuation designee” to perform fair value
determinations. The valuation designee can be the adviser of the fund or an officer of an
internally managed fund. 6 When a board designates the performance of determinations of fair
value to a valuation designee for some or all of the fund’s investments under the final rule, the
final rule requires the board to oversee the valuation designee’s performance of fair value
determinations. To facilitate such oversight, the final rule also includes certain reporting and
other requirements. 7 As relevant here, the final rule will require, if the board designates
performance of fair value determinations to a valuation designee, that the valuation designee
report to the board in both periodic and as needed reports on a per-fund basis. 8
Compliance with rule 2a-5 will be mandatory for any fund that would need to determine
fair value under the Act. To the extent that records will 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.

5

See Good Faith Determinations of Fair Value, Investment Company Act Release No.
34128 (Dec. 7, 2020) (“Adopting Release”).

6

Rule 2a-5(e)(4).

7

Rule 2a-5(b).

8

Rule 2a-5(b).

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2.

Purpose and Use of the Information Collection

The purpose of the information collection requirement in rule 2a-5 is to facilitate the
board’s ability to oversee effectively the adviser’s fair value determinations and satisfy the
board’s obligation under the Act.
3.

Consideration Given to Information Technology

The information collected under the rule would not be submitted to the Commission. The
proposed rule does not stipulate any particular method for communicating or preserving the
information collected. The Electronic Signatures in Global and National Commerce Act 9 and the
conforming amendments to rules under the Investment Company Act permit funds to maintain
records electronically.
4.

Duplication

The Commission is not aware of any duplicate reporting requirements concerning rule
2a-5.
5.

Effects on Small Entities

The Commission reviews all rules periodically, as required by the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.), to identify methods to minimize recordkeeping or reporting
requirements affecting small businesses. The requirements of rule 2a-5 do not distinguish
between small entities and larger entities. The burden on smaller entities may be greater than for
larger entities. There are different factors that will affect whether a smaller fund incurs costs
related to this requirement that are on the higher or lower end of the estimated range. For
example, smaller funds – and more specifically, smaller funds that are not part of a fund complex
9

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

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– may not have an advisory agreement that has a reporting mechanism that meets all the
elements that will be required under the final rule. Also, while larger funds or funds that are part
of a large fund complex may incur higher costs, via increased advisory fees for valuation
designees to take on this responsibility on behalf of such funds, related to this requirement in
absolute terms relative to a smaller fund or a fund that is part of a smaller fund complex, a
smaller fund may find it more costly, per dollar managed, to comply with the final requirement
because it will not be able to benefit from a larger fund complex’s economies of scale. 10
We do not believe that exempting small funds from the provisions in the rule would
permit us to achieve our stated objectives, principally to protect investors from improper
valuations. Further, the board reporting of the rule only affects fund boards that designate a
valuation designee to perform fair value determinations, and, therefore, the rule will require
funds to comply with this specific requirement only if the boards designated responsibilities to a
valuation designee. 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 this provisions of the
rule.
6.

Consequences of Not Conucting Collection

Less frequent information collection would be incompatible with the objectives of rule
2a-5. The requirements of the rule are necessary to facilitate the board’s ability to oversee
effectively the adviser’s fair value determinations and satisfy the board’s obligation under the
Act.
10

See Adopting Release, supra footnote 5, at section III.C.1.

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7.

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

Not applicable.
8.

Consultations Outside the Agency

Before adopting rule 2a-5, the Commission solicited and evaluated public comment on
the collection of information requirement. Specifically, the public was given the opportunity to
comment on the Commission’s estimates for the burdens of rule 2a-5 as proposed. While
comments were received from filers, investors and other market participants, and were
considered by the Commission as discussed in the Adopting Release, most of these did not relate
to the proposed burden estimates for rule 2a-5. However, specific to the proposed collection,
some commenters argued that the burden estimates as proposed for this requirement were too
low, arguing in particular that the cost to produce the items that would have been required on a
quarterly basis as part of the proposed periodic reporting requirements would be in excess of
what we had assumed due to burdens of both creating these reports and of reviewing them on the
part of the board. While we clarified in the Adopting Release that certain reporting that
commenters thought was suggested in the proposed rule will not be required in the final rule and
made other changes to address these concerns, 11 we are nonetheless increasing our estimates for
the final rule in consideration of these comments. We also have corrected certain estimates,
specifically to include an initial burden as we believe the final rule will impose some start-up
burdens and to update the wage rates for relevant personnel. We have also updated the estimated
number of respondents based upon updated data.12 Lastly, we increased the estimated amount of
11

See Adopting Release, supra footnote 5, at Section II.B.2.

12

See Adopting Release, supra footnote 5, at n. Error! Bookmark not defined. - Error!
Bookmark not defined. and accompanying text.

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external cost burden to include costs relating to both legal and accounting services as the
proposed estimate only estimated external costs relating to legal expenses.
In addition, the Commission and 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 staff with a means of ascertaining and acting upon paperwork burdens that
may confront the industry.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

Not applicable.
12.

Burden of Information Collection

The following estimates of average burden hours and costs are made solely for purposes
of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) and are not derived from a
comprehensive or even representative survey or study of the cost of Commission rules and
forms.

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The table below summarizes the estimated burdens associated with the collection of
information from the proposal and the final PRA estimates for internal and external burdens
associated with rule 2a-5. 13
Rule 2a-5 PRA Estimates Table
Initial
internal
burden
hours

Internal
annual burden
hours1

Wage rate2

Internal time
costs

Initial external
cost burden

Annual
external cost
burden

$2,000

$2,000

PROPOSED ESTIMA TES

Adviser written
reports

0 hours

8 hours

×

$329 (senior
manager)

$2,632

0 hours

1 hour

×

$17,860 (combined
rate for 4 directors)

$17,860

0 hours

1 hour

×

$365 (compliance
attorney)

$365

Total annual
burden per
fund

10 hours

$20,857

$2,000

$2,000

Number of
funds

× 9,501

× 9,501

× 9,501

× 9,501

Total proposed
burden

95,010 hours

$198,162,357

$19,002,000

$19,002,000

$3,180

$3,180

FINA L ESTIMA TES

Valuation
designee
written reports

13

12 hours

24 hours

×

$368 (senior
operations manager)

$8,832

1.5 hours

2 hours

×

$4,770 (directors)3

$9,540

6 hours

8 hours

×

$368 (compliance
attorney)

$2,944

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 inflation, and multiplied by 5.35 for professional staff and 2.93 for clerical
staff 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”).

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Total annual
burden per
fund

34 hours

$21,316

$3,180

$3,180

Number of
funds

× 9,335

× 9,335

× 9,335

× 9,335

Total final
burden

317,390
hours

$198,984,860

$29,685,300

$29,685,300

$198,162,357

$19,002,000

$19,002,000

$198,984,860

$29,685,300

$29,685,300

TOTA L ESTIMA TED BURDEN S FOR BOA RD REPORTIN G
Proposed
burden
estimates

95,010 hours

Proposed total
respondents

9,501

Revised
burden
estimates

317,390
hours

Revised total
respondents

9,335

Notes:
1. These estimates include initial burden estimates annualized over three years.
2. See SIFMA Report, supra footnote 13.
3. This wage rate is not from the SIFMA Report but is a staff estimate. It is a combined cost for the entire board (not a per board member
cost). This estimate assumes an average of 9 board members per board.
4. This estimated burden is based on the estimated wage rate of $489/hour, for 4 hours, for outside legal services and of $306/hour, for
4 hours, for outside accounting services. See supra footnote 13.

13.

Cost to Respondents

Cost burden is the cost of goods and services purchased to collect the information
required under rule 2a-5. The cost burden does not include the hour burden discussed in Item 12
above. As outlined in the table above, we estimate the total external cost burden to comply with
rule 2a-5 to be $29,685,300.
14.

Cost to the Federal Government

The rule will not entail any costs on the federal government.

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15.

Changes in Burden

Not applicable. This is the first request for approval of a collection of information for
this proposed rule.
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

Submission
Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.