Rule 17a-7_Supporting Statement (2023)

OMB CONTROL NUMBER: 3235-0214

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 17a-7
•

JUSTIFICATION

•

Necessity for the Information Collection

Section 17(a) of the Investment Company Act of 1940 (the “Act”) generally prohibits an
affiliated person 1 (“first-tier affiliate”) of a registered investment company (“fund”) or an
affiliated person of that first-tier affiliate (“second-tier affiliate”) from engaging in a purchase,
sale, or loan transaction with the fund (or any company controlled by the fund). Section 17(b) of
the Act authorizes the Commission to exempt proposed transactions from the prohibitions of
section 17(a) when it finds that the terms of the transaction are fair and reasonable and do not
involve overreaching on the part of any person involved, the transaction is consistent with the
policy of each fund, and the transaction is consistent with the purposes of the Act.
In 1966, the Commission exercised its exemptive rulemaking authority by adopting rule
17a-7 [17 CFR. § 270.17a-7]. 2 Rule 17a-7, as subsequently amended on several occasions,
provides an exemption from section 17(a) of the Act for purchases and sales of securities
between funds that are first- or second-tier affiliates, or between a fund and a first- or second-tier
affiliate other than another fund, when the affiliation arises solely because of a common

1

Under section 2(a)(3) of the Act, “affiliated person” of another person means:
“(A) any person directly or indirectly owning, controlling, or holding with power to vote, 5 per centum or
more of the outstanding voting securities of such other person; (B) any person 5 per centum or more of
whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote,
by such other person; (C) any person directly or indirectly controlling, controlled by, or under common
control with, such other person; (D) any officer, director, partner, copartner, or employee of such other
person; (E) if such other person is an investment company, any investment adviser thereof or any member
of an advisory board thereof; and (F) if such other person is an unincorporated investment company not
having a board of directors, the depositor thereof.”

2

See Exemption of Certain Purchase or Sale Transactions Between Affiliated Registered Investment
Companies; Investment Company Act Release No. 4697 (Sept. 8, 1966) [31 FR 12092 (Sept. 16, 1966)].

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investment adviser (or advisers that are affiliated persons of each other), director, or officer. The
exemption is subject to conditions intended to eliminate the likelihood of overreaching. The rule
permits funds and other companies under common management to trade securities with each
other and thus to avoid brokerage commissions. 3 The rule also limits the prices at which
purchase and sale transactions may occur, to prevent inequitable pricing practices that could
harm a participating fund. 4
Rule 17a-7(e) requires the board of directors of a fund to establish procedures reasonably
designed to ensure that the conditions of the rule have been satisfied for purchases and sales
effected in reliance on the rule, and to make changes to these policies as necessary. In addition,
the rule requires that the fund maintain and preserve a written copy of the procedures adopted by
the board. Under the rule, the board is required to determine, at least on a quarterly basis, that all
affiliated transactions effected during the preceding quarter in reliance on the rule were made in
compliance with these established procedures. If a fund enters into a purchase or sale transaction
with an affiliated person, the rule requires the fund to maintain written records of the transaction
for a period of not less than six years. 5
In order to rely on the rule, the fund also must comply with certain fund governance
standards – including requirements that independent directors must select and nominate other
independent directors, independent directors must be affirmatively authorized to hire their own

3

See rule 17a-7(d).

4

See rule 17a-7(b).

5

Rule 17a-7(g) requires the written record of the affiliated transaction to include the following information:
a description of the security purchased or sold, the identity of the person on the other side of the
transaction, the terms of the purchase or sale transaction, and the information or materials upon which the
board determined that the purchase or sale complied with the procedures set by the board.

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staff, and any person who acts as legal counsel for the independent directors must be an
independent legal counsel. 6
2.

Purpose and Use of the Information Collection

The records maintained under the rule are not submitted to the Commission, but may be
reviewed by Commission staff on request to ensure compliance with the rule. Fund directors use
the records to evaluate procedures and transactions executed pursuant to the rule.
If maintenance of these records were not required, the Commission and fund directors
could not readily monitor or evaluate potentially unfair or unreasonable transactions between
funds and their affiliates. The rule’s requirement to maintain such records avoids the need for
potentially more burdensome requirements such as mandatory filings of similar information with
the Commission.
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. As of this renewal, rule 17a-7 does not
require the filing of any documents with the Commission.
Under rule 31a-2(f) [17 CFR 270.31a-2(f)], the Commission permits funds to maintain
(and produce as necessary) on magnetic tape, disk or other electronic storage media, many types
of records, including records like those required to be maintained under rule 17a-7.
4.

Duplication

The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication, and reevaluates those requirements whenever it proposes a rule or
6

See rule 17a-7(f); see also rule 0-1(a)(7) [17 CFR § 270.0-1(a)(7)].

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form or a change in either. Section 31(a) of the Act [15 U.S.C. 80a-30(a) and rules 31a-1 and
31a-2 thereunder [17 CFR 270.31a-1, 17 CFR 270.31a-2] require funds to maintain and preserve
records similar to those required to be kept pursuant to rule 17a-7. Rule 17a-7 does not require
that duplicate records be kept, but reiterates the requirement to maintain and preserve such
records as they relate to the rule.
5.

Effect on Small Entities

The recordkeeping requirements of rule 17a-7 are the same for all funds subject to the
rule, including small entities. The Commission believes that compliance with rule 17a-7 is not
unduly burdensome for large or small entities, and that the minimal costs of complying with the
rule are justified by the benefits it affords.
6.

Consequences of Not Conducting Collection

Rule 17a-7 requires fund directors to establish and maintain written procedures for
review of pertinent transactions, and requires funds to maintain records concerning each
transaction undertaken pursuant to the rule. Less frequent collection of this information would
make it difficult for fund directors to evaluate transactions executed pursuant to the rule, and
could hamper the ability of the Commission’s examination staff to ensure compliance with the
rule.
7.

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

Rule 17a-7 requires funds to retain certain records for more than three years. The fund
must maintain and preserve permanently a written copy of the procedures (and any modifications
thereto) established by the board of directors to ensure that all conditions of the rule have been
satisfied. Additionally, the fund must maintain and preserve for a period of six years from the
end of the fiscal year in which any transactions occurred a written record of each such

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transaction setting forth a description of the security purchased or sold, the identity of the person
on the other side of the transaction, the terms of the purchase or sale transaction, and the
information or materials upon which the board of directors’ determination that the transaction
was in compliance with the procedures was made.
The long-term retention of records required under rule 17a-7 is necessary to carry out the
Commission’s examination and enforcement responsibilities, and its mandate to ensure that the
Act’s provisions are legally enforceable. The Commission periodically inspects the operations
of funds to ensure compliance with the rules and regulations under the Act. Each fund, however,
may only be inspected at intervals of several years due to the Commission’s limited resources.
For this reason, the Commission often needs information relating to events or transactions which
occurred years ago. Moreover, in section 31(a) of the Act, Congress specifically empowered the
Commission to require funds to “maintain and preserve” books and records “for such period or
periods as the Commission may prescribe by rules.” Electronic record storage has made longterm retention of records less burdensome.
8.

Consultations Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 17a-7 before it submitted this request for extension and approval to the
Office of Management and Budget. The Commission received no comments in response to its
request.
The Commission and 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 forums provide the Commission and the staff useful means to
identify and address paperwork burdens that may affect the industry.

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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

While most funds do not commonly engage in transactions covered by rule 17a-7, the
Commission staff estimates that nearly all funds have adopted procedures for complying with the
rule. Of the approximately 2,768 currently active funds, the staff estimates that virtually all have
already adopted procedures for compliance with rule 17a-7. 7 This is a one-time burden, and the
staff therefore does not estimate an ongoing burden related to the policies and procedures
requirement of the rule for funds. 8 The staff estimates that there are approximately 110 new
funds that register each year, and that each of these funds adopts the relevant polices and

7

For purposes of this calculation, the number of currently active funds was estimated using the number of
active registrants/trusts as of December 2022 identified using Form N-CEN filings received through June
14, 2023.

8

Based on our reviews and conversations with fund representatives, we understand that funds rarely, if ever,
need to make changes to these policies and procedures once adopted, and therefore we do not estimate a
paperwork burden for such updates.

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procedures. 9 The staff estimates that it takes approximately 4 hours to develop and adopt these
policies and procedures, as follows; 3 hours spent by a compliance attorney at a rate of $425 per
hour, and 1 hour collectively spent by the board of directors at a rate of $4,770 per hour, for a
total cost of $6,045. 10 Therefore, the total annual burden related to developing and adopting
these policies and procedures would be approximately 440 hours at a cost of $664,950. 11
Of the 2,768 currently active funds, the staff estimates that approximately 582 funds 12
enter into transactions affected by rule 17a-7 each year (either by the fund directly or through
one of the fund’s series). Staff estimates that 21% 13(or 23 funds) of the estimated 110 funds that
newly register each year will also enter into these transactions, for a total of 605 14 companies that
are affected by the recordkeeping requirements of rule 17a-7. These funds must keep records of
each of these transactions, and the board of directors must quarterly determine that all relevant
transactions were made in compliance with the company’s policies and procedures. The rule

9

For purposes of this calculation, the number of new funds that register each year was arrived at by
averaging the number of new registrants/trusts filing Form N-CEN over the prior three years.

10

This estimate is based on the following calculations: (3 hours × $425 = $1,275); ($1,275 + $4,770 =
$6,045). The estimate for compliance attorney pay rates is from SIFMA’s Management & Professional
Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1800-hour workyear and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and
overhead. SIFMA data does not include a fund board of directors. 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, fund intermediaries, and their counsel. This figure was last adjusted through 2019. This 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.

11

This estimate is based on the following calculations: (4 hours ×110 = 440); ($6,045 × 110 = $664,950).

12

This estimate is based on the number of active registrants/trusts as of December 2022 that indicated on
Form N-CEN filings received through June 14, 2023 that at least one of their funds/series rely on rule 17a7.

13

This estimate is based on the percentage of active registrants/trusts as of December 2022 that indicated on
Form N-CEN filings received through June 14, 2023 that at least one of their funds/series rely on rule 17a7.

14

These estimates are based on the following calculations: (21% = 582 / 2,768); (605 = 582 + 23).

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generally imposes a minimal burden of collecting and storing records already generated for other
purposes. 15 The staff estimates that the burden related to making these records and for the board
to review all transactions would be 3 hours annually for each respondent, (2 hours spent by
compliance attorneys and 1 hour spent by the board of directors) at a cost of $5,620 per fund. 16
Thus, the total of the rule’s recordkeeping requirements for all funds is approximately 1,815 total
hours each year at cost of $3,400,100. 17
Based on these estimates, the staff estimates the combined total annual burden hours
associated with rule 17a-7 is 2,225 hours at a cost of $4,065,050. 18 The staff also estimates that
there are approximately 605 respondents and 4,840 total responses. 19 The estimate of average
burden hours is made solely for the purposes of the Paperwork Reduction Act. The estimate is
not derived from a comprehensive or even a representative survey or study of the costs of
Commission rules.
IC Title
IC: Recordkeeping

Annual No. of Responses
Previously
Requested Change
approved
6,016
4,840
-1,176

Annual Time Burden (Hrs.)
Previously
Requested Change
approved
2,616
2,225
-391

Internal Cost Burden ($)
Previously
Requested
Change
approved
$4,412,362 $4,065,050 -$347,312

15

Commission staff believes that rule 17a-7 does not impose any costs associated with record preservation in
addition to the costs that funds already incur to comply with the record preservation requirements of rule
31a-2 under the Act. Rule 31a-2 requires companies to preserve certain records for specified periods of
time.

16

The staff estimates that funds that rely on rule 17a-7 annually enter into an average of 8 rule 17a-7
transactions each year. The staff estimates that the compliance attorneys of the companies spend
approximately 15 minutes per transaction on this recordkeeping, and the board of directors spends a total of
1 hour annually in determining that all transactions made that year were done in compliance with the
company’s policies and procedures. This estimate is based on the following calculations: (2 hours × $425 =
$850); ($850 + $4,770= $5,620).

17

This estimate is based on the following calculations: (3 hours × 605 companies = 1,815 hours); ($5,620 ×
605 companies = $3,400,100).

18

This estimate is based on the following calculations: (440 hours + 1,815 hours = 2,255 total hours);
($664,950 + $3,400,100 = $4,065,050).

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13.

Cost to Respondents

The commission staff estimates that there is no cost burden of rule 17a-7 other than the
cost of the burden identified in Item 12 of this Supporting Statement.
14.

Cost to the Federal Government

There are no costs to the Federal Government associated with rule 17a-7.
1.

15.

Changes in Burden

The estimated burden hours associated with rule 17a-7 has decreased from 2,616 burden
hours to 2,225 burden hours. This decrease of 391 hours is primarily due to a decrease in the
number of currently active funds.
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.
COLLECTION OF INFORMATION EMPLOYING STATISTICAL
METHODS
Not applicable.
•

19

This estimate is based on the following calculations: 605 funds that engage in rule 17a-7 transactions × 8
transactions per year = 4,840.