Rule 18f-1 SS

6

SUPPORTING STATEMENT

Rule 18f-1 and Form N-18f-1

A. JUSTIFICATION

1. Necessity for the Information Collection

An open-end investment company is a managed investment company that offers for sale or has outstanding any redeemable security of which it is the issuer. Section 2(a)(32) of the Investment Company Act (the “Act”) [15 U.S.C. 80a-2(a)(32)] defines a “redeemable security” as any security (other than short-term paper) under the terms of which the holder, upon presentation to the issuer, is entitled to a proportionate share of the issuer’s current net assets or the cash equivalent thereof. Because the assets of an investment company consist primarily of the securities of other companies, satisfaction of a redemption request could be made by delivery of a portion of those securities (“redemption in-kind”). Although redemptions in-kind are rarely made, the ability of an investment company to make redemptions in this manner is important because the sale of sizable blocks of securities to effect redemptions in cash would have the tendency to depress the market price of those securities.

The securities administrators of several states (as well as those of certain foreign countries) in the past have required or have considered requiring, as a condition to doing business in their respective jurisdictions, that open-end investment companies that have the right to redeem in-kind file an undertaking that, as to residents within their respective jurisdictions, redemptions will be effected in cash only, or that redemptions in-kind will not be effected unless specific approval for such redemption is first obtained from the securities regulator. Under section 22(e) of the Act [15 U.S.C. 80a-22(e)], however, an open-end investment company may not postpone the payment of redemptions beyond seven days after the date of tender of securities for payment, except in extraordinary circumstances. In addition, an agreement by an open-end investment company to make payments to certain of its shareholders in a manner different from payments to other shareholders (e.g., cash only rather than cash or in-kind) would be deemed to be the creation of a class of senior securities with priority as to the distribution of an investment company’s assets. Section 18(f)(1) of the Act [15 U.S.C. 80a-18(f)(1)] expressly prohibits the creation of classes of senior securities. Therefore, absent exemptive relief from the requirements of the Act, an open-end investment company could not retain the ability to redeem in-kind and also sell its securities in jurisdictions that require limitations on in-kind redemptions.

Rule 18f-1 [17 CFR 270.18f-1] enables funds to limit redemptions in-kind, in the manner prescribed by the rule. In brief, a fund may elect to commit to pay in cash all requests for redemptions by any shareholder of record, limited in amount during any 90-day period to the lesser of $250,000 or one percent of the net asset value of the fund at the beginning of such period. The fund must file Form N-18F-1 [17 CFR 274.51] to notify the Commission of its election to limit redemptions in-kind. The rule also requires the fund to disclose that election in either its prospectus or Statement of Additional Information.¹

2. Purpose of the Information Collection

Rule 18f-1 provides investment companies that wish to limit redemptions in-kind with an exemption from section 18 of the Act, which would otherwise prohibit them from doing so. Form N-18F-1 notifies the Commission that a fund has elected to limit redemptions in-kind. The Commission does not review the Form, but uses it as appropriate to monitor compliance with the Investment Company Act.

3. Role of Improved Information Technology

The Commission’s Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) is designed to automate the filing, processing, and dissemination of full disclosure filings. The system permits publicly held companies to transmit their filings to the Commission electronically. This automation has increased the speed, accuracy, and public availability of information, generating benefits to investors and financial markets. Form N-18F-1 is filed with the Commission electronically on EDGAR. The public may access filings on EDGAR through the Commission’s Internet Web site (http://www.sec.gov) or at EDGAR terminals located at the Commission’s public reference rooms.

4. Efforts to Identify Duplication

The Commission periodically evaluates rule-based reporting and recordkeeping requirements for duplication, and reevaluates those requirements whenever it proposes a rule or form, or a change in either. Rule 18f-1 requires a fund that elects to use the exemption provided by the rule to file Form N-18F-1 and subsequently disclose that election in either its prospectus or Statement of Additional Information.² Neither of these reporting requirements are duplicated in other rules or forms.

5. Effect on Small Entities

The Commission believes that compliance with rule 18f-1 is not unduly burdensome for large or small entities. Rule 18f-1 gives funds, including those that are small entities, the flexibility to elect to limit redemptions in-kind. Although the rule imposes certain notification requirements on funds that elect to rely on the rule, as discussed in Item 12 below, those notification requirements are minimal.

6. Consequences of Less Frequent Collection

The collection of information requirements of rule 18f-1 do not recur periodically, but only once, when a fund elects to limit redemptions in-kind. Failure to collect this information could harm the Commission’s ability to determine whether a fund is in compliance with the Act and could make it difficult for shareholders to learn of a fund’s election to limit redemptions in-kind.

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

Not applicable.

8. Consultations Outside the Agency

The Commission requested public comment on the collection of information requirement of rule 18f-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. 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 forums provide the Commission and the staff with a means of ascertaining and acting upon paperwork burdens confronting the industry.

9. Payment or Gift to Respondents

Not applicable.

10. Assurance of Confidentiality

Not applicable.

11. Sensitive Questions

Not applicable.

12. Estimate of Hour Burden

The Commission staff estimates that Form N-18F-1 takes approximately one hour to complete. Based on the number of investment companies that filed Form N-18F-1 from 2005 through 2007, it is estimated that 39 investment companies file Form N-18F-1 annually. At an estimated cost of $41.00 per hour for clerical or administrative costs associated with preparing and filing the Form, the total cost of the Form is estimated to be $41.00 per respondent. This cost is nonrecurring because each investment company must file Form N-18F-1 only once with the Commission.³ The total annual burden estimate is 39 hours annually. The total estimated annual cost of burden hours is $1,599.00 and 39 responses.

13. Estimate of Total Annual Cost Burden

Rule 18f-1 does not appear to impose any paperwork related cost burden that is not described above in Item 12.

14. Estimate of Cost to the Federal Government

Form N-18F-1 is required to be filed with the Commission, but the staff does not generally review the Form. The rule and Form do not entail any costs on the federal government.

15. Explanation of Changes in Burden

The estimated burden hours associated with rule 18f-1 have increased by one hour from the current allocation. This increase is due to a slight increase in the estimated number of investment companies filing Form N-18F-1 annually.

16. Information Collection Planned for Statistical Purposes

Not applicable.

17. Approval to not Display Expiration Date

Not applicable.

18. Exceptions to Certification Statement

Not applicable.

B. COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS

Not applicable.

1 See Form N-1A, Item 18 (OMB No. 3234-0307). The burdens associated with this collection of information requirement have been addressed separately in the Paperwork Reduction Act submissions relating to Form N-1A.

2 See Form N-1A, Item 18 (“Purchase, Redemption and Pricing of Shares”).

3 As noted above, the hour burdens associated with the rule’s requirement that a fund disclose its election to limit redemptions in kind in either its prospectus or Statement of Additional Information have been addressed separately in the Paperwork Reduction Act submissions relating to Form N-1A. See supra note 1.