Rule 17f-7 Supporting Statement 2011

SUPPORTING STATEMENT
FOR THE PAPERWORK REDUCTION ACT SUBMISSION FOR A CURRENT
INFORMATION COLLECTION
“Rule 17f-7”

A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 17f-7 (17 CFR 270.17f-7) under the Investment Company Act of 1940 (15 U.S.C.
80a) (the “Act”) governs the custody of the assets of registered management investment
companies (“funds”) with a foreign securities depository outside the United States. Rule 17f-7
permits a fund under certain conditions to maintain its foreign assets with an eligible securities
depository, which has to meet minimum standards for a depository. The fund or its investment
adviser generally determines whether the depository complies with those requirements based on
information provided by the fund’s primary custodian (a bank that acts as global custodian). The
depository custody arrangement also must meet certain conditions. The fund or its adviser must
receive from the primary custodian (or its agent) an initial risk analysis of the depository
arrangements, and the fund’s contract with its primary custodian must state that the custodian
will monitor risks and promptly notify the fund or its adviser of material changes in risks. The
primary custodian and other custodians also are required to agree to exercise reasonable care.
2.

Purpose of the Information Collection

The collection of information requirements in rule 17f-7 are intended to provide workable
standards that protect funds from the risks of using foreign securities depositories while assigning
appropriate responsibilities to the fund’s primary custodian and investment adviser based on their
capabilities. The requirement that the foreign securities depository meet specified minimum
standards is intended to ensure that the depository is subject to basic safeguards deemed

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appropriate for all depositories. The requirement that the fund or its adviser must receive from
the primary custodian (or its agent) an initial risk analysis of the depository arrangements, and the
fund’s contract with its primary custodian must state that the custodian will monitor risks and
promptly notify the fund or its adviser of material changes in risks, is intended to provide
essential information about custody risks to the fund’s investment adviser as necessary for it to
approve the continued use of the depository. The requirement that the primary custodian agree to
exercise reasonable care is intended to provide assurances that its services and the information it
provides will meet an appropriate standard of care.
3.

Role of Improved Information Technology

Rule 31a-2(f) under the Act permits investment companies to maintain many types of
records on micrographic and electronic storage media.
4.

Efforts to Identify 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. Rule 17f-7 does not require duplicative reporting or recordkeeping.
5.

Effect on Small Entities

The Commission does not believe that compliance with rule 17f-7 is unduly burdensome
for small entities. Rule 17f-7 affects, among other persons, the relatively small number of global
custodians that act as primary custodians. None of these global custodians would likely qualify
as a small entity, because each custodian is a major bank with a global branch network or global
ties to other banks. Rule 17f-7 also affects the funds that invest in foreign markets, and the

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investment advisers to those funds. Few if any of the affected funds and advisers are small
entities.1
6.

Consequences of Less Frequent Collection

Rule 17f-7’s reporting requirements apply only upon the occurrence of material changes
in the custody risks associated with maintaining the fund’s assets with a foreign securities
depository. Some custody arrangements, such as arrangements with less established foreign
depositories, may require more frequent reporting than other arrangements.
7.

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

None.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 17f-7 before it submitted this request for extension and approval to the
Office of Management and Budget. The Commission received no comment in its response to its
request.
The Commission and the staff also 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 useful means to
identify and address paperwork burdens that may confront the industry.
1

A fund is considered a small entity for purposes of the Regulatory Flexibility Act, 5 U.S.C. 601
et seq., if it, together with other investment companies in the same group of related investment
companies, has net assets of $50 million or less. 17 CFR 270.0-10. An adviser is considered a
small entity if it has assets under management of less than $25 million, has total assets of less
than $5 million, and is not in a control relationship with other advisers or persons that are not
small entities. 17 CFR 275.0-7. Most funds that invest in foreign securities are part of a fund
complex that has net assets of more than $50 million, and are advised by advisers with assets
under management of $25 million or more.

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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 staff estimates that each of approximately 836 investment advisers2 will make an
average of 8 responses annually under the rule to address depository compliance with minimum
requirements, any indemnification or insurance arrangements, and reviews of risk analyses or
notifications. The staff estimates each response will take 6 hours, requiring a total of
approximately 48 hours for each adviser. The total annual burden associated with these
requirements of the rule will be approximately 40,128 hours (836 advisers x 48 hours per
adviser). The staff further estimates that during each year, each of approximately 15 global
custodians will make an average of 4 responses to analyze custody risks and provide notice of
any material changes to custody risk under the rule. The staff estimates that each response will
take 260 hours, requiring approximately 1040 hours annually per custodian.3 The total annual
burden associated with these requirements is approximately 15,600 hours (15 custodians x 1040
hours). Therefore, the staff estimates that the total annual burden associated with all collection
of information requirements of the rule is 55,728 hours (40,128 + 15,600). The total annual cost
of burden hours is estimated to be $14,948,736 (40,128 x $287 for a portfolio manager, plus
2

At the start of 2011, 836 investment advisers managed or sponsored open-end (including ETFs)
portfolios and closed-end registered funds.

3

These estimates are based on conversations with representatives of the fund industry.

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15,600 hours x $220/hour for a trust administrator’s time).4 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 and forms. Compliance with the collection of information requirements of the
rule is necessary to obtain the benefit of relying on the rule’s permission for funds to maintain
their assets in foreign custodians.
13.

Estimate of Total Annual Cost Burden

Rule 17f-7 does not impose any paperwork related cost burden not discussed in item 12
above.
14.

Estimate of Cost to the Federal Government

The rule imposes no costs associated with filing reports or any other costs to the Federal
government.
15.

Explanation of Changes in Burden

The increase in the estimated time burden of rule 17f-7 by 8835 hours results from
updated information from industry participants regarding annual hourly burdens per custodian
and investment adviser as well as an updated number of investment advisers. Based on
information received from the fund industry, the staff has increased its estimate of the total
annual hourly burden per custodian from 15,015 to 15,600 hours and per investment adviser from
31,878 to 40,128 hours. The staff anticipates that the number of existing funds that change their
global custodians is negligible and, therefore, primarily new funds are required to make a
response.

4

The salaries for a portfolio manager and a trust administrator are from SIFMA’s Management &
Professional Earnings in the Securities Industry 2010, modified to account for an 1800-hour

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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.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and
overhead.