Rule 17j-1 Supporting Statement 2012

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
“Rule 17j-1”

A.

JUSTIFICATION
1.

Information Collection Necessity

Conflicts of interest between investment company personnel (such as portfolio managers) and their
funds can arise when these persons buy and sell securities for their own accounts (“personal investment
activities”). These conflicts arise because fund personnel have the opportunity to profit from information
about fund transactions, often to the detriment of fund investors. Section 17(j) of the Investment Company
Act of 1940 (the “Investment Company Act”) (15 U.S.C. 80a-17(j)) makes it unlawful for persons
affiliated with a registered investment company (“fund”) or with the fund’s investment adviser or principal
underwriter (each a “17j-1 organization”), in connection with the purchase or sale of securities held or to
be acquired by the investment company, to engage in any fraudulent, deceptive, or manipulative act or
practice in contravention of the Commission’s rules and regulations. Section 17(j) also authorizes the
Commission to promulgate rules requiring 17j-1 organizations to adopt codes of ethics.
In order to implement section 17(j), rule 17j-1 imposes certain requirements on 17j-1 organizations
and “Access Persons” 1 of those organizations. The rule prohibits fraudulent, deceptive or manipulative
acts by persons affiliated with a 17j-1 organization in connection with their personal securities transactions
in securities held or to be acquired by the fund. The rule requires each 17j-1 organization, unless it is a
money market fund or a fund that does not invest in Covered Securities, 2 to: (i) adopt a written codes of
ethics; (ii) submit the code and any material changes to the code, along with a certification that it has
1

Rule 17j-1(a)(1) defines an “access person” as “Any Advisory Person of a Fund or of a Fund's investment adviser. If
an investment adviser's primary business is advising Funds or other advisory clients, all of the investment adviser's
directors, officers, and general partners are presumed to be Access Persons of any Fund advised by the investment
adviser. All of a Fund's directors, officers, and general partners are presumed to be Access Persons of the Fund.” The
definition of Access Person also includes “Any director, officer or general partner of a principal underwriter who, in
the ordinary course of business, makes, participates in or obtains information regarding, the purchase or sale of
Covered Securities by the Fund for which the principal underwriter acts, or whose functions or duties in the ordinary
course of business relate to the making of any recommendation to the Fund regarding the purchase or sale of Covered
Securities.” Rule 17j-1(a)(1).

2

A “Covered Security” is any security that falls within the definition in section 2(a)(36) of the Act, except for direct
obligations of the U.S. Government, bankers’ acceptances, bank certificates of deposit, commercial paper and high
quality short-term debt instruments, including repurchase agreements, and shares issued by open-end funds. Rule 17j1(a)(4).

adopted procedures reasonably necessary to prevent Access Persons from violating the code of ethics, to
the fund board for approval; (iii) use reasonable diligence and institute procedures reasonably necessary to
prevent violations of the code; (iv) submit a written report to the fund describing any issues arising under
the code and procedures and certifying that the 17j-1 entity has adopted procedures reasonably necessary
to prevent Access Persons form violating the code; (v) identify Access Persons and notify them of their
reporting obligations; and (vi) maintain and make available to the
Commission for review certain records related to the code of ethics and transaction reporting by Access
Persons.
The rule requires each Access Person of a fund (other than a money market fund or a fund that
does not invest in Covered Securities) and of an investment adviser or principal underwriter of the fund,
who is not subject to an exception, 3 to file: (i) within 10 days of becoming an Access Person, a dated
initial holdings report that sets forth certain information with respect to the Access Person’s securities and
accounts; (ii) dated quarterly transaction reports within 30 days of the end of each calendar quarter
providing certain information with respect to any securities transactions during the quarter and any account
established by the Access Person in which any securities were held during the quarter; and (iii) dated
annual holding reports providing information with respect to each Covered Security the Access Person
beneficially owns and accounts in which securities are held for his or her benefit. In addition, rule 17j-1
3

Rule 17j-1(d)(2) contains the following exceptions: (i) an Access Person need not file a report for transactions effected
for, and securities held in, any account over which the Access Person does not have control; (ii) an independent
director of the fund, who would otherwise be required to report solely by reason of being a fund director and who does
not have information with respect to the fund’s transactions in a particular security, does not have to file an initial
holdings report or a quarterly transaction report; (iii) an Access Person of a principal underwriter of the fund does not
have to file reports if the principal underwriter is not affiliated with the fund (unless the fund is a unit investment trust)
or any investment adviser of the fund and the principal underwriter of the fund does not have any officer, director, or
general partner who serves in one of those capacities for the fund or any investment adviser of the fund; (iv) an Access
Person to an investment adviser need not make quarterly reports if the report would duplicate information provided
under the reporting provisions of the Investment Adviser’s Act of 1940; (v) an Access Person need not make quarterly
transaction reports if the information provided in the report would duplicate information received by the 17j-1
organization in the form of broker trade confirmations or account statements or information otherwise in the records of
the 17j-1 organization; and (vi) an Access Person need not make quarterly transaction reports with respect to
transactions effected pursuant to an Automatic Investment Plan.

-2-

requires investment personnel of a fund or its investment adviser, before acquiring beneficial ownership in
securities through an initial public offering (IPO) or in a private placement, to obtain approval from the
fund or the fund’s investment adviser.
2.

Purpose of the Information Collection

Rule 17j-1 provides for oversight by a fund’s board of directors of the codes of ethics and
procedures employed by the fund, its investment advisers and underwriters to prevent fraudulent,
deceptive, or manipulative acts in connection with the purchase or sale by persons associated with those
entities of securities held or to be acquired by the fund. Without the rule, fund boards and the Commission
would be hampered in their ability to monitor fully the conduct of such persons for activities that are
fraudulent, deceptive or manipulative.
3.

Role of Improved Information Technology

Some 17j-1 entities employ computerized transaction reporting and recordkeeping systems to
reduce the burden in connection with rule 17j-1. Although these systems can impose substantial start-up
and maintenance costs, they can help to reduce the information collection burdens arising under rule 17j-1.
The Commission permits the use of such technologies to comply with rule 17j-1.
4.

Duplication

The Commission is not aware of any duplicate reporting or recordkeeping requirements. Rule 17j1(d)(2)(iv) under the Investment Company Act relieves an Access Person of the duty to file reports if those
reports would duplicate reports required by rules under the Investment Advisers Act of 1940. 4 Rule 17j1(d)(2)(v) exempts an Access Person from filing the quarterly transaction report if it would duplicate
information already received by the 17j-1 organization in the form of broker trade confirmations or
account statements or information otherwise in the records of the 17j-1 organization.

4

Investment Adviser Codes of Ethics, Investment Advisers Act Release No. 2256 (Jul. 2, 2004) (69 FR 41696 (Jul. 9,
2004)).

-3-

Information collected under the rule is intended to improve board oversight of personal investment
activities of fund personnel. Similar information would not achieve that goal.
5.

Effect on Small Entities

All rule 17j-1 organizations, regardless of size, must adopt a code of ethics and keep records of
reports submitted by Access Persons. The reporting and recordkeeping requirements for small entities
could not be reduced without risking harm to investors’ interests.
6.

Consequences of Less Frequent Collection

In order for fund boards to play a meaningful oversight role, it is necessary for them to receive no
less frequently than annually reports from the fund, its investment advisers and underwriters regarding
issues arising under the code of ethics. Rule 17j-1, by requiring Access Persons to provide initial holdings
reports, quarterly transactions reports, and annual holdings reports, enables rule 17j-1 organizations to
monitor the securities transactions of Access Persons to ensure compliance with their codes of ethics.
Less frequent collection of such reports would hinder these organizations from enforcing their codes.

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 in rule
17j-1 before it submitted this request for approval to the Office of Management and Budget. The
Commission received no comments in response to this request.
More generally, the Commission and the staff 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 the staff with a means of ascertaining and
acting upon the paperwork burdens confronting the industry.
9.

Payment or Gift
-4-

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

Not applicable.
12.

Estimate of Time Burden

The staff spoke with representatives of a number of 17j-1 organizations. Based upon these
conversations and its experience with the industry, the staff has made the following estimates with respect
to the reporting burden. As noted above, Access Persons must file initial and annual holdings reports and
quarterly transaction reports. Investment personnel must obtain approval before acquiring beneficial
ownership in any securities through an IPO or private placement. In addition, rule 17j-1 organizations
have a number of responsibilities, most of which are carried out at the fund complex level 5, arising from
information collection requirements under rule 17j-1. The organizations must notify Access Persons of
their reporting obligations, prepare an annual rule 17j-1 report and certification for the board, document
their approval or rejection of IPO and private placement requests, maintain annual rule 17j-1 records,
maintain electronic reporting and recordkeeping systems, amend their codes of ethics as necessary, and,
for new fund complexes, adopt a code of ethics.
The estimated burdens associated with these information collections are set forth in the table
below.
Information Collection

Annual
Hours Per
Person or
Complex

Annual
Aggregate
Hours

Person
Responsible

Hourly
Rate
($) 6

Annual
Aggregate
Cost ($)

5

The staff estimates that there are 832 fund complexes currently operating.

6

All hourly rates used in this analysis (except for the “Access Person” average rate of $246 per hour and the aggregate
board rate) are derived from salaries reported in Securities Industry and Financial Markets Association, Management
and Professional Earnings in the Securities Industry (2011) and Securities Industry and Financial Markets Association,

-5-

Information Collection

Initial Holdings Report
Quarterly Transaction Report
Annual Holdings Report
IPO/Private Placement
Preapproval Request
Informing Access Persons of
Reporting Obligation

Annual
Hours Per
Person or
Complex
2

Annual
Aggregate
Hours

Person
Responsible

Hourly
Rate
($) 6

Annual
Aggregate
Cost ($)

13,312 7

246 8

3,274,752 9

1/4
3/4
1

6,250 10
52,500 12
4,992 14

246
246
246

1,537,500 11
12,915,000 13
1,228,032 15

3

2,496

New Access
Person
Access Person
Access Person
Investment
Personnel
Compliance
Officer

279

696,384 16

Office Salaries in the Securities Industry (2011) modified to account for an 1800-hour work-year and multiplied by
2.93 or 5.35 to account for bonuses, firm size, employee benefits and overhead.
7

We estimate that there are approximately 8 new Access Persons per fund complex each year and 5,240 total new
Access Persons each year (8 new Access Persons × 832 fund complexes = 6,656 new Access Persons). In addition, we
estimate that the total number of Access Persons remains approximately steady due to attrition. This is based on the
following calculation: (6,656 new Access Persons × 2 hours = 13,312 hours).

8

Although hourly rates of Access Persons differ, we estimate that, on average, the time for Access Persons required to
complete initial holdings reports and other transaction reports costs $246 per hour. Access Persons would include
portfolio managers, directors and other officers of the fund. The $246 rate is that of a typical mid level portfolio
manager.

9

This is based on the following calculations: (6,656 new Access Persons × 2 hours = 13,312 hours; 13,312 hours × $246
rate = $3,274,752).

10

We estimate that annually 25,000 quarterly transactions reports are filed. Access Persons do not have to file such
reports in certain instances including, for example, when they have not engaged in any securities transactions during a
particular quarter, or when the relevant information is contained in duplicate broker trade confirmations or account
statements received by the firm.

11

This is based on the following calculations: (25,000 quarterly reports × .25 hour = 6,250 hours; 6,250 hours × $246
rate = $1,537,500).

12

Each of the approximately 70,000 Access Persons must file an annual holdings report. This is based on the following
calculation: (70,000 Access Persons × .75 hour = 52,500 hours).

13

This is based on the following calculation: (52,500 hours × $246 rate = $12,915,000).

14

We estimate that each of the 832 fund complexes receives approximately 6 such requests each year, for a total of
approximately 4,992 such requests filed each year.

15

This is based on the following calculations: (4,992 IPO requests × 1 hour = 4,992 hours; 4,992 hours × $246 rate =
$1,228,032).

16

This is based on the following calculations: (832 fund complexes × 3 hours = 2,496 hours; 2,496 hours × $279 rate =
$696,384).

-6-

Information Collection

Preparation of Annual Report to
Board and Certification

Annual
Hours Per
Person or
Complex
8 1/2

Annual
Aggregate
Hours

Person
Responsible

Hourly
Rate
($) 6

Annual
Aggregate
Cost ($)

7,072

Chief
Compliance
Officer (50%)
Attorney for
Fund
Complex
(50%)
Chief
Compliance
Officer
Chief
Compliance
Officer (5%)
Compliance
Clerk (95%)
Programmer
Analyst

433

2,867,696 17

Documentation of IPO/Private
Placement Approval/Rejection

3 (½ hour
per request)

2,496

Rule 17j-1 Recordkeeping,
Review and Analysis

300

249,600

Maintenance of Computer
Systems for Use in 17j-1
Reporting and Recordkeeping

50

41,600

378

433

1,080,768 18

433

19,631,040 19

60

196

8,153,600 20

17

This is based on the following calculations: (832 fund complexes × 8.5 hours = 7,072 hours; 7,072 ÷ 2 = 3,536 hours
(50% division between CCO and attorney); 3,536 hours × $433 rate = $1,531,088 CCO costs; 3,536 hours × $378 rate
= $1,336,608 attorney costs; $1,531,088 CCO costs + $1,336,608 attorney costs = $2,867,696 total costs).

18

This is based on the following calculations: (4,992 IPO requests × .5 hour for processing each request = 2,496 hours;
1965 hours × $433 rate = $1,080,768).

19

This is based on the following calculations: (832 fund complexes × 300 hours = 249,600 hours; 249,600 x .95 =
237,120 hours clerk time (12,480 hours CCO time with a 95% and 5% division between clerk and CCO); 12,480 CCO
hours × $433 rate = $5,403,840 CCO costs; 237,120 clerk hours × $60 rate = $14,227,200 clerk costs; $5,403,840
CCO costs + $14,227,200 clerk costs = $19,631,040 total costs).

20

This is based on the following calculations: (832 fund complexes × 50 hours = 41,600 hours; 41,600 hours x $196 rate
= $8,153,600).

-7-

Information Collection

Preparation and Board Approval
of New Code of Ethics for New
Fund Complex

Preparation and Board approval
of Material Amendments to
Existing Codes of Ethics,
Implementing Policies and
Procedures, and Board Review
and Certification

Annual
Hours Per
Person or
Complex
25

8

Annual
Aggregate
Hours

Person
Responsible

Hourly
Rate
($) 6

Annual
Aggregate
Cost ($)

625 21

Chief
Compliance
Officer (40%)
Attorney for
Fund
Complex
(40%)

433

765,250 23

6,656

Board of
Directors
(20%)
Chief
Compliance
Officer (25%)
Attorney for
Fund
Complex
(50%)

378
4,500 22

433

9,466,496 24

378
4,500

Board of
Directors
(25%)
TOTAL

387,599

61,616,518

We estimate that annually there are approximately 75,496 respondents under rule 17j-1, of which

21

We estimate that there are 25 new fund complexes formed each year.

22

Commission staff estimates that a fund board’s hourly rate is $4500 per hour (on average, a board has 9 directors and
the fund pays each director $500 per hour).

23

This is based on the following calculations: (25 new fund complexes × 25 hours = 625 hours; 625 hours x .40 = 250
hours (40% division each for CCO and attorney); 625 hours x .20 = 125 hours (board time); 250 hours × $433 rate =
$108,250 CCO costs; 250 hours × $378 rate = $94,500 attorney costs; 125 hours × $4,500 rate = $562,500, $108,250
CCO costs + $94,500 attorney costs + $562,500 board costs = $765,250 total costs).

24

This is based on the following calculations: (832 fund complexes × 8 hours = 6,656 hours, 6,656 hours x .25 = 1,664
hours (25% division each for CCO and Board); 6,656 hours x .50 = 3,328 hours (attorney time); 1,664 hours × $433
rate = $720,512 CCO costs; 3,328 hours × $378 rate = $1,257,984 attorney costs; 1,664 hours × $4,500 rate =
$7,488,000, $720,512 CCO costs + $1,257,984 attorney costs + $7,488,000 board costs = $9,466,496 total costs).

-8-

5,496 are rule 17j-1 organizations 25 and 70,000 are Access Persons. In the aggregate, these respondents
make approximately 107,780 responses annually. 26 As the table shows, we estimate that the total annual
burden of complying with the information collection requirements in rule 17j-1 is approximately 387,599
hours and the cost of those hours is approximately $61,616,518.
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
Commission rules. Reporting burdens may differ substantially across respondents.
13.

Annual Cost Burden

We estimate that there is an annual cost burden of approximately $5,000 per fund complex, for a
total of $4,160,000 27, associated with complying with the information collection requirements in rule 17j1, aside from the cost of the burden hours discussed above. 28 This represents the costs of purchasing and
maintaining computers and software to assist funds in carrying out rule 17j-1 recordkeeping. The estimate
of the average cost burden 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 Commission rules.
Reporting burdens may differ substantially across respondents.
14.

Cost to the Federal Government

There is no cost to the federal government of administering the information collection
requirements in rule 17j-1 under the Investment Company Act.
25

Currently, there are approximately 4,184 active funds, approximately 937 investment advisers to funds, and
approximately 375 principal underwriters to funds, for a total of 5,496 17j-1 organizations.

26

This estimate is based on the following calculation: (6,656 initial holdings reports by Access Persons + 25,000
quarterly transaction reports by Access Persons + 70,000 annual holdings reports by Access Persons + 4,992
preapproval requests by Access Persons for purchases of initial public offerings and private placements + 832 annual
certifications by fund boards + 275 annual material amendments + 25 new codes of ethics for new fund complexes =
107,780 annual responses).

27

This estimate is based on the following calculation: ($5,000 software costs × 832 fund complexes = $4,160,000 total
costs).

28

The cost burden associated with filing of new and amended codes of ethics on the Commission’s Electronic Data
Gathering, Analysis, and Retrieval system (EDGAR) is included in the Paperwork Reduction Act estimates for the
relevant forms to which these codes must be appended.

-9-

15.

Changes in Burden

The increase from 292,740 burden hours to 387,599 hours (an increase of 94,859 hours) reflects a
change in the estimated number of Access Persons and fund complexes, as well as adjustments to the hour
estimates we made based on discussions with representatives of fund complexes about their experiences in
complying with rule 17j-1. The increase in costs from $3,275,000 to $4,160,000 (an increase of $885,000)
associated with the collections of information is attributable to an increase in the number of fund
complexes currently operating.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exception to Certification Statement

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

- 10 -