Supporting_Statement_-_17a-8[1]

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection for
“Rule 17a-8”
A.

JUSTIFICATION
1.

Information Collection Necessity

Section 17(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-17(a)) (the
“Investment Company Act” or “Act”) generally prohibits a person that has specified
affiliate relationships with a registered investment company (“fund”), 1 when acting as
principal, from knowingly selling securities or property to or purchasing securities or
property from the fund. 2 Congress enacted section 17(a) to protect funds and their
shareholders from overreaching by fund affiliates. Mergers of funds with their affiliates
(“affiliated fund mergers”) are among the affiliated transactions that section 17(a)
prohibits. Section 17(b) of the Act authorizes the Commission to permit affiliated
transactions if: (i) the terms of the transaction are reasonable and fair and do not involve
overreaching on the part of any person concerned; (ii) the proposed transaction is
consistent with the policy of each fund; and (iii) the proposed transaction is consistent
with the general purposes of the Act. 3
In 1980, the Commission adopted rule 17a-8, which exempted affiliated fund
mergers from the prohibitions in section 17(a) if the affiliation arose as the result of a
common investment adviser, common directors, or common officers. The amendments
1

Unless otherwise indicated, the term “fund” will be used in this supporting statement to
refer to both registered investment companies and series or portfolios of registered
investment companies.

2

15 U.S.C. 80a-17(a). Section 17(a) governs transactions involving affiliated persons of
funds, promoters of or principal underwriters for a fund, or affiliated persons of any
affiliated person, promoter, or underwriter. See also section 2(a)(3) of the Investment
Company Act (defining the term “affiliated person). 15 U.S.C. 80a-2(a)(3).

3

15 U.S.C. 80a-17(b).

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to rule 17a-8, adopted in 2002, 4 expanded the types of mergers exempted by the rule to
include mergers between funds affiliated for any reason and mergers between funds and
certain unregistered entities. 5
To ensure that mergers permitted under the amended rule will not raise the types
of investor protection issues that require Commission review, funds must satisfy certain
conditions in order to rely on the rule. These conditions include information collection
requirements. These collections of information requirements are voluntary. Rule 17a-8
is an exemptive rule and, therefore, funds may choose whether or not to rely on the rule.
The rule requires that the board of any fund participating in the merger (“Merging
Company”) determine that participation in the merger is in the best interests of the
Merging Company, and that the interests of the Merging Company’s existing
shareholders will not be diluted as a result of the merger. 6 The directors must request and
evaluate such information as may reasonably be necessary to make these determinations
and must consider and give appropriate weight to all pertinent factors. 7

4

Investment Company Mergers, Investment Company Act Release No. IC-25666 (July 18,
2002) [67 FR 48512 (July 24, 2002)] (“Adopting Release”).

5

Eligible unregistered entities include collective trust funds, as described in 15 U.S.C. 80a3(c)(11), and common trust funds and similar funds, as described in 15 U.S.C.
80a-3(c)(3) of the Act. Rule 17a-8(b)(2).

6

Rule 17a-8(a)(2)(i).

7

Rule 17a-8(a)(2)(ii). The rule includes a note that refers to the Adopting Release, which
provides factors that the board should consider, if relevant, in connection with the
determination that participation in the merger is in the best interests of the fund. The
factors relate to the following issues: the federal income tax consequences to the
shareholders, the fees or expenses that the Merging Company will pay (directly or
indirectly) in connection with the merger, any effect of the merger on annual fund
operating expenses and shareholder fees and services, and any change in investment
objectives, restrictions, and policies after the merger. See Note to Rule 17a-8(a)(2)(i);
Adopting Release, supra note 4 at 48513.

2

In order to enable boards of directors to assess whether the interests of existing
shareholders would be diluted as a result of improper valuations in connection with a
merger transaction, the directors of any fund merging with an unregistered entity must
approve procedures for the valuation of assets received from that entity. The procedures
must provide for the preparation of a report by an independent evaluator that sets forth
the fair value of each such asset for which market quotations are not readily available. 8
Unless certain conditions are met, the rule also requires a fund being acquired
to obtain approval of the merger transaction by a majority of its outstanding voting
securities. 9
A Merging Company must record the determinations of its board, and the bases
for those determinations, in its minute books.10 The preparation and recording of these
board determinations constitutes a collection of information under the Paperwork
Reduction Act.
Finally, the rule requires any surviving fund to preserve written records describing
the merger and its terms for six years after the merger (the first two in an easily
accessible place). 11 This preservation of written records constitutes a collection of
information under the Paperwork Reduction Act.

2.

Information Collection Purpose

8

Rule 17a-8(a)(2)(iii). These procedures are unnecessary for mergers between registered
investment companies because they value assets according to methods set forth in the
Investment Company Act. See, e.g., 15 U.S.C. 2(a)(41); 17 C.F.R. 2a41-1.

9

Rule 17a-8(a)(3).

10

Rule 17a-8(a)(2)(iv).

11

Rule 17a-8(a)(5).

3

The purpose of the conditions in rule 17a-8, including those that are information
collection requirements, is to ensure that the interests of each Merging Company and its
shareholders are sufficiently considered and protected throughout the merger negotiation
and approval process. The information collection requirements in the rule also ensure
that adequate records are available for Commission review in the course of its
compliance and examination program.
3.

Consideration Given to Information Technology

Rule 17a-8 does not require the reporting of any information or the filing of any
documents with the Commission. The amended rule requires Merging Companies to
keep board minutes and maintain written records describing the merger transaction and
its terms. The Electronic Signatures in Global and National Commerce Act 12 and the
conforming amendments to rules under the Investment Company Act permit funds to
maintain records electronically.
4.

Duplication

With the exception of the requirements identified below, rule 17a-8 does not
impose any requirements that are duplicated elsewhere in federal securities laws, and
similar information is not available from other sources. The written records that describe
the merger and its terms may be encompassed by the general recordkeeping requirements
contained in rules 31a-1 and 31a-2 under the Investment Company Act. 13 For example,
the rule requires the preservation of minute books recording board meetings at which the
merger was considered and advisory materials received from the investment adviser in
connection with the merger, both of which fall within categories of records required to be
12

Pub. L. No. 106-229, 114 Stat. 464 (June 30, 2000).

13

17 CFR 270.31a-1 and 270.31a-2.

4

kept under the general recordkeeping rules. 14 The record preservation requirements under
rule 17a-8 are more specific than those in rules 31a-1 and 31a-2 and are designed to
ensure preservation of adequate information to assess the compliance of Merging
Companies with the rule's conditions. A fund that has preserved those records for
purposes of rule 17a-8 will have also satisfied the requirements for the preservation of
such records pursuant to rules 31a-1 and 31a-2.
5.

Effect on Small Entities

Rule 17a-8 is available for any merger, including mergers involving small
entities, as long as the registered funds participating in the merger comply with the
conditions set forth in the rule. These requirements protect the interests of the funds and
their shareholders from overreaching by fund affiliates. Rule 17a-8 does not
disproportionately burden small entities. The Commission believes that it could not
adjust the rule to lessen the burden on small entities of complying with the rule without
jeopardizing the interests of holders of securities of those entities.
6.

Consequences of Less Frequent Collection

The information collection requirements of rule 17a-8 apply to a fund only if the
fund relies on the rule to merge with an affiliated fund or affiliated common or collective
trust fund. Less frequent information collection would be incompatible with the eventspecific nature of the rule.

14

See rule 31a-1(b)(4) (requiring investment companies to maintain, among other things,
minute books of directors’ meetings); rule 31a-1(b)(11) (requiring investment companies
to maintain, among other things, “files of all advisory material received from the
investment adviser”). Funds will not be required to maintain duplicate copies of any
overlapping records.

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7.

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

Rule 17a-8 requires that written records describing the merger transaction and
terms be maintained for six years after the merger, the first two in an easily accessible
place. Although this provision exceeds the three-year guideline for most kinds of records
under 5 CFR 1320.5(d)(2)(iv), the Commission believes that the unusual and important
nature of merger transactions in the life of a fund warrants the six-year recordkeeping
requirement. This requirement contributes to the effectiveness of the Commission’s
examination and inspection program.
8.

Consultations Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 17a-8 before it submitted these requests for extension and approval
to OMB. The Commission received no comments in response to this 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
with means to identify and address paperwork burdens that may confront the industry.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

Not applicable.

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12.

Time Burden Estimates

During 2011, there were approximately 368 mergers of affiliated series or
portfolios of registered investment companies. 15 The staff estimates that none of the
affiliated mergers proceeded pursuant to an exemptive order under section 17(b) of the
Act. Accordingly, the staff believes that all the affiliated mergers in 2011 proceeded
under rule 17a-8. 16 Assuming that there will be approximately 368 mergers annually, we
estimate that approximately 736 registered investment companies, or, in many cases,
portfolios or series thereof, would be subject to the rule’s information collection
requirements annually.
The staff estimates that compliance with the rule's requirements imposes a total
annual burden on each merging portfolio or series of 7 hours (3 hours of professional
time and 4 hours of clerical time) 17 to prepare and record board resolutions documenting
the board's findings and to compile and maintain records documenting the merger
transaction and its terms. 18 The staff therefore estimates the total annual burden imposed
by the rule on all affected funds is 5,152 hours, based on an estimate of 368 affiliated

15

This figure is based on data from Morningstar®. Each portfolio or series merger was
counted separately. This way of counting reflects the staff’s determination to assess the
paperwork burden faced at the series or portfolio level rather than at the level of the
registered investment company, in order to be consistent with the amendments discussed
above, which require that the impact of the merger be separately assessed for each series
or portfolio involved.

16

Any merger that involved affiliated funds would not be able to proceed without either
relying on rule 17a-8 or on an exemptive order obtained under section 17(b).

17

These estimates are based on a survey of representatives from mutual funds and service
providers.

18

This estimate encompasses the aggregate burden to comply with both of the collection of
information requirements of the rule. The surviving fund would maintain the documents
describing the merger transaction and its terms.

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mergers under rule 17a-8 per year. 19 We estimate that professional staff performs 2,208
of these burden hours at a total cost of $710,976, 20 while support staff performs 2,944 of
these burden hours at a total cost of $176,640. 21 The staff estimates the total annual cost
of the burden hours for all funds of complying with rule 17a-8 is $887,616. 22
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. The number of burden
hours may vary depending on the nature of the merger transaction and the number of
records a fund is required to preserve pursuant to the rule.
13.

Annual Cost Burden

The rule imposes an annual cost burden on the industry in addition to the cost
arising from the hour burden described in Item 12 of this Supporting Statement. The
directors of any fund merging with an unregistered entity must approve procedures for
the valuation of assets received from that entity. The procedures must provide for the
preparation of a report by an independent evaluator that sets forth the fair value of each

19

This estimate is based on the following calculation: (3 hours + 4 hours) x 2 x 368 funds
= 5,152 hours.

20

The professional staff estimates are based on the following calculations: 2208 = 3 hours x
2 x 368 funds; and 2208 hours x $322/hour = $710,976. The per hour cost estimates are
based on figures for compliance attorney positions found in the Securities Industry and
Financial Markets Association’s Management & Professional Earnings in the Securities
Industry 2011, modified to account for an 1800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead.

21

The support staff estimates are based on the following calculations: 2,944 hours = 4 hours
x 2 x 368 funds; and 2,944 hours x $60/hour = $176,640. The per hour cost estimates are
based on figures for compliance clerk positions found in the Securities Industry and
Financial Markets Association’s Office Salaries in the Securities Industry 2011,
modified to account for an 1800-hour work-year and multiplied by 2.93 to account for
bonuses, firm size, employee benefits and overhead.

22

This estimate is based on the following calculation: $887,616 = $710,976 + $176,640.

8

such asset for which market quotations are not readily available. The staff estimates,
based on discussions with professionals who have prepared similar valuation reports, that
obtaining a valuation report from independent evaluators typically would cost each fund
that merges with an unregistered entity approximately $15,000. In 2011, the staff
estimates there were no affiliated fund mergers involving the kinds of unregistered
entities covered by the rule. 23 Thus, the staff estimates there is no annual cost to the
industry from this requirement.
We anticipate that the condition in the rule requiring non-surviving funds to
obtain shareholder approval would result in shareholder votes by approximately 15 funds
that otherwise would not have conducted shareholder votes. 24 The funds or their advisers
incur legal, mailing, printing, solicitation, and tabulation costs in connection with a
shareholder vote. We estimate, based on discussions with representatives of funds and
service providers, that the total cost to an acquired fund of obtaining shareholder approval
for a fund merger is $100,000. Thus, we estimate that the aggregate annual cost
associated with this provision is $1,500,000. 25

23

The staff’s estimate that there are no mergers each year involving common or collective
trust funds is based on discussions with staff in the Division of Investment Management
that review filings regarding fund mergers.

24

The staff’s estimate that the condition in the rule requiring non-surviving funds to obtain
shareholder approval would result in shareholder votes by approximately 15 funds that
otherwise would not have conducted shareholder votes is based on discussions with staff
in the Division of Investment Management. We estimate that most funds are constrained
by state law to conduct a shareholder vote in the event of a merger, and that even funds
that are not required by state law to obtain shareholder approval may do so in order to
maintain good relations with their shareholders.

25

This estimate is based on the following calculation: $1,500,000 = $100,000 x 15
funds.

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The staff estimates that the total annual cost burden associated with rule 17a-8 is
$1,500,000. 26
14.

Cost to the Federal Government

Rule 17a-8 imposes essentially no costs on the federal government. The rule does
not require funds to file any documents with the Commission. Commission staff may
review board minutes and records related to the merger as a matter of course during fund
inspections.
15.

Changes in Burden

The estimated burden of rule 17a-8 increased by 882 hours from the prior
estimate of 4,270 hours. This increase reflects a change in the estimated number of funds
relying on rule 17a-8. The increase in costs from $1,200,000 to $1,500,000 (an increase
of $300,000) associated with relying on the rule reflects adjustments we made based on
discussions with representatives of fund complexes about their experiences in relying on
rule 17a-8.
16.

Information Collection Planned for Statistical Purposes
Not applicable.

17.

Approval to Omit the OMB Expiration Date
Not applicable.

18.

Exception to Certification Requirement
Not applicable.

B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS

Not applicable.

26

See id.

10