Rule_482_SUPPORTING_STATEMENT_2013[1]

SUPPORTING STATEMENT
Proposed Rule 482
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Like most issuers of securities, when an investment company 1 (“fund”) offers its
shares to the public, its promotional efforts become subject to the advertising restrictions
of the Securities Act of 1933 (“Securities Act”). In recognition of the particular problems
faced by funds that continually offer securities and wish to advertise their securities, the
Securities and Exchange Commission (“Commission”) has previously adopted
advertising safe harbor rules. The most important of these is rule 482 adopted under the
Securities Act, which, under certain circumstances, permits funds to advertise investment
performance data, as well as other information (17 CFR 230.482). Rule 482
advertisements are deemed to be “prospectuses” under Section 10(b) of the Securities
Act. 2
Rule 482 contains certain requirements regarding the disclosure that funds are
required to provide in qualifying advertisements. These requirements are intended to
encourage the provision to investors of information that is balanced and informative,
particularly in the area of investment performance. For example, a fund is required to
include disclosure advising investors to consider the fund’s investment objectives, risks,
charges, and expenses, and other information described in the fund’s prospectus, and
highlighting the availability of the fund’s prospectus. In addition, rule 482
advertisements that include performance data of open-end funds or insurance company
separate accounts offering variable annuity contracts are required to include certain

1

“Investment company” refers to both investment companies registered under the Investment
Company Act of 1940 (“Investment Company Act”) and business development companies.

2

15 U.S.C. 77j(b).

standardized performance information, information about any sales loads or other
nonrecurring fees, and a legend warning that past performance does not guarantee future
results. Such funds including performance information in rule 482 advertisements are
also required to make available to investors month-end performance figures via Web site
disclosure or by a toll-free telephone number, and to disclose the availability of the
month-end performance data in the advertisement. The rule also sets forth requirements
regarding the prominence of certain disclosures, requirements regarding advertisements
that make tax representations, requirements regarding advertisements used prior to the
effectiveness of the fund’s registration statement, and requirements regarding the
timeliness of performance data. In addition, rule 482(b) describes the information that is
required to be included in an advertisement, including a cautionary statement under rule
482(b)(4) disclosing the particular risks associated with investing in a money market
fund.
On June 5, 2013, the Commission issued a release proposing two alternatives as
part of a money market reform proposal. Under the first alternative, prime institutional
money market funds would be required to float their net asset value. Under the second
alternative, money market funds whose weekly liquid assets fell below 15% of total
assets would be required to impose a 2% liquidity fee unless the fund’s board of directors
determines that such a fee would not be in the best interest of the fund, and permit the
funds to suspend redemptions temporarily (i.e., “gate” the fund). 3 Under either
alternative, the proposed amendments would change the investment expectations and
experience of money market fund investors, rendering the current rule 482(b)(4) risk
disclosures in advertisements for money market funds out of date. The proposed
3

See Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release
No. 30551 (June 5, 2013).
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amendments to rule 482(b)(4) would revise the disclosure requirements to better reflect
the operation of money market funds under the proposed alternatives and require that that
the risk disclosures be made prominently on a fund’s website.
2.

Purpose of the Information Collection

Rule 482 advertisements must be filed with the Commission or, in the alternative,
with the Financial Industry Regulatory Authority (“FINRA”). 4 This information
collection differs from many other federal information collections that are primarily for
the use and benefit of the collecting agency.
Rule 482 contains requirements that are intended to encourage the provision to
investors of information that is balanced and informative, particularly in the area of
investment performance. The Commission is concerned that in the absence of such
provisions fund investors may be misled by deceptive rule 482 advertisements and may
rely on less-than-adequate information when determining in which funds they should
invest money. As a result, the Commission believes it is beneficial for funds to provide
investors with balanced information in fund advertisement in order to allow investors to
make better-informed decisions.
3.

Consideration Given to Information Technology

The Commission’s electronic filing system (Electronic Data Gathering, Analysis
and Retrieval or “EDGAR”) automates the filing, processing and dissemination of full
disclosure filings. The system permits public companies to transmit filings to the
Commission electronically. This automation has increased the speed, accuracy, and
availability of information, generating benefits to investors and financial markets.

4

See rule 24b-3 under the Investment Company Act (17 CFR 270.24b-3), which provides that any
sales material, including rule 482 advertisements, shall be deemed filed with the Commission for
purposes of Section 24(b) of the Investment Company Act upon filing with FINRA.
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The vast majority of fund advertisements are filed with FINRA under Investment
Company Act rule 24b-3, which allows any sales material filed with FINRA to be
deemed to be filed with the Commission.5 Rule 482 advertisements that are required to
be filed with the Commission are to be filed electronically on EDGAR (17 CFR
232.101(a)(1)(i) and (iv)). 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.

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. The requirements of rule 482 are not generally duplicated elsewhere.
5.

Effect on Small Entities

The Commission reviews all rules periodically, as required by the Regulatory
Flexibility Act, to identify methods to minimize recordkeeping or reporting requirements
affecting small businesses. The current disclosure requirements for fund advertisements
do not distinguish between small entities and other entities. To the extent smaller funds
advertise, their burden to prepare advertisements may be greater than for larger funds due
to economies of scale. This burden would include the cost of reviewing an advertisement
to confirm that it meets the requirements of rule 482.
The Commission considered special requirements for small entities. The
Commission believes, however, that imposing different requirements on smaller fund
companies would not be consistent with investor protection. The use of different
standards for small entities may create a risk that investors may receive false or

5

17 CFR 270.24b-3.
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misleading information. In addition, the Commission believes that uniform disclosure
standards for all fund advertisements should allow investors to compare funds more
easily when making an investment decision. Allowing different standards for small
entities may create confusion for investors who wish to compare funds.
With respect to the proposed amendments, pursuant to 5 U.S.C. section 605(b),
the Commission certified that the proposed amendments to rule 482 would not, if
adopted, have a significant economic impact on a substantial number of small entities.
6.

Consequences of Less Frequent Collection

Since fund advertising is voluntary, the Commission does not determine the
frequency with which funds advertise pursuant to rule 482. Therefore, short of not
requiring any collection for advertisements governed by rule 482, the Commission cannot
require less frequent collection. Not requiring disclosure of the information required by
rule 482 would harm investors by denying them information that may be useful in
making investment decisions. If such advertisements did not contain this disclosure,
investors could receive inadequate information or could receive confusing, false, or
misleading information. As a result, investor confidence in the securities industry could
be adversely affected.
7.

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

This collection is not inconsistent with 5 CFR 1320.5(d)(2).
8.

Consultation Outside the Agency

Rule 482 has previously been amended through rulemaking actions pursuant to
the Administrative Procedures Act. In these rulemaking actions, comments are generally
received from registrants, trade associations, the legal and accounting professions, and
other interested persons. In addition, the Commission and the Division staff also
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participate in an ongoing dialogue with representatives of the fund 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 paperwork
burdens that may confront the industry.
The Commission requested public comment on the collection of information
required by rule 482, before it submitted this request for revision and approval to the
Office of Management and Budget. We will consider all comments received on the
proposed amendments.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

Not applicable.
12.

Estimate of Time Burden

The burden hour estimate for complying with rule 482 is based on consultations
with industry representatives and on the Commission’s experience with the contents of
disclosure documents. The number of burden hours may vary depending on, among
other things, the complexity of the document, the number of funds included in a single
document, and whether preparation of the document is performed by fund staff or outside
counsel. The number of funds used to estimate the burden hours is an estimate based on
the Commission’s statistics. The estimates of average burden hours are made solely for
purposes of the Paperwork Reduction Act of 1995 (“PRA”) 6 and are not derived from a

6

44 U.S.C. 3501 et seq.
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comprehensive or even representative survey or study of the cost of Commission rules
and forms.
Rule 482 is part of Regulation C under the Securities Act (17 CFR 230.400-498).
Regulation C describes the disclosure that must appear in the registration statements
under the Securities Act and Investment Company Act. However, the burden associated
with rule 482 is included within the collection entitled rule 482, and rule 482 is not
considered part of Regulation C for information collection purposes.
In our most recent Paperwork Reduction Act submission for rule 482,
Commission staff estimated the annual compliance burden to comply with the collection
of information requirement of rule 482 is 301,179 hours. The proposed amendments
would affect the staff’s estimates of the hour burden as described below.
Under the floating NAV proposal, each money market fund, other than a
government or retail fund, would be required to replace its existing disclosure statement
with a bulleted statement disclosing the particular risks associated with investing in a
floating NAV money market fund on any advertisement or sales material that it
disseminates (including on the fund website). Specifically, floating NAV money market
funds would generally be required to include the following bulleted disclosure statement
on their advertisements and sales materials:
•

You could lose money by investing in the Fund.

•

You should not invest in the Fund if you require your investment to maintain a
stable value.

•

The value of shares of the Fund will increase and decrease as a result of
changes in the value of the securities in which the Fund invests. The value of

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the securities in which the Fund invests may in turn be affected by many
factors, including interest rate changes and defaults or changes in the credit
quality of a security’s issuer.
•

An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.

•

The Fund’s sponsor has no legal obligation to provide financial support to the
Fund, and you should not expect that the sponsor will provide financial
support to the Fund at any time.

Each government and retail money market fund would be required to replace its
existing disclosure statement with the following bulleted disclosure on any advertisement
or sales material it disseminates (including on the fund website):
•

You could lose money by investing in the Fund.

•

The Fund seeks to preserve the value of your investment at $1.00 per share,
but cannot guarantee such stability.

•

An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.

•

The Fund’s sponsor has no legal obligation to provide financial support to the
Fund, and you should not expect that the sponsor will provide financial
support to the Fund at any time.

Under the liquidity fees and gates alternative proposal, money market funds (other
than government funds 7) would be required to include a bulleted statement, disclosing the
particular risks associated with investing in a fund that may impose liquidity fees or

7

Government money market funds that are exempt from the proposed liquidity fees and gates
alternative would not be required to disclose the third and fourth bullet points listed below.
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redemption restrictions, on any advertisement or sales material that it disseminates
(including on the fund website):
•

You could lose money by investing in the Fund.

•

The Fund seeks to preserve the value of your investment at $1.00 per share, but
cannot guarantee such stability.

•

The Fund may impose a fee upon sale of your shares when the Fund is under
considerable stress.

•

The Fund may temporarily suspend your ability to sell shares of the Fund when
the Fund is under considerable stress.

•

An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.

•

The Fund’s sponsor has no legal obligation to provide financial support to the
Fund, and you should not expect that the sponsor will provide financial support to
the Fund at any time.

Regardless of the alternative proposal adopted 8, for each money market fund, staff
estimates that internal marketing staff and in-house counsel would spend, on a one-time
basis, 9 an average of 4 hours to update and review the wording of the rule 482(b)(4) risk

8

As discussed above, the extent of the proposed amendments to the wording of the rule 482(b)(4)
risk disclosures in money market funds’ advertisements are generally the same under either the
proposed FNAV alternative or the liquidity fees and gates alternative. Therefore, we estimate that
the incremental change in burden hours would be the same under either alternative.

9

Under either proposed alternative, the compliance period for updating rule 482(b)(4) risk
disclosures would be 2 years. The staff understands that money market funds commonly update
and issue new advertising materials on a relatively periodic and frequent basis. Accordingly,
given the extended compliance period proposed, the staff expects that funds should be able to
amend the wording of their rule 482(b)(4) risk disclosures as part of one of their general updates
of their advertising materials. Similarly, the staff believes that funds could update the
corresponding risk disclosures on their websites when performing other periodic website
maintenance. The staff therefore accounts only for the incremental change in burden that
amending the rule 482(b)(4) risk disclosures would cause in the context of a larger update to a
fund’s advertising materials or website.
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disclosures for each fund’s printed advertising and sales materials, resulting in one-time
time costs of $1,162. 10 In addition, for each money market fund, staff estimates that
internal information technology staff and in-house counsel would spend, on a one-time
basis, an average of 1.25 hours to post and review the wording of the rule 482(b)(4) risk
disclosures on a fund’s website, resulting in one-time time costs of approximately $302. 11
In the aggregate, staff estimates that each money market fund would spend a total of 5.25
hours and incur total time costs of approximately $1,464 on a one-time basis to comply
with the amendments to rule 482(b)(4).
Using an estimate of 586 money market funds that would be required to comply with
the amendments to rule 482(b)(4), 12 staff estimates that in the aggregate, these proposed
amendments would result in a total one-time incremental compliance burden of
approximately 3,077 burden hours 13 at a total one-time incremental time cost of
approximately $857,904. 14 Amortizing the incremental hour burden over three years
results in an average annual aggregate hour burden of approximately 1,026 hours.

10

This estimate is based on the following calculation: 3 hours spent by a marketing manager to
update the wording of the risk disclosures for each fund’s marketing materials + 1 hour spent by
an attorney reviewing the amended rule 482(b)(4) risk disclosures. Accordingly, the estimated
costs are based on the following: $261/hour for a marketing manager x 3 hours = $783, plus
$379/hour for an attorney x 1 hour = $379, for a combined total of $1,162.

11

This estimate is based on the following calculation: 1 hour spent by a webmaster to update a
fund’s website’s risk disclosures, plus 15 minutes spent by an attorney reviewing the amended risk
disclosures. The estimated costs are based on the following calculations: $207/hour for a
webmaster x 1 hour = $207, plus $378/hour for an attorney x 0.25 hours = approximately $95, for
a combined total of approximately $302.

12

This estimate is based on a staff review of reports on Form N-MFP filed with the Commission for
the month ended February 28, 2013. For purposes of this PRA, the staff assumes that the universe
of money market funds affected by the amendments to rule 482(b)(4) would be the same as the
current universe for Form N-MFP.

13

This estimate is based on the following calculation: 5.25 burden hours per fund x 586 funds =
approximately 3,077 total burden hours.

14

This estimate is based on the following calculation: approximately $1,464 total costs per fund x
586 funds = approximately $857,904 total costs.
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13.

Estimate of Total Annual Cost Burden

Cost burden is the cost of services purchased to comply with rule 482, such as for
the services of computer programmers, outside counsel, financial printers, and
advertising agencies. The cost burden does not include the cost of the hour burden
discussed in Item 12 above. Estimates are based on the Commission’s experience with
advertisements and sales literature. The Commission currently attributes no external cost
burden to rule 482.
14.

Cost to the Federal Government

Advertising regulation affects costs incurred by the federal government. 58,368
responses are filed annually pursuant to rule 482; however these responses are generally
filed with FINRA and are generally not reviewed by the Commission. The annual cost of
reviewing and processing disclosure documents, including new registration statements,
post-effective amendments, proxy statements, and shareholder reports of investment
companies, amounted to approximately $19.8 million in fiscal year 2012, based on the
Commission’s computation of the value of staff time devoted to this activity and related
overhead.
15.

Explanation of Changes in Burden

Currently, the approved annual hour burden for rule 482 is 301,179 hours. The
new estimate of the total annual hour burden for the first year is 302,205 hours. 15 The
increase in the total annual hour burden is 1,026 hours. This increase is due to the staff’s
estimates of the time costs that would result from our proposed amendments. There is no
annual external cost burden attributed to rule 482.
15

This estimate is based on the following calculation: (301,179 current approved burden hours +
1,026 annual incremental burden hours = 302,205 hours).
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16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date
We request authorization to omit the expiration date on the electronic

version of the form. Including the expiration date on the electronic version of the form
will result in increased costs, because the need to make changes to the form may not
follow the EDGAR application’s scheduled version release dates. The OMB control
number will be displayed.
18.

Exception to Certification Statement

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS

Not applicable.

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