Rule 7d-1 SUPPORTING STATEMENT

SUPPORTING STATEMENT
Rule 7d-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 7(d) of the Investment Company Act of 1940 (15 U.S.C. 80a-7(d)) (the
“Act” or “Investment Company Act”) requires an investment company (“fund”)
organized outside the United States (“foreign fund”) to obtain an order from the
Commission allowing the fund to register under the Act before making a public offering
of its securities through the United States mail or any means of interstate commerce. The
Commission may issue an order only if it finds that it is both legally and practically
feasible effectively to enforce the provisions of the Act against the foreign fund, and that
the registration of the fund is consistent with the public interest and protection of
investors.
Rule 7d-1 (17 CFR 270.7d-1) under the Act, which was adopted in 1954, specifies
the conditions under which a Canadian management investment company (“Canadian
fund”) may request an order from the Commission permitting it to register under the Act.
Although rule 7d-1 by its terms applies only to Canadian funds, funds in other
jurisdictions generally have agreed to comply with the requirements of rule 7d-1 as a
prerequisite to receiving an order permitting the fund’s registration under the Act.
The rule requires Canadian funds that propose to register under the Act to file an
application with the Commission that contains various undertakings and agreements by
the fund. The requirement of the Canadian fund to file an application is a collection of
information under the Paperwork Reduction Act. Certain of the undertakings and
agreements, in turn, impose the following additional information collection requirements:

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(1)

the fund must file with the Commission agreements between the fund and
its directors, officers, and service providers requiring them to comply with
the fund’s charter and bylaws, the Act, and certain other obligations
relating to the undertakings and agreements in the application;

(2)

the fund and each of its directors, officers, and investment advisers that is
not a U.S. resident, must file with the Commission an irrevocable
designation of the fund’s custodian in the United States as agent for
service of process;

(3)

the fund’s charter and bylaws must provide that (a) the fund will comply
with certain provisions of the Act applicable to all funds, (b) the fund will
maintain originals or copies of its books and records in the United States,
and (c) the fund’s contracts with its custodian, investment adviser, and
principal underwriter, will contain certain terms, including a requirement
that the adviser maintain originals or copies of pertinent records in the
United States;

(4)

the fund’s contracts with service providers will require that the provider
perform the contract in accordance with the Act, the Securities Act of
1933 (15 U.S.C. 77a), and the Securities Exchange Act of 1934 (15 U.S.C.
78a), as applicable; and

(5)

the fund must file, and periodically revise, a list of persons affiliated with
the fund or its adviser or underwriter.
As noted above, under section 7(d) of the Act, the Commission may issue an

order permitting a foreign fund’s registration only if the Commission finds that “by
reason of special circumstances or arrangements, it is both legally and practically feasible
effectively to enforce the provisions of the (Act).” The information collection
requirements are necessary to assure that the substantive provisions of the Act may be
enforced as a matter of contract right in the United States or Canada by the fund's
shareholders or by the Commission.
Rule 7d-1 also contains certain information collection requirements that are
associated with other provisions of the Act. These requirements are applicable to all
registered funds and are outside the scope of this Supporting Statement.

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2.

Purposes of the Information Collection

The collection of information requirements (as well as other requirements) of rule
7d-1 are designed to assure that appropriate arrangements are in place to confirm the
enforceability of the Act against the Canadian fund. Under international law, for
example, it is uncertain whether the Commission or a fund's shareholders could enforce
the Act’s provisions against the Canadian fund and associated persons (that is, those
persons in addition to the fund, such as the Canadian fund’s service providers, that must
meet the requirements of rule 7d-1) solely on the basis of the Canadian fund’s registration
under the Act. Thus, rule 7d-1 requires foreign funds to file an application containing
certain undertakings and agreements that confirm that the Commission and the fund’s
shareholders will be able to enforce the provisions of the Act as a matter of contract right
in the United States or Canada. The application itself allows Commission staff to
determine whether to permit the applicant to register under the Act.
In addition, the rule’s requirement to maintain records in the United States
(which, without the requirement, might be maintained in Canada or another foreign
jurisdiction) facilitates routine inspections and any special investigations of the fund by
Commission staff. The requirement to update the list of affiliated persons also assists the
staff in monitoring the fund's relationships with affiliates.
3.

Role of Improved Information Technology

Rule 31a-2(f) under the Investment Company Act permits funds to maintain many
types of records (and produce them for the Commission's examination as necessary) on
micrographic media, including microfilm, microfiche, or similar medium, or any
electronic storage media, including any digital storage medium or system. Canadian

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funds and their advisers generally may keep records in the United States as required by
rule 7d-1 in these forms.
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 many filings
to the Commission electronically, including applications for orders under the Investment
Company Act, such as those submitted by Canadian or other foreign funds. EDGAR may
also be used in the future to obtain other types of information from sources outside the
Commission, such as updates of lists of affiliated persons, as required by rule 7d-1.
4.

Efforts to Identify Duplication

The requirement under rule 7d-1 to maintain original or duplicate books and
records in the United States is intended to assure that the provisions of the Act can be
enforced against a Canadian (or foreign) fund. Without the requirement, records could be
maintained only in Canada. The Commission’s ability to examine those records would
depend upon Canadian law. The inconvenience and expense of travel to Canada also
could adversely affect enforcement of the Act.
5.

Effect on Small Entities

The Commission does not believe that compliance with rule 7d-1 is unduly
burdensome for large or small entities. The information collection requirements of the
rule apply to all Canadian funds that seek the benefit of registration under the Act,
whether or not they are small entities. The requirements establish the enforceability of
the Act for all funds regardless of size, and in so doing, enable the Commission to fulfill
its statutory mandate.

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6.

Consequences of Less Frequent Collection

Rule 7d-1’s requirement that Canadian funds file an application that contains
certain undertakings and agreements as a prerequisite to the fund’s registration under the
Act is not a recurring obligation. The rule also imposes requirements to maintain records
in the United States, and to update certain fund agreements, designations of the fund’s
custodian as service agent, and lists of affiliated persons as changes occur. Without the
rule’s information collection requirements, the Commission could not determine whether
the substantive provisions of the Act would be enforceable as a matter of contract right in
the United States by the fund’s shareholders or by the Commission.
On occasion, after a Canadian (or other foreign fund) has registered, it may file a
supplemental application seeking special exemptive relief from provisions of the Act
based on the fund’s particular circumstances. Rule 7d-1 does not mandate these
applications, which are submitted at a fund’s discretion.
7.

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

By requiring funds to maintain records in the United States, rule 7d-1 effectively
requires the fund to preserve these records either permanently or for six years after
pertinent transactions, depending on the record. This requirement applies to the records
of all registered funds, including any records maintained in Canada.1
The Commission believes that the long-term retention of records in the United
States is necessary to carry out its examination and enforcement responsibilities, and its
mandate to ensure that the Act’s provisions are legally enforceable. The Commission
periodically inspects the operations of registered funds to ensure compliance with the
rules and regulations under the Act; however, each fund may be inspected only at
1

17 CFR 270.7d-1(b)(8)(iii).

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intervals of several years due to limits on the Commission’s resources. Furthermore,
Congress has placed no time limit on the prosecution of persons engaged in certain types
of conduct that violate the securities laws. For these reasons, the Commission often
needs information relating to events or transactions that occurred years ago. In section
31(a) of the Act (15 U.S.C. 80a-30(a)), Congress specifically authorized the Commission
to require funds to “maintain and preserve” books and records “for such period or periods
as the Commission, by rules and regulations, may prescribe as necessary or appropriate in
the public interest or for the protection of investors.” Computerized record storage has
made long-term retention of records less burdensome.
8.

Consultation Outside the Agency

The Commission proposed rule 7d-1 for public comment before it was adopted on
April 27, 1954. The requirements of the rule were formulated after extended discussions
with Canadian funds that had applied for orders permitting registration before the rule
was adopted. The Commission considered all comments and suggestions and determined
to adopt the rule’s information collection requirements substantially as proposed.
Subsequent amendments have not significantly altered the rule’s information collection
requirements. The Commission requested public comment on the collection of
information requirements in rule 7d-1 before it submitted this request for extension and
approval to the Office of Management and Budget. The Commission received no
comments.
9.

Payment or Gift to Respondents

Not applicable.
10.

Assurance of Confidentiality

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Not applicable.
11.

Sensitive Questions

Not applicable.
12.

Estimate of Hour Burden

The Commission believes that one foreign fund is registered under the Act
pursuant to rule 7d-1 and currently active. The burden hours under the rule associated
with the fund’s compliance with the Act’s requirements are reflected in the information
collection burdens applicable to those requirements for all registered funds.
Apart from requirements under the Act applicable to all registered funds, rule
7d-1 imposes ongoing burdens to maintain records in the United States, and to update, as
necessary, certain fund agreements, designations of the fund’s custodian as service agent,
and the fund’s list of affiliated persons. The Commission staff estimates that each year
under the rule, the active registrant and its directors, officers, and service providers
engage in the following collections of information and associated burden hours:


For the fund and its investment adviser to maintain records in the United States: 2
0 hours:
0 minutes of compliance clerk time.



For the fund to update its list of affiliated persons:
2 hours:
2 hours of support staff time.

2

The rule requires an applicant and its investment adviser to maintain records in the
United States (which, without the requirement, might be maintained in Canada or another
foreign jurisdiction), which facilitates routine inspections and any special investigations
of the fund by Commission staff. The registrant and its investment adviser, however,
already maintain the registrant’s records in the United States and in no other jurisdiction.
Therefore, maintenance of the registrant’s records in the United States does not impose
an additional burden beyond that imposed by other provisions of the Act. Those
provisions are applicable to all registered funds and the compliance burden of those
provisions is outside the scope of this Supporting Statement.

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

For new officers, directors, and service providers to enter into and file agreements
requiring them to comply with the fund’s charter and bylaws, the Act, and certain
other obligations:
0.5 hours:
7.5 minutes of director time;
2.5 minutes of officer time;
20 minutes of support staff time.



For new officers, directors, and investment advisers who are not residents of the
United States to file irrevocable designation of the fund’s custodian as agent for
process of service:
0.25 hours:
5 minutes of director time;
10 minutes of support staff time.

Based on the estimates above, the Commission estimates that the total annual burden of
the rule's paperwork requirements is 2.75 hours.3 We estimate that directors perform
0.21 hours of these burden hours at a total cost of $945,4 officers perform 0.04 of these
burden hours at a total cost of $17.32,5 and support staff perform 2.5 of these burden
hours at a total cost of $150.6 Thus, the Commission estimates the aggregate annual cost
of these burden hours associated with rule 7d-1 is $1112.32.7

3

This estimate is based on the following calculation: (0 + 2 + 0.5 + 0.25) = 2.75 hours.

4

The director estimates are based on the following calculations: (7.5 minutes + 5 minutes)
/ 60 minutes per hour = 0.21 hours; and 0.21 hours x $4500 per hour = $945. The per
hour cost estimate is based on estimated hourly compensation for each board member of
$500 and an average board size of 9 members.

5

The officer estimates are based on the following calculations: 2.5 minutes / 60 minutes
per hour = 0.04 hours; 0.04 hours x $433 per hour = $17.32. The per hour cost estimate,
as well as other internal time cost estimates for management and professional earnings, is
based on the figure for chief compliance officers found in SIFMA’s Management &
Professional Earnings in the Securities Industry 2011, modified by Commission staff to
account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm
size, employee benefits and overhead.

6

The support staff estimates are based on the following calculations: 2 hours + 20 minutes
+ 10 minutes = 2.5 hours; and 2.5 hours x $60 per hour = $150. The per hour cost
estimate, as well as other internal time cost estimates for office salaries, is based on the
figure for compliance clerks found in SIFMA’s Office Salaries in the Securities Industry
2011, modified by Commission staff to account for an 1800-hour work-year and
multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead.

7

This estimate is based on the following calculation: $1112.32 = $945 + $17.32 + $150.

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If a fund were to file an application under rule 7d-1 to register under the Act, the
Commission estimates that the rule would impose initial information collection burdens
(for filing an application, preparing the specified charter, bylaw, and contract provisions,
designations of agents for service of process, and an initial list of affiliated persons, and
establishing a means of keeping records in the United States) of approximately 90 hours
for the fund and its associated persons. The Commission is not including these hours in
its calculation of the annual burden because no fund has applied to register under the Act
pursuant to rule 7d-1 in the last three years.
As noted above, after registration, a Canadian fund may file a supplemental
application seeking special relief designed for the fund's particular circumstances. Rule
7d-1 does not mandate these applications. The active registrant filed a substantive
supplemental application in 2011.

The Commission staff estimates that the rule would

impose an additional information collection burden of 5 hours on a fund to comply with
the Commission’s application process at a cost of $5957.8 The staff understands that
funds also obtain assistance from outside counsel to comply with the Commission’s
application process and the cost burden of using outside counsel is discussed in Item 13
below.
Therefore, the Commission staff estimates the aggregate annual burden hours of
the collection of information associated with rule 7d-1 is 7.75 hours, at a cost of

8

The staff estimates that, on average, the fund’s investment adviser spends approximately
4 hours to review an application, including 3.5 hours by an assistant general counsel at a
cost of $407 per hour, 0.5 hours by an administrative assistant, at a cost of $65 per hour,
and the fund’s board of directors spends an additional 1 hour at a cost of $4500 per hour
for a total of 5 hours, at a total cost of $5957. This estimate is based on the following
calculation: (3.5 hours x $407 per hour) + (0.5 hours x $65 per hour) + (1 hour x $4500
per hour) = $5957.

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$7069.32.9 These estimates of average burden hours are 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.
13.

Estimate of Total Annual Cost Burden

If a Canadian or other foreign fund in the future applied to register under the Act
under rule 7d-1, the fund initially might have capital and start-up costs (not including
hourly burdens) of an estimated $17,280 to comply with the rule’s initial information
collection requirements. These costs include legal and processing-related fees for
preparing the required documentation (such as the application, charter, bylaw, and
contract provisions, designations for service of process, and the list of affiliated persons).
Other related costs would include fees for establishing arrangements with a custodian or
other agent for maintaining records in the United States, copying and transportation costs
for records, and the costs of purchasing or leasing computer equipment, software, or other
record storage equipment for records maintained in electronic or photographic form.
The Commission expects that the fund and its sponsors would incur these costs
immediately, and that the annualized cost of the expenditures would be $17,280 in the
first year. Some expenditures might involve capital improvements, such as computer
equipment, having expected useful lives for which annualized figures beyond the first
year would be meaningful. These annualized figures are not provided, however, because,
in most cases, the expenses would be incurred immediately rather than on an annual
basis. The Commission is not including these costs in its calculation of the annualized

9

These estimates are based on the following calculations: 2.75 + 5 = 7.75 hours;
$1112.32 + $5957 = $7069.32.

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capital/start-up costs because no fund has applied under rule 7d-1 to register under the
Act in the last three years.
As indicated above, a Canadian or foreign fund may file a supplemental
application seeking special relief designed for the fund’s particular circumstances. Rule
7d-1 does not mandate these applications. The active registrant filed a substantive
supplemental application in 2011. As noted above, the staff understands that funds
generally use outside counsel to prepare the application. The staff estimates that outside
counsel spends 10 hours preparing a supplemental application, including 8 hours by an
associate and 2 hours by a partner. Outside counsel billing arrangements and rates vary
based on numerous factors, but the staff has estimated the average cost of outside counsel
as $400 per hour, based on information received from funds, intermediaries and their
counsel. The Commission staff therefore estimates that the fund would obtain assistance
from outside counsel at a cost of $4000.10
These estimates of average costs are 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.
14.

Estimate of Cost to the Federal Government

Rule 7d-1 has imposed minimal costs on the federal government for reviewing the
small number of applications and supporting documents filed with the Commission under
the rule since 1954. No new fund has applied under rule 7d-1 to register under the Act in
the last three years. The Commission received one supplemental application from an
existing registrant. The Commission staff in the Office of Investment Company
Regulation in the Division of Investment Management processes these and other
10

This estimate is based on the following calculation: 10 hours x $400 per hour = $4000.

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exemptive applications. The annual cost of reviewing and processing all applications
under the Investment Company Act for orders from the Commission for exemptive relief
amounted to approximately $9.6 million in fiscal year 2011, based on the Commission’s
computation for the value of staff time devoted to these activities and related overhead.
The Commission receives occasional reports updating lists of affiliated persons as
required by the rule.
15.

Explanation of Changes in Burden

The estimated number of 7.75 burden hours reflects an increase of 5 hours from
the current allocation. This increase results from adding the burden hours for preparation
of a supplemental application filed under rule 7d-1 because the current registrant filed
such an application over the past three years.
The estimated cost burden has increased from $0 to $4000, an increase of $4000.
The increase results from adding the cost burden for preparation of a supplemental
application filed under rule 7d-1 because the current registrant filed such an application
over the past three years.
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.