Revised Supportingstmt Rule 31a-1 (clean)

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
RULE 31a-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 31a-1 (17 CFR 270.31a-1) under the Investment Company Act of 1940 (15 U.S.C.
80a) (the “Act”) requires registered investment companies (“funds”), and certain of their
majority-owned subsidiaries, to maintain and keep current the accounts, books, auditors’
certificates, and other documents that underlie and support the financial statements these entities
are required to file with the Commission under section 30 of the Act (15 U.S.C. 80a-30). Rule
31a-1(a) defines the entities that must comply with the rule. As mentioned, the rule encompasses
funds as well as every underwriter, broker, dealer, or investment adviser that is a majority-owned
subsidiary of a fund. Rule 31a-1(b) describes the specific records that must be maintained and
kept current by the entities identified in rule 31a-1(a). These records consist of the following:
(i) journals detailing purchases and sales of securities; (ii) general and auxiliary ledgers
reflecting all asset, liability, reserve, capital income, and expense accounts; (iii) a record of all
“long” and “short” positions carried by the fund for its own account; (iv) corporate charters,
certificates of incorporation or trust agreements, bylaws, shareholder and director meeting
minutes; (v) a record of each brokerage order made by the fund for the purchase or sale of
securities; (vi) a record of all other portfolio purchases or sales; (vii) a record of all options and
contractual commitments to purchase or sell securities or other property; (viii) a record of the
money balances in all ledger accounts in the form of trial balances; (ix) a quarterly record of the
specific basis for the allocation of orders to brokerages for the purchase or sale of portfolio
securities and for the division of commissions among brokerages and record of the persons

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responsible for such allocation and division; (x) a record identifying the person or persons who
authorized the purchase or sale of portfolio securities; and (xi) files of advisory material received
from the investment adviser or other person from whom the fund accepts investment advice.
Rule 31a-1(c) requires underwriters, brokers, and dealers that are majority-owned
subsidiaries of a fund to maintain the accounts, books, and other documents that are required to
be maintained by brokers and dealers by rule adopted under section 17 of the Securities
Exchange Act of 1934 (15 U.S.C. 78q) (the “1934 Act”). Rule 31a-1(d) requires depositors and
principal underwriters for any fund other than a closed-end fund to maintain the accounts, books,
and other documents that are required to be maintained by brokers and dealers by rule adopted
under section 17 of the 1934 Act, to the extent those records are necessary or appropriate to
record such persons' transactions with such funds.
Rule 31a-1(e) requires investment advisers that are majority-owned subsidiaries of funds
to maintain the accounts, books, and other documents that are required to be maintained by
investment advisers under section 204 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-4)
(the “Advisers Act”). Finally, rule 31a-1(f) requires investment advisers that are not majorityowned subsidiaries of funds to maintain the accounts, books, and other documents that are
required under section 204 of the Advisers Act, to the extent those records are necessary or
appropriate to record such persons' transactions with such funds.
2.

Purposes of the Information Collection

The Commission regularly conducts inspections and examinations of funds and other
regulated entities to foster compliance with the securities laws, to detect violations of the law,
and to keep the Commission informed of developments in the regulated community. The books
and records required to be maintained by rule 31a-1 constitute a major focus of the Commission's

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inspection and examination programs. Without the information contained in the records required
by rule 31a-1, the Commission could not readily determine whether funds are in compliance with
the Act’s provisions. The rule’s requirement to maintain such records avoids the need for
potentially more burdensome requirements such as mandatory filings of similar information with
the Commission.
3.

Consideration Given to Information Technology

The records required by rule 31a-1 are required to be preserved pursuant to rule 31a-2
under the Investment Company Act (17 CFR 270.31a-2). Rule 31a-2(f) permits funds to
maintain many types of records (and produce them for the Commission's inspections and
examinations as necessary) on photographic film, magnetic tape, disk, or other computer storage
media.
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 recordkeeping required by rule 31a-1 is not duplicated elsewhere in the Commission’s
rules. To the extent the rule requires the maintenance of books and records by underwriters,
brokers, dealers, and investment advisers to funds, the requirements are consistent with those that
apply to these entities under other federal securities laws and do not require the entities to
maintain duplicate records.
5.

Effect on Small Entities

The Commission does not believe that compliance with rule 31a-1 is unduly burdensome
for large or small entities. The information collection requirements of rule 31a-1 are the same
for all funds, including those that are small entities. Most of the information required to be

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maintained is the type that generally would be maintained as a matter of good business practice
and to prepare the fund’s financial statements. The Commission reviews all rules periodically, as
required by the Regulatory Flexibility Act (5 U.S.C. 610), to identify methods to minimize
recordkeeping or filing requirements affecting small businesses.
6.

Consequences of not Conducting Collection

As noted above, without the information contained in the records required to be
maintained and kept current by rule 31a-1, it would be difficult or impossible to determine if a
fund was in compliance with the provisions of the Act. Funds’ maintenance of these records
avoids the need for potentially more burdensome requirements such as mandatory filings with
the Commission.
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 31a-1 before it submitted this request for extension and approval to the
Office of Management and Budget. The Commission received no comments in response to its
request.
The Commission and the staff of the Division of Investment Management 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 confronting the industry.
9.

Payment or Gift to Respondents

Not applicable.

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10.

Assurance of Confidentiality

Not applicable.
11.

Sensitive Questions

No questions of a sensitive nature are involved. The information collection does not
include personally identifiable information.
12.

Estimate of Respondent Reporting Burden

There are approximately 4,132 active investment companies registered with the
Commission all of which are required to comply with rule 31a-1. 1 For purposes of estimating
the burden imposed on the industry by rule 31a-1, the Commission staff estimates that, on
average, each of the registered investment companies has four series and that each series is
required to comply with the recordkeeping requirements of rule 31a-1. Thus, the Commission
staff estimates that a total of approximately 16,528 series must comply with the recordkeeping
requirements of rule 31a-1 (4132 registrants x 4 series per registrant = 16,528 series).
Based on conversations with fund representatives, the Commission staff estimates that
each series spends approximately 1750 hours per year complying with rule 31a-1, for a total of
7000 hours annually per registrant (1750 per year/per series x 4 series per registrant = 7000
hours). The estimated total annual hours all investment companies spend in maintaining the
records required under the rule therefore is approximately 28,924,000 hours (7000 hours per
registrant x 4132 registrants = 28,924,000 hours).
Of the 1750 hours spent annually by each series to comply with rule 31a-1, the
Commission staff estimates that:

1

This estimate is based on statistics compiled by Commission staff.

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•

Ten percent (175 hours) are spent by clerical staff at an estimated hourly wage of $57,
for a total of $9,975 per year (175 hours x $57 per hour = $9,975 per year); 2

•

Seventy-five percent (1312.5 hours) are spent by fund accountants at an estimated
hourly wage of $157, for a total of $206,063 per year (1312.5 hours x $157 per hour
= $206,063 per year);

•

Five percent (87.5 hours) are spent by attorneys at an estimated hourly wage of $380,
for a total of $33,250 per year (87.5 hours x $380 per hour = $33,250 per year). 3

•

10 percent (175 hours) are spent by operations staff at an estimated hourly wage of
$334, for a total of $58,450 per year (175 hours x $334 per hour = $58,450 per year). 4

Thus, the estimated annual cost each series spends to maintain the records required under rule
31a-1 is $307,738 ($9,975 + $206,063 + $33,250 + $58,450 = $307,738), for a total annual cost
per registrant of $1,230,952 ($2307,738 per series x 4 series per registrant = $1,230,952), and a
total annual cost to the industry of $5.09 billion ($1,230,952 per registrant x 4132 registrants =
$5,086,293,664).
Based on conversations with fund representatives, however, the Commission staff
estimates that at least 90% of the total annual burden hours and total annual costs would be
incurred by funds in any case to keep books and records that are necessary to prepare financial
2

The estimated hourly wages used in this analysis were derived from reports prepared by the
Securities Industry and Financial Markets Association. See Securities Industry and Financial
Markets Association, Office Salaries in the Securities Industry – 2013 (2013), modified to
account for an 1800-hour work year and multiplied by 2.93 to account for bonuses, firm size,
employee benefits and overhead.

3

. See Securities Industry and Financial Markets Association, Report on Management and
Professional Earnings in the Securities Industry – 2013 (2013), modified to account for an 1800hour work year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and
overhead.

4

Specifically, the operation manager functions involved are security holder record keeping and
transfer. See Securities Industry and Financial Markets Association, Report on Management and
Professional Earnings in the Securities Industry – 2013 (2013), modified to account for an 1800hour work year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and
overhead.

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statements for shareholders, to prepare their annual income tax returns and as a normal business
practice. Therefore, the Commission staff estimates that the actual total annual burden hours and
costs associated with rule 31a-1 are approximately 2,892,400 hours (28,924,000 hours –
26,031,600 hours = 2,892,400 hours) and $509 million ($5,086,293,664 - $4,577,664,297.6 =
$508,629,366). 5 These estimates are made solely for the purposes of the Paperwork Reduction
Act and are not derived from a comprehensive or even representative survey or study of the cost
of Commission rules.
13.

Estimate of Total Annual Cost Burden

The Commission staff estimates that there is no cost burden of rule 31a-1 other than the
costs of the respondent recordkeeping burden identified in section 12 above. Although funds
may rely on computer systems to assist with the creation of records required by rule 31a-1,
funds likely would need to acquire and maintain these computer systems in any event for the
normal functioning of their daily operations and as part of the customary and usual investment
company business practice.
14.

Estimate of Cost to the Federal Government

There are no costs to the Federal Government associated with rule 31a-1.
15.

Explanation of Changes in Burden

The estimated total annual hour burden has decreased from 2,952,600 hours to 2,892,400
hours. This decrease is the result of a decrease in the number of registered funds from 4218 to
4132. This estimate is based on statistics compiled by Commission staff.

5

We have subtracted the hours and costs that staff estimates funds maintain as a matter of normal
business practice and to prepare financial statements. These estimates are: 28,924,000 hours x
0.9 = 26031600; $5,086,293,664 x 0.9 = $4,577,664,297.6.

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16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the OMB expiration date.
18.

Exceptions to Certification Statement

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.