Rule 17j-1 Supporting Statement -

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

A.

JUSTIFICATION
1.

Necessity for the Information Collection

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

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).

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 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

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 17j-1(a)(4).

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.

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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 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.

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4.

Duplication

The Commission is not aware of any duplicate reporting or recordkeeping requirements.
Rule 17j-1(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 17j-1(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.
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.

4

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

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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

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

No questions of a sensitive nature are involved.
12.

Burden of Information Collection

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
5

The staff estimates that there are 867 fund complexes currently operating.

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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

Initial Holdings Report
Quarterly Transaction
Report

Annual
Hours Per
Person or
Complex
2

Annual
Aggregate
Hours

Person
Responsible

Hourly
Rate
($) 6

Annual
Aggregate
Cost ($)

13,872 7

213 8

2,954,736 9

1/4

6,250 10

New Access
Person
Access
Person

213

1,331,250 11

6

All hourly rates used in this analysis (except for the “Access Person” average rate of $213 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 (2013) and Securities
Industry and Financial Markets Association, Office Salaries in the Securities Industry (2013) 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 6,936
total new Access Persons each year (8 new Access Persons × 867 fund complexes = 6,936 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: (6,936 new Access Persons × 2 hours = 13,872
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 $213 per hour. Access
Persons would include portfolio managers, directors and other officers of the fund. The $213 rate is that of
a typical mid level portfolio manager.

9

This is based on the following calculations: (6,936 new Access Persons × 2 hours = 13,872 hours; 13,872
hours × $213 rate = $2,954,736).

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. This is based on the following calculation:
(25,000 quarterly reports × .25 hour) = 6,250 hours.

11

This is based on the following calculations: (25,000 quarterly reports × .25 hour = 6,250 hours; 6,250
hours × $213 rate = $1,331,250).

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Information Collection

Annual Holdings Report
IPO/Private Placement
Preapproval Request
Informing Access Persons
of Reporting Obligation
Preparation of Annual
Report to Board and
Certification

Documentation of
IPO/Private Placement
Approval/Rejection
Rule 17j-1 Recordkeeping,
Review and Analysis

Annual
Hours Per
Person or
Complex
3/4

Annual
Aggregate
Hours

Person
Responsible

Hourly
Rate
($) 6

Annual
Aggregate
Cost ($)

52,500 12

213

11,182,500 13

1

5,202 14

213

1,108,026 15

3

2,601

283

736,083 16

8 1/2

7,370

Access
Person
Investment
Personnel
Compliance
Officer
Chief
Compliance
Officer
(50%)
Attorney for
Fund
Complex
(50%)
Chief
Compliance
Officer
Chief
Compliance
Officer (5%)
Compliance
Clerk (95%)

485

3,187,525 17

3 (½ hour
per
request)
300

2,601

260,100

380

485

1,261,485 18

485

22,121,505 19

64

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 × $213 rate = $11,182,500).

14

We estimate that each of the 867 fund complexes receives approximately 6 such requests each year, for a
total of approximately 5,202 such requests filed each year.

15

This is based on the following calculations: (5,202 IPO requests × 1 hour = 5,202 hours; 5,202 hours ×
$213 rate = $1,108,026).

16

This is based on the following calculations: (867 fund complexes × 3 hours = 2,601 hours; 2,601 hours ×
$283 rate = $736,083).

17

This is based on the following calculations: (867 fund complexes × 8.5 hours = 7,370 hours; 7,370 ÷ 2 =
3,685 hours (50% division between CCO and attorney); 3,685 hours × $485 rate = $1,787,225 CCO costs;
3,685 hours × $380 rate = $1,400,300 attorney costs; $1,787,225 CCO costs + $1,400,300 attorney costs =
$3,187,525 total costs).

18

This is based on the following calculations: (5,202 IPO requests × .5 hour for processing each request =
2,601 hours; 2601 hours × $485 rate = $1,261,485).

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Information Collection

Maintenance of Computer
Systems for Use in 17j-1
Reporting and
Recordkeeping
Preparation and Board
Approval of New Code of
Ethics for New Fund
Complex

Annual
Hours Per
Person or
Complex
50

Annual
Aggregate
Hours

Person
Responsible

Hourly
Rate
($) 6

Annual
Aggregate
Cost ($)

43,350

Programmer
Analyst

220

9,537,000 20

25

625 21

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

485

778,750 23

Board of
Directors
(20%)

4,500 22

380

19

This is based on the following calculations: (867 fund complexes × 300 hours = 260,100 hours; 260,100 x
.95 = 247,095 hours clerk time (13,005 hours CCO time with a 95% and 5% division between clerk and
CCO); 13,005 CCO hours × $485 rate = $6,307,425 CCO costs; 247,095 clerk hours × $64 rate =
$15,814,080 clerk costs; $6,307,425 CCO costs + $15,814,080 clerk costs = $22,121,505 total costs).

20

This is based on the following calculations: (867 fund complexes × 50 hours = 43,350 hours; 43,350 hours
x $220 rate = $9,537,000).

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 × $485 rate = $121,250 CCO costs; 250 hours × $380 rate = $95,000 attorney costs; 125 hours ×
$4,500 rate = $562,500, $121,250 CCO costs + $95,000 attorney costs + $562,500 board costs = $778,750
total costs).

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Information Collection

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

TOTAL

Annual
Hours Per
Person or
Complex
8

Annual
Aggregate
Hours

Person
Responsible

Hourly
Rate
($) 6

Annual
Aggregate
Cost ($)

6,936

Chief
Compliance
Officer
(25%)
Attorney for
Fund
Complex
(50%)

485

9,961,830 24

Board of
Directors
(25%)

4,500

401,407

380

64,160,090

We estimate that annually there are approximately 75,497 respondents under rule 17j-1,
of which 5,497 are rule 17j-1 organizations 25 and 70,000 are Access Persons. In the aggregate,
these respondents make approximately 108,305 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 401,407 hours and the cost of those hours is approximately
$64,160,690.
The estimate of average burden hours is made solely for the purposes of the Paperwork
24

This is based on the following calculations: (867 fund complexes × 8 hours = 6,936 hours, 6,936 hours x
.25 = 1,734 hours (25% division each for CCO and Board); 6,936 hours x .50 = 3,468 hours (attorney
time); 1,734 hours × $485 rate = $840,990 CCO costs; 3,468 hours × $380 rate = $1,317,840 attorney
costs; 1,734 hours × $4,500 rate = $7,803,000, $840,990 CCO costs + $1,317,840 attorney costs +
$7,803,000 board costs = $9,961,830 total costs).

25

As of December 2014, there are approximately 4,101 active funds, approximately 1,021 investment
advisers to funds, and approximately 375 principal underwriters to funds, for a total of 5,497 17j-1
organizations.

26

This estimate is based on the following calculation: (6,936 initial holdings reports by Access Persons +
25,000 quarterly transaction reports by Access Persons + 70,000 annual holdings reports by Access
Persons + 5,202 preapproval requests by Access Persons for purchases of initial public offerings and
private placements + 867 annual certifications by fund boards + 275 annual material amendments + 25 new
codes of ethics for new fund complexes = 108,305 annual responses).

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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.

Cost to Respondents

We estimate that there is an annual cost burden of approximately $5,000 per fund
complex, for a total of $4,335,000 27, associated with complying with the information collection
requirements in rule 17j-1, 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.

Costs 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.
15.

Changes in Burden

The increase from to 387,599 burden hours to 401,407 hours (an increase of 13,808
hours) reflects a change in the estimated number of Access Persons and fund complexes. The
increase in costs from $4,160,000 to $4,335,000 (an increase of $175,000) associated with the
collections of information is attributable to an increase in the number of fund complexes
currently operating.

27

This estimate is based on the following calculation: ($5,000 software costs × 867 fund complexes =
$4,335,000 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.

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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 not display the
expiration date for OMB approval.

18.

Exception to Certification Statement

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

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