Supporting Statement for Rule 22c-1 (2015)

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 22c-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Proposed amendments to rule 22c-1 (17 CFR 270.22c-1) under the Investment Company
Act of 1940 (15 U.S.C. 80a) (the “Investment Company Act” or “Act”) would permit a
registered open-end investment company (but not a registered investment company that is
regulated as a money market fund, and not including an exchange-traded fund) to use “swing
pricing,” the process of adjusting a fund’s 1 current net asset value per share (“NAV”) to mitigate
dilution of the value of its outstanding redeemable securities as a result of shareholder purchase
and redemption activity, under certain circumstances. The proposed amendments to rule 22c-1
are intended to provide funds with an additional tool to mitigate potential dilution and to manage
fund liquidity.
In order to use swing pricing, a fund would have to establish and implement swing pricing
policies and procedures in accordance with the requirements of proposed rule 22c-1(a)(3).
Proposed rule 22c-1(a)(3) would require a fund’s swing pricing policies and procedures to
incorporate certain specified elements, and also would require a fund’s board of directors
(including a majority of directors who are not interested persons of the fund) to approve the
policies and procedures, including any material changes thereto. Finally, proposed rule

1

For purposes of this Supporting Statement, the term “fund” denotes a fund as defined in proposed
rule 22c-1(a)(3), that is, “a registered open-end management investment company (but not a
registered open-end management investment company that is regulated as a money market fund
under § 270.2a-7 or an exchange traded fund as defined in [proposed rule 22c-1(a)(3)(v)(A)]).”

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22c-1(a)(3) would require a fund to maintain a written copy of swing pricing policies and
procedures adopted by the fund that are in effect, or at any time within the past six years were in
effect, in an easily accessible place. The requirements for a fund that chooses to use swing
pricing to (i) adopt swing pricing policies and procedures, (ii) obtain board approval of the swing
pricing policies and procedures, and (iii) maintain a written copy of the swing pricing policies
and procedures are “collections of information” within the meaning of the Paperwork Reduction
Act of 1995 (“PRA”). 2
2.

Purpose and Use of the Information Collection

The information collection requirements of proposed rule 22c-1(a)(3) are integral to the
swing pricing framework created by the proposed rule. Thus, the information collections are
necessary to help further the proposed rule’s goal of promoting investor protection by providing
funds with a tool to mitigate potential dilution and to manage fund liquidity. The information
collections also would assist the Commission’s examination staff to ascertain whether a fund that
has adopted swing pricing policies and procedures has done so in compliance with the
requirements of proposed rule 22c-1(a)(3).
3.

Consideration Given to Information Technology

Proposed rule 22c-1(a)(3) does not require the reporting of any information or the filing
of any documents with the Commission. The Electronic Signatures in Global and National
Commerce Act 3 and the conforming amendments to rules under the Investment Company Act
and the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) permit funds and their financial
intermediaries to maintain records electronically.

2

44 U.S.C. 3501-3520.

3

P.L. 106-229, 114 Stat. 464 (June 30, 2000).

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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 information required by proposed rule 22c-1(a)(3) is not duplicated elsewhere.
5.

Effect on Small Entities

The information collection requirements of proposed rule 22c-1(a)(3) do not distinguish
between small entities and other funds. As discussed above, the information collection
requirements of proposed rule 22c-1(a)(3) are integral to the swing pricing framework created by
the proposed rule, and thus they are necessary to help further the investor protection goals of the
proposed rule. The Commission therefore believes that imposing different requirements on
smaller investment companies would not be consistent with investor protection and the purposes
of proposed rule 22c-1(a)(3). Because the adoption of swing pricing policies and procedures
would be permitted, but not required, under the proposed rule, a fund that is a small entity would
not need to incur the costs of compliance with the proposed rule if the fund (and the fund’s
board) were to determine that the advantages of swing pricing would not outweigh the associated
disadvantages, including costs associated with the information collection requirements.
6.

Consequences of Less Frequent Collection

Proposed rule 22c-1(a)(3) requires a fund that chooses to use swing pricing to adopt
swing pricing policies and procedures that are approved by the fund’s board of directors and to
maintain a written copy of these policies and procedures. The adoption and maintenance of
written policies and procedures are integral to the swing pricing framework created by the
proposed rule. Thus, not requiring these collections of information would be incompatible with
the investor protection goals of proposed rule 22c-1(a)(3).

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7.

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

Proposed rule 22c-1(a)(3) would require funds to retain certain written records for more
than three years. Specifically, the proposed rule would require a fund to maintain a written copy
of swing pricing policies and procedures adopted by the fund that are in effect, or at any time
within the past six years were in effect, in an easily accessible place. The long-term retention of
these records contributes to the effectiveness of the Commission’s examination and inspection
program. Commission staff periodically inspects the operations of funds to ensure compliance
with rules and regulations under the Act; however, each fund may be inspected only at intervals
of several years due to limits on our resources. For this reason, we often need information
relating to events or transactions that occurred years ago.
We note that the Commission has also proposed amendments to current rule 31a-2(a)(2),
which requires a fund to keep records evidencing and supporting each computation of the fund’s
NAV, to reflect the NAV adjustments based on a fund’s swing pricing policies and procedures.
The six-year retention period in proposed rule 22c-1(a)(3) is consistent with the retention period
in current rule 31a-2 (as well as rule 31a-2 as proposed to be amended). Consistency in these
retention periods is appropriate in order to permit a fund or Commission staff to review historical
instances of NAV adjustments effected pursuant to the fund’s swing pricing policies and
procedures, in light of the policies and procedures that were actually in place at the time the
NAV adjustments occurred.
8.

Consultation Outside the Agency

Before adopting proposed rule 22c-1(a)(3), the Commission will receive and evaluate
public comments on the proposal and its collection of information requirements. Moreover, the
Commission and the staff of the Division of Investment Management participate in an ongoing

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dialogue with representatives of the investment company industry through public conferences,
meetings, and information exchanges. These various forums provide the Commission and staff
with a means of ascertaining and acting upon the paperwork burdens confronting the industry.
9.

Payment or Gift

Not applicable.
10.

Assurance of Confidentiality

Responses provided to the Commission in connection with staff examinations or
investigations would be kept confidential subject to the provisions of applicable law. If
information collected pursuant to proposed rule 22c-1(a)(3) is reviewed by the Commission’s
examination staff, it will be accorded the same level of confidentiality accorded to other
responses provided to the Commission in the context of its examination and oversight program.
11.

Sensitive Questions

No questions of a sensitive nature are asked. The information collection does not collect
any Personally Identifiable Information (PII).
12.

Burden of Information Collection

As discussed above, funds would be permitted but not required to use swing pricing,
provided that, in order to use swing pricing, a fund must adopt swing pricing policies and
procedures in accordance with the requirements of proposed rule 22c-1(a)(3). We estimate that
167 fund complexes include funds that would adopt swing pricing policies and procedures
pursuant to proposed rule 22c-1(a)(3). 4

4

In developing the estimate that 167 fund complexes would adopt swing pricing policies and
procedures, Commission staff assumed that the percentage of fund complexes that includes
high-yield bond funds, world bond funds (including emerging market debt funds), multi-sector

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A. Documentation and Approval of Swing Pricing Policies and Procedures
We estimate that each fund complex that includes funds that use swing pricing would
incur a one-time average burden of 24 hours to document swing pricing policies and procedures.
Proposed 22c-1(a)(3) would require fund boards initially to approve the swing pricing policies
and procedures and any material changes to them, and we estimate a one-time burden of 5 hours
per fund complex associated with the fund board’s approval of swing pricing policies and
procedures. Accordingly, we estimate that the total burden associated with the preparation and
approval of swing pricing policies and procedures would be 4,843 hours. 5 We estimate that it
would cost a fund complex $21,710 to document and initially approve these policies and
procedures, for a total cost of $3,625,570. 6

bond funds, state municipal funds, alternative strategy funds, and emerging market equity funds,
as a fraction of all fund complexes, is the same as the percentage of all mutual funds (excluding
money market funds) that these strategies represent. The actual number of fund complexes that
includes these selected strategies could be higher or lower than the number calculated using this
assumption. 241 high yield bond mutual funds + 347 world bond mutual funds (estimate includes
emerging market bond funds) + 139 multi-sector bond mutual funds + 322 state municipal mutual
funds + 376 alternative strategy funds that are equity funds (alternative strategy funds that are
bond funds are included in our estimates of the number of bond mutual funds) + 469 emerging
market equity mutual funds = 1,894 funds with strategies that staff assumed would be relatively
more likely to adopt swing pricing policies and procedures. 1,894 funds with selected strategies
÷ 7,395 mutual funds (excluding money market funds) = approximately 25.6%. 0.256 x 867 fund
complexes = approximately 222 fund complexes. Assuming that 75% of these fund complexes
would actually adopt swing pricing policies and procedures, 0.75 x 222 fund complexes =
approximately 167 fund complexes. These estimates are based on figures included in the
Investment Company Institute’s 2015 Investment Company Fact Book (“2015 ICI Fact Book”).
See Investment Company Institute, 2015 Investment Company Act Book (2015), available at
http://www.ici.org/pdf/2015_factbook.pdf.
5

This estimate is based on the following calculation: (24 +5) hours x 167 fund complexes = 4,843
hours.

6

These estimates are based on the following calculations: 12 hours x $198 (hourly rate for a senior
accountant) = $2,376; 12 hours x $455.5 (blended hourly rate for assistant general counsel ($426)
and chief compliance officer ($485) = $5,466; 3 hours x $4,400 (hourly rate for a board of 8
directors) = $13,200; 2 hours (for a fund attorney’s time to prepare materials for the board’s
determinations) x $334 (hourly rate for a compliance attorney) = $668; ($2,376 + $5,466 +
$13,200 + $668) = $21,710; $21,710 x 167 fund complexes = $3,625,570.

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B. Recordkeeping Requirements Associated with Proposed Rule 22c-1(a)(3)
We estimate that each fund complex that includes funds that use swing pricing would
incur an annual burden of 3 hours to retain the records required under proposed rule 22c-1(a)(3).
We estimate a time cost per fund complex of $216 associated with this annual recordkeeping
burden. 7 We estimate the recordkeeping requirements of proposed rule 22c-1(a)(3) would result
in a total aggregate burden of 501 hours per year, at a total aggregate time cost of $36,072 per
year. 8
C. Estimated Total Burden
Amortized over a three-year period, the hour burdens and time costs associated with
proposed rule 22c-1(a)(3) (which include the burdens and time costs associated with the
requirements that funds adopt swing pricing policies and procedures, obtain board approval of
the policies and procedures, and retain certain records) would result in a aggregate annual burden
of 2,115 hours and aggregate annual time costs of $1,244,595. 9

The hourly wages used are from SIFMA’s Management & Professional Earnings in the Securities
Industry 2013, modified to account for an 1800-hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits, and overhead. Commission staff previously estimated
in 2009 that the average cost of board of director time was $4,000 per hour for the board as a
whole, based on information received from funds and their counsel. Adjusting for inflation,
Commission staff estimates that the current average cost of board of director time is
approximately $4,400.
7

This estimate is based on the following calculations: 1.5 hours x $57 (hourly rate for a general
clerk) = $85.5; 1.5 hours x $87 (hour rate for a senior computer operator) = $130.5. $85.5 +
$130.5 = $216.

8

These estimates are based on the following calculation: 3 hours x 167 fund complexes = 501
hours; 167 fund complexes x $216 = $36,072.

9

These estimates are based on the following calculations: (4,843 hours (year 1) + (3 x 501 hours)
(years 1, 2 and 3)) ÷ 3 = 2,115 hours; ($3,625,570 (year 1) + (3 x $36,072) (years 1, 2 and 3)) ÷ 3
= $1,244,595.

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13.

Cost to Respondents

We estimate that proposed rule 22c-1(a)(3) does not impose any burdens other than those
discussed in Item 12 above. Although proposed rule 22c-1(a)(3) requires funds to maintain
records for six years, these records may be maintained electronically and, even if maintained in
hard copy, are unlikely to be voluminous. The staff has not estimated a capital cost in
connection with the recordkeeping requirements because funds and their advisers would likely
use existing recordkeeping systems to maintain the required records.
14.

Cost to the Federal Government

The rule does not impose any additional costs on the federal government.
15.

Changes in Burden

Not applicable. This is the first request for approval of the collection of information for
this rule.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable. The Commission is not seeking approval to not display the expiration
date for OMB approval.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

Not applicable. The Commission is not seeking an exception to the certification
statement.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable. The collection of information will not employ statistical methods.