151009_PRA_Rule 31a-2 Supporting Statement

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 31a-2
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 31(a)(1) of the Investment Company Act of 1940 (the “Act”) (15 U.S.C. 80a30(a)(1)) requires registered investment companies (“funds”) and certain underwriters, brokerdealers, investment advisers, and depositors to maintain and preserve records as prescribed by
Commission rules. Rule 31a-1 under the Act (17 CFR 270.31a-1) specifies the books and
records that each of these entities must maintain. Rule 31a-2 under the Act (17 CFR 270.31a-2),
which was adopted on April 17, 1944, specifies the time periods that entities must retain certain
books and records, including those required to be maintained under rule 31a-1.
Rule 31a-2 requires the following:
1. Every fund must preserve permanently, and in an easily accessible place for the
first two years, all books and records required under rule 31a-1(b)(1)-(4). 1
2. Every fund must preserve for at least six years, and in an easily accessible place
for the first two years:
a. all books and records required under rule 31a-1(b)(5)-(12); 2
b. all vouchers, memoranda, correspondence, checkbooks, bank statements,

1

These include, among other records, journals detailing daily purchases and sales of securities,
general and auxiliary ledgers reflecting all asset, liability, reserve, capital, income and expense
accounts, separate ledgers reflecting separately for each portfolio security as of the trade date all
“long” and “short” positions carried by the fund for its own account, and corporate charters,
certificates of incorporation, by-laws and minute books.

2

These include, among other records, records of each brokerage order given in connection with
purchases and sales of securities by the fund, records of all other portfolio purchases or sales,
records of all puts, calls, spreads, straddles or other options in which the fund has an interest, has
granted, or has guaranteed, records of proof of money balances in all ledger accounts, files of all
advisory material received from the investment adviser, and memoranda identifying persons,
committees, or groups authorizing the purchase or sale of securities for the fund.

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canceled checks, cash reconciliations, canceled stock certificates, and all
schedules evidencing and supporting each computation of net asset value
of fund shares, and other documents required to be maintained by rule
31a-1(a) and not enumerated in rule 31a-1(b);
c. any advertisement, pamphlet, circular, form letter or other sales literature
addressed or intended for distribution to prospective investors;
d. any record of the initial determination that a director is not an interested
person of the fund, and each subsequent determination that the director is
not an interested person of the fund, including any questionnaire and any
other document used to determine that a director is not an interested
person of the company;
e. any materials used by the disinterested directors of a fund to determine
that a person who is acting as legal counsel to those directors is an
independent legal counsel; and
f. any documents or other written information considered by the directors of
the fund pursuant to section 15(c) of the Act (15 U.S.C. 80a-15(c)) in
approving the terms or renewal of a contract or agreement between the
fund and an investment advisor. 3
3. Every underwriter, broker, or dealer that is a majority-owned subsidiary of a fund
must preserve records required to be preserved by brokers and dealers under rules
adopted under section 17 of the Securities Exchange Act of 1934 (15 U.S.C. 78q)
3

Section 15 of the Act requires that fund directors, including a majority of independent directors,
annually approve the fund’s advisory contract and that the directors first obtain from the adviser
the information reasonably necessary to evaluate the contract. The information request
requirement in section 15 provides fund directors, including independent directors, a tool for
obtaining the information they need to represent shareholder interests.

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(“section 17”) for the periods established in those rules.
4. Every depositor of a fund, and every principal underwriter of a fund (other than a
closed-end fund), must preserve for at least six years records required to be
maintained by brokers and dealers under rules adopted under section 17 to the
extent the records are necessary or appropriate to record the entity’s transactions
with the fund.
5. Every investment adviser that is a majority-owned subsidiary of a fund must
preserve the records required to be preserved by investment advisers under rules
adopted under section 204 of the Investment Advisers Act of 1940 (15 U.S.C.
80b-4) (“section 204”) for the periods specified in those rules.
6. Every investment adviser that is not a majority-owned subsidiary of a fund must
preserve for at least six years records required to be maintained by registered
investment advisers under rules adopted under section 204 to the extent the
records are necessary or appropriate to reflect the adviser’s transactions with the
fund.
The records required to be maintained and preserved under this part may be maintained
and preserved for the required time by, or on behalf of, a fund on (i) micrographic media,
including microfilm, microfiche, or any similar medium, or (ii) electronic storage media,
including any digital storage medium or system that meets the terms of rule 31a-2(f). The fund,
or person that maintains and preserves records on its behalf, must arrange and index the records
in a way that permits easy location, access, and retrieval of any particular record. 4

4

In addition, the fund, or person who maintains and preserves records for the fund, must provide
promptly any of the following that the Commission (by its examiners or other representatives) or
the directors of the fund may request: (A) a legible, true, and complete copy of the record in the
medium and format in which it is stored; (B) a legible, true, and complete printout of the record;
and (C) means to access, view, and print the records; and must separately store, for the time

4
We periodically inspect the operations of all funds to ensure their compliance with the
provisions of the Act and the rules under the Act. Our staff spends a significant portion of its
time in these inspections reviewing the information contained in the books and records required
to be kept by rule 31a-1 and to be preserved by rule 31a-2.
On September 22, 2015, the Commission issued a release proposing amendments to rule
31a-2 to require a fund that chooses to use “swing pricing” to create and maintain a record of
support for each computation of an adjustment to the net asset value of the fund’s shares based
on the fund’s swing policies and procedures. 5 Proposed amendments to rule 22c-1 under the
Investment Company Act would permit, but not require, registered open-end management
investment companies (except money market funds and exchange-traded funds) to use swing
pricing, a process of adjusting the net asset value of a fund’s shares to pass on to purchasing or
redeeming shareholders costs associated with their trading activity.
2.

Purpose of the Information Collection

The retention of records, as required by the rule, is necessary to ensure access to material
business and financial information about funds and certain related entities. As noted above, we
periodically inspect the operations of funds to ensure they are in compliance with the Act and
regulations under the Act. Due to the limits on our resources, however, each fund may only be
inspected at intervals of several years. In addition, the prosecution of persons who have engaged
in certain violations of the federal securities laws may not be limited by timing restrictions. For
required for preservation of the original record, a duplicate copy of the record on any medium
allowed by rule 31a-2(f). In the case of records retained on electronic storage media, the fund, or
person that maintains and preserves records on its behalf, must establish and maintain procedures:
(i) to maintain and preserve the records, so as to reasonably safeguard them from loss, alteration,
or destruction; (ii) to limit access to the records to properly authorized personnel, the directors of
the fund, and the Commission (including its examiners and other representatives); and (iii) to
reasonably ensure that any reproduction of a non-electronic original record on electronic storage
media is complete, true, and legible when retrieved.
5

Investment Company Act Release No. 31835 (Sept. 22, 2015) (the “Proposing Release”).

5
these reasons, we often need information relating to events or transactions that occurred years
ago. Without the requirement to preserve books, records and other documents, our staff would
have difficulty determining whether the fund was in compliance with the law in such areas as
valuation of its portfolio securities, computation of the prices investors paid and, when
purchasing and selling fund shares, types and amounts of expenses the fund incurred, kinds of
investments the fund purchased, actions of affiliated persons, or whether the fund had engaged in
any illegal or fraudulent activities. As part of our examinations of funds, our staff also reviews
the materials that directors consider in approving the advisory contract.
3.

Role of Improved Information Technology

The Electronic Signatures in Global and National Commerce Act 6 and rule 31a-2(f)
permit many records that are required to be maintained and preserved under the rule to be
maintained electronically. The Commission's Electronic Data Gathering, Analysis and Retrieval
System (“EDGAR”) provides for the automated filing, processing, and dissemination of full
disclosure filings. The automation provides for speed, accuracy and public availability of
information, generating benefits to investors and financial markets. Although the rule does not
require the filing of any documents with the Commission, the Commission may use its EDGAR
facility in the future to improve the examination of records that funds and their affiliated entities
keep under the rule.
4.

Duplication

The requirements of rule 31a-2 are not generally duplicated anywhere else. While funds
may currently maintain records under the requirements of rule 31a-1, rule 31a-1 does not
specifically require preservation of these records.

6

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

6
5.

Effect on Small Entities

The recordkeeping requirements of rule 31a-2 do not distinguish between large and small
entities. We believe that compliance with rule 31a-2 is not unduly burdensome for large or small
entities.
6.

Consequences of Less Frequent Collection

Rule 31a-1 requires funds, certain of their majority-owned subsidiaries, and other related
entities to maintain certain records. The frequency with which entities collect this information
depends, to a large extent, on the circumstances of the activities and transactions of the fund and
these entities. Rule 31a-2 requires funds, their majority-owned subsidiaries, and other related
entities to preserve the records required to be maintained under rule 31a-1. Rule 31a-2 also
requires funds to maintain advertising materials, materials considered by a fund board each time
it approves a fund’s advisory contract, and materials relating to the independence of legal
counsel and fund directors. If entities did not have to preserve these records, our staff would
have difficulty determining whether a fund is in compliance with the Act.
7.

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

Rule 31a-2 requires funds to preserve certain records for six years and other records
permanently. We believe that the long-term retention of records is necessary to carry out our
examination and enforcement responsibilities, and our mandate to ensure that the Act's
provisions are legally enforceable. We periodically inspect the operations of funds to ensure
compliance with the rules and regulations under the Act; however, each fund may be inspected
only at intervals of several years due to limits on our resources. Furthermore, the prosecution of
persons that have engaged in certain violations of the federal securities laws may not be limited
by timing restrictions. For these reasons, we often need information relating to events or

7
transactions that occurred years ago. In section 31(a) of the Act, 7 Congress specifically
authorized the Commission to require funds to “maintain and preserve” books and records “for
such period or periods” as the Commission may prescribe by rules. Electronic record storage has
made long-term retention of records less burdensome.
8.

Consultation Outside the Agency

Rule 31a-2 has been previously amended through rulemaking actions. Comments
generally are received from registrants, trade associations, the legal and accounting profession,
and other interested parties. In addition, 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 information exchanges. These various
forums assist us and our staff in ascertaining the magnitude of paperwork burdens confronting
the industry.
The Commission requested public comment on the information collection requirement
with respect to rule 31a-2 before submitting this request for extension to the Office of
Management and Budget.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

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

7

15 U.S.C. 80a-30(a).

8
12.

Burden of Information Collection

There are 3,146 funds currently operating as of December 31, 2014, all of which are
required to comply with rule 31a-2. 8 Based on conversations with representatives of the fund
industry and past estimates, our staff estimates that each fund currently spends 220 total hours
per year complying with rule 31a-2. Our staff estimates that the 220 hours spent by typical fund
would be split evenly between administrative and computer operation personnel, 9 with 110 hours
spent by a general clerk at a rate of $57 per hour and 110 hours spent by a senior computer
operator at a rate of $87 per hour. 10 Based on these estimates, our staff estimates that the total
annual burden for all funds to comply with rule 31a-2 is 692,120 hours at an estimated cost of
$49,832,640. 11
We are proposing to amend rule 31a-2 to require a fund that chooses to use swing pricing
to create and maintain a record of support for each computation of an adjustment to the net asset
value of the fund’s shares based on the fund’s swing policies and procedures. 12 This collection
of information requirement would be mandatory for any fund that chooses to use swing pricing
to adjust its net asset value in reliance on the proposed amendments to rule 22c-1. To the extent

8

For purposes of the Paperwork Reduction Act Analysis in the Proposing Release, we used the
total fund and total burden hours information approved at the time of the Proposing Release. We
have revised such information in this supporting statement to take into account the total fund and
total burden hours information available in the most recent Paperwork Reduction Act information
collection extension submission for rule 31a-2.

9

However, the hour burden may be incurred by a variety of fund staff, and the type of staff
position used for compliance with the rule may vary widely from fund to fund.

10

The estimated salary rates are derived from SIFMA’s Office Salaries in the Securities Industry
2013, 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.

11

This estimate is based on the following calculations: 3,146 funds × 220 hours = 692,120 total
hours; 692,120 hours / 2 = 346,060 hours; 346,060 × $57 rate per hour for a clerk = $19,725,420;
346,060× $87 rate per hour for a computer operator = $30,107,220; $19,725,420 + $30,107,220 =
$49,832,640 total cost.

12

Proposed amendment to rule 31a-2(a)(2).

9
that the Commission receives confidential information pursuant to this collection of information,
such information would be kept confidential, subject to the provisions of applicable law.
We estimate that approximately 947 funds would use swing pricing pursuant to the
proposed amendments to rule 22c-1. We also estimate that each fund that uses swing pricing
generally would incur an additional burden of 1 hour per year in order to comply with the
proposed amendments to rule 31a-2. Accordingly, we estimate that the total average annual hour
burden associated with the proposed amendments to rule 31a-2 would be an additional 947 hours
at a cost of $68,169. 13
The hour burden estimates for retaining records under rule 31a-2 are based on our
experience with registrants and our experience with similar requirements under the Act and the
rules under the Act. The number of burden hours may vary depending on, among other things,
the complexity of the fund, the issues faced by the fund, and the number of series and classes of
the fund. The estimated average burden hours are made solely for purposes of the Paperwork
Reduction Act and are not derived from quantitative, comprehensive, or even representative
survey or study of the burdens associated with our rules and forms.
13.

Costs to Respondents

Based on conversations with representatives of the fund industry and past estimates, our
staff estimates that the average cost of preserving books and records required by rule 31a-2 is
approximately $74,782 annually per fund. 14 As discussed previously, there are 3,146 funds

13

These estimates are based on the following calculations: 1 hour x 947 funds = 947 total hours;
474 hours x $57 rate per hour for a general clerk = $27,018; 473 hours x $87 rate per hour for a
senior computer operator = $41,151; $27,018 + $41,151 = $68,169 total cost.

14

This estimate is based on staff’s 2012 estimate of costs of preserving books and records required
by rule 31a-2 ($70,000), adjusted for inflation to January 2015 values using the Personal
Consumption Expenditures Chain-Type Price Index (“PCE Index”). The values of the PCE Index
are available from the Bureau of Economic Analysis, a bureau of the Department of Commerce.
See Bureau of Economic Analysis, Table 2.8.6. Real Personal Consumption Expenditures by
Major Type of Product, Monthly, Chained Dollars (Last Revised on March 2, 2015), available at

10
currently operating, for a total cost of preserving records as required by rule 31a-2 of
approximately $235,264,172 per year. 15 Our staff understands, however, based on previous
conversations with representatives of the fund industry, that even in the absence of rule 31a-2
funds would already spend approximately half of this amount ($117,632,086) to preserve these
same books and records, as they are also necessary to prepare financial statements, meet various
state reporting requirements, and prepare their annual federal and state income tax returns.
Therefore, we estimate that the total annual cost burden for all funds as a result of compliance
with rule 31a-2 is approximately $117,632,086 per year. We estimate that the annual external
cost burden of compliance with the information collection requirements of rule 31a-2 would
increase by $300 per fund that engages in swing pricing, for an increase in the total annual cost
burden of $284,100. 16
14.

Cost to the Federal Government

There is no cost to the Federal Government for these recordkeeping activities.
15.

Changes in Burden

We estimate that the total annual time burden associated with rule 31a-2 will increase by
947 hours and that the total annual external cost burden of compliance with rule 31a-2 would
increase by $284,100 for the estimated 947 funds the staff anticipates will engage in “swing
pricing” in reliance on the proposed amendments to rule 22c-1 under the Investment Company
Act, which would permit, but not require, registered open-end management investment
companies (except money market funds and exchange-traded funds) to use swing pricing, a
process of adjusting the net asset value of a fund’s shares to pass on to purchasing or redeeming
http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=83.
Thus, $70,000 (2012 estimate) x 11,163.6 (Jan. 2015 PCE Index value) / 10,449.7 (2012 PCE
Index value) = $74,782 (Jan. 2015 inflation adjusted estimate).
15

This estimate is based on the following calculation: 3,146 funds × $74,782 = $235,264,172.

16

This estimate is based on the following calculation: 947 funds x $300 = $284,100.

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shareholders costs associated with their trading activity. The change in burden hours and
external cost of compliance is due to the staff’s estimates of the time and costs that would result
from our proposed amendments to rule 31a-2 to require a fund that chooses to use swing pricing
to create and maintain a record of support for each computation of an adjustment to the net asset
value of the fund’s shares based on the fund’s swing policies and procedures.
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 Statements

Not Applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.