PRA_18f-4 Supporting Statement (1.07.16)

SUPPORTING STATEMENT
FOR THE PAPERWORK REDUCTION ACT INFORMATION
COLLECTION SUBMISSION
Proposed Rule 18f-4
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 18 of the Investment Company Act of 1940 (“Investment Company Act”) 1
imposes various limitations on the capital structure of funds, including, in part, by restricting the
ability of funds to issue “senior securities,” as defined in that section. 2 The protection of
investors against the potentially adverse effects of a fund’s issuance of senior securities is a core
purpose of the Investment Company Act. 3 Section 18(g) of the Investment Company Act defines
“senior security,” in part, as “any bond, debenture, note, or similar obligation or instrument
constituting a security and evidencing indebtedness.” 4
On December 11, 2015, the Commission issued a release proposing new rule 18f-4,
which would require a fund that relies on the rule in order to enter into derivatives transactions to:
(i) comply with one of two alternative portfolio limitations designed to impose a limit on the
amount of leverage the fund may obtain through derivatives transactions and other senior
securities transactions; (ii) manage the risks associated with its derivatives transactions by
maintaining an amount of certain assets, defined in the rule as “qualifying coverage assets,”
designed to enable the fund to meet its obligations under its derivatives transactions; and (iii)
depending on the extent of its derivatives usage, establish a derivatives risk management

1

15 U.S.C. 80a-1 et seq.

2

See 15 U.S.C. 80a-18.

3

See, e.g., 15 U.S.C. 80a-1(b)(7), 1(b)(8), 18(a), and 18(f).

4

The definition of senior security in section 15 U.S.C. 80a-18 also includes “any stock of a class
having priority over any other class as to the distribution of assets or payment of dividends” and
excludes certain limited temporary borrowings.

1

program. A fund that relies on the proposed rule in order to enter into financial commitment
transactions would be required to maintain qualifying coverage assets equal in value to the fund’s
full obligations under those transactions. 5
Compliance with proposed rule 18f-4 would be mandatory for all funds that seek to
engage in derivatives transactions and financial commitment transactions in reliance on the rule,
which would otherwise be subject to the restrictions of section 18. No information would be
submitted directly to the Commission under proposed rule 18f-4. To the extent that records
required to be created and maintained by funds under the rule are provided to Commission staff in
connection with examinations or investigations, such information would be kept confidential
subject to the provisions of applicable law.
2.

Purpose and Use of the Information Collection

Certain of the provisions of the proposed rule contain “collection of information”
requirements within the meaning on the Paperwork Reduction Act of 1995 (“Paperwork
Reduction Act”), 6 and the Commission is submitting the collection of information to the Office of
Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. The proposed rule is designed to address the investor protection purposes and concerns
underlying section 18 of the Act and to provide an updated and more comprehensive approach to
the regulation of funds’ use of derivatives transactions in light of the dramatic growth in the
volume and complexity of the derivatives markets over the past two decades and the increased
use of derivatives by certain funds.
The information collection requirements of proposed rule 18f-4 are designed to ensure
that funds appropriately limit the amount of leverage that may be obtained through derivatives
transactions and other senior securities transactions and manage the risks associated with
derivatives transactions and financial commitment transactions. The information collections also
5

Investment Company Act Release No. 31933 (Dec. 11, 2015) [80 FR 80883 (Dec. 28, 2015)].

6

44 U.S.C. 3501 et seq.

2

assist the Commission’s examination staff in assessing funds’ compliance with the proposed rule
and identifying weaknesses in a fund’s management of derivatives transactions and financial
commitment transactions if violations occur or are uncorrected.
3.

Consideration Given to Information Technology

Proposed rule 18f-4 requires that each fund relying on the proposed rule maintain certain
written records relating to the fund’s selection of a portfolio limitation; its compliance with the
portfolio limitation, asset segregation and other requirements of the proposed rule; and if the fund
is required to implement a formalized derivatives risk management program, copies of the
program’s policies and procedures and copies of any materials provided to the board of directors
related to the operation of the program. The Electronic Signatures in Global and National
Commerce Act 7 and the conforming amendments to rules under the Investment Company Act
permit funds to maintain records electronically.
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. Proposed rule 18f-4 imposes a requirement that funds relying on the proposed rule maintain
certain written records relating to the fund’s selection of a portfolio limitation; its compliance
with the portfolio limitation, asset segregation and other requirements of the proposed rule; and if
the fund is required to implement a formalized derivatives risk management program, copies of
the program’s policies and procedures and copies of any materials provided to the board of
directors related to the operation of the program. The information required by proposed rule 18f4 is not generally duplicated elsewhere.

7

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

3

5.

Effect on Small Entities

The information collection requirements of proposed rule 18f-4 do not distinguish
between small entities and other funds. The burden of the conditions on smaller funds may be
proportionally greater than for larger funds. The Commission believes, however, that imposing
different requirements on smaller investment companies would not be consistent with investor
protection and the purposes of the rule’s conditions and could potentially jeopardize the interests
of investors in small funds. The Commission reviews all rules periodically, as required by the
Regulatory Flexibility Act, to identify methods to minimize recordkeeping or reporting
requirements affecting small businesses.
6.

Consequences of Not Conducting Collection

Proposed rule 18f-4 requires funds relying on the proposed rule to maintain certain
written records relating to the fund’s selection of a portfolio limitation; its compliance with the
portfolio limitation, asset segregation and other requirements of the proposed rule; and if the fund
is required to implement a formalized derivatives risk management program, copies of the
program’s policies and procedures and copies of any materials provided to the board of directors
related to the operation of the program.
Not collecting information or collecting such information less frequently would be
incompatible with the objectives of rule 18f-4. The reporting of information and the
establishment of written policies and procedures and maintaining written reports are integral parts
to ensuring compliance with the proposed rule and detecting and correcting any violations or
potential violations before irrevocable or widespread harm is inflicted upon investors. Not
requiring the collection of information increases the likelihood that such harm could go
unchecked.
7.

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

Proposed rule 18f-4 would require a fund to maintain for at least five years: (i) a record
of each determination made by the fund’s board that the fund will comply with one of the

4

portfolio limitations; (ii) certain written records that document the fund’s ongoing compliance
with the conditions of the proposed rule, including a written copy of the policies and procedures
approved by the board regarding the fund’s maintenance of qualifying coverage assets and a
written record demonstrating that the fund complied with the applicable portfolio limitation; (iii)
written records reflecting the fund’s mark-to-market and risk-based coverage amounts and the
fund’s financial commitment obligations, and identifying the qualifying coverage assets
maintained by the fund to cover these amounts; and (iv) records relating to the derivatives risk
management program, if the fund is required to adopt and implement a derivatives risk
management program. 8 Although this five-year period exceeds the three-year guideline for most
kinds of records under 5 CFR 1320.5(d)(2), the staff believes that this is warranted because the
rule contributes to the effectiveness of the Commission’s examination and inspection program.
Because the period between examinations may be as long as five years, it is important that the
Commission have access to records that cover the entire period between examinations.
The five-year retention period in proposed rule 18f-4 is consistent with that in rule 38a1(d) under the Investment Company Act. We believe that consistency in these retention periods
is appropriate because funds currently have program-related recordkeeping procedures in place
incorporating a five-year retention period. Furthermore, we believe that a five-year retention
period would lessen the compliance burden of proposed rule 18f-4 slightly, compared to choosing
a different retention period, such as the six-year recordkeeping retention period under rule 31a-2
of the Investment Company Act.
8.

Consultation Outside the Agency

Before adopting proposed rule 18f-4, 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

8

See proposed rule 18f-4(a)(6)(iii).

5

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

No payment or gift to respondents was provided.
10.

Assurance of Confidentiality

No information would be submitted directly to the Commission under proposed rule 18f4. Other information 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 18f-4 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 PII collected/Not applicable.
12.

Estimate of Hour Burden

The following estimates of average burden hours and costs are made solely for 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 and forms. Compliance with proposed rule 18f-4
would be mandatory for all funds that seek to engage in derivatives transactions and financial
commitment transactions in reliance on the proposed rule, which would otherwise be subject to
the restrictions of section 18.
A. Portfolio Limitations for Derivatives Transactions
Proposed rule 18f-4 would require a fund that engages in derivatives transactions in
reliance on the proposed rule to comply with one of two alternative portfolio limitations. 9 Under
9

Proposed rule 18f-4(a)(1).

6

the exposure-based portfolio limit, a fund generally would be required to determine that,
immediately after entering into any senior securities transaction, its aggregate exposure does not
exceed 150% of the value of the fund’s net assets. 10 Under the risk-based portfolio limit, a fund
generally would be required to determine that, immediately after entering into any senior
securities transaction, (1) the fund’s full portfolio VaR does not exceed its securities VaR and (2)
the fund’s aggregate exposure does not exceed 300% of the value of the fund’s net assets. 11
Proposed rule 18f-4 would require a fund’s board of directors, including a majority of the
directors who are not interested persons of the fund, to approve (a) the fund’s determination to
comply with either the exposure-based portfolio limit or the risk-based portfolio limit under the
proposed rule, and (b) if applicable, the fund’s determination to limit its aggregate exposure under
derivatives transactions to not more than 50% of its NAV and not to use complex derivatives
transactions. 12
Staff estimates that 3,831 funds will seek to rely on this part of proposed rule 18f-4 and
therefore comply with the portfolio limitation requirements. These funds would be subject to the
collections of information described below with respect to their applicable portfolio limitations.
Initial Determination of Portfolio Limitations
We estimate a one-time burden of 3 hours per fund associated with a board’s review and
approval of a fund’s portfolio limitation or, amortized over a three-year period, a burden of
approximately 1 hour annually per fund. We therefore estimate that the total hourly burden for
the initial reviews and approvals of funds’ portfolio limitations would be 11,493 hours. 13 We

10
11

Proposed rule 18f-4(a)(1)(i).
Proposed rule 18f-4(a)(1)(ii).

12

Proposed rule 18f-4(a)(5)(i). The cost burdens associated with a fund board’s approvals include
costs incurred to prepare materials for the board’s determinations, as well as the board’s review
and approval of determinations required by the proposed rule.

13

This estimate is based on the following calculation: 3 hours x 3,831 funds = 11,493 hours.

7

estimate that each fund would incur a time cost of approximately $5,121 to obtain this initial
approval, for a total initial time cost for all funds of approximately $19,618,551. 14
Recordkeeping
The proposed rule would require a fund to maintain a record of each determination made
by the fund’s board that the fund will comply with one of the portfolio limitations under the
proposed rule, which would include the fund’s initial determination as well as a record of any
determination made by the fund’s board to change the portfolio limitation. 15 We estimate a onetime burden of 0.6 hours per fund associated with maintaining a record of a board’s initial
determination of the fund’s portfolio limit or, amortized over a three-year period, a burden of
about 0.2 hours annually per fund. We therefore estimate that the total burden for maintaining a
record of a board’s initial determination of the fund’s portfolio limit would be 2,299 hours. 16 We
also estimate that each fund would incur a time cost of approximately $38 to meet this
requirement, for a total initial time cost of approximately $164,733. 17
In addition, a fund that relies on the proposed rule also would be subject to an ongoing
requirement to maintain a written record demonstrating that immediately after the fund entered

14

This estimate is based on the following calculations: 0.6 hours x $301 (hourly rate for a senior
portfolio manager) = $181; 0.6 hours x $455.5 (blended hourly rate for assistant general counsel
($426) and chief compliance officer ($485) = $273; 1.0 hours x $4,400 (hourly rate for a board of
8 directors) = $4,400; 0.8 hours (for a fund attorney’s time to prepare materials for the board’s
determinations) x $334 (hourly rate for a compliance attorney) = $267. $181 + $273 + $4,400 +
$267 = $5,121; $5,121 x 3,831 funds = $19,618,551. 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. The 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, the staff estimates that the current average cost of board of
director time is approximately $4,400.

15

Proposed rule 18f-4(a)(6)(i). The fund would be required to maintain this record for a period of
not less than five years (the first two years in an easily accessible place) following each
determination.

16

This estimate is based on the following calculation: 0.6 hours x 3,831 funds = 2,299 hours.

17

This estimate is based on the following calculation: 0.3 hours x $57 (hourly rate for a general
clerk) = $17; 0.3 hours x $87 (hourly rate for a senior computer operator) = $26. $17 + $26 = $43;
$43 x 3,831 funds = $164,733.

8

into any senior securities transaction, the fund complied with its applicable portfolio limit, with
such record reflecting the fund’s aggregate exposure, the value of its net assets and, if applicable,
the fund’s full portfolio VaR and its securities VaR. 18 We estimate that each fund would incur an
average burden of 50 hours to retain these records. 19 We therefore estimate that the total annual
burden for maintaining these records would be 191,550 hours. 20 We also estimate that each fund
would incur an annual time cost of approximately $3,600, and a total annual time cost for all
funds of approximately $13,791,600. 21
Accordingly, we estimate that, for recordkeeping associated with a fund’s portfolio
limitations, including maintenance of a record of a board’s initial determination of the fund’s
portfolio limit and maintenance of written records demonstrating the fund’s ongoing compliance
with applicable portfolio limits, the time burden per fund would be 50.6 hours and the time cost
per fund would be $3,638. 22 We therefore estimate that the total burden for maintaining such
records would be 193,849 hours, at an aggregate time cost of $13,937,178. 23

18

Proposed rule 18f-4(a)(6)(iv). The fund would be required to maintain this record for a period of
not less than five years (the first two years in an easily accessible place) following each senior
securities transaction. This written record requirement would also apply to a fund’s monitoring of
the 50% portfolio limit for purposes of the derivatives risk management program requirement
(discussed below).

19

We assume for purposes of this estimate that funds would implement automated processes for
creating a written record of their compliance with the applicable portfolio limit immediately after
entering into any senior securities transaction, and that a fund would enter into at least one
derivatives transaction or other senior securities transaction per trading day. Based on 250 trading
days per year, and assuming 0.1 hours per trading day spent by a general clerk and 0.1 hours per
trading day spent by a senior computer operator, we estimate the annual time cost to be (0.1 x 250)
= 25 hours per year per fund for each general clerk and senior computer operator.

20

This estimate is based on the following calculations: 50 hours x 3,831 funds = 191,550 hours.

21

This estimate is based on the following calculation: 25 hours x $57 (hourly rate for a general
clerk) = $1,425; 25 hours x $87 (hourly rate for a senior computer operator) = $2,175. $1,425 +
$2,175 = $3,600; $3,600 x 3,831 funds = $13,791,600.

22

This estimate is based on the following calculations: 0.6 hours (maintenance of a record of
board’s initial determination of fund’s portfolio limit) + 50 hours (maintenance of written records
demonstrating fund’s compliance with applicable portfolio limits) = 50.6 hours; $38 (maintenance
of a record of a board’s initial determination of a fund’s portfolio limit) + $3,600 (maintenance of
written records demonstrating funds’ compliance with applicable portfolio limits) = $3,638.

23

This estimate is based on the following calculations: 50.6 hours x 3,831 funds = 193,849 hours;
$3,638 x 3,831 funds = $13,937,178.

9

Estimated Total Burden
Amortized over a three-year time period, the hour burdens and time costs for collections
of information associated with portfolio limitations under proposed rule 18f-4, including the
burdens associated with (a) board review and approval of funds’ initial portfolio limitations,
(b) maintenance of records of initial board determinations of funds’ portfolio limits, and
(c) maintenance of written records demonstrating funds’ compliance with applicable portfolio
limits, are estimated to result in an aggregate average annual hour burden of 196,147 hours and
aggregate time cost of $20,386,028. 24
B. Asset Segregation: Derivatives Transactions
Proposed rule 18f-4 would require a fund that enters into derivatives transactions in
reliance on the proposed rule to manage the risks associated with its derivatives transactions by
maintaining an amount of qualifying coverage assets designed to enable the fund to meet its
obligations arising from such transactions. 25 A fund would be required to identify on the books
and records of the fund, at least once each business day, qualifying coverage assets with a value
equal to at least the fund’s aggregate “mark-to-market coverage amounts” and “risk-based
coverage amounts.” 26 A fund would also be required to have policies and procedures approved
by its board of directors that are reasonably designed to provide for the fund’s maintenance of
qualifying coverage assets. 27
Staff estimates that 3,831 funds will seek to rely on this aspect of proposed rule 18f-4 and
therefore comply with the asset segregation requirements. These funds would be subject to the
collections of information described below with respect to asset segregation requirements.

24

These estimates are based on the following calculations: (11,493 hours (year 1) + 2,299 hours
(year 1) + (3 x 191,550 hours) (years 1, 2 and 3)) ÷ 3 = 196,147 hours; ($19,618,551 (year 1) +
($164,733 (year 1) + (3 x $13,791,600)) ÷ 3 = $20,386,028.

25

Proposed rule 18f-4(a)(2), (c)(6), (c)(8), (c)(9).

26

Proposed rule 18f-4(a)(2).

27

Proposed rule 18f-4(a)(5)(ii).

10

Identification of Qualifying Coverage Assets
We estimate that each fund would incur an average annual burden of 110 hours
associated with the identification of qualifying coverage assets. We therefore estimate that the
total annual burden for the identification of qualifying coverage assets would be 421,410 hours. 28
We also estimate that each fund would incur an annual time cost of approximately $11,530 to
identify qualifying coverage assets, for a total annual time cost for all funds of approximately
$44,171,430. 29
Board-Approved Policies & Procedures
Proposed rule 18f-4 would require funds to have written policies and procedures
reasonably designed to provide for the fund’s maintenance of qualifying coverage assets. We
estimate that a fund would incur a one-time average burden of 15 hours associated with
documenting its policies and procedures. The proposed rule would also require that the fund’s
board approve such policies and procedures and we estimate a one-time burden of 1 hour per fund
associated with fund boards’ review and approval of its policies and procedures. Amortized over
a three-year period, this would be an annual burden per fund of approximately 5.3 hours. We
estimate that the total one-time burden for the initial documentation, and board approval of,
written policies and procedures to provide for a fund’s maintenance of qualifying coverage assets
would be 61,296 hours. 30 We also estimate that each fund would incur a time cost of
approximately $6,291, and a total initial time cost for all funds of approximately $38,593,494. 31
We estimate that there are no ongoing annual costs associated with this collection of information.

28

This estimate is based on the following calculation: 110 hours x 3,831 funds = 421,410 hours.

29

This estimate is based on the following calculations: 100 hours x $87 (hourly rate for a senior
computer operator) = $8,700; 10 hours x $283 (hourly rate for compliance manager) = $2,830.
$8,700 + $2,830 = $11,530; $11,530 x 3,831 funds = $44,171,430.

30

This estimate is based on the following calculation: 16 hours x 3,831 funds = 61,296 hours.

31

This estimate is based on the following calculations: 7.5 hours x $301 (hourly rate for a senior
portfolio manager) = $2,258; 7.5 hours x $455.5 (blended hourly rate for assistant general counsel
($426) and chief compliance officer ($485)) = $3,416; 1 hour x $4,400 (hourly rate for a board of
8 directors) = $4,400. $2,258 + $3,416 + $4,400= $10,074; $10,074 x 3,831 funds = $38,593,494.

11

Recordkeeping
The proposed rule would require a fund to maintain a written copy of the policies and
procedures approved by the fund’s board of directors that are in effect, or at any time within the
past five years were in effect, in an easily accessible place. We estimate a one-time burden (and
no ongoing annual burden) of 1 hour per fund associated with maintaining a written copy of the
fund’s board-approved policies and procedures or, amortized over a three-year period, a burden
of approximately 0.3 hours annually per fund. We therefore estimate that the total one-time
burden for maintaining this record would be 3,831 hours. 32 We also estimate that each fund
would incur a time cost of approximately $57, and a total initial time cost for all funds of
approximately $218,367. 33
In addition, a fund that relies on the proposed rule also would be subject to an ongoing
requirement to maintain a written record reflecting the mark-to-market coverage amount and riskbased coverage amount for each derivatives transaction entered into by the fund and identifying
the associated qualifying coverage assets, as determined by the fund at least once each business
day, for a period of not less than five years (the first two years in an easily accessible place). 34
We estimate that each fund would incur an average annual burden of 50 hours to retain these
records. 35 We therefore estimate that the total annual burden for maintaining these records would

32

This estimate is based on the following calculation: 1 hour x 3,831 funds = 3,831 hours.

33

This estimate is based on the following calculation: 1 hour x $57 (hourly rate for a general clerk)
= $57. $57 x 3,831 funds = $218,367.

34

Proposed rule 18f-4(a)(6)(v).

35

We assume for purposes of this estimate that funds would implement automated processes for
creating a written record of their compliance with the qualifying coverage asset requirements and
that a fund would enter into at least one derivatives transaction per trading day. Based on 250
trading days per year, and assuming 0.1 hours per trading day spent by a general clerk and 0.1
hours per trading day spent by a senior computer operator, we estimate the annual time cost to be
(0.1 x 250) = 25 hours per year per fund for each general clerk and senior computer operator.

12

be 191,550 hours. 36 We also estimate that each fund would incur an annual time cost of
approximately $3,600, and a total annual time cost for all funds of approximately $13,791,600. 37
Estimated Total Burden
Amortized over a three-year time period, the hour burdens and time costs for collections
of information associated with the asset segregation requirement for derivatives transactions
under proposed rule 18f-4, including the burdens associated with (a) identifying qualifying
coverage assets; (b) documenting board-approved policies and procedures; and (c) maintaining
required records, are estimated to result in an aggregate average annual hour burden of 634,669
hours and aggregate time costs of $70,900,317. 38
C. Asset Segregation: Financial Commitment Transactions
Proposed rule 18f-4 would require a fund that enters into financial commitment
transactions in reliance on the proposed rule to similarly maintain qualifying coverage assets
designed to enable the fund to meet its obligations arising from such transactions. A fund would
be required to identify on the books and records of the fund, at least once each business day,
qualifying coverage assets with a value equal to at least the fund’s aggregate financial
commitment obligations. 39 A fund that enters solely into financial commitment transactions
would, as described above for a fund that enters into derivatives transactions, be required to have
policies and procedures approved by its board of directors that are reasonably designed to provide
for the fund’s maintenance of qualifying coverage assets. 40

36

This estimate is based on the following calculations: 50 hours x 3,831 funds = 191,550 hours.

37

This estimate is based on the following calculation: 25 hours x $57 (hourly rate for a general
clerk) = $1,425; 25 hours x $87 (hourly rate for a senior computer operator) = $2,175. $1,425 +
$2,175 = $3,600; $3,600 x 3,831 funds = $13,791,600.

38

These estimates are based on the following calculations: ((3 x 421,410 hours) (years 1, 2 and 3) +
61,296 (year 1) + 3,831 (year 1) + (3 x 191,550 hours) (years 1, 2 and 3)) ÷ 3 = 634,669 hours; ((3
x $44,171,430) + ($38,593,494 (year 1)) + ($218,367 (year 1)) + (3 x $13,791,600) (years 1, 2,
and 3)) ÷ 3 = $70,900,317.

39

Proposed rule 18f-4(b)(1).

40

Proposed rule 18f-4(b)(2)(3).

13

Staff estimates 359 funds would comply with the asset segregation requirements in
proposed rule 18f-4 applicable to financial commitment transactions and would not also be
complying with the asset segregation and other requirements applicable to derivatives
transactions. In addition, staff estimates that 537 money market funds and 88 BDCs may engage
in certain types of financial commitment transactions. In sum, staff estimates that 984 funds
would comply with the asset segregation requirements applicable to financial commitment
transactions and incur the same costs we estimate above (with regard to funds that engage in
derivatives transactions). These funds would be subject to the collections of information
described below.
Identification of Qualifying Coverage Assets
We estimate that each fund would incur an average annual burden of 110 hours (and no
initial one-time burdens) associated with the identification of qualifying coverage assets. We
therefore estimate that the total annual burden for the identification of qualifying coverage assets
would be 108,240 hours. 41 We also estimate that each fund would incur an ongoing annual time
cost of approximately $11,530 to identify qualifying coverage assets, for a total ongoing annual
time cost for all funds of approximately $11,345,520. 42
Board-Approved Policies & Procedures
A fund that enters solely into financial commitment transactions, like a fund that enters
into derivatives transactions, would be required under the proposed rule to have board-approved
policies and procedures regarding the maintenance of qualifying coverage assets. Accordingly,
we estimate that a fund would incur a one-time average burden of 15 hours associated with
documenting its policies and procedures. The proposed rule would also require that the fund’s
board approve such policies and procedures and we estimate a one-time burden of 1 hour per fund
41

This estimate is based on the following calculation: 110 hours x 984 funds = 108,240 hours.

42

This estimate is based on the following calculations: 100 hours x $87 (hourly rate for a senior
computer operator) = $8,700; 10 hours x $283 (hourly rate for compliance manager) = $2,830.
$8,700 + $2,830 = $11,530; $11,530 x 984 funds = $11,345,520.

14

associated with fund boards’ review and approval of its policies and procedures. Amortized over
a three-year period, this would be an annual burden per fund of approximately 5.3 hours. We
estimate that the total one-time burden for the initial documentation, and board approval of,
written policies and procedures to provide for a fund’s maintenance of qualifying coverage assets
would be 15,744 hours. 43 We also estimate that each fund would incur a time cost of
approximately $6,291, and a total initial time cost for all funds of approximately $9,912,816. 44
We estimate that there are no annual time costs associated with this collection of information.
Recordkeeping
A fund that enters solely into financial commitment transactions would also be required
under the proposed rule to retain a written copy of the fund’s board-approved policies and
procedures regarding the maintenance of qualifying coverage assets. This requirement also
applies to funds that enter into derivatives transactions. Accordingly, as discussed above for the
recordkeeping burdens associated with asset segregation for derivatives transactions, we estimate
a one-time burden (and no annual burden) of 1 hour per fund associated with maintaining a
written copy of the fund’s board-approved policies and procedures or, amortized over a three-year
period, a burden of approximately 0.3 hours annually per fund. We therefore estimate that the
total one-time burden for maintaining this record would be 984 hours. 45 We also estimate that
each fund would incur a time cost of approximately $57, and a total initial time cost for all funds
of approximately $56,088. 46

43

This estimate is based on the following calculation: 16 hours x 984 funds = 15,744 hours.

44

This estimate is based on the following calculations: 7.5 hours x $301 (hourly rate for a senior
portfolio manager) = $2,258; 7.5 hours x $455.5 (blended hourly rate for assistant general counsel
($426) and chief compliance officer ($485)) = $3,416; 1 hour x $4,400 (hourly rate for a board of
8 directors) = $4,400. $2,258 + $3,416 + $4,400= $10,074; $10,074 x 984 funds = $9,912,816.

45

This estimate is based on the following calculation: 1 hour x 984 funds = 984 hours.

46

This estimate is based on the following calculation: 1 hour x $57 (hourly rate for a general clerk)
= $57. $57 x 984 funds = $56,088.

15

In addition, a fund that relies on the proposed rule also would be subject to an ongoing
requirement to maintain a written record reflecting the amount of each financial commitment
obligation associated with each financial commitment transaction entered into by the fund and
identifying the associated qualifying coverage assets, as determined by the fund at least once each
business day, for a period of not less than five years (the first two years in an easily accessible
place). 47 We estimate that each fund would incur an average annual burden of 50 hours to retain
these records. 48 We therefore estimate that the total annual hour burden for maintaining these
records would be 49,200 hours. 49 We also estimate that each fund would incur an annual time
cost of approximately $3,600, and a total annual time cost for all funds of approximately
$3,542,400. 50
Estimated Total Burden
Amortized over a three-year time period, the hour burdens and time costs for collections
of information associated with the asset segregation requirement for financial commitment
transactions under proposed rule 18f-4, including the burdens associated with (a) identifying
qualifying coverage assets; (b) documenting board-approved policies and procedures; and
(c) maintaining required records, are estimated to result in an aggregate average annual hour
burden of 163,016 hours and aggregate time costs of $18,210,888. 51

47

Proposed rule 18f-4(b)(3)(ii).

48

We assume for purposes of this estimate that funds would implement automated processes for
creating a written record of their compliance with the qualifying coverage asset requirements and
that a fund would enter into at least one financial commitment transaction per trading day. Based
on 250 trading days per year, and assuming 0.1 hours per trading day spent by a general clerk and
0.1 hours per trading day spent by a senior computer operator, we estimate the annual time cost to
be (0.1 x 250) = 25 hours per year per fund for each general clerk and senior computer operator.

49

This estimate is based on the following calculations: 50 hours x 984 funds = 49,200 hours.

50

This estimate is based on the following calculation: 25 hours x $57 (hourly rate for a general
clerk) = $1,425; 25 hours x $87 (hourly rate for a senior computer operator) = $2,175. $1,425 +
$2,175 = $3,600; $3,600 x 984 funds = $3,542,400.

51

These estimates are based on the following calculations: ((3 x 108,240 hours) (years 1, 2 and 3) +
15,744 (year 1) + 984 (year 1) + (3 x 49,200) (years 1, 2 and 3)) ÷ 3 = 163,016 hours; ((3 x
$11,345,520) (years 1, 2 and 3) + ($9,912,816 (year 1)) + ($56,088 (year 1)) + (3 x $3,542,400)
(years 1, 2 and 3)) ÷ 3 = $18,210,888.

16

D. Derivatives Risk Management Program
Proposed rule 18f-4 would require that a fund that engages in more than a limited amount
of derivatives transactions, or that uses complex derivatives transactions, to adopt and implement
a derivatives risk management program. 52 This risk management program would require a fund
to adopt and implement policies and procedures reasonably designed to assess and manage the
risks of the fund’s derivatives transactions, reasonably segregate the functions associated with the
program from the portfolio management function of the fund, and periodically review and update
the program at least annually. 53 The proposed rule would also require a fund to designate a
derivatives risk manager responsible for administering the program and require that the risk
manager, no less frequently than quarterly, prepare a written report that describes the adequacy
and effectiveness of the fund’s risk management program. 54 A fund’s board of directors must
also (1) approve the fund’s derivatives risk management program, including any material changes
to the program; (2) approve the fund’s designation of the fund’s derivatives risk manager (who
cannot be a portfolio manager of the fund); and (3) review, no less frequently than quarterly, the
written report prepared by the fund’s derivatives risk manager that describes the adequacy and
effectiveness of the fund’s risk management program. 55
Staff estimates that approximately 1,676 funds 56 and no BDCs would be required to
establish a derivatives risk management program. These funds would be subject to the
collections of information described below with respect to the derivatives risk management
program provision.
52

A derivatives risk management program would not be required if the fund complies with a
portfolio limitation under which, immediately after entering into any derivatives transaction, the
fund’s aggregate exposure associated with the fund’s derivatives transactions does not exceed 50%
of the value of the fund’s net assets, and the fund does not use “complex derivatives” (as defined
in proposed rule 18f-4(c)(1)).

53

See proposed rule 18f-4(a)(3)(i)(A) through (D).

54

See proposed rule 18f-4(a)(3)(ii)(B) and (C).

55

Proposed rule 18f-4(a)(3)(ii).

56

This estimate is based on the following calculation: 11,973 funds x 14% = 1,676 funds.

17

Establishing a Derivatives Risk Management Program
We estimate that each fund would incur an average initial burden of 30 hours associated
with establishing a derivatives risk management program, including (1) adopting and
implementing (including documenting) policies and procedures reasonably designed to assess and
manage the risks of the fund’s derivatives transactions and designating a derivatives risk manager
(24 hours); and (2) obtaining initial board approval of the derivatives risk management program
and the designation of the fund’s derivatives risk manager (6 hours). Amortized over a three-year
period, this would be an annual burden per fund of 10 hours. Accordingly, we estimate that the
total average annual initial burden for establishing a derivatives risk management program would
be 50,280 hours. 57 We also estimate that each fund would incur an initial time cost of $27,346 in
relation to this hour burden, for a total initial time cost for all funds of approximately
$45,831,896. 58
In addition to the initial burden, we estimate that each fund would incur an average
annual burden of 38 hours associated with its derivatives risk management program, including
that: (1) the fund review and update its risk management program at least annually (8 hours);
(2) the derivatives risk manager prepare, on a quarterly basis, a written report that describes the
adequacy and effectiveness of the fund’s risk management program (24 hours 59); and (3) the
fund’s board review, on a quarterly basis, the written report prepared by the fund’s derivatives
risk manager that describes the adequacy and effectiveness of the fund’s risk management
program, and approve any material changes to the derivatives risk management program (6

57

This estimate is based on the following calculation: 30 hours x 1,676 funds = 50,280 hours.

58

This estimate is based on the following calculations: 12 hours x $301 (hourly rate for a senior
portfolio manager) = $3,612; 12 hours x $455.5 (blended hourly rate for assistant general counsel
($426) and chief compliance officer ($485) = $5,466; 4 hours x $4,400 (hourly rate for a board of
8 directors) = $17,600; 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. $3,612 + $5,466 +
$17,600 + $668 = $27,346; $27,346 x 1,676 funds = $45,831,896.

59

The estimate is based on the following calculation: 4 quarterly reports x 6 hours to prepare each
written report = 24 hours.

18

hours). Accordingly, we estimate that the total average annual burden for establishing a
derivatives risk management program would be 63,688 hours. 60 We also estimate that each fund
would incur an annual time cost of $41,066, for a total annual time cost for all funds of
approximately $68,826,616. 61
Recordkeeping
Proposed rule 18f-4 would require a fund that adopts and implements a derivatives risk
management program to maintain (1) a written copy of the policies and procedures adopted by
the fund (as required in proposed rule 18f-4(a)(3)) that are in effect, or any time within the past
five years were in effect, in an easily accessible place; (2) copies of any materials provided to the
board of directors in connection with its approval of the derivatives risk management program,
including any material changes to the program, and any written reports provided to the board
relating to the derivatives risk management program, for at least five years after the end of the
fiscal year in which the documents were provided (the first two years in an easily accessible
place); and (3) records documenting the periodic reviews and updates required under proposed
rule 18f-4(a)(3)(i)(D), for a period of not less than five years (the first two years in an easily
accessible place) following each review or update.
We estimate that each fund would incur an annual average burden of 4 hours to retain
these records. 62 We therefore estimate that the total annual burden for maintaining these records
would be 6,704 hours. 63 We also estimate that each fund would incur an annual time cost of

60

This estimate is based on the following calculation: 38 hours x 1,676 funds = 63,688 hours.

61

This estimate is based on the following calculations: Reviewing/updating the risk management
program (8 hours): 4 hours x $301 (hourly rate for a senior portfolio manager) = $1,204; 4 hours
x $455.5 (blended hourly rate for assistant general counsel ($426) and chief compliance officer
($485) = $1,822; Preparing quarterly reports by the derivatives risk manager (6 hours x 4 reports =
24 hours): 24 hours x $485 (hourly rate for chief compliance officer functioning as proposed
derivatives risk manager) = $11,640; Reviewing quarterly reports by the fund’s board (1.5 hours x
4 reports = 6 hours): 6 hours x $4,400 (hourly rate for a board of 8 directors) = $26,400. $1,204 +
$1,822 + $11,640 + $26,400 = 41,066; $41,066 x 1,676 funds = $68,826,616.

62

We estimate 2 hours spent by a general clerk and 2 hours spent by a senior computer operator.

63

This estimate is based on the following calculation: 4 hours x 1,676 funds = 6,704 hours.

19

approximately $288, and a total annual time cost for all funds of approximately $482,688 with
respect to this hourly burden. 64
Estimated Total Burden
Amortized over a three-year time period, the hour burdens and time costs for collections
of information associated with the derivatives risk management program under proposed rule 18f4, including the burdens associated with (a) establishing a derivatives risk management program;
and (b) maintaining required records, are estimated to result in an aggregate average annual hour
burden of 65,923 hours and aggregate time costs of $61,644,397. 65
E. Estimated Total Burden
Amortized over a three-year time period, the hour burdens and time costs for collections
of information associated with proposed rule 18f-4, including the burdens associated with
(a) portfolio limitations for derivatives transactions; (b) asset segregation for derivatives
transactions; (c) asset segregation for financial commitment transactions; and (d) derivatives risk
management program, are estimated to result in an aggregate average annual hour burden of
1,059,755 hours and aggregate time costs of $171,141,630. 66

64

This estimate is based on the following calculation: 2 hours x $57 (hourly rate for a general clerk)
= $114; 2 hours x $87 (hourly rate for a senior computer operator) = $174. $114 +$ 174 = $288;
$288 x 1,676 funds = $482,688.

65

These estimates are based on the following calculations: (50,280 hours (year 1) + (2 x 63,688
hours) (years 2 and 3) + (3 x 6,704 hours) (years 1, 2 and 3)) ÷ 3 = 65,923 hours; ($45,831,896
(year 1) + (2 x $68,826,616) (years 2 and 3) + (3 x $482,688) (years 1, 2 and 3)) ÷ 3 =
$61,644,397.

66

These estimates are based on the following calculations: (196,147 hours: portfolio limitations +
634,669 hours: asset segregation (derivatives) + 163,016 hours: asset segregation (financial
commitment transactions) + 65,923 hours (risk management program) = 1,059,755 hours;
($20,386,028: portfolio limitations + $70,900,317: asset segregation (derivatives) + $18,210,888:
asset segregation (financial commitment transactions) + $61,644,397 (risk management program)
= $171,141,630.

20

13.

Cost to Respondents

The cost burden is the cost associated with a fund board consulting its outside legal
counsel with regard to the required board approvals. The cost burden does not include the hour
burden discussed in Item 12.
We estimate that each fund would incur a one-time average external cost of $800
associated with a fund board consulting its outside legal counsel with regard to the required board
approvals of the portfolio limitation. 67 We estimate that each fund would incur a one-time
average external cost of $800 associated with a fund board consulting its outside legal counsel
with regard to the required board approval of the policies and procedures for qualifying coverage
assets for derivatives. 68 We also estimate that each fund would incur a one-time average external
cost of $800 associated with a fund board consulting its outside legal counsel with regard to the
required board approvals for policies and procedures for qualifying coverage assets for financial
commitment transactions. 69 We estimate that each fund that is required to implement a
derivatives risk management program would incur a one-time average external cost of $1,600
associated with a fund board consulting its outside legal counsel with regard to the required board
approval for the program and the designation of the fund’s derivatives risk manager. 70 In
addition, we estimate that each fund would incur average annual external costs of $3,200
associated with a fund board’s consulting its outside legal counsel with regard to quarterly
reviews of the reports prepared by the fund’s derivatives risk manager. 71 In sum, we estimate that
each fund would incur an aggregate average one-time external cost of $4,000 and aggregate
67

This estimate is based on the following calculation: 2 hours x $400 (hourly rate for outside legal
services) = $800.

68

This estimate is based on the following calculation: 2 hours x $400 (hourly rate for outside legal
services) = $800.

69

This estimate is based on the following calculation: 2 hours x $400 (hourly rate for outside legal
services) = $800.

70

This estimate is based on the following calculation: 4 hours x $400 (hourly rate for outside legal
services) = $1,600.

71

This estimate is based on the following calculation: 8 hours (2 hours x 4 quarterly reviews) x
$400 (hourly rate for outside legal services) = $3,200.

21

average annual external costs of $3,200. 72 We estimate that all applicable funds would incur on
average, in the aggregate, one-time external costs of $9,598,400 and annual external costs of
$5,363,200. 73
The staff estimates that rule 18f-4 does not impose any other material cost burdens on
funds, apart from the costs and hour burdens discussed above. Although rule 18f-4 requires funds
to maintain records for five 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.

Costs to Federal Government

Proposed rule 18f-4 does not impose a cost to the federal government. Commission staff
may, however, review records produced pursuant to the rule in order to assist the Commission in
carrying out its examination and oversight program.
15.

Changes in Burden

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

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

72

These estimates are based on the following calculations: One-time costs: ($800: portfolio
limitations + $800: asset segregation (derivatives) + $800: asset segregation (financial
commitment transactions) + $1,600 (risk management program) = $4,000; Annual costs: ($3,200:
risk management program).

73

These estimates are based on the following calculations: One-time costs: (($800: portfolio
limitations x 3,831 funds) + ($800: asset segregation (derivatives) x 3,831 funds) + ($800: asset
segregation (financial commitment transactions) x 984 funds) + ($1,600 (risk management
program) x 1,676 funds) = $9,598,400; Annual costs: ($3,200: risk management program x 1,676
funds = $5,363,200).

22

18.

Exceptions to Certification for Paperwork Reduction Act Submissions

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

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL
METHODS
The collection of information will not employ statistical methods.

23