12d3-1 Supporting Statement

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 12d3-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 12(d)(3) of the Act generally prohibits a registered investment company (“fund”)
and companies controlled by the fund from purchasing securities issued by a registered
investment adviser, broker, dealer, or underwriter (“securities-related businesses”). 1 Rule
12d3-1 permits a fund to invest up to five percent of its assets in securities of an issuer deriving
more than fifteen percent of its gross revenues from securities-related businesses, but a fund may
not rely on rule 12d3-1 to acquire securities of its own investment adviser or any affiliated
person of its own investment adviser. 2
A fund may, however, rely on an exemption in rule 12d3-1 to acquire securities issued by
its subadvisers in circumstances in which the subadviser would have little ability to take
advantage of the fund, because it is not in a position to direct the fund’s securities purchases.
This exemption in rule 12d3-1 is available if: (i) the subadviser is not, and is not an affiliated
person of, an investment adviser that provides advice with respect to the portion of the fund that
is acquiring the securities; and (ii) the advisory contracts of the subadviser, and any subadviser
that is advising the purchasing portion of the fund, prohibit them from consulting with each other
concerning securities transactions of the fund, and limit their responsibility in providing advice
to providing advice with respect to discrete portions of the fund’s portfolio. 3

1

15. U.S.C. 80a-17(d)(3).

2

See 17 CFR 270.12d3-1(b); 17 CFR 270.12d3-1(c)(3).

3

See 17 CFR 270.270.12d3-1(c)(3).

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2.

Purpose and Use of the Information Collection

The rule requires funds to amend their subadvisory contracts before they can rely on rule
12d3-1’s exemption to ensure that the subadviser that engages in the transaction does not
influence the fund’s investment decision to engage in the transaction.
3.

Consideration Given to Information Technology

To the extent the rule includes recordkeeping requirements, the Electronic Signatures in
Global and National Commerce Act 4 and the conforming amendments to recordkeeping rules
under the Investment Company Act permit funds to maintain records electronically.
4.

Duplication

The requirement regarding limitations in the subadviser’s contracts is similar to
conditions in exemptive rules 10f-3 5(permitting, under certain conditions, a fund to purchase
securities from underwriting syndicates whose members include affiliated persons of the
purchasing fund), 17a-10 6 (permitting a fund’s subadviser to enter into certain transactions with
their affiliated subadvisers), and 17e-1 7 (governing the receipt of compensation by a broker
affiliated with a fund in connection with securities transactions by the fund). To the extent that a
fund relies on more than one of these rules, its subadviser may use the same contract language to
satisfy the comparable condition in the other rules.

4

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

5

17 CFR 270.10f-3.

6

17 CFR 270.17a-10.

7

17 CFR 270.17e-1.

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5.

Effect on Small Entities

Rule 12d3-1’s exemptive relief is conditioned upon funds including certain provisions in
their advisory contracts to ensure that fund interests are the primary consideration for otherwise
prohibited transactions; these conditions apply equally to all funds, including small entities.
6.

Consequences of Not Conducting Collection

Rule 12d3-1 requires that a fund’s subadvisory contract be either initially drafted or
amended to qualify for the rule’s exemption. This is not a recurring requirement; less frequent
collection is not possible.
7.

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

Not applicable. The collection is not inconsistent with 5 CFR 1320.5(d)(2).
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 12d3-1 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 at the Division of Investment Management
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 paperwork burdens
confronting the industry.
9.

Payment or Gift
Not applicable.

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10.

Confidentiality
Not applicable.

11.

Sensitive Questions
Not applicable.

12.

Burden of Information Collection

The following estimates of average burden hours are made solely for the purposes of the
Paperwork Reduction Act. The estimates are not derived from a comprehensive or even a
representative survey or study of the costs of Commission rules.
The staff believes that all existing funds with subadvisory contracts amended those
contracts to comply with the rule following amendments to rule 12d3-1 in 2002 that conditioned
certain exemptions upon these contractual alterations, and that after that one-time change, there
is no continuing burden for those funds. However, the staff assumes that all newly formed
subadvised funds, and funds that enter into new contracts with subadvisers, will incur the onetime burden by amending their contracts to add the terms required by the rule.
Based on an analysis of third-party information, the staff estimates that approximately
319 fund portfolios enter into such new subadvisory agreements each year. 8 Based on
discussions with industry representatives, the staff estimates that it will require approximately 3
attorney hours to draft and execute additional clauses in new subadvisory contracts in order for
funds and subadvisers to be able to rely on the exemptions in rule 12d3-1. Because these
additional clauses are identical to the clauses that a fund would need to insert in their
subadvisory contracts to rely on rules 10f-3, 17a-10, and 17e-1 and because we believe that
8

Based on information available from Morningstar and the ICI Fact Book, we estimate that 37
percent of funds are advised by subadvisers.

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funds that use one such rule generally use all of these rules, we apportion this 3 hour time burden
equally to all four rules. Therefore, we estimate that the burden allocated to rule 12d3-1 for this
contract change would be 0.75 hours. 9 Assuming that all 319 funds that enter into new
subadvisory contracts each year make the modification to their contract required by the rule, we
estimate that the rule’s contract modification requirement will result in 239.25 burden hours
annually, with an associated time cost of approximately $92,351. 10
13.

Cost to Respondents

We estimated that there is no cost burden of rule 12d3-1, other than the respondent
recordkeeping burden identified in Item 12 of this Supporting Statement. Compliance with the
rule is part of customary and usual investment company business practice to ensure compliance
with applicable laws and regulations.
14.

Cost to the Federal Government

There are no costs to the Federal Government associated with rule 12d3-1.
15.

Change in Burden

Rule 12d3-1 has a current annual burden of 581 hours and no costs. The hour burden
associated with rule 12d3-1 has decreased to 239.25 hours since our last burden analysis due to a
change in our estimate of the number of funds using subadvisers. The cost burden has not
changed. We now estimate that funds that rely on rule 12d3-1 will incur an annual burden of

9

This estimate is based on the following calculation (3 hours ÷ 4 rules = .75 hours).

10

These estimates are based on the following calculations: (0.75 hours × 319 portfolios = 239.25
burden hours); ($386 per hour × 239.25 hours = $92,350.50 total cost). The Commission’s
hourly wage estimate for an in-house attorney is based on data from the SIFMA’s Office Salaries
in the Securities Industry Report 2013, modified by Commission staff for an 1,800-hour workyear and inflation (as of January 2016), and multiplied by 2.93 to account for bonuses, firm size,
employee benefits and overhead.

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239.25 hours instead of the previously estimated 581 burden hours, for a total decrease of 341.75
burden hours.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exceptions to Certification Statement for Paperwork Reduction Act

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.