Supporting Statement for Rule 22c-1 (2016)

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

JUSTIFICATION
1.

Necessity for the Information Collection

We are adopting, largely as 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”) that will enable a fund 1 choose to use “swing pricing” as a tool to mitigate shareholder
dilution. This will be a new collection of information under the PRA. We believe that rule 22c1 will promote investor protection by providing funds with an additional tool to mitigate the
potentially dilutive effects of shareholder purchase or redemption activity and provide a set of
operational standards that will allow funds to gain comfort using swing pricing as a new means
of mitigating potential dilution.
In order to use swing pricing under rule 22c-1, as amended, a fund is required to establish and
implement swing pricing policies and procedures that meet certain requirements. The policies and
procedures must specify the process for determining the level(s) of net purchases into or net

redemptions from the fund (“swing thresholds(s)”) that would trigger share price adjustment for
transacting shareholders, as well as for determining the figure(s) used for such share price
adjustment (“swing factor(s)”), including the establishment of an upper limit on the swing factor(s)
used (which may not exceed two percent of net asset value (“NAV”) per share). The amendments
require a fund’s board of directors to approve the fund’s swing pricing policies and procedures, as

1

For purposes of this Supporting Statement, the term “fund” denotes a fund as defined in 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 rule 22c-1(a)(3)(v)(A)).”

well as the fund’s swing threshold and swing factor upper limit (and any changes to the swing
threshold or swing factor upper limit). The fund’s board is also required to review, no less frequently
than annually, a written report prepared by the persons responsible for administering swing pricing
that describes: (i) its review of the adequacy of the fund’s swing pricing policies and procedures and
the effectiveness of their implementation, including the impact on mitigating dilution; (ii) any
material changes to the fund’s swing pricing policies and procedures since the date of the last report;
and (iii) its review and assessment of the fund’s swing threshold(s), swing factor(s), and swing

factor upper limit considering the requirements of the rule, including the information and data
supporting these determinations. A fund is required to maintain the fund’s swing pricing policies
and procedures and a written copy of the periodic report provided to the board.
The respondents to amended rule 22c-1 will be open-end management investment
companies (other than money market funds or exchange-traded funds) that engage in swing
pricing. Compliance with rule 22c-1(a)(3) will be mandatory for any fund that chooses to use
swing pricing to adjust its NAV in reliance on the amendments. Finally, rule 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 that funds adopt policies and procedures, obtain board
approval and periodic review, provide a written report to the board, and retain certain records
related to swing pricing are “collections of information” within the meaning of the Paperwork
Reduction Act of 1995 (“PRA”). 2

2

44 U.S.C. 3501-3520.

2.

Purpose and Use of the Information Collection

The information collection requirements of rule 22c-1(a)(3) are integral to the swing
pricing framework created by the rule. Thus, the information collections are necessary to help
further the 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 rule 22c-1(a)(3).
3.

Consideration Given to Information Technology

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.
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 rule 22c-1(a)(3) is not duplicated elsewhere.
5.

Effect on Small Entities

The information collection requirements of rule 22c-1(a)(3) do not distinguish between
small entities and other funds. As discussed above, the information collection requirements of
rule 22c-1(a)(3) are integral to the swing pricing framework created by the rule, and thus they

3

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

are necessary to help further the investor protection goals of the rule. The Commission therefore
believes that imposing different requirements on smaller investment companies would not be
consistent with investor protection and the purposes of rule 22c-1(a)(3). Because the adoption
of swing pricing policies and procedures would be permitted, but not required, under the rule a
fund that is a small entity is not required to incur the costs of compliance.
6.

Consequences of Not Conducting Collection

Rule 22c-1(a)(3) requires a fund that chooses to use swing pricing to adopt swing pricing
policies and procedures that include certain elements and are approved by the fund’s board of
directors, and to maintain certain records, including written copies of the fund’s swing pricing
policies and procedures, the periodic report provided to the board, 4 and records of support for
each computation of an adjustment to the fund’s NAV based on the fund’s swing pricing policies
and procedures The adoption and maintenance of written policies and procedures are integral to
the swing pricing framework created by the rule. Furthermore, the board reporting elements of
the rule are important investor protection controls. Thus, not requiring these collections of
information would be incompatible with the investor protection goals of rule 22c-1(a)(3).
7.

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

Rule 22c-1(a)(3) would require funds to retain certain written records for more than three
years. Specifically, the 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.

4

Rule 22c-1(a)(3)(iii).

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 adopted 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 rule 22c-1(a)(3) is consistent with the retention period in current
rule 31a-2 (as well as rule 31a-2 as 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

The Commission requested public comment on the collection requirements of rule 22c1(a)(3) before it submitted this request for revision and approval to the Office of Management
and Budget. 5 The Commission evaluated all public comments it received regarding the collection
requirements associated with rule 22c-1(a)(3). Moreover, the Commission and the staff of the

Division of Investment Management participate in an ongoing 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.

5

See Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment
Period for Investment Company Reporting Modernization Release, Investment Company Act Release No.
31835 (Sept. 22, 2015) [80 FR 62273 (Oct. 15, 2015)] (“Proposing Release”).

The Commission has modified the estimated increase in burden hours associated with a
fund documenting its swing pricing policies and procedures in consideration of commenters’
concerns that such burdens were underestimated in the Proposing Release, 6 as well as
modifications made to the proposal and updates to data figures that were utilized in the
Proposing Release. We estimate that 84 fund complexes, rather than 167 fund complexes (half
as many fund complexes as estimated in the proposal), include funds that will adopt swing
pricing policies and procedures pursuant to the rule. 7 While one commenter suggested that the
burden to comply with the amendments to rule 22c-1 would be four or five times more costly
than in the proposal, 8 we believe that with respect to the PRA analysis, the estimated burdens for
documenting swing pricing procedures will not be as high as the commenter’s estimate of the
costs associated with the entire implementation of swing pricing policies and procedures. Based
on our review of the adopted requirements, we estimate that each fund complex will incur a onetime average burden of 48 hours, rather than 24 hours, to document swing pricing policies and
procedures. We further estimate that each fund complex will spend 2 hours, on average,
preparing the required written report to the board. Since a fund board will approve the fund’s

6

See Comment Letter of Dechert LLP (Jan. 13, 2016) (“Dechert Comment Letter”); Comment Letter of
Eaton Vance Corp. (June 13, 2016) (“Eaton Vance Comment Letter”) ; Comment Letter of Investment
Company Institute (Jan. 13, 2016) (“ICI Comment Letter”); Comment Letter of Independent Directors
Council (Jan. 13, 2016) (“IDC Comment Letter”); Comment Letter of Invesco Ltd. (Jan. 13, 2016)
(“Invesco Comment Letter”); Comment Letter of J.P. Morgan Asset Management (Jan. 13, 2016) (“J.P.
Morgan Comment Letter”) ; Comment Letter of Charles Schwab Investment Management (Jan. 13, 2016)
(“Charles Schwab Comment Letter”); Comment Letter of T. Rowe Price (Jan. 13, 2016) (“T. Rowe
Comment Letter”) .

7

Commenters noted a variety of challenges associated with the immediate implementation of swing pricing.
Accordingly, we have revised our estimated number of fund complexes that will implement swing pricing
within the three-year period discussed below. Additionally, the two-year extended effective date means
that no fund may implement swing pricing until the third year, which will likely further reduce the number
of funds for purposes of this estimate.

8

See Charles Schwab Comment Letter (stating that the Commission based its estimated costs to establish
and implement swing pricing policies and procedures in part on the costs associated with implementing the
fees and gates provisions of the 2014 money market fund reform rule and that, in the commenter’s
experience, the implementation costs for the money market fund reform rule were severely understated).

swing pricing policies and procedures and review, no less frequently than annually, a written
report that includes certain required elements, we estimate a one-time burden of 6 hours, rather
than 5 hours per fund complex associated with the fund board’s review and approval of swing
pricing policies and procedures. We did not receive any comments on the estimated hour and
cost burdens for recordkeeping requirements associated with rule 22c-1(a)(3).
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

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 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 involved.
12.

Burden of Information Collection

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 rule
22c-1(a)(3) would only be mandatory for funds that chose to adopt swing pricing.
A. Documentation and Approval of Swing Pricing Policies and Procedures
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 rule 22c-1(a)(3). In the Proposing Release,
we estimated that 167 fund complexes include funds that would adopt swing pricing policies and
procedures pursuant to the rule. For purposes of the PRA analysis, we estimated that each fund
complex would incur a one-time average burden of 24 hours to document swing pricing policies
and procedures. Under the proposal, rule 22c-1 would have required fund boards initially to
approve the swing pricing policies and procedures (including the swing threshold) and any
material changes to them, and we estimated a one-time burden of five hours per fund complex
associated with the fund board’s review and approval of swing pricing policies and procedures.
Amortized over a 3-year period, we estimated that this would be an annual burden per fund
complex of about 10 hours. Accordingly, we estimated that the total burden associated with the
preparation and approval of swing pricing policies and procedures by those fund complexes that
we believed would use swing pricing would be 4,843 hours. 9 We also estimated that it would
cost a fund complex $21,710 to document, review and initially approve these policies and
procedures, for a total cost of $3,625,570. 10
As discussed above, many commenters expressed general concerns about the operational
and technology costs associated with swing pricing and recommended that the Commission
consider the substantial costs and technology challenges that need to be overcome to implement
swing pricing. One commenter expressed the belief that the Commission significantly

9

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

10

These estimates were 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. The hourly wages used were 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. See also infra footnote 16
(discussing basis for estimated hourly rate for a board of directors).

underestimated the costs associated with developing and implementing the systems and
procedures necessary to comply with rule 22c-1 swing pricing requirements and stated that its
implementation costs for swing pricing would likely be four or five times more costly than the
Commission’s estimates in the proposal. We appreciate the information provided by the
commenter and, in consideration of their comment, have extrapolated from this commenter’s
estimate increased cost estimates for the amendments to rule 22c-1 adopted today.
The Commission has modified the estimated increase in burden hours associated with a
fund documenting its swing pricing policies and procedures in consideration of commenters’
concerns that such burdens were underestimated, 11 as well as modifications made to the proposal
and updates to data figures that were utilized in the Proposing Release. We estimate that 84 fund
complexes, rather than 167 fund complexes (half as many fund complexes as estimated in the
proposal), include funds that will adopt swing pricing policies and procedures pursuant to the
rule. 12 While one commenter suggested that the burden to comply with the amendments to rule
22c-1 would be four or five times more costly than in the proposal, 13 we believe that with respect
to the PRA analysis, the estimated burdens for documenting swing pricing procedures will not be
as high as the commenter’s estimate of the costs associated with the entire implementation of
swing pricing policies and procedures. Based on our review of the adopted requirements, we

11

See Dechert Comment Letter; Eaton Vance Comment Letter; ICI Comment Letter I; IDC Comment Letter;
Invesco Comment Letter; J.P. Morgan Comment Letter; Charles Schwab Comment Letter; T. Rowe
Comment Letter.

12

Commenters noted a variety of challenges associated with the immediate implementation of swing pricing.
Accordingly, we have revised our estimated number of fund complexes that will implement swing pricing
within the three-year period discussed below. Additionally, the two-year extended effective date means
that no fund may implement swing pricing until the third year, which will likely further reduce the number
of funds for purposes of this estimate.

13

See Charles Schwab Comment Letter (stating that the Commission based its estimated costs to establish
and implement swing pricing policies and procedures in part on the costs associated with implementing the
fees and gates provisions of the 2014 money market fund reform rule and that, in the commenter’s
experience, the implementation costs for the money market fund reform rule were severely understated).

estimate that each fund complex will incur a one-time average burden of 48 hours, rather than 24
hours, to document swing pricing policies and procedures. We further estimate that each fund
complex will spend 2 hours, on average, preparing the required written report to the board.
Since a fund board will approve the fund’s swing pricing policies and procedures and review, no
less frequently than annually, a written report that includes certain required elements, we
estimate a one-time burden of 6 hours, rather than 5 hours per fund complex associated with the
fund board’s review and approval of swing pricing policies and procedures.
Amortized over a 3-year period, we estimate that this will be an annual burden per fund
complex of about 18.67 hours, rather than 10 hours. 14 Accordingly, we estimate that the total
burden associated with the preparation and approval of swing pricing policies and procedures by
those fund complexes that we believe will use swing pricing will be 4,704 hours, rather than
4,843 hours. 15 We also estimate that it will cost a fund complex $30,351, rather than $21,710, to
document, review and initially approve these policies and procedures, for a total cost of
$2,549,484, rather than $3,625,570. 16
B. Recordkeeping Requirements Associated with Rule 22c 1(a)(3)
We are adopting, as proposed, amendments to rule 22c-1 to require a fund that uses

14

This estimate is based on the following calculations: 48 hours +2 hours + 6 hours ÷ 3 = 18.67 hours.

15

This estimate is based on the following calculation: (48 +2 +6) hours x 84 fund complexes = 4,704 hours.

16

These estimates are based on the following calculations: 24 hours x $201 (hourly rate for a senior
accountant) = $4,824; 24 hours x $463 (blended hourly rate for assistant general counsel ($433) and chief
compliance officer ($493)) = $11,112; 3 hours x $4,465 (hourly rate for a board of 8 directors) = $13,395; 3
hours (for a fund attorney’s time to prepare materials for the board’s determinations) x $340 (hourly rate
for a compliance attorney) = $1,020; ($4,824 + $11,112 +$13,395 + $1,020) = $30,351; $30,351 x 84 fund
complexes = $2,549,484. The hourly wages used are from SIFMA’s Management & Professional Earnings
in the Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year and
inflation, 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.

swing pricing to maintain the fund’s swing policies and procedures that are in effect, or at any
time within the past six years were in effect, in an easily accessible place. 17 In a modification to
the proposal, we also are requiring a fund to retain a written copy of the periodic report provided
to the board prepared by the swing pricing administrator that describes, among other things, the
swing pricing administrator’s review of the adequacy of the fund’s swing pricing policies and
procedures and the effectiveness of their implementation, including the impact on mitigating
dilution and any back-testing performed. 18 The retention of these records is necessary to allow
the staff during examinations of funds to determine whether a fund is in compliance with its
swing pricing policies and procedures and with rule 22c-1, as amended.
In the Proposing Release, we estimated that the burden would be three hours per fund
complex to retain the proposed swing pricing records, with 1.5 hours spent by a general clerk and
1.5 hours spent by a senior computer operator. We estimated a time cost per fund complex of
$216. 19 We estimated that the total for recordkeeping related to swing pricing would be 501
hours, at an aggregate cost of $36,072 for all fund complexes that we believe include funds that
would adopt swing pricing policies and procedures. 20 Amortized over a three-year period, we
believed that the hour burdens and time costs associated with the proposed amendments to rule
22c-1, including the burden associated with the requirements that funds adopt policies and
procedures, obtain board approval and retain certain records related to swing pricing, would
result in an average aggregate annual burden of 2,115 hours and average aggregate time costs of

17

See rule 22c-1(a)(3)(iii).

18

See id.

19

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

20

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

$1,244,595. 21 We estimated that there were no external costs associated with this collection of
information.
We did not receive any comments on the estimated hour and cost burdens for this record
retention requirement. The Commission has modified the estimated increase in annual burden
hours and total time costs that will result from the amendments based on the modification to the
proposal to require funds to retain a written copy of the annual report provided to the board from
the swing pricing administrator. We have also modified the estimated increase in annual burden
hours and total time costs in light of updated data concerning funds and fund personnel salaries.
We estimate that the burden will be four hours, rather than three hours, per fund complex to
retain these records, with 2 hours, rather than 1.5 hours, spent by a general clerk and 2 hours,
rather than 1.5 hours, spent by a senior computer operator. Based on updates to the industry data
figures that were utilized in the Proposing Release, we estimate a time cost per fund complex of
$292, rather than $216. 22 We estimate that the total for recordkeeping related to swing pricing
will be 336 hours, rather than 501 hours, at an aggregate cost of $24,528, rather than $36,072, for
all fund complexes that we believe include funds that would adopt swing pricing policies and
procedures. 23
C. Estimated Total Burden
Amortized over a three-year period, we believe that the hour burdens and time costs
associated with the amendments to rule 22c-1, including the burden associated with the

21

These estimates were 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.

22

This estimate is based on the following calculations: 2 hours x $58 (hourly rate for a general clerk) = $116;
2 hours x $88 (hourly rate for a senior computer operator) = $176. $116 + $176 = $292.

23

These estimates are based on the following calculations: 4 hours x 84 fund complexes = 336 hours. 84
fund complexes x $292 = $24,528.

requirements that funds adopt policies and procedures, obtain board approval, and periodic
review of an annual written report from the swing pricing administrator, and retain certain
records and written reports related to swing pricing, will result in an average aggregate annual
burden of 1,848 hours, rather than 2,115 hours, and average aggregate time costs of $874,356,
rather than $1,244,595. 24
13.

Cost to Respondents

Cost burden is the cost of goods and services purchased to comply with rule 22c-1(a)(3),
such as licensing software solutions or for the services of external service providers. The cost
burden does not include the hour burden discussed in Item 12. We estimate that rule 22c-1(a)(3)
does not impose any burdens other than those discussed in Item 12 above. Although rule 22c1(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.

Change in Burden

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

24

These estimates are based on the following calculations: (4,536 hours (year 1) + (3 x 336 hours) (years 1, 2
and 3)) ÷ 3 = 1,848 hours; ($2,549,484 (year 1) + (3 x $24,528) (years 1, 2 and 3)) ÷ 3 = $874,356.

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.