Form N-3_Supporting Statement

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
FORM N-3
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Form N-3 (17 CFR 239.17a and 274.11b) is the form used by separate accounts offering
variable annuity contracts which are organized as management investment companies to register
under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) (“Investment Company
Act”) and/or to register their securities under the Securities Act of 1933 (15 U.S.C. 77a et seq.)
(“Securities Act”).
Form N-3 is also the form used to file a registration statement under the Securities Act
(and any amendments thereto) for variable annuity contracts funded by separate accounts which
would be required to be registered under the Investment Company Act as management
investment companies except for the exclusion provided by Section 3(c)(11) of the Investment
Company Act (15 U.S.C. 80a-3(c)(11)). Section 5 of the Securities Act (15 U.S.C. 77e) requires
the filing of a registration statement prior to the offer of securities to the public and that the
statement be effective before any securities are sold, and section 8 of the Investment Company
Act (15 U.S.C. 80a-8) requires a separate account to register as an investment company.
Form N-3 also permits separate accounts offering variable annuity contracts which are
organized as investment companies to provide investors with a prospectus and a statement of
additional information (“SAI”) covering essential information about the separate account when it
makes an initial or additional offering of its securities. Section 5(b) of the Securities Act requires

that investors be provided with a prospectus containing the information required in a registration
statement prior to the sale or at the time of confirmation or delivery of the securities.
On October 13, 2016, the Commission issued a release adopting, among other things,
amendments to Form N-3 requiring certain disclosures regarding securities lending activities. 1
Specifically, the Commission adopted amendments to the Statement of Additional Information
requirements in Form N-3 to require funds to disclose the dollar amounts of income and fees and
compensation paid to service providers related to their securities lending activities during their
most recent fiscal year, as illustrated in Table 1 below. 2
SECURITIES LENDING ACTIVITIES
Gross income from securities lending activities

$

Fees and/or compensation for securities lending activities and
related services
Fees paid to securities lending agent from a revenue split

$

Fees paid for any cash collateral management service (including
fees deducted from a pooled cash collateral reinvestment
vehicle) that are not included in the revenue split

$

Administrative fees not included in revenue split

$

Indemnification fee not included in revenue split

$

Rebate (paid to borrower)

$

Other fees not included in revenue split (specify)

$

Aggregate fees/compensation for securities lending activities

$

Net income from securities lending activities

$

Table 1
We proposed similar requirements as part of proposed amendments to Regulation S-X, including
disclosure in the fund’s financial statements of (1) the gross income from securities lending,
1

See Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (October
13, 2016).

2

See Item 19(i)(1) of Form N-1A. The disclosure need not be presented in a tabular format.
2

including income from cash collateral reinvestment; (2) the dollar amount of all fees and/or
compensation paid by the fund for securities lending activities and related services, including
borrower rebates and cash collateral management services; (3) the net income from securities
lending activities; (4) the terms governing the compensation of the securities lending agent,
including any revenue sharing split, with the related percentage split between the fund and the
securities lending agent, and/or any fee-for-service, and a description of services included; (5) the
details of any other fees paid directly or indirectly, including any fees paid directly by the fund
for cash collateral management and any management fee deducted from a pooled investment
vehicle in which cash collateral is invested; and (6) the monthly average of the value of portfolio
securities on loan. 3 We proposed these disclosures in order to allow investors to better
understand the income generated from, as well as the expenses associated with, a fund’s
securities lending activities. 4
2.

Purpose and Use of the Information Collection

The title for the collection of information is: Form N-3 under the Securities Act of 1933
and under the Investment Company Act of 1940, registration of separate accounts organized as
management investment companies. The purpose of Form N-3 is to meet the filing and
disclosure requirements of the Securities Act and the Investment Company Act and to enable
filers to provide investors with information necessary to evaluate an investment in the security.
This information collection differs significantly from many other federal information collections,
which are primarily for the use and benefit of the collecting agency. The information required to

3

See proposed rule 6-03(m) of Regulation S-X; Investment Company Reporting Modernization, Investment
Company Act Release No. 31610 (May 20, 2015) [80 FR 33590 (June 12, 2015)] at 33624.

4

See id.
3

be filed with the Commission permits verification of compliance with securities law
requirements and assures the public availability and dissemination of the information.
3.

Consideration Given to Information Technology

The Commission’s electronic filing system (Electronic Data Gathering, Analysis and
Retrieval or “EDGAR”) is designed to automate the filing, processing, and dissemination of full
disclosure filings. The system permits publicly held companies to transmit filings to the
Commission electronically. This automation has increased the speed, accuracy, and availability
of information, generating benefits to investors and financial markets. Form N-3 is required to
be filed with the Commission electronically on EDGAR. (17 CFR 232.101(a)(1)(i) and (iv)).
The public may access filings on EDGAR through the Commission’s Internet Web site
(http://www.sec.gov) or at EDGAR terminals located at the Commission’s public reference
rooms. Prospectuses and SAIs may be sent to investors by electronic means so long as certain
requirements are met. 5
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 requirements of Form N-3 are not generally duplicated elsewhere.
5.

Effect on Small Entities

The current disclosure requirements for Form N-3 do not distinguish between small
entities and larger entities. The burden on smaller entities may be greater than for larger entities.

5

See Use of Electronic Media for Delivery Purposes, Securities Act Release No. 7233, Exchange Act
Release No. 36345, Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458 (Oct. 13,
1995)].
4

This burden includes the cost of producing, printing, and filing, and disseminating prospectuses
and SAIs. The Commission believes, however, that imposing different requirements on smaller
investment companies would not be consistent with investor protection and the purposes of the
registration statements. 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

The purpose of Form N-3 is to meet the filing and disclosure requirements of the
Securities Act and the Investment Company Act and to enable filers to provide investors with
information necessary to evaluate an investment in the security. Less frequent filing would be
inconsistent with the filing and disclosure requirements of the Securities Act and the Investment
Company Act. In addition, if the form were to be filed less frequently, investors may not be
provided with the information necessary to evaluate an investment in the security.
7.

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

Not Applicable.
8.

Consultation Outside the Agency

The Commission and the staff of the Division of Investment Management participate in
an ongoing dialogue with representatives of the investment company industry and 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. The Commission requested public comment on the proposed amendments to
Regulation S-X regarding securities lending activities disclosures and related information
5

collection requirements that were adopted in Form N-3 before it submitted this request for
revision and approval to the OMB. The Commission received no comments on this aspect of the
proposal in response to its request.
9.

Payment or Gift

Not Applicable.
10.

Confidentiality

Not Applicable.
11.

Sensitive Questions

No information of a sensitive nature, including social security numbers, will be required
under this collection of information. The information collection collects basic Personally
Identifiable Information (PII) that may include names, job titles and work addresses. However,
the agency has determined that the information collection does not constitute a system of record
for purposes of the Privacy Act. Information is not retrieved by a personal identifier. In
accordance with Section 208 of the E-Government Act of 2002, the agency has conducted a
Privacy Impact Assessment (PIA) of the EDGAR system, in connection with this collection of
information. The EDGAR PIA, published on 1/29/2016, is provided as a supplemental document
and is also available at https://www.sec.gov/privacy.
12.

Burden of Information Collection

The estimate of the annual number of registration statements filed on Form N-3 is based
on the average annual number of filings received by the Commission in the 12-month period
ending December 31, 2015. The hour burden estimates for preparing and filing Form N-3 are
based on the Commission’s experience with the contents of the form. The number of burden
6

hours may vary depending on, among other things, the complexity of the filing and whether
preparation of the form is performed by internal staff or outside counsel. The estimated average
burden hours are made solely for purposes of the Paperwork Reduction Act and are not derived
from a quantitative, comprehensive, or even representative survey or study of the burdens
associated with Commission rules and forms.
Form N-3 generally imposes two types of reporting burdens on investment companies: (1)
the burden of preparing and filing the initial registration statement; and (2) the burden of
preparing and filing post-effective amendments to a previously effective registration statement.
Separate accounts organized as management investment companies and offering variable
annuities register as investment companies under the Investment Company Act and register their
securities under the Securities Act on Form N-3. In our most recent Paperwork Reduction Act
submission for Form N-3, Commission staff estimated the annual compliance burden to comply
with the collection of information requirement of Form N-3 is 3,104 hours.
As a result of the amendments to Form N-3 concerning securities lending activities, we
estimate that registrants will incur an additional 2 burden hours in the first year and an additional
0.5 hours for filings in subsequent years. Amortized over three years, we estimate that the
average additional annual hour burden will therefore be 1 hour per fund. 6
Based on a review of Form N-3 filings made with the Commission, Commission staff
estimates that the annual burden hours imposed by Form N-3 are as follows: 7

6

2 hours in first year + (0.5 hours per year thereafter × 2 years) = 2 hours + 1 hour = 3 hours total. 3 hours
total ÷ 3 years = 1 hour per year.

7

Commission staff reviewed initial filings and post-effective amendments for Form N-3 filed with the
Commission from January 1, 2015 to December 31, 2015. There were no initial filings of Form N-3 during
that time period.
7

Calculation of Hour Burden of Initial Form N-3 Filings
•
•
•
•
•

Number of initial Form N-3 filings
annually
Average number of portfolios per filing
Number of portfolios referenced in
initial Form N-3 filings annually
Current hour burden per portfolio for
initial Form N-3 filing
Total annual hour burden for initial
Form N-3 filings

0
0
0
0
0

Calculation of Hour Burden of Post-Effective Amendments
•
•
•
•
•

Number of post-effective amendments
filed annually
Average number of portfolios per filing
Number of portfolios in post-effective
amendments to Form N-3 filings
annually
Current hour burden per portfolio for
preparing post-effective amendments
Total annual hour burden to prepare
post-effective amendments (16 x 156.2)

8
2
16
156.2 8
2499.2

Total Annual Hour Burden
Annual hours for post effective
amendments + annual hours for initial
Form N-3 filings
(0 + 2499.2)

2499.2

Based on an estimated hourly wage rate of $324, Commission staff estimates the annual
internal time cost equivalent of the hour burden of Form N-3 is approximately $809,740.80. 9

8

This calculation is based on the following: 156.2 hours = 155.2 hours (current hour burden per portfolio for
preparing post-effective amendments) + 1 hour (average additional annual hour burden for amendments
concerning securities lending activities).

9

The internal time cost equivalent is calculated by multiplying the total annual hour burden (2499.2 hours)
by the estimated hourly wage rate of $324. The estimated wage figure is based on published rates for
Compliance Attorneys ($340) and Senior Programmers ($308). The $340/hour figure for a Compliance
Attorney and $308/hour figure for a Senior Programmer are from SIFMA’s Management & Professional
Earnings in the Securities Industry 2013, modified to account for an 1,800-hour work year; multiplied by
8

13.

Cost to Respondents

Cost burden is the cost of goods and services purchased to prepare and update Form N-3,
such as for the services of independent auditors and outside counsel. The cost burden does not
include the hour burden discussed in Item 12. Estimates are based on Commission staff’s
discussions with fund representatives and the Commission’s experience with the filing of
registration forms.
In our most recent Paperwork Reduction Act submission for Form N-3, Commission staff
estimated that, on an annual basis, 0 portfolios will be referenced in initial filings on Form N-3
and 20 portfolios will be referenced in post-effective amendments of Form N-3 filings.
Commission staff further estimated the cost burden for preparing a post-effective amendment to a
previously effective registration statement is $10,259 10 per portfolio. The staff estimates that the
amendments to Form N-3 do not impose any additional material cost burdens on registrants,
apart from the cost of the burden hours discussed above. Thus, the staff estimates that the total
cost burden allocated to Form N-3 would be as follows:
Cost Burden of Preparing and Filing Initial Form N-3
•
•
•

Cost burden per portfolio for initial Form N-3 filings
Number of portfolios referenced in initial Form N-3
filings annually
Cost burden of initial Form N-3 filings

$0
0
$0

5.35 to account for bonuses, firm size, employee benefits, and overhead; and adjusted to account for the
effects of inflation. The estimated wage rate was further based on the estimate that Compliance Attorneys
and Senior Programmers would divide time equally, resulting in a weighted wage rate of $324 (($340 x .50)
+ ($308 x .50)).
10

The previous cost burden for preparing a post-effective amendment to a previously effective registration
statement on Form N-3 was $9,950 per portfolio. To account for the effects of inflation since 2012, a rate
of 3.11% was applied, which was calculated using the Consumer Price Index.
9

Cost Burden of Preparing and Filing Post-Effective Amendments
•
•
•

Cost burden per portfolio of post-effective
amendments Form N-3 filings
Number of portfolios referenced in post-effective
amendments to Form N-3 filings annually
Cost burden of post-effective amendments to Form
N-3 filings (16 x $10,259)

$10,259
16
$164,144

Total Cost Burden for Form N-3
•

14.

Initial Form N-3 filings + post-effective amendments
($0 + $164,144)

$164,144

Cost to the Federal Government

The annual cost of reviewing and processing registration statements, post-effective
amendments, proxy statements, shareholder reports, and other filings of investment companies
amounted to approximately $19.5 million in fiscal year 2015, based on the Commission’s
computation of the value of staff time devoted to this activity and related overhead. A portion of
those costs relate to processing and reviewing Form N-3 filings submitted to the Commission.
15.

Change in Burden

Annual Hour Burden. Currently, the approved annual hour burden for preparing and
filing registration statements on Form N-3 is 3,104 hours based on the previous estimate of 20
responses per year. The new estimate of the total annual hour burden is 2,499.2 hours based on
the new estimate of 16 responses per year and takes into account the average additional annual
hour burden of one hour in connection with amendments to Form N-3 concerning securities
lending activities. The decrease in the total annual hour burden is 604.8 hours. This decrease is

10

due to the decrease in our estimates of the annual number of responses for post-effective
amendments.
Total Cost Burden. The current approved total cost burden for preparing and filing
registration statements on Form N-3 is $205,180, based on the previous estimate of 20 responses
per year. Based on the new estimate of 16 responses per year, the new estimate of the total cost
burden is $164,144 in external costs per year, resulting in a decrease of $41,036 per year. This
decrease is due to the decrease in our estimates of the annual number of responses for posteffective amendments.
16.

Information Collection Planned for Statistical Purposes

Not Applicable.
17.

Approval to Omit OMB Expiration Date

We request authorization to omit the expiration date on the electronic version of the form,
although the OMB control number will be displayed. Including the expiration date on the
electronic version of this form will result in increased costs, because the need to make changes to
the form may not follow the application’s scheduled version release dates.

18.
Submission

Exceptions to Certification Statement for Paperwork Reduction Act

Not Applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not Applicable.

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