2017 17f-5 Supporting Statement

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
For Rule 17f-5
A.

JUSTIFICATION

1.

Necessity for the Information Collection

Rule 17f-5 (17 CFR 270.17f-5) under the Investment Company Act of 1940 [15 U.S.C.
80a] (the “Act”) governs the custody of the assets of registered management investment
companies (“funds”) with custodians outside the United States. Under rule 17f-5, a fund or its
foreign custody manager (as delegated by the fund’s board) may maintain the fund’s foreign
assets in the care of an eligible fund custodian under certain conditions. If the fund’s board
delegates to a foreign custody manager authority to place foreign assets, the fund’s board must
find that it is reasonable to rely on each delegate the board selects to act as the fund’s foreign
custody manager. The delegate must agree to provide written reports that notify the board when
the fund’s assets are placed with a foreign custodian and when any material change occurs in the
fund’s custody arrangements. The delegate must agree to exercise reasonable care, prudence, and
diligence, or to adhere to a higher standard of care. When the foreign custody manager selects an
eligible foreign custodian, it must determine that the fund’s assets will be subject to reasonable
care if maintained with that custodian, and that the written contract that governs each custody
arrangement will provide reasonable care for fund assets. The contract must contain certain
specified provisions or others that provide at least equivalent care. The foreign custody manager
must establish a system to monitor the performance of the contract and the appropriateness of
continuing to maintain assets with the eligible foreign custodian.

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2.

Purpose and Use of the Information Collection
The collection of information requirements in rule 17f-5 are intended to provide

protection for fund assets maintained with a foreign bank custodian whose use is not authorized
by statutory provisions that govern fund custody arrangements, 1 and that is not subject to
regulation and examination by U.S. regulators. The requirement that the fund board determine
that it is reasonable to rely on each delegate is intended to ensure that the board carefully
considers each delegate’s qualifications to perform its responsibilities. The requirement that the
delegate provide written reports to the board is intended to ensure that the delegate notifies the
board of important developments concerning custody arrangements so that the board may
exercise effective oversight. The requirement that the delegate agree to exercise reasonable care
is intended to provide assurances to the fund that the delegate will properly perform its duties.
The requirements that the foreign custody manager determine that fund assets will be
subject to reasonable care with the eligible foreign custodian and under the custody contract, and
that each contract contain specified provisions or equivalent provisions, are intended to ensure
that the delegate has evaluated the level of care provided by the custodian, that it weighs the
adequacy of contractual provisions, and that fund assets are protected by minimal contractual
safeguards. The requirement that the foreign custody manager establish a monitoring system is
intended to ensure that the manager periodically reviews each custody arrangement and takes
appropriate action if developing custody risks may threaten fund assets. 2

1

See section 17(f) of the Act. 15 U.S.C. 80a-17(f).

2

The staff believes that subcustodian monitoring does not involve “collection of information”
within the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 - 3520)
(“Paperwork Reduction Act”).

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3.

Consideration Given to Information Technology

Rule 31a-2(f) under the Act permits investment companies to maintain many types of
records on micrographic and electronic storage media.
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. Rule 17f-5 does not require duplicative reporting or recordkeeping. Other law generally
does not require the board findings concerning delegation, foreign custody manager findings and
monitoring systems, delegate reports, and risk analysis, monitoring, and notification systems
required by these rules.
5.

Effect on Small Entities

The effect of rule 17f-5 on small entities is not unduly burdensome. Rule 17f-5 affects,
among other persons, the relatively small number of global custodians that act as foreign custody
managers for funds under rule 17f-5. None of these global custodians would likely qualify as a
small entity, because each custodian is a major bank with a global branch network or global ties
to other banks. Rule 17f-5 also affects the funds that invest in foreign markets, and the
investment advisers to those funds. Few if any of the affected funds and advisers are small
entities. 3

3

A fund is considered a small entity for purposes of the Regulatory Flexibility Act, 5 U.S.C. 601
et seq., if it, together with other investment companies in the same group of related investment
companies, has net assets of $50 million or less. 17 CFR 270.0-10. An adviser is considered a
small entity if it has assets under management of less than $25 million, has total assets of less
than $5 million, and is not in a control relationship with other advisers or persons that are not
small entities. 17 CFR 275.0-7. Most funds that invest in foreign securities are part of a fund
complex that has net assets of more than $50 million, and are advised by advisers with assets
under management of $25 million or more.

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6.

Consequences of Not Conducting Collection

The reporting requirements of rule 17f-5 do not recur periodically, but apply only upon
the occurrence of certain events, such as when the fund board selects a delegate or the foreign
custody manager selects a foreign custodian. These event-triggered requirements include the
rule’s provisions for board findings and custody contracts. Some custody arrangements, such as
arrangements with less established foreign banks, or with reliable subcustodians in countries
subject to economic or political turmoil, may require more frequent reporting than other
arrangements.
7.

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

None.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 17f-5 before it submitted this request for extension and approval to the
Office of Management and Budget. The Commission received no comment in its response to its
request.
The Commission and the staff also participate in an ongoing dialogue with
representatives of the investment company industry through public conferences, meetings, and
informal exchanges. These forums provide the Commission and the staff useful means to
identify and address paperwork burdens that may confront the industry.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.

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11.

Sensitive Questions

No PII collected/not applicable.
12.

Burden of Information Collection

Commission staff estimates that each year, approximately 97 registrants 4 could be
required to make an average of one response per registrant under rule 17f-5, requiring
approximately 2.5 hours of board of director time per response, to make the necessary findings
concerning foreign custody managers. The total annual burden associated with these
requirements of the rule is up to approximately 243 hours (97 registrants x 2.5 hours per
registrant). The staff further estimates that during each year, approximately 15 global
custodians 5 are required to make an average of 4 responses per custodian concerning the use of
foreign custodians other than depositories. The staff estimates that each response will take
approximately 270 hours, requiring approximately 1080 total hours annually per custodian (270
hours x 4 responses per custodian). The total annual burden associated with these requirements
of the rule is approximately 16,200 hours (15 global custodians x 1080 hours per custodian).
Therefore, the total annual burden of all collection of information requirements of rule 17f-5 is
estimated to be up to 16,443 hours (243 + 16,200). The total annual cost of burden hours is
estimated to be $4,522,392 ((243 hours x $4,144/hour for board of director’s time) + (16,200
hours x $217/hour for a trust administrator’s time)). 6 Compliance with the collection of

4

This figure is an estimate of the number of new funds each year, based on data reported by funds
for 2014, 2015, and 2016. In practice, not all funds will use foreign custody managers. The
actual figure therefore may be smaller.

5

This estimate is based on staff research.

6

Based on fund industry representations, the staff estimated in 2014 that the average cost of
board of director time, for the board as a whole, was $4,000 per hour. Adjusting for
inflation, the staff estimates that the current average cost of board of director time is
approximately $4,144 per hour. The $217/hour figure for a trust administrator is from
SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by

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information requirements of the rule is necessary to obtain the benefit of relying on the rule’s
permission for funds to maintain their assets in foreign custodians.
The estimate of average burden hours is made solely for the purposes of the Paperwork
Reduction Act. The estimate is not derived from a comprehensive or even a representative
survey or study of the costs of Commission rules and forms.
13.

Cost to Respondents

Rule 17f-5 does not impose any paperwork related cost burden not discussed in item 12
above.
14.

Cost to the Federal Government

The rule imposes no costs associated with filing reports or any other costs to the Federal
government.
15.

Change in Burden

The decrease in the estimated burden of rule 17f-5 by 82 hours results from changes in
the estimated number of respondents. Based on information from 2014 to 2016, the estimated
number of new registrants with the Commission in a calendar year that might need to comply
with rule 17f-5 dropped from 130 to approximately 97.
As discussed above, the staff anticipates that the number of existing funds that change
their global custodians is negligible and, therefore, the compliance burden of rule 17f-5 falls
primarily on new funds.
16.

Information Collection Planned for Statistical Purposes

Not applicable.

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.

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17.

Approval to Omit OMB Expiration Date

Not applicable.
18.
Submission

Exceptions to Certification Statement for Paperwork Reduction Act

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.