11a-3 Supporting Statement 2017

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 11a-3
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 11(a) of the Investment Company Act of 1940 ("Act") (15 U.S.C. 80a-11(a))
provides that it is unlawful for a registered open-end investment company ("fund") or its
underwriter to make an offer to the fund's shareholders or the shareholders of any other fund to
exchange the fund's securities for securities of the same or another fund on any basis other than
the relative net asset values ("NAVs") of the respective securities to be exchanged, "unless the
terms of the offer have first been submitted to and approved by the Commission or are in
accordance with such rules and regulations as the Commission may have prescribed in respect of
such offers." Section 11(a) was designed to prevent "switching," the practice of inducing
shareholders of one fund to exchange their shares for the shares of another fund for the purpose
of exacting additional sales charges.
Rule 11a-3 (17 CFR 270.11a-3) under the Act permits funds and their principal
underwriters, subject to specified conditions, to make exchange offers at other than relative
NAVs to the fund's own shareholders or to shareholders of another fund in the same group of
investment companies. Paragraphs (b)(6) and (7) of the rule require a fund to disclose in its
prospectus and advertising literature, among other things, the amount of any administrative or
redemption fee imposed on an exchange transaction ("disclosure requirement"). Paragraph
(a)(2)(i) of the rule requires a fund that imposes an administrative fee on exchange transactions,
other than a nominal one, to maintain and preserve records with respect to the actual costs
incurred in connection with exchanges for at least six years, the first two in an easily accessible
place ("recordkeeping requirement"). Finally, paragraph (b)(8) of the rule requires a fund to give
its shareholders a sixty day notice of a termination of an exchange offer or any material
amendment to the terms of an exchange offer ("notice requirement"). The notice is not required

-2when the only material effect of an amendment is to reduce or eliminate an administrative fee,
sales load or redemption fee payable at the time of an exchange, or under certain extraordinary
circumstances.
2.

Purpose of the Information Collection

Rule 11a-3 is an exemptive rule designed to enable funds to make exchange offers,
subject to conditions designed to protect investors against abuses that are addressed by section
11(a) of the Act. The disclosure and notice requirements of the rule are intended to provide fund
shareholders with information necessary to evaluate exchange offers and certain material
changes in the terms of exchange offers. The recordkeeping requirement is designed to enable
the staff to monitor the use of administrative fees imposed in connection with exchange
transactions.
3.

Role of Improved Information Technology

The Commission's Electronic Data Gathering, Analysis and Retrieval system
(“EDGAR”) is designed to automate the filing, processing, and dissemination of full disclosure
filings. The system permits publicly held companies to transmit their filings to the Commission
electronically. Although EDGAR currently is limited to disclosure filings, EDGAR may be used
in the future to obtain other types of information from sources outside the Commission.
Rule 11a-3 does not require the filing of any information with the Commission. The
information covered by the recordkeeping requirement of the rule may be preserved on
photographic film or on magnetic tape, disk, or other computer storage medium in the manner
prescribed in rule 31a-2 under the Act (17 CFR 270.31a-2).
4.

Efforts to Identify 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 11a-3 does not impose any duplicative recordkeeping or reporting requirements, and
information similar to that required to be provided by the rule is not available elsewhere.

-3-

5.

Effect on Small Entities

The Commission does not believe that compliance with rule 11a-3 is unduly burdensome
for large or small entities. Rule 11a-3 provides an exemption for any fund, including a fund that
is a small entity, to make exchange offers. The requirements of the rule must be complied with
by any fund that wishes to make exchange offers in reliance on the rule. These requirements are
designed to protect fund investors and provide them with adequate and timely information. The
benefits of being able to rely on the rule, rather than seek exemptive relief from the Commission,
should outweigh the burdens associated with the rule's requirements.
6.

Consequences of Less Frequent Collection

The notice requirement in rule 11a-3 is designed to give fund shareholders timely
information concerning a termination of an exchange offer or a material change in the terms of
an exchange offer. If shareholders did not receive notice of such a change, or received notice
only a short time before the change took effect, they might not be able to exercise their right to
make an exchange before the change took effect.
If the disclosure requirement were deleted, shareholders would not receive full
information on the terms under which exchange transactions take place. If the recordkeeping
requirement were deleted, the Commission would not have access to information regarding
funds' compliance with the terms of the rule.
7.

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

The recordkeeping requirement in the rule requires certain records to be preserved for at
least six years. This requirement is designed to ensure that the Commission staff would be able
to adequately evaluate funds' use of administrative fees charged in connection with exchange
transactions.
8.

Consultation Outside the Agency

-4The Commission requested public comment on the collection of information
requirements in rule 11a-3 before it submitted this request to the Office of Management and
Budget. The Commission received no comments in response to its request.
The Commission and its staff 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 to Respondents

Not applicable.
10.

Assurance of 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 does not collect personally
identifiable information (PII). The agency has determined that a system of records notice
(SORN) and privacy impact assessment (PIA) are not required in connection with the collection
of information.
12.

Estimate of Hour Burden

The staff estimates that there are approximately 1,606 active open-end investment
companies registered with the Commission as of September 2017. The staff estimates that 25
percent (or 402) of these funds impose a non-nominal administrative fee on exchange
transactions. The staff estimates that the recordkeeping requirement of the rule requires
approximately 1 hour annually of clerical time (at an estimated $59 per hour) 1 per fund, for a
1

The estimate of $59 per hour for a General Clerk is derived from the Securities Industry and Financial
Markets Association’s (“SIFMA”) Office Salaries in the Securities Industry 2013, modified to account for
an 1800-hour work-year and multiplied by 2.93 to account for bonuses, firm size, employee benefits and
overhead (updated for inflation).

-5total of 402 hours for all funds (at a total annual cost of $23,718). 2
The staff estimates that 5 percent of these 1,606 funds (or 80) terminate an exchange
offer or make a material change to the terms of their exchange offer each year, requiring the fund
to comply with the notice requirement of the rule. The staff estimates that complying with the
notice requirement of the rule requires approximately 1 hour of attorney time (at an estimated
$392 per hour) 3 and 2 hours of clerical time (at an estimated $59 per hour) per fund, for a total of
approximately 240 hours for all funds to comply with the notice requirement (at a total annual
cost of $40,800). 4 The staff estimates that such notices will be enclosed with other written
materials sent to shareholders, such as annual shareholder reports or account statements, and
therefore any burdens associated with mailing required notices are accounted for in the burdens
associated with Form N-1A registration statements for funds. The recordkeeping and notice
requirements together therefore impose a total burden of 642 hours on all funds (at a total annual
cost of $64,518). 5 The total number of respondents is 482, each responding once a year. 6 The
burdens associated with the disclosure requirement of the rule are accounted for in the burdens
associated with the Form N-1A registration statement for funds.
13.

Estimate of Total Annual Cost Burden

The rule is not estimated to impose any cost burdens other than those discussed in item

2

3

4

5

6

This estimate is based on the following calculations: (1,606 funds × 25% = 402 funds); (402 × 1 (clerical
hour) = 402 clerical hours); (402 × $59 = $23,718 total annual cost for recordkeeping requirement).
The estimate of $392 per hour for an Attorney is derived 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 (adjusted for inflation).
This estimate is based on the following calculations: (1,606 (funds) × 5% = 80 funds); (80 × 1 (attorney
hour) = 80 total attorney hours); (80 (funds) × 2 (clerical hours) = 160 total clerical hours); (80 (attorney
hours) + 160 (clerical hours) = 240 total hours); (80 (attorney hours) × $392 = $31,360 total attorney
cost); (160 (clerical hours) × $59 = $9,440 clerical cost); ($31,360 + $9,440 = $40,800 total annual cost).
This estimate is based on the following calculations: (240 (notice hours) + 402 (recordkeeping hours)
= 642 total hours); ($40,800 (notice costs) + $23,718 (recordkeeping costs) = $64,518 total annual costs).
This estimate is based on the following calculation: (402 funds responding to recordkeeping requirement +
80 funds responding to notice requirement = 482 total respondents).

-612 above.
14.

Estimate of Cost to the Federal Government

The rule does not impose any additional costs on the Federal government. The rule's
recordkeeping requirement assists the Commission staff in its examination efforts.
15.

Explanation of Changes in Burden

The decrease in the estimated total annual burden hours from 654 hours to 642 hours is
primarily due to a decrease in the estimated number of active registered open-ended funds. The
decrease in the number of annual responses from 490 to 482 is due to a similar decrease in the
number of funds registered with the Commission.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to not Display Expiration Date

The Commission is not seeking to approval to omit the expiration date.
18.

Exceptions to Certification Statement

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.