Rule 0-2 Supporting Statement For FOF Proposal [REVISED CLEAN 2019-05-29]

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 0-2
A.

JUSTIFICATION
1.

Necessity for the Collection Information

Several sections of the Investment Company Act of 1940 (“Act” or “Investment
Company Act”) 1 give the Securities and Exchange Commission (“Commission”) the authority to
issue orders granting exemptions from the Act’s provisions. The section that grants broadest
authority is section 6(c), which provides the Commission with authority to conditionally or
unconditionally exempt persons, securities or transactions from any provision of the Investment
Company Act, or the rules or regulations thereunder, if and to the extent that such exemption is
necessary or appropriate in the public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the Act. 2 Congress enacted section
6(c) to give the Commission the flexibility to address unforeseen or changed circumstances in
the investment company industry. Rule 0-2 under the Investment Company Act,3 entitled
“General Requirements of Papers and Applications,” prescribes general instructions for filing an
application seeking exemptive relief with the Commission.
Rule 0-2(c)(1) requires that every application for an order for which a form is not
specifically prescribed and which is executed by a corporation, partnership or other company and
filed with the Commission contain a statement of the applicable provisions of the articles of
incorporation, bylaws or similar documents, relating to the right of the person signing and filing
such application to take such action on behalf of the applicant, and a statement that all such
1

15 U.S.C. 80a-1 et seq.

2

15 U.S.C. 80a-6(c).

3

17 CFR 270.0-2.

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requirements have been complied with and that the person signing and filing the application is
fully authorized to do so. If such authorization is dependent on resolutions of stockholders,
directors, or other bodies, such resolutions must be attached as an exhibit to or quoted in the
application. Any amendment to the application must contain a similar statement as to the
applicability of the original statement of authorization. When any application or amendment is
signed by an agent or attorney, rule 0-2(c)(1) requires that the power of attorney evidencing his
authority to sign shall state the basis for the agent’s authority and shall be filed with the
Commission. Every application subject to rule 0-2 must be verified by the person executing the
application by executing an instrument in substantially the form specified in the rule. Each
application subject to rule 0-2 must state the reasons why the applicant is deemed to be entitled
to the action requested, the name and address of each applicant, and the name and address of any
person to whom any questions regarding the application should be directed. Electronic filing of
all applications for orders under the Investment Company Act is mandatory. Each application
subject to rule 0-2 is a one-time request and the rule itself does not impose any ongoing
obligations or burdens on the part of an applicant.
On December 19, 2018 the Commission proposed new rule 12d1-4. 4 Proposed rule
12d1-4 would permit registered funds or business development companies to acquire shares of
other funds in excess of the limits of section 12(d)(1) of the Act subject to several conditions that
are designed to limit the acquiring funds’ control over the acquired funds, limit the potential for
duplicative or excessive fees, and limit the construction of complex structures that may confuse
investors. Many of these fund of funds arrangements are permitted under current Commission
exemptive orders. Therefore, proposed rule 12d1-4 would alleviate some of the burdens
4

See Fund of Funds Arrangements, Investment Company Act Release No. 33329 (December 19,
2018) (the “FOF Release”).

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associated with rule 0-2 because it would reduce the number of entities that require exemptive
relief in order to operate.
2.

Purpose and Use of the Information Collection

Respondents to the collection are applying for orders of the Commission exempting them
from one or more provisions of the Investment Company Act. The Commission uses the
information required by rule 0-2 to decide whether the applicant should be deemed to be entitled
to the action requested by the application.
3.

Consideration Given to Information Technology

All applications for orders under any section of the Investment Company Act must be
filed electronically on the Commission’s electronic filing system (Electronic Data Gathering,
Analysis and Retrieval System or “EDGAR”). EDGAR is designed to automate the filing,
processing and dissemination of all 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.
4.

Duplication

The Commission periodically evaluates collection of information requirements for
duplication, and reevaluates them whenever it proposes a rule or form, or a change in either. The
reporting requirements of rule 0-2 are not duplicated elsewhere.
5.

Effect on Small Entities

The requirements of rule 0-2 apply equally to all applicants seeking orders of the
Commission exempting them from one or more provisions under the Act, regardless of size. The
burden on smaller entities may be greater; however, allowing small entities to seek exemption

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from Investment Company Act provisions contributes to lessening the burden on these entities
overall. As required by the Regulatory Flexibility Act,5 the Commission reviews all rules
periodically to identify ways to minimize reporting and recordkeeping requirements that may
affect small businesses.
6.

Consequences of Not Conducting Collection

The requirements of rule 0-2 apply only to applications for orders from the Commission
for which a form is not specifically prescribed. Applicants file applications as they deem
necessary. Because the Commission has no control over the number of applications submitted, it
cannot generally require less frequent collection unless it does not require the collection with
respect to every application. Eliminating rule 0-2 requirements for certain or all applications
would make it difficult for the Commission to review requests for exemptive relief. The
Commission will, however, when it deems it necessary and appropriate, codify prior exemptive
relief granted to applicants into rules, thus eliminating the need for respondents to file exemptive
applications in those instances and relieving them of the requirements of rule 0-2. 6
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 through public
conferences, meetings and informal exchanges. These various forums provide the Commission
5

5 U.S.C. 601.

6

For example, in 2006 the Commission adopted rules 12d1-1, 12d1-2, and 12d1-3 which codified
and expanded upon a number of exemptive orders issued that permit funds to invest in other
funds. See Fund of Funds Investments, Investment Company Act Release No. 27399 (June 20,
2006) [71 FR 36640 (June 27, 2006)].

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and the staff with a means of ascertaining and acting upon paperwork burdens confronting the
industry. Before adopting proposed rule 12d1-4, the Commission will receive and evaluate
public comments on the proposal and its collection of information requirements, including those
related to rule 0-2.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

No PII collected/Not applicable. A System of Records Notice for applications under the
Investment Company Act can be found at https://www.sec.gov/about/privacy/sorn/secsorn2.pdf.
12.

Burden of Information Collection

Applicants for orders under the Investment Company Act can include registered
investment companies, affiliated persons of registered investment companies, and issuers seeking
to avoid investment company status, among other entities. Applicants file applications as they
deem necessary. Commission staff previously estimated that it receives approximately 184
applications per year under the Investment Company Act. Although each application typically is
submitted on behalf of multiple entities, the entities in the vast majority of cases are related
companies and are treated as a single respondent for purposes of this analysis. Each application
subject to rule 0-2 is a one-time request and the rule itself does not impose any ongoing
obligations or burdens on the part of an applicant.
The time to prepare an application depends on the complexity and/or novelty of the issues
covered by the application. We previously estimated that the Commission receives 25 of the

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most time-consuming applications annually, 125 applications of medium difficulty, and 34 of the
least difficult applications. Based on conversations with applicants, we estimate that in-house
counsel would spend from ten to fifty hours helping to draft and review an application. We
previously estimated that the total annual hour burden to all respondents of 5,340 hours [(50
hours x 25 applications) + (30 hours x 125 applications) + (10 hours x 34 applications)] at an
annual cost of $2,029,200. 7
As discussed above, proposed rule 12d1-4 would alleviate some of the burdens associated
with rule 0-2 because it would reduce the number of entities that require exemptive relief in
order to operate. 8 Based on staff experience, we estimate that this reduction would decrease the
annual aggregate burden by approximately $5,400,000 (approximately 33.5%). 9 Therefore, in the
aggregate, we estimate that proposed rule 12d1-4 would result in a decrease of the annual burden
of rule 0-2 to approximately 3,55110 hours at an annual time cost of $1,349,418. 11
The estimate of annual burden hours is made solely for the purposes of the Paperwork
Reduction Act, and is not derived from a comprehensive or even representative survey or study
of the costs of Commission rules and forms.

7

The cost estimate is based on the last time the rule’s information collection was submitted for
PRA renewal in 2016.

8

We expect to continue to receive applications for complex or novel fund of funds exemptive
relief that are beyond the scope of proposed rule 12d1-4.

9

See Proposing Release at n.267 and accompanying text. $5,400,000 / ($2,029,200.60 +
$14,090,000) = 0.335.

10

This estimate is based on the following calculation: 5,340 hours – (5,340 hours x 0.335) = 3,551
hours. Reducing the number of responses by 33.5% for consistency yields 122 responses. This
estimate is based on the following calculation: 184 responses – (184 responses x 0.335) =
approximately 122 responses.

11

This estimate is based on the following calculation: $2,029,200.60 – ($2,029,200.60 x 0.335) =
$1,349,418.40.

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Table 1: Summary of Revised Annual Responses, Burden Hours, and Burden Hour Costs
Estimates for Each Information Collection

IC

IC1

IC Title

Rule 0-2
Totals for all ICs

13.

No. of

Burden

Burden

Responses

Hours

Hour Costs

122

3,551

$1,349,418

122

3,551

$1,349,418

Cost to Respondents

Much of the work of preparing an application is performed by outside counsel. The cost
outside counsel charges applicants depends on the complexity of the issues covered by the
application and the time required for preparation. Based on conversations with attorneys who
serve as outside counsel, the cost ranges from approximately $10,000 for preparing a wellprecedented, routine application to approximately $150,000 to prepare a complex and/or novel
application. We previously estimated that the Commission receives 25 of the most timeconsuming applications annually, 125 applications of medium difficulty, and 34 of the least
difficult applications. This distribution gives a total estimated annual cost burden to applicants
of filing all applications of $14,090,000 [(25 x $150,000) + (125 x $80,000) + (34 x $10,000)].
Proposed rule 12d1-4 also would alleviate some of the annual cost burdens associated
with rule 0-2. As discussed above, and based on staff experience, we estimate that proposed rule
12d1-4 could result in a reduction of approximately 33.5% of the burdens associated with

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applications under rule 0-2. Therefore, we estimate that proposed rule 12d1-4 would result in a
decrease of the annual cost burden of rule 0-2 to $9,369,850. 12
The estimate of annual cost burden is made solely for the purposes of the Paperwork
Reduction Act, and is not derived from a comprehensive or even representative survey or study
of the costs of Commission rules and forms.
14.

Cost to the Federal Government

The annual cost of reviewing and processing all applications under the Investment
Company Act for orders from the Commission for exemptive relief amounted to approximately
$9.3 million in fiscal year 2017, based on the Commission’s computation of the value of staff
time devoted to this activity and related overhead.
15.

Changes in Burden

The annual burden for this collection of information is estimated to be 3,551 hours and
$9,369,850. The annual hour burden decreased by 1,789 hours, and the annual cost burden
decreased by approximately $4.72 million, because the number of applications decreased by
approximately 33.5%.
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

Submission
Not applicable.
12

This estimate is based on the following calculation: $14,090,000 – ($14,090,000 x 0.335) =
$9,369,850.

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B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.