PRA - Rule 17a-10 Supporting Statement (2019)

SUPPORTING STATEMENT FOR
For the Paperwork Reduction Act Information Collection Submission for
Rule 17a-10

A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 17(a) of the Investment Company Act of 1940 (the “Act”), generally prohibits
affiliated persons of a registered investment company (“fund”) from borrowing money or other
property from, or selling or buying securities or other property to or from, the fund or any
company that the fund controls. 1 Section 2(a)(3) of the Act defines “affiliated person” of a fund
to include its investment advisers. 2 Rule 17a-10 permits (i) a subadviser 3 of a fund to enter into
transactions with funds the subadviser does not advise but that are affiliated persons of a fund
that it does advise (e.g., other funds in the fund complex), and (ii) a subadviser (and its affiliated
persons) to enter into transactions and arrangements with funds the subadviser does advise, but
only with respect to discrete portions of the subadvised fund for which the subadviser does not
provide investment advice.
To qualify for the exemptions in rule 17a-10, the subadvisory relationship must be the
sole reason why section 17(a) prohibits the transaction. In addition, the advisory contracts of the
subadviser entering into the transaction, and any subadviser that is advising the purchasing
portion of the fund, must prohibit the subadvisers from consulting with each other concerning
securities transactions of the fund, and limit their responsibility to providing advice with respect

1

15 U.S.C. 80a-17(a).

2

15 U.S.C. 80a-2(a)(3)(E).

3

As defined in rule 17a-10(b)(2). 17 CFR 270.17a-10(b)(2).

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to discrete portions of the fund’s portfolio. 4 This requirement regarding the prohibitions and
limitations in advisory contracts of subadvisers relying on the rule constitutes a collection of
information under the Paperwork Reduction Act of 1995 (“PRA”). 5
2.

Purpose and Use of the Information Collection

Funds must include in their subadvisory contracts the provisions required under rule
17a-10(a)(2) in order to rely on the exemptions in rule 17a-10 to ensure that the subadviser that
engages in the transaction does not influence the fund’s investment decision to engage in the
transaction.
3.

Consideration Given to Information Technology

To the extent the rule includes recordkeeping requirements, the Electronic Signatures in
Global and National Commerce Act 6 and the conforming amendments to recordkeeping rules
under the Investment Company Act permit funds to maintain records electronically.
4.

Duplication

The requirement regarding limitations in the subadviser’s contracts is similar to
conditions in exemptive rules 10f-3 7(permitting, under certain conditions, a fund to purchase
securities from underwriting syndicates whose members include affiliated persons of the
purchasing fund), 12d3-1 8 (permitting a fund to invest up to five percent of its assets in securities
of an issuer deriving more than fifteen percent of its gross revenues from securities-related

4

17 CFR 270.17a-10(a)(2).

5

44 U.S.C. 3501-3521.

6

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

7

17 CFR 270.10f-3.

8

17 CFR 270.12d3-1.

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businesses), and 17e-1 9 (governing the receipt of compensation by a broker affiliated with a fund
in connection with securities transactions by the fund). To the extent that a fund relies on more
than one of these rules, its subadviser may use the same contract language to satisfy the
comparable condition in the other rules.
5.

Effect on Small Entities

Rule 17a-10’s exemptive relief is conditioned upon funds including certain provisions in
their advisory contracts to ensure that fund interests are the primary consideration for otherwise
prohibited transactions. These provisions apply equally to all funds, including small entities.
6.

Consequences of Not Conducting Collection

Rule 17a-10 requires that a fund’s subadvisory contract be either initially drafted or
amended to qualify for the rule’s exemption. This is not a recurring requirement, and therefore
less frequent collection is not possible.
7.

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

Not applicable. The collection is not inconsistent with 5 CFR 1320.5(d)(2).
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 17a-10 before it submitted this request for approval to the Office of
Management and Budget. The Commission received no comments in response to this request.
More generally, the Commission and the staff at 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

9

17 CFR 270.17e-1.

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the Commission and the staff with a means of ascertaining and acting upon paperwork burdens
confronting the industry.
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Confidentiality

No assurance of confidentiality was provided.
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.

Burden of Information Collection

The following estimates of average burden hours are made solely for the purposes of the
Paperwork Reduction Act. The estimates are not derived from a comprehensive or even a
representative survey or study of the costs of Commission rules.
The staff assumes that all existing funds with subadvisory contracts amended those
contracts to comply with the adoption of rule 17a-10 in 2003, which conditioned certain
exemptions upon these contractual alterations, and therefore there is no continuing burden for
those funds. 10 However, the staff assumes that all newly formed subadvised funds, and funds
10

Transactions of Investment Companies With Portfolio and Subadviser Affiliates, Investment
Company Act Release No. 25888 (Jan. 14, 2003) [68 FR 3153 (Jan. 22, 2003)]. We assume that
funds formed after 2003 that intended to rely on rule 17a-10 would have included the required
provision as a standard element in their initial subadvisory contracts.

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that enter into new contracts with subadvisers, will incur the one-time burden by amending their
contracts to add the terms required by the rule.
Based on an analysis of fund filings, the staff estimates that approximately 221 funds
enter into new subadvisory agreements each year. 11 Based on discussions with industry
representatives, the staff estimates that it will require approximately 3 attorney hours to draft and
execute additional clauses in new subadvisory contracts in order for funds and subadvisers to be
able to rely on the exemptions in rule 17a-10. Because these additional clauses are identical to
the clauses that a fund would need to insert in their subadvisory contracts to rely on rules 10f-3,
12d3-1, and 17e-1, and because we believe that funds that use one such rule generally use all of
these rules, we apportion this 3 hour time burden equally among all four rules. Therefore, we
estimate that the burden allocated to rule 17a-10 for this contract change would be 0.75 hours. 12
Assuming that all 221 funds that enter into new subadvisory contracts each year make the
modification to their contract required by the rule, we estimate that the rule’s contract
modification requirement will result in 166 burden hours annually, with an associated cost of
approximately $68,890. 13
11

Based on data from Morningstar, as of March 2019, there are 12,407 registered funds (open-end
funds, closed-end funds, and exchange-traded funds), 4,609 funds of which have subadvisory
relationships (approximately 37%). Based on data from certain 2019 ICI publications, 597 new
funds were established in 2018 (582 open-end funds and exchange-traded funds (from the 2019
ICI Fact Book) + 15 closed-end funds (from the ICI Research Perspective, April 2019)). 597 new
funds x 37% = 221 funds.

12

This estimate is based on the following calculation: 3 hours ÷ 4 rules = 0.75 hours.

13

These estimates are based on the following calculations: (0.75 hours × 221 portfolios = 166
burden hours); ($415 per hour × 166 hours = $68,890 total cost). The Commission’s estimates
concerning the wage rates for attorney time are based on salary information for the securities
industry compiled by the Securities Industry and Financial Markets Association. The estimated
wage figure is based on published rates for in-house attorneys, modified to account for a 1,800hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead, yielding an effective hourly rate of $415. See Securities Industry and

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Table 1: Burden Estimates for Rule 17a-10
Internal Burden Wage Rate
Per Response
CURRENTLY APPROVED ESTIMATES
Drafting and
0.75 hours
executing
additional
provisions in
new subadvisory
contracts
Number of
319
annual responses
Total annual
239 hours
$380
burden
PROPOSED ESTIMATES
Drafting and
0.75 hours
executing
additional
provisions in
new subadvisory
contracts
Number of
221
annual responses
Total annual
166 hours
$415
burden

Cost of Internal
Burden

Annual Cost
Burden
$0

319
$90,820

$0
$0

221
$68,890

$0

Table 2: Change in Burden Estimates

Rule
17a10

Annual Number of Responses
Previously Proposed Change
approved
estimate
319
221
-98

Annual Time Burden (hours)
Previously Proposed Change
approved
estimate
239
166
-73

Cost Burden (dollars)
Previously Proposed
approved estimate
$0
$0

Change
$0

Financial Markets Association, Report on Management & Professional Earnings in the Securities
Industry 2013.

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13.

Cost to Respondents

We estimate that there is no cost burden associated with rule 17a-10, other than the costs
of the contract modification burden identified in Item 12 of this Supporting Statement.
14.

Cost to the Federal Government

There are no costs to the Federal Government associated with rule 17a-10.
15.

Change in Burden

Rule 17a-10 has a current annual burden of 239 hours. The hour burden associated with
rule 17a-10 has decreased by 73 hours to a total of 166 hours since our last burden analysis. This
decrease is due to a change in our estimate of the number of funds entering into new contracts
with subadvisers from 319 to 221.
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.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.