Supporting Statement

SUP P O RT ING ST AT EMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 31a-2
A. J USTIFICATION
1. Necessity for the Information Collection
Section 31(a)(1) of the Investment Company Act of 1940 (the “Act”) 1 requires
registered investment companies (“funds”) and certain underwriters, broker-dealers,
investment advisers, and depositors to maintain and preserve records as prescribed
by Commission rules. 2 Rule 31a-1 under the Act specifies the books and records that
each of these entities must maintain. 3 Rule 31a-2 under the Act specifies the time
periods that entities must retain certain books and records, including those required
to be maintained under rule 31a-1. 4
Rule 31a-2 requires the following:
•

Every fund must preserve permanently, and in an easily accessible place for the
first two years, all books and records required under rule 31a-1(b)(1)–(4). 5

•

Every fund must preserve for at least six years, and in an easily accessible place
for the first two years:
•

all books and records required under rule 31a-1(b)(5)–(12);6

1

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

2

15 U.S.C. 80a-30(a)(1).

3

17 CFR 270.31a-1.

4

17 CFR 270.31a-2.

5

17 CFR 270.31a-2(a)(1). These include, among other records, journals detailing daily
purchases and sales of securities; general and auxiliary ledgers reflecting all assets,
liability, reserve, capital, income, and expense accounts; separate ledgers reflecting for
each portfolio security as of the trade date all “long” and “short” positions carried by the
fund for its own account; and corporate charters, certificates of incorporation, by-laws,
and minute books. 17 CFR 270.31a-1(b)(1)–(4).

6

17 CFR 270.31a-2(a)(2). These include, among other records, records of each brokerage
order given in connection with purchases and sales of securities by the fund; records of
all other portfolio purchases or sales; records of all puts, calls, spreads, straddles, and
other options in which the fund has an interest, which it has granted, or which it has
guaranteed; records of proof of money balances in all ledger accounts; files of all
advisory material received from the investment adviser; and memoranda identifying
persons, committees, or groups authorizing the purchase or sale of securities for the

1

•

•

all vouchers, memoranda, correspondence, checkbooks, bank statements,
canceled checks, cash reconciliations, canceled stock certificates, and all
schedules evidencing and supporting each computation of net asset value of
fund shares, including schedules evidencing and supporting each computation
of an adjustment to net asset value based on swing pricing policies and
procedures; 7

•

other documents required to be maintained by rule 31a-1(a) and not
enumerated in rule 31a-1(b); 8

•

any advertisement, pamphlet, circular, form letter, or other sales literature
addressed or intended for distribution to prospective investors; 9

•

any record of the initial determination that a director is not an interested
person of the fund, and each subsequent determination that the director is not
an interested person of the fund, including any questionnaire and any other
document used to determine that a director is not an interested person of the
company; 10

•

any materials used by the disinterested directors of a fund to determine that a
person who is acting as legal counsel to those directors is an independent legal
counsel; 11 and

•

any documents or other written information considered by the directors of the
fund pursuant to section 15(c) of the Act in approving the terms or renewal of
a contract or agreement between the fund and an investment advisor. 12

Every underwriter, broker, or dealer that is a majority-owned subsidiary of a fund
must preserve records required to be preserved by brokers and dealers under rules
fund. 17 CFR 270.31a-1(b)(5)–(12).

7

17 CFR 270.31a-2(a)(2).

8

Id.

9

17 CFR 270.31a-2(a)(3).

10

17 CFR 270.31a-2(a)(4).

11

17 CFR 270.31a-2(a)(5).

12

17 CFR 270.31a-2(a)(6). Section 15 of the Act requires that fund directors, including a
majority of independent directors, annually approve the fund’s advisory contract and
that the directors first obtain from the adviser the information reasonably necessary to
evaluate the contract. The information request requirement in section 15 provides fund
directors, including independent directors, a tool for obtaining the information they need
to represent shareholder interests. 15 U.S.C. 80a-15(c).

2

adopted under section 17 of the Securities Exchange Act of 1934 (the “Exchange
Act”) 13 for the periods established in those rules. 14
•

Every depositor of a fund and every principal underwriter of a fund (other than a
closed-end fund) must preserve for at least six years records required to be
maintained by brokers and dealers under rules adopted under section 17 of the
Exchange Act to the extent the records are necessary or appropriate to record the
entity’s transactions with the fund. 15

•

Every investment adviser that is a majority-owned subsidiary of a fund must
preserve the records required to be preserved by investment advisers under rules
adopted under section 204 of the Investment Advisers Act of 1940 (the
“Investment Advisers Act”) 16 for the periods specified in those rules. 17

•

Every investment adviser that is not a majority-owned subsidiary of a fund must
preserve for at least six years records required to be maintained by registered
investment advisers under rules adopted under section 204 of the Investment
Advisers Act to the extent the records are necessary or appropriate to reflect the
adviser’s transactions with the fund. 18

The records required to be maintained and preserved under this part may be
maintained and preserved for the required time by, or on behalf of, a fund on
(1) micrographic media, including microfilm, microfiche, or any similar medium, or
(2) electronic storage media, including a digital storage medium or system that meets
certain requirements. 19 The fund, or person that maintains and preserves records on
its behalf, must arrange and index the records in a way that permits easy location,
access, and retrieval of any particular record. 20

13

15 U.S.C. 78q.

14

17 CFR 270.31a-2(b).

15

17 CFR 270.31a-2(c).

16

15 U.S.C. 80b-4.

17

17 CFR 270.31a-2(d).

18

17 CFR 270.31a-2(e).

19

17 CFR 270.31a-2(f)(1).

20

17 CFR 270.31a-2(f)(2)(i). In addition, the fund, or person who maintains and preserves
records for the fund, must provide promptly any of the following that the Commission
(by its examiners or other representatives) or the directors of the fund may request: (A) a
legible, true, and complete copy of the record in the medium and format in which it is
stored; (B) a legible, true, and complete printout of the record; and (C) means to access,

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We periodically inspect the operations of all funds to ensure their compliance
with the provisions of the Act and the rules under the Act. Our staff spends a
significant portion of its time in these inspections reviewing the information
contained in the books and records required to be kept by rule 31a-1 and to be
preserved by rule 31a-2.
2. Purpose and Use of the Information Collection
The retention of records, as required by the rule, is necessary to ensure access to
material business and financial information about funds and certain related entities.
As noted above, we periodically inspect the operations of funds to ensure they are in
compliance with the Act and regulations under the Act. Due to the limits on our
resources, however, each fund may only be inspected at intervals of several years. In
addition, the prosecution of persons who have engaged in certain violations of the
federal securities laws may not be limited by timing restrictions. For these reasons,
we often need information relating to events or transactions that occurred years ago.
Without the requirement to preserve books, records, and other documents, our staff
would have difficulty determining whether the fund was in compliance with the law
in such areas as valuation of its portfolio securities, computation of the prices
investors paid, and, when purchasing and selling fund shares, types and amounts of
expenses the fund incurred, kinds of investments the fund purchased, actions of
affiliated persons, or whether the fund had engaged in any illegal or fraudulent
activities. As part of our examinations of funds, our staff also reviews the materials
that directors consider in approving the advisory contract.
3. Consideration Given to Information Technology
The Electronic Signatures in Global and National Commerce Act 21 and rule 31a2(f) permit many records that are required to be maintained and preserved under the
rule to be maintained electronically. The Commission's Electronic Data Gathering,
view, and print the records. 17 CFR 270.31a-2(f)(2)(ii). The fund (or person) also must
separately store, for the time required for preservation of the original record, a duplicate
copy of the record on any medium allowed by rule 31a-2. 17 CFR 270.31a-2(f)(2)(iii). In
the case of records retained on electronic storage media, the fund, or person that
maintains and preserves records on its behalf, must establish and maintain procedures:
(1) to maintain and preserve the records, so as to reasonably safeguard them from loss,
alteration, or destruction; (2) to limit access to the records to properly authorized
personnel, the directors of the fund, and the Commission (including its examiners and
other representatives); and (3) to reasonably ensure that any reproduction of a nonelectronic original record on electronic storage media is complete, true, and legible when
retrieved. 17 CFR 270.31a-2(f)(3).
21

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

4

Analysis, and Retrieval System (“EDGAR”) provides for the automated filing,
processing, and dissemination of full disclosure filings. This automation has
increased the speed, accuracy, and availability of information, generating benefits to
investors and financial markets. Although the rule does not require the filing of any
documents with the Commission, the Commission may use its EDGAR facility in
the future to improve the examination of records that funds and their affiliated
entities keep under the rule.
4. Duplication
The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication and reevaluates them whenever it proposes a rule or
form, or a change in either. The requirements of rule 31a-2 are not generally
duplicated elsewhere. While funds may currently maintain records under the
requirements of rule 31a-1, rule 31a-1 does not specifically require preservation of
these records.
5. Effect on Small Entities
The Commission reviews all rules periodically, as required by the Regulatory
Flexibility Act, 22 to identify methods to minimize recordkeeping or reporting
requirements affecting small businesses. The recordkeeping requirements of rule
31a-2 do not distinguish between large and small entities. We believe that
compliance with rule 31a-2 is not unduly burdensome for large or small entities. The
Commission believes that imposing different requirements on smaller funds would
not be consistent with investor protection and the purposes of the preservation of
records requirements.
6. Consequences of Not Conducting Collection
Rule 31a-1 requires funds, certain of their majority-owned subsidiaries, and other
related entities to maintain certain records. The frequency with which entities collect
this information depends, to a large extent, on the circumstances of the activities and
transactions of the fund and these entities. Rule 31a-2 requires funds, their majorityowned subsidiaries, and other related entities to preserve the records required to be
maintained under rule 31a-1. Rule 31a-2 also requires funds to maintain advertising
materials, materials considered by a fund board each time it approves a fund’s
advisory contract, materials relating to the independence of legal counsel and fund
directors and, for any fund that chooses to use swing pricing, a record of support for
each computation of an adjustment to the NAV of the fund’s shares based on the
fund’s swing policies and procedures. If entities did not have to preserve these

22

5 U.S.C. 601 et seq.

5

records, our staff would have difficulty determining whether a fund is in compliance
with the Act.
7. Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)
Rule 31a-2 requires funds to preserve certain records for six years and other
records permanently. We believe that the long-term retention of records is necessary
to carry out our examination and enforcement responsibilities, and our mandate to
ensure that the Act's provisions are legally enforceable. We periodically inspect the
operations of funds to ensure compliance with the rules and regulations under the
Act; however, each fund may be inspected only at intervals of several years due to
limits on our resources. Furthermore, the prosecution of persons that have engaged
in certain violations of the federal securities laws may not be limited by timing
restrictions. For these reasons, we often need information relating to events or
transactions that occurred years ago. In section 31(a) of the Act, 23 Congress
specifically authorized the Commission to require funds to “maintain and preserve”
books and records “for such period or periods” as the Commission may prescribe by
rules. Electronic record storage has made long-term retention of records less
burdensome.
8. Consultations Outside the Agency
The Commission and the staff of the Division of Investment Management
participate in an ongoing dialogue with representatives of the fund industry through
public conferences, meetings, and informal exchanges. These various forums provide
the Commission and staff with a means of ascertaining and acting upon paperwork
burdens confronting the industry. The Commission requested public comment on the
collection of information requirements in rule 31a-2 before it submitted this request
for extension and approval to the Office of Management and Budget. The
Commission received no comments in response to its request.
9. Payment or Gift
No payment or gift to respondents was provided.
10. Confidentiality
No assurance of confidentiality was provided.
11. Sensitive Questions
Rule 31a-2 requires that funds and other registered entities maintain records as
prescribed by Commission rules; however, this information collection does not
collect personally identifiable information (PII). No information of a sensitive
23

15 U.S.C. 80a-30(a).

6

nature, including social security numbers, will be required under this collection of
information. 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 and costs are made solely for
purposes of the Paperwork Reduction Act of 1995 24 and are not derived from a
comprehensive or even representative survey or study of the cost of Commission
rules and forms. Compliance with rule 31a-2 is mandatory. Responses to the
disclosure requirements will not be kept confidential.

24

44 U.S.C. 3501 et seq.

7

TABLE 1 : BURD EN ESTIMATES F OR RULE 3 1 a-2
Burden Per Response
Internal
Burden

Aggregate Burden
Cost of
Internal
Burden

Wage Rate1

Annual Cost
Burden

Annual
Responses

Internal
Burden

Cost of
Internal
Burden

383,240 hours

$19,928,480

383,240 hours

$31,042,440

711 hours

$41,238

711 hours

$62,568

767,902 hours

$51,074,726

348,232 hours

$21,590,384

348,232 hours

$33,082,040

696,464 hours

$54,672,424

Annual Cost
Burden

C U RREN T L Y AP P ROVED ES T I MAT ES
General burden of rule
31a-2

110 hours

×

$52 (general clerk)

$5,720

110 hours

×

$81 (senior computer operator)

$8,910

Burden associated with
swing pricing amendments

1.5 hours

×

$58 (general clerk)

$87

1.5 hours

×

$88 (senior computer operator)

$132

$35,000

×

3,484

$600

×

474

Total annual burden

$121,940,000

$284,400
$122,224,400

REVI S ED ES T I MAT ES
General burden of rule
31a-2

110.2 hours

×

$62 (general clerk)

$6,832.40

110.2 hours

×

$95 (senior computer operator)

$10,469

Total annual burden

220.4 hours

$36,510.28

×

3,160

$115,372,484.80
$115,372,484.80

Note:
1. The Commission’s estimates concerning the allocation of burden hours and the relevant wage rates are based on consultations with industry representatives and on salary information for
the securities industry compiled by the Securities Industry and Financial Markets Association’s Office Salaries in the Securities Industry 2013. The estimated wage figures are modified by
Commission staff to account for an 1800-hour work-year and multiplied by 2.93 to account for bonuses, firm size, employee benefits, overhead, and adjusted to account for the effects of
inflation. See Securities Industry and Financial Markets Association, Report on Management & Professional Earnings in the Securities Industry 2013.

8

As summarized in Table 1 above, the Commission has previously estimated that
about 3,484 funds are subject to rule 31a-2 each year, incurring 767,902 hours of
internal hour burden at a cost of about $51.1 million. 25 There are 3,160 funds
currently operating as of December 31, 2018, all of which are required to comply
with rule 31a-2.
TABLE 2 : EF F EC T OF SWING PRIC ING PROVISION
Swing pricing internal burden by general clerk

1.5 hours

Swing pricing internal burden by senior computer operator

+ 1.5 hours

Total burden associated with swing pricing amendments

3 hours

Funds using swing pricing

× 474

Aggregate burden hours from swing pricing

1,422 hours

Funds subject to rule 31a-2

÷ 3,484

Average incremental burden per fund

~0.40815

We have revised the estimated internal burden for each fund from 220 hours to
220.4 hours to account for the effects of the swing pricing provision, as summarized
in Table 2 above. The hour burden estimates for retaining records under rule 31a-2
are based on our experience with registrants, our experience with similar
requirements under the Act and the rules under the Act, and on prior conversations
with representatives of the fund industry. The number of burden hours may vary
depending on, among other things, the complexity of the fund, the issues faced by
the fund, the number of series and classes of the fund, and whether the fund uses
swing pricing. As summarized in Table 1 above, we estimate that the total internal
burden associated with rule 31a-2 is 696,464 hours at a cost of about $54.7 million.
13. Cost to Respondents
Cost burden is the cost of goods and services purchased to comply with the
requirements of rule 31a-2, such as for the services of outside counsel. The cost
burden does not include the hour burden discussed in Item 12 above. As summarized
in Table 1 above, the Commission has previously estimated that funds incur about
$122.2 million in external cost burden each year. 26
25

We had estimated, based on prior conversations with representatives of the fund industry
and past estimates that each fund spent 220 hours per year complying with the general
requirements of rule 31a-2, split evenly between administrative and computer operation
personnel. We estimated that 474 of these funds would use swing pricing and would
incur an additional 3 hours of internal burden to comply with the provision of rule 31a-2
concerning swing pricing.

26

The Commission previously estimated that the average external cost of preserving books

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TABLE 3 : EF F EC T OF SWING PRIC ING PROVISION
Burden associated with swing pricing amendment

$600

Funds using swing pricing

× 474

Aggregate cost burden from swing pricing

$284,400

Funds subject to rule 31a-2

÷ 3,484

Average incremental burden per fund

~$81.63

We have revised the estimated cost burden for each fund from $35,000 to
$35,081.83 to account for the effects of the swing pricing provision, as summarized
in Table 2 above.
TABLE 4 : C OST BURD EN INF LATION AD JUSTMENT
Estimate of cost burden as of Nov. 2016

$35,081.83

PCE Index as of Nov. 2016

÷ 104.942

PCE Index as of Mar. 2019

× 109.215

Estimate of cost burden as of Mar. 2019

~$36,510.28

We have further adjusted the estimated cost burden per fund from $35,081.83 to
$36,510.28 to account for the effects of inflation, 27 as summarized in Table 4 above.
Accordingly, as summarized in Table 1 above, we estimate that the total cost burden
associated with rule 31a-2 is about $115.4 million.
14. Costs to the Federal Government
There is no cost to the Federal Government for these recordkeeping activities.

and records generally required by rule 31a-2 is about $70,000 per fund, but that funds
would already spend approximately half this amount to preserve these same books and
records, as they are also necessary to prepare financial statements, meet various state
reporting requirements, and prepare their annual federal and state income tax returns.
Therefore, the Commission estimated that the annual cost burden for each fund as a
result of general compliance with rule 31a-2 is about $35,000.
27

The estimates have been adjusted using the Personal Consumption Expenditures Chaintype Price Index (“PCE Index”). See Personal Consumption Expenditures, Chain-type
Price Index, available at https://fred.stlouisfed.org/series/PCEPI.

10

15. Changes in Burden
TABLE 5 : C HANGE IN BURD EN ESTIMATES
Annual Number of Responses

Rule 31a-2

Previously
Approved

Revised
Estimate

3,484

3,160

Annual Time Burden (hours)

Change

Previously
Approved

Revised
Estimate

–324

767,902

696,464

Cost Burden (dollars)

Change

Previously
Approved

Revised Estimate

Change

–71,438

$122,224,400

$115,372,484.80

– $6,851,915.20

As summarized in Table 5 above, the hour burden estimate for compliance with
rule 31a-2 has decreased, from 767,902 hours 696,464 hours (a decrease of 71,438
hours). This is due to a decrease in the estimated number of funds subject to rule
31a-2. The cost burden estimate for compliance with rule 31a-2 has decreased from
about $122.2 million to about $115.4 million (an decrease of about $6.9 million).
This is due to a decrease in the estimated number of funds subject to rule 31a-2,
partially offset by the effects of inflation.
16. Information Collection Planned for Statistical Purposes
The results of any information collected will not be published.
17. Approval to Omit OMB Expiration Date
We request authorization to omit the expiration date on the electronic version of
the form for design and IT project scheduling reasons. The OMB control number will
be displayed.
18. Exceptions to Certification Statements for Paperwork Reduction Act
Submission
The Commission is not seeking an exemption to the certification statement.
B. CO LLECT ION O F INFO RMATION EMP LOYING ST ATISTICAL
MET H ODS
The collection of information will not employ statistical methods.

11