Supporting Statement for Rule 22c-1 (2019)

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 22c-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 22c-1 (17 CFR 270.22c-1) under the Investment Company Act of 1940 (15 U.S.C.
80a) (the “Investment Company Act” or “Act”) enables a fund 1 to choose to use “swing pricing”
as a tool to mitigate shareholder dilution. Rule 22c-1 is intended to promote investor protection
by providing funds with an additional tool to mitigate the potentially dilutive effects of
shareholder purchase or redemption activity and a set of operational standards that allow funds to
gain comfort using swing pricing as a means of mitigating potential dilution.
In order to use swing pricing under rule 22c-1, a fund is required to establish and
implement swing pricing policies and procedures that meet certain requirements. The policies
and procedures must specify the process for determining the level(s) of net purchases into or net
redemptions from the fund (“swing thresholds(s)”) that would trigger share price adjustment for
transacting shareholders, as well as for determining the figure(s) used for such share price
adjustment (“swing factor(s)”), including the establishment of an upper limit on the swing
factor(s) used (which may not exceed two percent of net asset value (“NAV”) per share). The
rule requires a fund’s board of directors to approve the fund’s swing pricing policies and
procedures, as well as the fund’s swing threshold and swing factor upper limit (and any changes
to the swing threshold or swing factor upper limit). The fund’s board is also required to review,

1

For purposes of this Supporting Statement, the term “fund” denotes a fund as defined in rule
22c-1(a)(3), that is, “a registered open-end management investment company (but not a registered
open-end management investment company that is regulated as a money market fund under §
270.2a-7 or an exchange traded fund as defined in rule 22c-1(a)(3)(v)(A)).”

no less frequently than annually, a written report prepared by the persons responsible for
administering swing pricing that describes: (i) its review of the adequacy of the fund’s swing
pricing policies and procedures and the effectiveness of their implementation, including the
impact on mitigating dilution; (ii) any material changes to the fund’s swing pricing policies and
procedures since the date of the last report; and (iii) its review and assessment of the fund’s
swing threshold(s), swing factor(s), and swing factor upper limit considering the requirements of
the rule, including the information and data supporting these determinations.

A fund is required

to maintain the fund’s swing pricing policies and procedures and a written copy of the periodic
report provided to the board.
The respondents to amended rule 22c-1 are open-end management investment companies
(other than money market funds or exchange-traded funds) that engage in swing pricing.
Compliance with rule 22c-1(a)(3) is mandatory for any fund that chooses to use swing pricing to
adjust its NAV in reliance on the rule. Finally, rule 22c-1(a)(3) requires a fund to maintain a
written copy of swing pricing policies and procedures adopted by the fund that are in effect, or at
any time within the past six years were in effect, in an easily accessible place. The requirements
that funds adopt policies and procedures, obtain board approval and periodic review, provide a
written report to the board, and retain certain records related to swing pricing are “collections of
information” within the meaning of the Paperwork Reduction Act of 1995 (“PRA”). 2
2.

Purpose and Use of the Information Collection

The information collection requirements of rule 22c-1(a)(3) are integral to the swing
pricing framework created by the rule. Thus, the information collections are necessary to help

2

44 U.S.C. 3501-3520.

further the rule’s goal of promoting investor protection by providing funds with a tool to mitigate
potential dilution and to manage fund liquidity. The information collections also assist the
Commission’s examination staff to ascertain whether a fund that has adopted swing pricing
policies and procedures has done so in compliance with the requirements of rule 22c-1(a)(3).
3.

Consideration Given to Information Technology

Rule 22c-1(a)(3) does not require the reporting of any information or the filing of any
documents with the Commission. The Electronic Signatures in Global and National Commerce
Act 3 and the conforming amendments to rules under the Investment Company Act and the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) permit funds and their financial
intermediaries to maintain records electronically.
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. The information required by rule 22c-1(a)(3) is not duplicated elsewhere.
5.

Effect on Small Entities

The information collection requirements of rule 22c-1(a)(3) do not distinguish between
small entities and other funds. As discussed above, the information collection requirements of
rule 22c-1(a)(3) are integral to the swing pricing framework created by the rule, and thus they
are necessary to help further the investor protection goals of the rule. The Commission therefore
believes that imposing different requirements on smaller investment companies would not be
consistent with investor protection and the purposes of rule 22c-1(a)(3). Because the adoption of
swing pricing policies and procedures is permitted, but not required, under the rule a fund that is

3

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

a small entity is not required to incur the costs of compliance.
6.

Consequences of Not Conducting Collection

Rule 22c-1(a)(3) requires a fund that chooses to use swing pricing to adopt swing pricing
policies and procedures that include certain elements and are approved by the fund’s board of
directors, and to maintain certain records, including written copies of the fund’s swing pricing
policies and procedures, the periodic report provided to the board,4 and records of support for
each computation of an adjustment to the fund’s NAV based on the fund’s swing pricing policies
and procedures. The adoption and maintenance of written policies and procedures are integral to
the swing pricing framework created by the rule. Furthermore, the board reporting elements of
the rule are important investor protection controls. Thus, not requiring these collections of
information would be incompatible with the investor protection goals of rule 22c-1(a)(3).
7.

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

Rule 22c-1(a)(3) would require funds to retain certain written records for more than three
years. Specifically, the rule would require a fund to maintain a written copy of swing pricing
policies and procedures adopted by the fund that are in effect, or at any time within the past six
years were in effect, in an easily accessible place. The long-term retention of these records
contributes to the effectiveness of the Commission’s examination and inspection program.
Commission staff periodically inspects the operations of funds to ensure compliance with rules
and regulations under the Act; however, each fund may be inspected only at intervals of several
years due to limits on our resources. For this reason, we often need information relating to
events or transactions that occurred years ago.

4

Rule 22c-1(a)(3)(iii).

We note that rule 31a-2(a)(2) requires a fund to keep records evidencing and supporting
each computation of the fund’s NAV and reflects the NAV adjustments based on a fund’s swing
pricing policies and procedures. The six-year retention period in rule 22c-1(a)(3) is consistent
with the retention period in current rule 31a-2. Consistency in these retention periods is
appropriate in order to permit a fund or Commission staff to review historical instances of NAV
adjustments effected pursuant to the fund’s swing pricing policies and procedures, in light of the
policies and procedures that were actually in place at the time the NAV adjustments occurred.
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
and the 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 of rule 22c-1(a)(3) before it submitted this request for extension and approval to the
Office of Management and Budget. The Commission received no comments in response to this
request.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Responses provided to the Commission in connection with staff examinations or
investigations would be kept confidential subject to the provisions of applicable law. If
information collected pursuant to rule 22c-1(a)(3) is reviewed by the Commission’s examination
staff, it will be accorded the same level of confidentiality accorded to other responses provided to

the Commission in the context of its examination and oversight program.
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

The following estimates of average burden hours and costs are made solely for purposes
of the Paperwork Reduction Act and are not derived from a comprehensive or even
representative survey or study of the cost of Commission rules and forms. Compliance with rule
22c-1(a)(3) is only mandatory for funds that choose to adopt swing pricing.
A. Documentation and Approval of Swing Pricing Policies and Procedures
As discussed above, funds are permitted but not required to use swing pricing, provided
that, in order to use swing pricing, a fund must adopt swing pricing policies and procedures in
accordance with the requirements of rule 22c-1(a)(3). While we are not aware of any funds that
have engaged in swing pricing,5 we are estimating for the purpose of this analysis that 5 fund
complexes have funds that may adopt swing pricing policies and procedures in the future
pursuant to the rule, and that each fund complex would incur a one-time average burden of 48
hours to document swing pricing policies and procedures, with 24 hours spent by a senior
accountant and 24 hours spent by an assistant general counsel or chief compliance officer. We
further estimate that each fund complex would spend 2 hours, on average, preparing the required
written report to the board, typically using a compliance attorney. Since a fund board approves
the fund’s swing pricing policies and procedures and review, no less frequently than annually, a

5

No funds have engaged in swing pricing as reported on Form N-CEN as of August 14, 2019.

written report that includes certain required elements, we estimate a one-time burden of 6 hours
per fund complex associated with the fund board’s review and approval of swing pricing policies
and procedures.
Amortized over a 3-year period, we estimate that this will be an annual burden per fund
complex of about 18.67 hours. 6 Accordingly, we estimate that the total burden associated with
the preparation and approval of swing pricing policies and procedures by those fund complexes
that would use swing pricing will be 280 hours. 7 We also estimate that it will cost a fund
complex $43,406 to document, review and initially approve these policies and procedures, for a
total cost of $217,030. 8
B. Recordkeeping Requirements Associated with Rule 22c-1(a)(3)
Rule 22c-1 requires a fund that uses swing pricing to maintain the fund’s swing policies
and procedures that are in effect, or at any time within the past six years were in effect, in an
easily accessible place. 9 The rule also requires a fund to retain a written copy of the periodic
report provided to the board prepared by the swing pricing administrator that describes, among
other things, the swing pricing administrator’s review of the adequacy of the fund’s swing

6

This estimate is based on the following calculations: (48 hours + 2 hours + 6 hours) ÷ 3 = 18.67 hours.

7

This estimate is based on the following calculation: (48 + 2 + 6) hours x 5 fund complexes = 280 hours.

8

These estimates are based on the following calculations: 24 hours x $201 (hourly rate for a senior
accountant) = $4,824; 24 hours x $463 (blended hourly rate for assistant general counsel ($433) and chief
compliance officer ($493)) = $11,112; 2 hours (for a fund attorney’s time to prepare materials for the
board’s determinations) x $340 (hourly rate for a compliance attorney) = $680; 6 hours x $4,465 (hourly
rate for a board of 8 directors) = $26,790; ($4,824 + $11,112 +$680 + $26,790) = $43,406; $43,406 x 5
fund complexes = $217,030. The hourly wages used are from SIFMA’s Management & Professional
Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1800-hour workyear and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and
overhead. The staff previously estimated in 2009 that the average cost of board of director time was $4,000
per hour for the board as a whole, based on information received from funds and their counsel. Adjusting
for inflation, the staff estimates that the current average cost of board of director time is approximately
$4,465.

9

See rule 22c-1(a)(3)(iii).

pricing policies and procedures and the effectiveness of their implementation, including the
impact on mitigating dilution and any back-testing performed. 10 The retention of these records is
necessary to allow the staff during examinations of funds to determine whether a fund is in
compliance with its swing pricing policies and procedures and with rule 22c-1. While we are not
aware of any funds that have engaged in swing pricing,11 we are estimating for the purpose of
this analysis that 5 fund complexes have funds that may adopt swing pricing policies and
procedures in the future pursuant to the rule.
We estimate that the burden is four hours per fund complex to retain the proposed swing
pricing records, with 2 hours spent by a general clerk and 2 hours spent by a senior computer
operator. We estimate a time cost per fund complex of $292. 12 We estimate that the total for
recordkeeping related to swing pricing will be 20 hours, at an aggregate cost of $1,460, for all
fund complexes that we believe include funds that have adopted swing pricing policies and
procedures. 13 We estimate that there are no external costs associated with this collection of
information.
C. Estimated Total Burden
Amortized over a three-year period, we believe that the hour burdens and time costs
associated with rule 22c-1, including the burden associated with the requirements that funds
adopt policies and procedures, obtain board approval, and periodic review of an annual written
report from the swing pricing administrator, and retain certain records and written reports related

10

See id.

11

No funds have engaged in swing pricing as reported on Form N-CEN as of August 14, 2019.

12

This estimate is based on the following calculations: 2 hours x $58 (hourly rate for a general clerk) = $116;
2 hours x $88 (hourly rate for a senior computer operator) = $176. $116 + $176 = $292.

13

These estimates are based on the following calculations: 4 hours x 5 fund complexes = 20 hours. 5 fund
complexes x $292 = $1,460.

to swing pricing, will result in an average aggregate annual burden of 113.3 hours, and average
aggregate time costs of $73,803. 14 Information related to the estimated total burden is also
summarized in the table below.
Summary of Revised Annual Responses, Burden Hours, and Cost Estimates
IC Title

Annual No. of Re sponses
Previously Requested
Change
approved

Annual Time Burden (Hrs.)
Previously Requested
Change
approved

Exte rnal Cost to Re spondents ($)
Previously
Requested
Change
approved

Rule 22c-1

84

1,848

0

13.

5

-79

113.3

-1,734.7

0

0

Cost to Respondents

Cost burden is the cost of goods and services purchased to comply with rule 22c-1(a)(3),
such as licensing software solutions or for the services of external service providers. The cost
burden does not include the hour burden discussed in Item 12. We estimate that rule 22c-1(a)(3)
does not impose any burdens other than those discussed in Item 12 above. Although rule 22c1(a)(3) requires funds to maintain records for six years, these records may be maintained
electronically and, even if maintained in hard copy, are unlikely to be voluminous. The staff has
not estimated a capital cost in connection with the recordkeeping requirements because funds
and their advisers would likely use existing recordkeeping systems to maintain the required
records.
14.

Cost to the Federal Government

The rule does not impose any additional costs on the federal government.

14

These estimates are based on the following calculations: (280 hours (year 1) + (3 x 20 hours) (years 1, 2
and 3)) ÷ 3 = 113.3 hours; ($217,030 (year 1) + (3 x $1,460) (years 1, 2 and 3)) ÷ 3 = $73,803.

15.

Change in Burden

The estimated total annual burden hours decreased 1,734.7 hours, from 1,848 hours to
113.3 hours. This change in burden hours is primarily attributable to changes in the staff’s
estimates of the number of fund complexes that have funds that may adopt swing pricing policies
and procedures in the future.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.