Rule 22e-4 Supporting Statement (2019)

Rule 22e-4 Supporting Statement (2019).pdf

Rule 22e-4 (17 CFR 270.22e-4) under the Investment Company Act 0f 1940, Investment Company Liquidity Risk Management Programs

OMB: 3235-0737

Document [pdf]
Download: pdf | pdf
OMB CONTROL NUMBER: 3235-0737

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 22e-4
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 22(e) of the Investment Company Act of 1940 (“Investment Company
Act”) [15 U.S.C. 80a-22)e) provides that no registered investment company shall suspend
the right of redemption or postpone the date of payment of redemption proceeds for more
than seven days after tender of the security absent specified unusual circumstances. The
provision was designed to prevent funds and their investment advisers from interfering
with the redemption rights of shareholders for improper purposes, such as the
preservation of management fees. Although section 22(e) permits funds to postpone the
date of payment or satisfaction upon redemption for up to seven days, it does not permit
funds to suspend the right of redemption for any amount of time, absent certain specified
circumstances or a Commission order.
Rule 22e-4 under the Act [17 CFR 270.22e-4] requires an open-end fund 1 and an
exchange-traded fund that redeems in kind (“In-Kind ETF”) to establish a written
liquidity risk management program that is reasonably designed to assess and manage the
fund’s or In-Kind ETF’s liquidity risk. 2 This program includes policies and procedures

1

The term “fund” is defined under rule 22e-4(a)(4) to mean an open-end management investment
company that is registered or required to be registered under section 8 of the Act and includes a
separate series of such an investment company, but does not include a registered open-end
management investment company that is regulated as a money market fund under § 270.2a-7 or
an In-Kind ETF, as defined under rule 22e-4(a)(9).

2

See Investment Company Liquidity Risk Management Programs, Investment Company Act
Release No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18, 2016)]; see also Investment

that incorporate certain program elements, including: (i) for funds and In-Kind ETFs, the
assessment, management, and periodic review of liquidity risk (with such review
occurring no less frequently than annually); (ii) for funds, the classification of the
liquidity of a fund’s portfolio investments, as well as at-least-monthly reviews of the
fund’s liquidity classifications; (iii) for funds that do not primarily hold assets that are
highly liquid investments, the determination of and periodic review of the fund’s highly
liquid investment minimum and establishment of policies and procedures for responding
to a shortfall of the fund’s highly liquid investment minimum, which includes reporting
to the fund’s board of directors; (iv) for funds and In-Kind ETFs, the limitation of the
fund’s or In-Kind ETF’s investment in illiquid investments that are assets to no more than
15% of the fund’s or In-Kind ETF’s net assets; and (iv) for funds and In-Kind ETFs, the
establishment of policies and procedures regarding redemptions in kind, to the extent that
the fund engages in or reserves the right to engage in redemptions in kind. The rule also
requires board approval and oversight of a fund’s or In-Kind ETF’s liquidity risk
management program and recordkeeping.
Rule 22e-4 also requires a limited liquidity review, under which a UIT’s principal
underwriter or depositor determines, on or before the date of the initial deposit of
portfolio securities into the UIT, that the portion of the illiquid investments that the UIT
holds or will hold at the date of deposit that are assets is consistent with the redeemable
nature of the securities it issues and retains a record of such determination for the life of
the UIT and for five years thereafter.

Company Liquidity Disclosure, Investment Company Act Rel. No. 33142 (Jun. 28, 2018) [83
FR 31859 (July 10, 2018)].

2

The requirements under rule 22e-4 that a fund and In-Kind ETF adopt a written
liquidity risk management program, report to the board, maintain a written record of how
the highly liquid investment minimum was determined and written policies and
procedures for responding to a shortfall of the fund’s highly liquid investment minimum,
which includes reporting to the fund’s board of directors (for funds that do not primarily
hold highly liquid investments), establish written policies and procedures regarding how
the fund will engage in redemptions in kind, and retain certain other records are all
collections of information under the PRA. In addition, the requirement under rule 22e-4
that the principal underwriter or depositor of a UIT assess the liquidity of the UIT on or
before the date of the initial deposit of portfolio securities into the UIT and retain a record
of such determination for the life of the UIT, and for five years thereafter, is also a
collection of information under the PRA. The respondents to rule 22e-4 are open-end
management investment companies (including, under certain circumstances, In-Kind
ETFs but excluding money market funds), and the principal underwriters or depositors of
UITs under certain circumstances. Compliance with rule 22e-4 is mandatory for funds.
2.

Purpose and Use of the Information Collection

Certain of the provisions of rule 22e-4 contain “collection of information”
requirements within the meaning on the Paperwork Reduction Act of 1995 [4 U.S.C.
3501, et seq.]. The Commission is submitting the collection of information to the Office
of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507 and
5 CFR 1320.12. The rule is intended to improve investor protection by decreasing the
likelihood that a fund will be unable to meet its redemption obligations, or would meet

3

such obligations only with significant dilution of remaining investors’ interests or
changes to the fund’s risk profile.
The information collection requirements of rule 22e-4 are designed to ensure that
funds maintain comprehensive, written liquidity risk management programs that promote
compliance with the federal securities laws and protect investors. The information
collections also assist the Commission’s examination staff in assessing the adequacy of
funds’ liquidity risk management programs and identifying weaknesses in a fund’s
liquidity risk management if violations occur or are uncorrected.
3.

Consideration Given to Information Technology

Rule 22e-4 requires that each fund maintain a written copy of the policies and
procedures adopted as part of its liquidity risk management program for five years, in an
easily accessible place. Additionally, each fund is required to maintain copies of any
materials provided to its board in connection with the board’s initial approval of the
fund’s liquidity risk management program, and copies of written reports provided to the
board on the adequacy of the fund’s liquidity risk management program, including the
fund’s highly liquid investment minimum, and the effectiveness of its implementation for
at least five years after the end of the fiscal year in which the documents were provided to
the board, the first two years in an easily accessible place.
Funds must keep records of any materials provided to the board related to the
fund dropping below its highly liquid investment minimum. Each fund must also keep a
written record of how its highly liquid investment minimum, and any adjustments thereto,
were determined, including the fund’s assessment and periodic review of its liquidity risk
for a period of not less than five years, the first two years in an easily accessible place,

4

following the determination of, and each change to, the fund’s highly liquid investment
minimum.3 The Electronic Signatures in Global and National Commerce Act 4 and the
conforming amendments to rules under the Investment Company Act permit funds 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. Rule 22e-4 imposes a requirement that funds have in place written
liquidity risk management policies and procedures. The information required by rule
22e-4 is not generally duplicated elsewhere.
5.

Effect on Small Entities

The information collection requirements of rule 22e-4 do not distinguish between
small entities and other funds. The burden of the conditions on smaller funds may be
proportionally greater than for larger funds. The Commission believes, however, that
imposing different requirements on smaller investment companies would not be
consistent with investor protection and the purposes of the rule’s conditions and could
potentially jeopardize the interests of investors in small funds. The Commission reviews
all rules periodically, as required by the Regulatory Flexibility Act, to identify methods to
minimize recordkeeping or reporting requirements affecting small businesses.
6.

Consequences of Not Conducting Collection

Rule 22e-4 requires funds to have and maintain a written liquidity risk
management program. Under the rule, a fund’s investment adviser or officer(s)
3

See rule 22e-4(b)(3)(iii).

4

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

5

designated to administer the liquidity risk management program must provide a written
report to the fund’s board at least annually that describes the adequacy and effectiveness
of the fund’s liquidity risk management program, including, if applicable, the operation
of the highly liquid investment minimum. In addition, the fund must adopt and
implement policies and procedures for responding to a shortfall of the fund’s assets that
are highly liquid investments below its highly liquid investment minimum, which must
include reporting to the fund’s board of directors with a brief explanation of the causes of
the shortfall, the extent of the shortfall, and any actions taken in response, and, if the
shortfall lasts more than 7 consecutive calendar days, an explanation of how the fund
plans to come back into compliance with its minimum within a reasonable period of time.
Not collecting information or collecting such information less frequently would
be incompatible with the objectives of rule 22e-4. The reporting of information and the
establishment of written policies and procedures and maintaining written reports are
integral parts to detecting and correcting any gaps in a fund’s liquidity risk management
programs before irrevocable or widespread harm is inflicted upon investors. Not
requiring the collection of information increases the likelihood that such harm could go
unchecked.
7.

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

Rule 22e-4 requires a fund to maintain for at least five years: (i) a written copy of
its liquidity risk management policies and procedures, (ii) any materials provided to its
board in connection with the board’s initial approval of the fund’s liquidity risk
management program, any materials provided to the board related to the fund dropping
below its highly liquid investment minimum, and copies of written reports provided to

6

the board on the adequacy of the fund’s liquidity risk management program, including the
fund’s highly liquid investment minimum, and the effectiveness of its implementation
(the first two years in an easily accessible place), and (iii) a written record of how a
fund’s highly liquid investment minimum, and any adjustments thereto, were determined,
including the fund’s assessment and periodic review of its liquidity risk. Although this
five-year period exceeds the three-year guideline for most kinds of records under 5 CFR
1320.5(d)(2), the staff believes that this is warranted because the rule contributes to the
effectiveness of the Commission’s examination and inspection program. Because the
period between examinations may be as long as five years, it is important that the
Commission have access to records that cover the entire period between examinations.
The five-year retention period in rule 22e-4 is consistent with that in rule 38a-1(d)
under the Investment Company Act. We believe that consistency in these retention
periods is appropriate because funds currently have program-related recordkeeping
procedures in place incorporating a five-year retention period. Furthermore, we believe
that a five-year retention period would lessen the compliance burden of rule 22e-4
slightly, compared to choosing a different retention period, such as the six-year
recordkeeping retention period under rule 31a-2 of the Investment Company Act.
8.

Consultation Outside the Agency

Before adopting rule 22e-4 the Commission received and evaluated public
comments on the proposal and its collection of information requirements. Moreover, 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

7

Commission and staff with a means of ascertaining and acting upon the paperwork
burdens confronting the industry.
The Commission requested public comment on this collection of information
before it submitted this request for extension to the Office of Management and Budget.
The Commission received no comments in response to its request.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Information regarding a fund’s monthly position-level liquidity classification and
its highly liquid investment minimum reported on Form N-PORT will be kept
confidential. Other information provided to the Commission in connection with staff
examinations or investigations is kept confidential subject to the provisions of applicable
law. If information collected pursuant to rule 22e-4 is reviewed by the Commission’s
examination staff, it is 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 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.

8

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 22e-4 is mandatory.
A. Preparation of Written Liquidity Risk Management Program
Rule 22e-4 requires funds and In-Kind ETFs to have a written liquidity risk
management program. This requirement is designed to minimize dilution of shareholder
interests by promoting stronger and more effective liquidity risk management across
open-end funds and reduce the risk that a fund or In-Kind ETF will be unable to meet
redemption obligations.
Based upon our review of industry data, Commission staff estimates that funds
within 846 fund complexes are subject to rule 22e-4. 5 Compliance with rule 22e-4 is
mandatory for all such funds and In-Kind ETFs, with certain program elements
applicable to certain funds within a fund complex based upon whether the fund is an InKind ETF or does not primarily hold assets that are highly liquid investments. We
discuss mandatory compliance with rule 22e-4 with respect to principal underwriters and
depositors of UITs below.
The Commission estimates that a fund complex will incur a one-time average
burden of 40 hours associated with documenting the liquidity risk management programs
adopted by each fund within a fund complex. In light of the requirement that a fund
subject to the highly liquid investment minimum requirement adopt and implement

5

See 2019 Investment Company Institute Fact Book,at 43, Fig. 1.8.

9

policies and procedures for responding to a shortfall of the fund’s highly liquid
investment minimum, and responding to any potential excesses of the 15% illiquid asset
limit, both of which include reporting to the fund’s board of directors, we estimate a
one-time burden of 10 hours per fund complex associated with fund boards’ review and
approval of the funds’ liquidity risk management programs and preparation of board
materials. Amortized over a 3-year period, we estimate this will be an annual burden per
fund complex of about 16.67 hours.
As reflected in the table below, we estimate that the total burden for initial
documentation and review of funds’ written liquidity risk management program will be
42,300 hours. We also estimate that it will cost a fund complex approximately $42,740
to document, review, and initially approve these policies and procedures, for a total cost
of approximately $36,158,040.
PREPARATION OF WRITTEN LIQUIDITY RISK MANAGEMENT PROGRAM
Internal
Burden

Initial documentation and board review of
liquidity risk management program

6

Wage Rate 6

Cost of
Internal Burden

20 hours

×

$329 (senior portfolio manager)

$6,580

10 hours

×

$466 (assistant general counsel)

$4,660

10 hours

×

$530 (chief compliance officer)

$5,300

5.5 hours

×

$4,465 (board of 8 directors)

$24,558

4,5 hours

×

$365 (compliance attorney)

$1,643

Total one-time burden

50 hours

$42,740

Number of Fund Complexes

X 846

X 846

Total estimated burden

42,300

$36,158,040

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 work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead.

10

B. Reporting Regarding the Highly Liquid Investment Minimum
Rule 22e-4 requires any fund that does not primarily hold assets that are highly
liquid investments to determine a highly liquid investment minimum for the fund, which
must be reviewed at least annually, and may not be changed during any period of time
that a fund’s assets that are highly liquid investments are below the determined minimum
without approval from the fund’s board of directors. The fund’s investment adviser or
officers designated to administer the liquidity risk management program must provide a
written report to the fund’s board at least annually that describes a review of the
adequacy and effectiveness of the fund’s liquidity risk management program, including,
if applicable, the operation of the highly liquid investment minimum. In addition, the
fund must adopt and implement policies and procedures for responding to a shortfall of
the fund’s assets that are highly liquid investments below its highly liquid investment
minimum, which must include reporting to the fund’s board of directors with a brief
explanation of the causes of the shortfall, the extent of the shortfall, and any actions taken
in response, and, if the shortfall lasts more than 7 consecutive calendar days, an
explanation of how the fund plans to come back into compliance with its minimum
within a reasonable period of time.
As reflected in the table below, we estimate that, for each fund complex,
compliance with the reporting requirement will entail: (i) 4 hours of portfolio
management time; (ii) 4 hours of compliance time; (iii) 4 hours of professional legal
time; and (iv) 2 hours of support staff time, requiring an additional 14 burden hours at a
time cost of approximately $4,796 per fund complex to draft the required report to the
board. We estimate that fund complexes will have at least one fund that will be subject to

11

the highly liquid investment minimum requirement. Thus, we estimate that 846 fund
complexes will be subject to this requirement under rule 22e-4 and that the total burden
for preparation of the board report associated will be 11,844 hours, at an aggregate cost
of $ $4,057,416.
REPORTING REGARDING THE HIGHLY LIQUID INVESTMENT MINIMUM
Internal
Burden

Compliance with reporting of highly liquid
investment minimum

Total one-time burden

Wage Rate 7

Cost of
Internal Burden

$329 (senior portfolio manager)

$1,316

4 hours

×

4 hours

×

$309 (compliance manager)

$1,236

4 hours

×

$530 (asst. general counsel)

$2,120

2 hours

×

$62 (general clerk)

$124

14 hours

$4,796

Number of Fund Complexes

X 846

X 846

Total estimated burden

11,844 hours

$4,057,416

Recordkeeping
Rule 22e-4 requires a fund or In-Kind ETF to maintain a written copy of the
policies and procedures adopted pursuant to its liquidity risk management program for
five years in an easily accessible place. The rule also requires a fund to maintain copies
of materials provided to the board in connection with its initial approval of the liquidity
risk management program and any written reports provided to the board, for at least five
years, the first two years in an easily accessible place. If applicable, a fund must also
maintain a written record of how its highly liquid investment minimum and any
adjustments to the minimum were determined, as well as any reports to the board
regarding a shortfall in the fund’s highly liquid investment minimum, for five years, the
first two years in an easily accessible place. The retention of these records is necessary to

7

See supra note 6.

12

allow the staff during examinations of funds to determine whether a fund is in
compliance with the liquidity risk management program requirements.
As reflected in the table below, we estimate that, on an annual basis, the burden to
retain records in connection with rule 22e-4 will be four hours per fund complex, with 2
hours spent by a general clerk, and 2 hours spent by a senior computer operator, with an
estimated time cost per fund complex of $314, based on updated data concerning funds
and fund personnel salaries. In addition, we estimate that the total burden for
recordkeeping related to the liquidity risk management program requirement of rule 22e4 will be 3,384 hours at an aggregate cost of $ $265,644.
RECORDKEEPING
Internal
Burden

Wage Rate 8

Cost of
Internal Burden

Compliance with reporting of highly liquid
investment minimum

2 hours

×

$95 (senior computer operator)

$190

2 hours

×

$62 (general clerk)

$124

Total one-time burden

4 hours

$314

Number of Fund Complexes

X 846

X 846

Total estimated burden

3,384 hours

$265,644

Estimated Total Burden
Amortized over a three-year period, we estimate that the hour burdens and time
costs associated with rule 22e-4 for open-end funds, including the burden associated with
(1) funds’ initial documentation and review of the required written liquidity risk
management program, (2) reporting to a fund’s board regarding the fund’s highly liquid
investment minimum, and (3) recordkeeping requirements will result in an average
aggregate annual burden of 25,380 hours, and average aggregate time costs of

8

See supra note 6.

13

$14,846,172. 9 We continue to estimate that there are no external costs associated with
this collection of information.
C. UIT Liquidity Determination
UITs may in some circumstances be subject to liquidity risk (particularly where
the UIT is not a pass-through vehicle and the sponsor does not maintain an active
secondary market for UIT shares). On or before the date of initial deposit of portfolio
securities into a registered UIT, the UIT’s principal underwriter or depositor is required
to determine that the portion of the illiquid investments that the UIT holds or will hold at
the date of deposit that are assets is consistent with the redeemable nature of the
securities it issues, and maintain a record of that determination for the life of the UIT and
for five years thereafter. The retention of these records is necessary to allow the staff
during examinations to determine whether a UIT is in compliance with the liquidity risk
assessment required under rule 22e-4. This assessment would occur on or before the
initial deposit of portfolio securities of a new UIT and thus only need to occur once.
Maintenance of the records is required for the life of the UIT and for five years thereafter.
As reflected in the chart below, we estimate that 1,385 newly registered UITs will
be subject to the UIT liquidity determination requirement under rule 22e-4 each year. 10
Compliance with rule 22e-4(c) is mandatory for all principal underwriters or depositors
of such UITs. We estimate that the principal underwriter or depositor of a UIT will incur
a one-time average burden of 10 hours to document its determination that the portion of

9

These estimates are based on the following calculations: 42,300 hours (year 1) + (2 x 11,844 hours)
(years 2 and 3) + (3 x 3,384 hours) (years 1, 2 and 3) ÷ 3 = 25,380 hours; $36,158,040 (year 1) + (2 x
$4,057,416) (years 2 and 3) + (3 x $265,644) (years 1, 2 and 3) ÷ 3 = $14,846,172.

10

This estimate is based on staff review of new UIT registration statement information reported on Form
N-CEN, filed annually with the Commission.

14

the illiquid investments that the UIT holds or will hold at the date of deposit that are
assets is consistent with the redeemable nature of the securities it issues. Amortized over
a 3-year period, we estimate this would be an annual burden per UIT of about 3 hours.
Accordingly, we estimate that the total burden for the initial documentation and review of
UIT funds’ written liquidity risk management program would be 13,850 hours. We also
estimate that it will cost the principal underwriter or depositor of a UIT approximately
$2,651 hours to perform and document this review, for a total cost of approximately
$3,671,635.
We estimate that the burden to retain these records will be two hours per UIT,
with 1 hour spent by a general clerk and 1 hour spent by a senior computer operator, with
an estimated time cost per UIT of $146. We also estimate that the total burden for
recordkeeping related to UIT liquidity risk management programs will be 2,770 hours, at
an aggregate cost of $217,445. We continue to estimate that there are no external costs
associated with this collection of information.
UIT LIQUIDITY DETERMINATION
Internal
Burden
Preparation of Written Liquidity Risk
Management Program

10 hours

Number of newly-registered UITs

X 1,385

Total estimated burden

13,850 hours

5 hours
Perform and document that illiquid holdings are
consistent with redemption requirements
(done by UIT’s principal underwriter or depositor)

1 hours
1 hours

Wage Rate

Cost of
Internal Burden

×

$331 (senior programmer)

$1,655

×

$466 (assistant general counsel)

$466

×

$530 (chief compliance officer)

$530

Subtotal:

$2,651

Number of newly-registered UITs

× 1,385

Total estimated burden

$3,671,635

15

Recordkeeping
Total burden

1 hour

×

$95 (senior computer operator)

1 hour

×

$62 (general clerk)

$95
$62

2 hours

$157

Number of newly-registered UITs

× 1,385

× 1,385

Total estimated burden

2,770 hours

$217,445

13.

Cost to Respondents

The staff estimates that rule 22e-4 does not impose any material cost burdens on
funds, apart from the cost of the burden hours discussed above. Although rule 22e-4
requires funds to maintain records for five 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.

Costs to Federal Government

Rule 22e-4 does not impose a cost to the federal government. Commission staff
may, however, review records produced pursuant to the rule in order to assist the
Commission in carrying out its examination and oversight program.
15.

Change in Burden

Currently, the approved total annual hour burden for complying with rule 22e-4 is
28,809 hours. The new estimate of the total annual hour burden is 28,150 hours. The
decrease is due to a reduction in estimates of the number of fund complexes and UITs
subject to the rule. We continue to estimate that there is no external cost burden
associated with this collection of information.

16

16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to not display the expiration date for
OMB approval.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

The Commission is not seeking an exception to the certification statement.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL
METHODS
The collection of information will not employ statistical methods.

17


File Typeapplication/pdf
AuthorNixon, Naseem
File Modified2019-11-21
File Created2019-11-21

© 2024 OMB.report | Privacy Policy