Draft - PRA Supporting Statement (Rule 18f-4)

OMB CONTROL NUMBER: 3235-0741

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 18f-4
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 18 of the Investment Company Act of 1940 (“Investment Company Act”) 1
imposes various limitations on the capital structure of funds, including, in part, by restricting the
ability of funds to issue “senior securities,” as defined in that section. 2 The protection of
investors against the potentially adverse effects of a fund’s issuance of senior securities is a core
purpose of the Investment Company Act. 3 Section 18(g) of the Investment Company Act defines
“senior security,” in part, as “any bond, debenture, note, or similar obligation or instrument
constituting a security and evidencing indebtedness.” 4
On November 25, 2019, the Commission issued a release proposing new rule 18f-4,
which would permit a fund to enter into derivatives transactions, notwithstanding the
prohibitions and restrictions on the issuance of senior securities under section 18 of the
Investment Company Act. 5 Rule 18f-4 would generally require a fund that relies on the rule to
enter into derivatives transactions to: (1) adopt a derivatives risk management program; (2) have
its board of directors approve the fund’s designation of a derivatives risk manager and receive
1

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

2

See 15 U.S.C. 80a-18.

3

See, e.g., 15 U.S.C. 80a-1(b)(7), 1(b)(8), 18(a), and 18(f).

4

The definition of senior security in section 15 U.S.C. 80a-18 also includes “any stock of a class
having priority over any other class as to the distribution of assets or payment of dividends” and
excludes certain limited temporary borrowings.

5

See Use of Derivatives by Registered Investment Companies and Business Development
Companies; Required Due Diligence by Broker-Dealers and Registered Investment Advisers
Regarding Retail Customers’ Transactions in Certain Leveraged/Inverse Investment Vehicles,
Investment Company Act Release No. 33704 (Nov. 25, 2019) (“Proposing Release”).

1

direct reports from the derivatives risk manager about the derivatives risk management program;
and (3) require a fund to comply with an outer limit on fund leverage risk based on value-at-risk,
or “VaR,” designed to limit a fund’s leverage risk consistent with the investor protection
purposes underlying section 18. This outer limit would be based on a relative VaR test that
compares the fund’s VaR to the VaR of a “designated reference index.” If the fund’s derivatives
risk manager is unable to identify an appropriate designated reference index, the fund would be
required to comply with an absolute VaR test. Proposed rule 18f-4 includes an exception from
the risk management program requirement and limit on fund leverage risk if a fund is a “limited
derivatives user” that either limits its derivatives exposure to 10% of its net assets or it uses
derivatives transactions solely to hedge certain currency risks. A fund relying on the proposed
exception would be required to adopt policies and procedures that are reasonably designed to
manage its derivatives risks. Proposed rule 18f-4 also includes alternative requirements for
certain registered investment companies that seek, directly or indirectly, to provide investment
returns that correspond to the performance of a market index by a specified multiple, or to
provide investment returns that have an inverse relationship to the performance of a market
index, over a predetermined period of time (“leveraged/inverse funds”). Under the proposed rule,
a leveraged/inverse fund would not be subject to the proposed VaR-based leverage risk limit if
such a fund: (1) meets the definition of a “leveraged/inverse investment vehicle” in proposed rule
15l-2 under the Securities Exchange Act of 1934 and proposed rule 211(h)-1 under the
Investment Advisers Act of 1940 (collectively, the “proposed sales practices rules”); (2) limits
the investment results it seeks to 300% of the return (or inverse of the return) of the underlying
index; and (3) discloses in its prospectus that it is not subject to proposed rule 18f-4’s limit on
fund leverage risk. Proposed rule 18f-4 also would require a fund to adhere to certain

2

recordkeeping requirements that are designed to provide the Commission’s staff, and the fund’s
board of directors and compliance personnel, the ability to evaluate the fund’s compliance with
the proposed rule’s requirements.
Compliance with proposed rule 18f-4 would be mandatory for all funds that seek to
engage in derivatives transactions in reliance on the rule, which would otherwise be subject to
the restrictions of section 18. To the extent that records required to be created and maintained by
funds under the rule are provided to the Commission in connection with examinations or
investigations, such information would be kept confidential subject to the provisions of
applicable law.
2.

Purpose and Use of the Information Collection

Certain of the provisions of the proposed rule contain “collection of information”
requirements within the meaning on the Paperwork Reduction Act of 1995 (“Paperwork
Reduction Act”), 6 and 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(d) and 5
CFR 1320.11. The proposed rule is designed to address the investor protection purposes and
concerns underlying section 18 and to provide an updated and more comprehensive approach to
the regulation of funds’ use of derivatives transactions and certain other transactions.
The information collection requirements of proposed rule 18f-4 are designed to ensure
that funds appropriately limit the amount of leverage risk that may be obtained through
derivatives transactions and manage the risks associated with derivatives transactions and certain
other transactions. The information collections also assist the Commission’s examination staff in

6

44 U.S.C. 3501 et seq.

3

assessing funds’ compliance with the proposed rule and identifying weaknesses in a fund’s
management of derivatives transactions and certain other transactions.
3.

Consideration Given to Information Technology

Proposed rule 18f-4 would require a fund to maintain certain records documenting its
derivatives risk management program’s written policies and procedures, along with its stress test
results, VaR backtesting results, internal reporting or escalation of material risks under the
program, and reviews of the program. The proposed rule would also require a fund to maintain
records of any materials provided to the fund’s board of directors in connection with approving
the designation of the derivatives risk manager and any written reports relating to the derivatives
risk management program. A fund that is required to comply with the proposed VaR test would
also have to maintain records documenting the determination of: its portfolio VaR; the VaR of its
designated reference indexes, as applicable; its VaR ratio (the value of the VaR of the fund’s
portfolio divided by the VaR of the designated reference index), as applicable; and any updates
to any of its VaR calculation model and the basis for any material changes to its VaR model. A
fund that is a limited derivatives user under the proposed rule would have to maintain a written
record of its policies and procedures that are reasonably designed to manage derivatives risks. A
fund engaging in unfunded commitment agreements would be required to maintain records
documenting the sufficiency of its funds to meet its obligations with respect to all unfunded
commitment agreements. The Electronic Signatures in Global and National Commerce Act 7 and
the conforming amendments to rules under the Investment Company Act permit funds to
maintain records electronically.

7

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

4

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. Proposed rule 18f-4 would impose information collection requirements for funds relying on
the proposed rule relating to: the derivatives risk management program, board oversight and
reporting, the VaR-based limit on fund leverage risk, disclosure requirements for
leveraged/inverse funds and money market funds, limited derivatives users’ policies and
procedures, and associated recordkeeping requirements. The information required by proposed
rule 18f-4 is not generally duplicated elsewhere.
5.

Effect on Small Entities

The information collection requirements of proposed rule 18f-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. While proposed rule 18f-4 does not distinguish between small
entities and other funds, the rule includes a limited derivatives user exception, which requires
fewer information collection burdens. To the extent smaller funds generally use derivatives
transactions on a more limited basis, and therefore could qualify as limited derivatives users
under the rule, these funds would incur fewer burdens associated with their compliance as
compared to other funds that would not qualify as limited derivatives users. 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.

5

6.

Consequences of Not Conducting Collection

Proposed rule 18f-4 would impose information collection requirements for funds relying
on the proposed rule relating to: the derivatives risk management program, board oversight and
reporting, the VaR-based limit on fund leverage risk, disclosure requirements for
leveraged/inverse funds and money market funds, limited derivatives users’ policies and
procedures, and associated recordkeeping requirements.
Not collecting information or collecting such information less frequently would be
incompatible with the objectives of rule 18f-4. The reporting of information and the
establishment of written policies and procedures and maintaining written reports are integral
parts to ensuring compliance with the proposed rule and detecting and correcting any violations
or potential violations.
7.

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

Proposed rule 18f-4 would require a fund to maintain for a period of five years:
(1) certain records documenting the fund’s derivatives risk management program; (2) records of
any materials provided to the fund’s board of directors in connection with approving the
designation of the derivatives risk manager; (3) for a fund that is required to comply with the
proposed VaR-based limit on fund leverage risk, records documenting the fund’s determination
of: the VaR of its portfolio; the VaR of the fund’s designated reference index, as applicable; the
fund’s VaR ratio (the value of the VaR of the fund’s portfolio divided by the VaR of the
designated reference index), as applicable; and any updates to any VaR calculation models used
by the fund, as well as the basis for any material changes made to those models; (4) for a fund
that is a limited derivatives user, a written record of its policies and procedures that are
reasonably designed to manage its derivatives risk; and (5) for a fund that enters into unfunded

6

commitment agreements, a record documenting the basis for the fund’s belief regarding the
sufficiency of its cash and cash equivalents to meet its obligations with respect to its unfunded
commitment agreements. 8 Although this five-year period exceeds the three-year guideline for
most kinds of records under 5 CFR 1320.5(d)(2), the Commission 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 proposed rule 18f-4 is consistent with that in
rules 38a-1(d) and 22e-4 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 proposed rule
18f-4 slightly, compared to choosing a different, longer 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 proposed rule 18f-4, the Commission will receive and evaluate 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 information exchanges. These various forums provide the Commission and staff
with a means of ascertaining and acting upon the paperwork burdens confronting the industry.

8

See proposed rule 18f-4(c)(6).

7

9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Assurance of Confidentiality

No information would be submitted directly to the Commission under proposed rule 18f4. Other information 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 proposed rule 18f-4 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 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.

Estimate of Hour Burden

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. 9

9

The Commission’s estimates of the relevant wage rates in the tables below are based 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 1,800-hour work-year and multiplied by 2.93 to
account for bonuses, firm size, employee benefits, overhead, and adjusted to account for the

8

The respondents to proposed rule 18f-4 would be registered open- and closed-end
management investment companies, and companies that have elected to be treated as business
development companies under the Investment Company Act (collectively, “funds”). 10 We
estimate that 5,091 funds would likely rely on rule 18f-4. 11 Compliance with proposed rule 18f-4
would be mandatory for all funds that seek to engage in derivatives transactions in reliance on
the rule, which would otherwise be subject to the restrictions of section 18. To the extent that
records required to be created and maintained by funds under the rule are provided to the
Commission in connection with examinations or investigations, such information would be kept
confidential subject to the provisions of applicable law.
A.

Derivatives Risk Management Program

Proposed rule 18f-4 would require certain funds relying on the rule to adopt and
implement a written derivatives risk management program, which would include policies and
procedures reasonably designed to manage the fund’s derivatives risks. The proposal would
require a fund’s program to include the following elements: (1) risk identification and
assessment; (2) risk guidelines; (3) stress testing; (4) backtesting; (5) internal reporting and
escalation; and (6) periodic review of the program. 12 Under the proposed rule, the derivatives
risk manager is responsible for administering the derivatives risk management program and its
policies and procedures. Certain funds relying on the proposed rule would not be subject to the

effects of inflation. See Securities Industry and Financial Markets Association, Report on
Management & Professional Earnings in the Securities Industry 2013 (“SIFMA Report”).
10

See proposed rule 18f-4(a) (defining “fund”).

11

2,693 funds that would be subject to the proposed derivatives risk management program and limit
on fund leverage risk requirements + 2,398 funds relying on the limited derivatives user
exception and complying with the related limited derivatives user requirements.

12

See proposed rule 18f-4(c)(1)(i)-(vi).

9

program requirement. 13 We estimate that 2,693 funds would likely be subject to the program
requirement. 14 Below we estimate the initial and annual ongoing burdens associated with initial
documentation of the program, and any revision (and related documentation) of the derivatives
risk management program arising from the periodic review of the program. In addition to the
initial burden to document the program, including policies and procedures reasonably designed
to manage the fund’s derivatives risks, we estimate that a fund relying on the proposed rule
would have an ongoing burden associated with the proposed periodic review requirements to
evaluate the program’s effectiveness and to reflect changes in the fund’s derivatives risks over
time. Below we estimate the initial and annual ongoing burdens associated with documentation
and any review and revision of funds’ programs including their policies and procedures.
Table 1 below summarizes the proposed PRA initial and ongoing annual burden
estimates associated with the derivatives risk management program requirement under proposed
rule 18f-4. We do not estimate that there will be any initial or ongoing external costs associated
with the derivatives risk management program requirement.

13

A fund that is a limited derivatives user would not be required to comply with the proposed
program requirement. Funds that are limited derivatives users would be required to adopt policies
and procedures that are reasonably designed to manage its derivatives risks. See proposed rule
18f-4(c)(3).

14

See supra note 11.

10

Table 1: Derivatives Risk Management Program PRA Estimates
Internal
initial
burden
hours

Written derivatives risk
management program
development

Periodic review and revisions
of the program

Total annual burden per fund
Number of funds

Internal annual
burden hours1
Wage rate2
PROPOSED ESTIMATES
$357 (derivatives risk
×
12 hours
4 hours
manager)

Internal time costs
$1,428

12 hours

4 hours

×

$466 (assistant general
counsel)

$1,864

12 hours

4 hours

×

$365 (compliance
attorney)

$1,460

0 hours

2 hours

×

$357 (derivatives risk
manager)

$714

0 hours

2 hours

×

$466 (assistant general
counsel)

$932

0 hours

2 hours

×

$365 (compliance
attorney)

$730

18 hours
× 2,693

Total annual burden
48,474 hours
Notes:
1. For “Written derivatives risk management program development,”
these estimates include initial burden estimates annualized over a
three-year period.
2. See supra note 9.

11

$7,128
× 2,693
$19,195,704

B.

Board Oversight and Reporting

The proposed rule would require: (1) a fund’s board of directors to approve the
designation of the fund’s derivatives risk manager, 15 (2) the derivatives risk manager to provide
written reports to the board regarding the program’s implementation and effectiveness, 16 and
(3) the derivatives risk manager to provide written reports describing any exceedances of the
fund’s guidelines and the results of the fund’s stress testing and backtesting. 17 We estimate that
2,693 funds would be subject to these requirements. 18
Table 2 below summarizes the proposed PRA initial and ongoing annual burden
estimates associated with the board oversight and reporting requirements under proposed
rule 18f-4. We do not estimate that there will be any initial or ongoing external costs associated
with the board oversight and reporting requirements.

15

See proposed rule 18f-4(c)(5)(i).

16

See proposed rule 18f-4(c)(5)(ii).

17

See proposed rule 18f-4(c)(5)(iii).

18

See supra note 11.

12

Table 2: Board Oversight and Reporting PRA Estimates
Internal
initial
burden
hours
Approving the designation of
the derivatives risk manager
Derivatives risk manager
written reports
Total annual burden per fund
Number of funds

3 hours

Internal annual
burden hours1
PROPOSED ESTIMATES

Wage rate2

Internal time costs

1 hour

×

$17,860 (combined rate
for 4 directors)2

$17,860

8 hours

×

$357 (derivatives risk
manager)

$2,856

1 hour

×

$17,860 (combined rate
for 4 directors)

$17,860

10 hours
× 2,693

Total annual burden
26,930 hours
Notes:
1. For “Approving the designation of the derivatives risk manager,”
this estimate includes initial burden estimates annualized over a threeyear period.
2. See supra note 9.

13

$11,786
× 2,693
$31,739,698

C.

Disclosure Requirement Associated with Limit on Fund Leverage
Risk

The proposed rule would also generally require funds relying on the rule to comply with
an outer limit on fund leverage risk based on VaR. This outer limit would be based on a relative
VaR test that compares the fund’s VaR to the VaR of a “designated reference index.” If the
fund’s derivatives risk manager is unable to identify an appropriate designated reference index,
the fund would be required to comply with an absolute VaR test. 19 Under the proposed rule, a
fund must disclose its designated reference index in its annual report. 20 We estimate that 2,424
funds would be required to implement VaR tests and therefore would be subject to this
disclosure requirement. 21
Table 3 below summarizes the proposed PRA initial and ongoing annual burden
estimates associated with the disclosure requirement associated with the proposed limit on fund
leverage risk. We do not estimate that there will be any paperwork-related initial or ongoing
external costs associated with this proposed disclosure requirement.

19

The collections of information burdens for disclosure requirements associated with the proposed
limit on fund leverage risk are reflected in the PRA for proposed rule 18f-4 and not in the funds’
applicable disclosure forms because the burden arises from the proposed rule. The Paperwork
Reduction Act analysis for the funds’ applicable disclosure forms will not reflect the collections
of information burdens for disclosure requirements associated with the proposed limit on fund
leverage risk.
A fund that is a leveraged/inverse investment vehicle, as defined in the proposed sales practices
rules, would not be required to comply with the proposed VaR-based limit on fund leverage risk.
Broker-dealers and investment advisers would be required to approve retail investors’ accounts to
purchase or sell shares in these funds. The proposed rule also would provide an exception from
the proposed VaR tests for funds that use derivatives to a limited extent or only to hedge currency
risks.
VaR test burdens related to recordkeeping and reporting are reflected in the recordkeeping section
below, and also in the Forms N-PORT, N-CURRENT, and N-CEN burdens.

20

See proposed rule 18f-4(c)(2)(iv).

21

See Proposing Release, supra note 5, at n.520 and accompanying text.

14

Table 3: Disclosure Requirement Associated with Limit on Fund Leverage Risk PRA Estimates
Internal
initial
burden
hours

Disclosure of designated
reference index

Internal annual
burden hours
PROPOSED ESTIMATES

Wage rate1

Internal time costs

0 hours

.5 hours

×

$309 (compliance
manager)

$154.50

0 hours

.5 hours

×

$365 (compliance
attorney)

$182.50

Total annual burden per fund
Number of funds

1 hour
× 2,424

$337
× 2,424

Total annual burden

2,424 hours

$816,888

Notes:
1. See supra note 9.

15

D.

Disclosure Requirement for Leveraged/Inverse Funds

Under the proposed rule, a fund would not have to comply with the proposed VaR-based
leverage risk limit if it: (1) meets the definition of a “leveraged/inverse investment vehicle” in
the proposed sales practices rules; (2) limits the investment results it seeks to 300% of the return
(or inverse of the return) of the underlying index; and (3) discloses in its prospectus that it is not
subject to proposed rule 18f-4’s limit on fund leverage risk. 22 We estimate that 269 funds would
be subject to the proposed prospectus disclosure requirement for leveraged/inverse funds. 23
Table 4 below summarizes the proposed PRA initial and ongoing annual burden
estimates associated with the disclosure requirement in the proposed rule’s alternative provision
for leveraged/inverse funds. We do not estimate that there will be any initial or ongoing external
costs associated with this proposed disclosure requirement.

22

See proposed rule 18f-4(c)(4).

23

164 leveraged/inverse ETFs + 105 leveraged mutual funds.

16

Table 4: Disclosure Requirement Associated with Leveraged/Inverse Funds PRA Estimates
Internal
initial
burden
hours

Leveraged/inverse fund
prospectus disclosure

Internal annual
burden hours
PROPOSED ESTIMATES

Wage rate1

Internal time costs

0 hours

.25 hours

×

$309 (compliance
manager)

$77

0 hours

.25 hours

×

$365 (compliance
attorney)

$91

Total annual burden per fund
Number of funds

1 hour
× 269

$168
× 269

Total annual burden

269 hours

$45,192

Notes:
1. See supra note 9.

17

E.

Disclosure Changes for Money Market Funds

Money market funds are excluded from the scope of the rule and could not rely on
proposed rule 18f-4 to enter into derivatives transactions or other transactions addressed in the
proposed rule. 24 To the extent a money market fund currently discloses in its prospectus that it
may use any of these transactions—even if it is not currently entering into these transactions—
money market funds would be subject to the burdens associated with making disclosure changes
to their prospectuses. We estimate that 413 funds could be subject to such disclosure changes on
account of money market funds’ exclusion from the proposed rule. 25
Table 5 below summarizes the proposed PRA initial and ongoing annual burden
estimates associated with disclosure changes that money market funds could make because of
their exclusion from proposed rule 18f-4. 26 We do not estimate that there will be any initial or
ongoing external costs associated with this disclosure change requirement.

24

See proposed rule 18f-4(a) (defining the term “Fund” to “…not include a registered open-end
company that is regulated as a money market fund”).

25

This likely overestimates the total number of funds subject to these disclosure changes, because
we believe that money market funds currently do not typically engage in derivatives transactions
or the other transactions addressed by proposed rule 18f-4.

26

These per-fund burden estimates likely overestimate the total burden associated with these
disclosure changes.

18

Table 5: Disclosure Changes for Money Market Funds PRA Estimates
Internal
initial
burden
hours

Money market prospectus
disclosure changes

Internal annual
burden hours
PROPOSED ESTIMATES

Wage rate1

Internal time costs

.75 hours

.25 hours

×

$309 (compliance
manager)

$77

.75 hours

.25 hours

×

$365 (compliance
attorney)

$91

Total annual burden per fund
Number of funds

.5 hour
× 413

$168
× 413

Total annual burden

207 hours

$69,384

Notes:
1. See supra note 9.

19

F.

Policies and Procedures for Limited Derivatives Users

Proposed rule 18f-4 would require funds relying on the limited derivatives user
provisions to adopt and implement written policies and procedures reasonably designed to
manage the fund’s derivatives risks. 27 Only funds that limit their derivatives exposure to 10% of
their net assets or that use derivatives transactions solely to hedge certain currency risks would
be permitted to rely on these provisions. We estimate that 2,398 funds would be subject to the
limited derivatives user requirements. 28 In addition to the initial burden to document the policies
and procedures, we estimate that limited derivatives users would have an ongoing burden
associated with any review and revisions to its policies and procedures to ensure that they are
“reasonably designed” to manage the fund’s derivatives risks. Below we estimate the initial and
annual ongoing burdens associated with documentation and any review and revision of the
limited derivatives users’ policies and procedures.
Table 6 below summarizes the proposed PRA initial and ongoing annual burden
estimates associated with the policies and procedures requirement for limited derivatives users
under proposed rule 18f-4. We do not estimate that there will be any initial or ongoing external
costs associated with the policies and procedures requirement for limited derivatives users.

27

See proposed rule 18f-4(c)(3).

28

See supra note 11.

20

Table 6: Policies and Procedures for Limited Derivatives Users PRA Estimates
Internal
initial
burden
Internal annual
hours
burden hours1
PROPOSED ESTIMATES
Written policies and procedures
Review of policies and
procedures
Total annual burden per fund
Number of funds

Wage rate2

Internal time
costs

3 hours

1 hour

×

$329 (senior manager) 4

$329

3 hours

1 hour

×

$365 (compliance
attorney) 4

$365

0 hours

.25 hours

$329 (senior manager)

.25 hours

$365 (compliance
attorney) 4

0 hours

2.5 hours
× 2,398

Total annual burden
5,995 hours
Notes:
1. For “Written policies and procedures,” these estimates include
initial burden estimates annualized over a three-year period.
2. See supra note 9.

21

4

$82.25
$91.25
$867.50
× 2,398
$2,080,265

G.

Recordkeeping Requirements

Proposed rule 18f-4 would require a fund to maintain certain records documenting its
derivatives risk management program’s written policies and procedures, along with its stress test
results, VaR backtesting results, internal reporting or escalation of material risks under the
program, and reviews of the program. 29 The proposed rule would also require a fund to maintain
records of any materials provided to the fund’s board of directors in connection with approving
the designation of the derivatives risk manager and any written reports relating to the derivatives
risk management program. 30 A fund that is required to comply with the proposed VaR test would
also have to maintain records documenting the determination of: its portfolio VaR; the VaR of its
designated reference indexes, as applicable; its VaR ratio (the value of the VaR of the Fund’s
portfolio divided by the VaR of the designated reference index), as applicable; and any updates
to any of its VaR calculation model and the basis for any material changes to its VaR model. 31 A
fund that is a limited derivatives users under the proposed rule would have to maintain a written
record of its policies and procedures that are reasonably designed to manage derivatives risks. 32
A fund engaging in unfunded commitment agreements would be required to maintain records
documenting the sufficiency of its funds to meet its obligations with respect to all unfunded
commitment agreements. 33
We estimate that 5,091 funds would be subject to the recordkeeping requirements. 34
Below we estimate the average initial and ongoing annual burdens associated with the
29

See proposed rule 18f-4(c)(6)(i)(A).

30

See proposed rule 18f-4(c)(6)(i)(B).

31

See proposed rule 18f-4(c)(6)(i)(C).

32

See proposed rule 18f-4(c)(6)(i)(D).

33

See proposed rule 18f-4(e)(2).

34

See supra note 11.

22

recordkeeping requirements. This average takes into account that some funds such as limited
derivatives users may have less extensive recordkeeping burdens than other funds that use
derivatives more substantially.
Table 7 below summarizes the proposed PRA estimates associated with the
recordkeeping requirements in rule 18f-4.

23

Table 7: Recordkeeping PRA Estimates
Internal
initial
burden
hours

Internal
annual
burden
hours1

Wage rate2

Internal
time costs

.5

$62 (general clerk)

$31

$95 (senior computer
operator)

$47.50

PROPOSED ESTIMATES
Establishing
recordkeeping policies
and procedures

1.5
1.5

.5

Recordkeeping

0 hours

2 hours

×

$62 (general clerk)

$31

0 hours

2 hours

×

$95 (senior computer
operator)

$47.50

Total annual burden per
fund
Number of funds
Total annual burden

5 hours

$157

× 5,091

× 5,091

25,455
hours

$799,287

Notes:
1. For “Establishing recordkeeping policies and procedures,”
these estimates include initial burden estimates annualized over a
three-year period.
2. See supra note 9.

24

H.

Proposed Rule 18f-4 Total Estimated Burden

As summarized in Table 8 below, we estimate that the total hour burdens and time
costs associated with proposed rule 18f-4, including the burden associated with
documenting the derivatives risk management program, board oversight and reporting,
disclosure requirements associated with the proposed VaR tests, disclosure requirements
associated with the alternative requirements for leveraged/inverse funds, policies and
procedures development for limited derivatives users, and recordkeeping, amortized over
three years, would result in an average aggregate annual burden of 109,754 hours and an
average aggregate annual monetized time cost of $54,761,797. Therefore, each fund that
relies on the rule would incur an average annual burden of approximately 20.56 hours, at
an average annual monetized time cost of approximately $10,757, to comply with
proposed rule 18f-4. 35

35

These per-fund burden estimates likely overestimate the total burden of proposed rule
18f-4 because not all funds (e.g., limited derivatives users) would incur the various
burdens set forth in the table.

25

Table 8: Proposed Rule 18f-4 Total PRA Estimates
Internal
hour burden

Internal
burden time
cost

48,474 hours

$19,195,704

26,930 hours

$31,739,698

2,424 hours

$816,888

269 hours

$45,192

207 hours

$69,384

5,995 hours

$2,080,265

25,455 hours

$799,287

Total annual burden
Number of funds

109,754
÷ 5,091

$54,746,418
÷ 5,091

Average annual burden per
fund

20.56 hours

Derivatives risk management
program
Board oversight and reporting
Disclosure requirement
associated with limit on fund
leverage risk
Disclosure requirement
associated with alternative
requirements for
leveraged/inverse funds
Disclosure changes for money
market funds
Policies and procedures for
limited derivatives users
Recordkeeping requirements

13.

$10,754

Cost to Respondents

We estimate that, amortized over three years, there would be external costs of
$3,054,600 associated with this collection of information. Therefore, each fund that relies
on proposed rule 18f-4 would incur a one-time annualized external cost of $600 to
comply with the proposed rule. The cost burden is the cost associated with a fund
establishing recordkeeping policies and procedures related to the recordkeeping
requirements under rule 18f-4. The cost burden does not include the hour burden
discussed in Item 12 above.
Initial
external
cost burden

Annual
external cost
burden

$1,800

$600

Establishing
recordkeeping policies
and procedures
Total annual burden per
fund

$600

26

14.

Number of funds

5,091

Total annual burden

$3,054,600

Costs to Federal Government

Proposed rule 18f-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.

Changes in Burden

This is the first request for approval of the collection of information for this rule.
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.

27