Supporting Statement 18F-3 new

OMB CONTROL NUMBER: 3235-0441

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 18f-3
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 18(f)(1) of the Investment Company Act of 1940 (the “Act”) 1 generally
prohibits registered open-end management investment companies (“funds”) from
issuing any senior security. 2 Rule 18f-3 under the Act exempts from section 18(f)(1) a
fund that issues multiple classes of shares representing interests in the same portfolio
of securities (a “multiple class fund”) if the fund satisfies the conditions of the rule. 3
In general, each class must differ in its arrangement for shareholder services or
distribution or both, and must pay the related expenses of that different arrangement.
The rule includes one requirement for the collection of information. A multiple
class fund must prepare, and fund directors must approve, a written plan setting forth
the separate arrangement and expense allocation of each class, and any related
conversion features or exchange privileges (“rule 18f-3 plan”). 4 Approval of the plan
must occur before the fund issues any shares of multiple classes and whenever the
fund materially amends the plan. In approving the plan, the fund board, including a
majority of the independent directors, must determine that the plan is in the best
interests of each class and the fund as a whole.
2.

Purpose and Use of the Information Collection

The requirement that the fund prepare and directors approve a written rule 18f-3
plan is intended to ensure that the fund compiles information relevant to the fairness
of the separate arrangement and expense allocation for each class, and that directors
review and approve the information. Without a blueprint that highlights material
differences among classes, directors might not perceive potential conflicts of interests
when they determine whether the plan is in the best interests of each class and the
fund. In addition, the plan may be useful to Commission staff in reviewing the fund’s
compliance with the rule.

1

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

2

15 U.S.C. 80a-18(f)(1).

3

17 CFR 270.18f-3.

4

17 CFR 270.18f-3(d).

3.

Consideration Given to Information Technology

The Commission’s Electronic Data Gathering, Analysis, and Retrieval System
(“EDGAR”) automates the 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.
Rule 18f-3 does not require a multiple class fund to file its rule 18f-3 plan with the
Commission. The fund, however, is required to file the plan as an exhibit to its
registration statement. 5 Absent a hardship exemption, a fund transmits its
registration statement and exhibits electronically to the Commission via EDGAR. 6
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.
5.

Effect on Small Entities

The information collection requirements of rule 18f-3 do not distinguish between
small entities and other entities. To the extent that smaller funds rely on rule 18f-3,
their burden to prepare and approve an 18f-3 plan may be greater than for larger
funds due to economies of scale.
The Commission considered special requirements for small entities. The
Commission believes, however, that imposing different requirements on smaller fund
companies would not be consistent with investor protection. The Commission
reviews all rules periodically, as required by the Regulatory Flexibility Act, to
identify methods to minimize reporting or recordkeeping requirements affecting
small businesses.
6.

Consequences of Not Conducting Collection

The rule’s information collection requirements are not triggered by the passage of
time, but by events within the control of funds. Rule 18f-3 requires a multiple class
fund to prepare and its board to approve a rule 18f-3 plan before the fund issues any
shares of multiple classes and whenever the fund materially amends the plan. If a

5

Item 28(n) of Form N-1A [17 CFR 274.11A] (description of form).

6

Regulation S-T, rule 101(a) [17 CFR 232.101(a)] (registration statements); rule 102 [17
CFR 232.102] (exhibits).

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plan was not prepared and approved before shares of multiple classes were issued
and before the plan was materially amended, conflicts of interests between classes
could go undetected. Without a plan, there would be no assurance that the board had
considered all material differences between classes, or any record of the information
the board considered.
7.

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

The collection is not inconsistent with 5 CFR 1320.5(d)(2).
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 fund 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 the
paperwork burdens confronting the industry. The Commission requested public
comment on the collection of information requirements of rule 18f-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 its request.
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Assurance of Confidentiality

No assurance of confidentiality was provided.
11.

Sensitive Questions

No information of a sensitive nature, including social security numbers, will be
required under this collection of information. The information collection does not
collect personally identifiable information (PII). The agency has determined that a
system of records notice (SORN) and privacy impact assessment (PIA) are not
required in connection with the collection of information. In accordance with
Section 208 of the E-Government Act of 2002, the agency has conducted a Privacy
Impact Assessment (PIA) of the EDGAR system, in connection with this collection
of information. The EDGAR PIA, published on 1/29/2016, is provided as a
supplemental document and is also available at https://www.sec.gov/privacy.

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12.

Burden of Information Collection

The following estimates of average burden hours are made solely for purposes of
the Paperwork Reduction Act of 1995 7 and are not derived from a comprehensive or
even representative survey or study of the cost of Commission rules and forms.
Compliance with the information collection requirements of rule 18f-3 is necessary
to obtain the benefit of the rule’s exemption. Responses to the collection of
information requirements will not be kept confidential.
The burden hour estimate for complying with the information collection
requirements of rule 18f-3 is based on consultations with industry representatives
and on the Commission’s experience. The number of burden hours may vary
depending on, among other things, the complexity of the multiple-class
arrangements, the number of funds that use similar rule 18f-3 plans, and whether
preparation of the 18f-3 plan is performed by fund staff or outside counsel. The
number of funds used to estimate the burden hours is an estimate based on the
Commission’s statistics.
Based on an analysis of fund filings, the Commission estimates that there are
approximately 7,293 multiple class funds offered by 990 registrants. The Commission
estimates that each of the 990 registrants will make an average of 0.5 responses
annually to prepare and approve a written 18f-3 plan. 8 The Commission estimates
each response will take 6 hours, requiring a total of 3 hours per registrant per year. 9
Thus the total annual hour burden associated with these requirements of the rule is
approximately 2,970 hours. 10 Of the 2,970 hours spent annually to comply with the
requirements of rule 18f-3, the Commission estimates that:
•

Two thirds (1,980 hours) are spent by in-house attorneys to prepare the plan,
at an estimated hourly wage of $419, 11 for a total of approximately $829,620
per year; 12 and

7

44 U.S.C. 3501 et seq.

8

The Commission estimates that each registrant prepares and approves a rule 18f-3 plan
every two years when issuing a new fund or new class or amending a plan (or that 495 of
all 990 registrants prepare and approve a plan each year).

9

0.5 responses per registrant × 6 hours per response = 3 hours per registrant.

10

3 hours per registrant per year × 990 registrants = 2,970 hours per year.

11

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

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•

One third (990 hours) are spent by the funds’ board of directors to approve the
plan at an hourly cost of $4,465, for a total of approximately $4,420,350 per
year. 13

Based on these estimated wage rates, the total cost to the industry of this hour
burden is approximately $5,249,970. 14
Summary of Revised Annual Responses, Burden Hours, and Cost Estimates
IC Title

Rule 18f-3

13.

Annual No. of Responses
Previously
Requested
Change
approved
522.5

495

-27.5

Annual Time Burden (Hrs.)
Previously Requested Change
approved
3,135

2,970

-345

External Cost to Respondents ($)
Previously
Requested
Change
approved
$5,485,205

$5,249,970

Costs to Respondents

Cost burden is the cost of services purchased to comply with rule 18f-3, such as
for the services of computer programmers or outside legal counsel. The cost burden
does not include the cost of the hour burden discussed in Item 12 above. Estimates
are based on the Commission’s experience. The Commission currently attributes no
external cost burden to rule 18f-3.
14.

Costs to Federal Government

The rule imposes no costs associated with filing reports or any other costs to the
Federal government.

Markets Association. The estimated wage figures are also based on published rates for inhouse attorneys, modified to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead,
yielding an effective hourly rate of $419. See Securities Industry and Financial Markets
Association, Report on Management & Professional Earnings in the Securities Industry
2020.
12

1,980 hours × $419 per hour = $829,620.

13

990 hours × $4,465 per hour = $4,420,350. The estimate for the cost of board time as a
whole is derived from estimates made by the staff regarding typical board size and
compensation that is based on information received from fund representatives and
publicly available sources. The $4465 per hour estimate for a fund board of directors
includes a CPI inflation adjustment from the 2009 estimate.

14

$829,620 + $4,420,350 = $5,249,970.

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-$235,235

15.

Changes in Burden

The estimated hourly burden associated with rule 18f-3 has decreased from 3,135
hours to 2,970 hours (a decrease of 165 hours). The decrease is due to a decrease in
the estimated number of multiple class funds being offered by registrants.
16.

Information Collection Planned for Statistical Purposes

The results of any information collection 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, although the OMB control number will be displayed. Including the
expiration date on the electronic version of this form will result in increased costs,
because the need to make changes to the form may not follow the application’s
scheduled version release dates.
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.

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