Supporting Statement 34b-1 (2020 Rulemaking) (004)

OMB CONTROL NUMBER: 3235-0346

SUPPORTING STATEMENT

For the Paperwork Reduction Act Information Collection Submission for

Rule 34b-1

A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 34(b) of the Investment Company Act of 1940 (“Investment Company
Act”) makes it unlawful for any person to make an untrue statement of a material fact in
any documents filed or transmitted pursuant to the Investment Company Act or to omit a
statement necessary to prevent such documents from being materially misleading.
Rule 34b-1 under the Investment Company Act governs sales material that
accompanies or follows the delivery of a statutory prospectus (“sales literature”). 1 Rule
34b-1 deems to be materially misleading any investment company (“fund”) sales
literature required to be filed with the Securities and Exchange Commission
(“Commission”) by Section 24(b) of the Investment Company Act 2 that includes
performance data, unless the sales literature also includes the appropriate uniformly
computed data and the legend disclosure required in investment company advertisements
by rule 482 under the Securities Act.

1

A “statutory prospectus” is a prospectus that meets the requirements of Section 10(a) of
the Securities Act of 1933 (“Securities Act”).

2

Sales literature addressed to or intended for distribution to prospective investors is
deemed filed with the Commission for purposes of Section 24(b) of the Investment
Company Act upon filing with a national securities association registered under Section
15A of the Securities Exchange Act of 1934 that has adopted rules providing standards
for the investment company advertising practices of its members and has established and
implemented procedures to review that advertising. See rule 24b-3 under the Investment
Company Act.

On August 5, 2020 the Commission issued a release proposing amendments that
would modernize the disclosure framework for open-end management investment
companies. 3 As a part of this proposal, the Commission proposed amendments to the
advertising rules for registered investment companies and business development
companies to promote more transparent and balanced statements about investment costs.
The proposed advertising rule amendments would generally apply to any investment
company, including mutual funds, ETFs, registered closed end funds, and BDCs. Under
the proposed amendments, investment company fee and expense presentations in sales
literature would have to include timely and prominent information about a fund’s
maximum sales load (or any other nonrecurring fee) and gross total annual expenses,
based on the methods of computation that the company’s Investment Company Act or
Securities Act registration statement form prescribes for a prospectus.
Compliance with the requirements of rule 34b-1 is mandatory and the responses
to the information collections would not be kept confidential.
2.

Purpose and Use of the Information Collection

Rule 34b-1 is designed to prevent misleading performance claims by funds and to
enable investors to make meaningful comparisons among funds. The proposed rules are
designed to incorporate content, presentation, and timeliness requirements for
information about investment company fees and expenses that appears in sales literature.
Specifically, investment company sales literature providing fee and expense figures must
include: (1) the maximum amount of any sales load, or any other nonrecurring fee; and
3

Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing
Investors, and Improved Fee and Risk Disclosure for Mutual Funds and ExchangeTraded Funds; Fee Information in Investment Company Advertisements, Investment
Company Act Release No. 33963 (Aug. 5, 2020).

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(2) the total annual expenses without any fee waiver or expense reimbursement
arrangement. Under the proposed amendments, investment company fee and expense
presentations in sales literature would have to include timely and prominent information
about a fund’s maximum sales load (or any other nonrecurring fee) and gross total annual
expenses, based on the methods of computation that the company’s Investment Company
Act or Securities Act registration statement form prescribes for a prospectus.
Compliance with the requirements of rule 34b-1 is mandatory and the responses
to the information collections would not be kept confidential.
3.

Consideration Given to Information Technology

The Commission’s electronic filing system (“EDGAR”) automates the filing,
processing, and dissemination of full disclosure filings. The system permits publicly held
companies to transmit their filings to the Commission electronically. This automation
has increased the speed, accuracy, and availability of information, generating benefits to
investors and financial markets.
The vast majority of fund sales literature is filed with the Financial Industry
Regulatory Authority (FINRA) under Investment Company Act rule 24b-3, which allows
any sales material filed with FINRA to be deemed to be filed with the Commission. Rule
34b-1 sales literature that is required to be filed with the Commission is to be filed
electronically on EDGAR (17 CFR 232.101(a)(1)(i) and (iv)). The public may access
filings on EDGAR through the Commission’s Internet web site (http://www.sec.gov) or
at EDGAR terminals located at the Commission’s public reference rooms.
4.

Duplication

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The Commission periodically evaluates reporting and recordkeeping requirements
for duplication and reevaluates them whenever it proposes a rule or form or a change in a
rule or form. While the proposed new fee and expense presentation requirements in rule
34b-1 are the same as proposed new fee and expense presentation requirements in rule
482, we do not believe that the proposed amendments to rule 34b-1 are duplicative with
the proposed amendments to rule 482 because the rule 34b-1 amendments would apply to
sales literature that would not otherwise be subject to rule 482. For example, the
proposed amendments to rule 34b-1 would apply to sales literature that is excluded from
the definition of “prospectus” in section 2(a)(10) of the Securities Act and thus is not
subject to rule 482.
5.

Effect on Small Entities

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. The current disclosure requirements for rule 34b-1 sales
literature do not distinguish between small entities and other funds. Although the burden
on small funds may be greater than those of larger ones, the Commission believes that
imposing different requirements on smaller investment companies would not be
consistent with investor protection and the purposes of the rule 34b-1 requirements.
6.

Consequences of Not Conducting Collection

Since use of sales literature by funds is voluntary, the Commission does not
determine the frequency with which funds prepare and file sales literature. Therefore,
short of not requiring any collection for sales literature governed by rule 34b-1, the
Commission cannot require less frequent collection. Not requiring disclosure of the

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information required by rule 34b-1 would harm investors by denying them information
that may be useful in making investment decisions. If such sales literature did not
contain this information, investors could receive inadequate information or could receive
confusing, false, or misleading information. As a result, investor confidence in the
securities industry could be adversely affected.
7.

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

This collection is not inconsistent with 5 CFR 1320.5(d)(2).
8.

Consultation Outside the Agency

The Commission and the Division of Investment Management staff 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 that may confront the industry. Before adopting the proposed amendments, the
Commission will receive and evaluate public comments on the proposal and its collection
of information requirements. The Commission’s solicitation of public comments included
estimating and requesting public comments on the burden estimates for all information
collections under this OMB control number (i.e., both changes associated with the
rulemaking and other burden updates).
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Confidentiality

No assurance of confidentiality was provided.

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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 EGovernment 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.
12.

Burden of Information Collection

The following estimates of average burden hours and costs are made solely for
purposes of the Paperwork Reduction Act of 1995 (“PRA”) 4 and are not derived from a
comprehensive or even representative survey or study of the cost of Commission rules
and forms. Compliance with rule 34b-1 is mandatory. Responses to the disclosure
requirements will not be kept confidential.
For the currently approved burden estimates for rule 34b-1, the Commission
estimated that on average approximately 208 respondents file 13,004 5 responses that
include the information required by rule 34b-1 each year. The burden resulting from the
collection of information requirements of rule 34b-1 is estimated to be 2 hours per

4

44 U.S.C. 3501 et seq.

5

The estimated number of responses to rule 34b-1 is composed of 12,772 responses filed
with FINRA and 232 responses filed with the Commission in 2016.

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response. The total hourly burden for rule 34b-1 is approximately 26,008 hours per year
in the aggregate (with an internal time cost of approximately $7.3 million). 6
For purposes of estimating the incremental additional burden associated with the
proposed amendments to rule 34b-1, we estimate that there are 351 responses to rule 34b1 filed annually. 7 We also estimate that approximately 96% of the rule 34b-1 responses
(96% x 351 = approximately 337 responses) would be required to comply with the
proposed amendments because they either: (1) provide fee and expense figures in
qualifying advertisements; or (2) include information regarding a fund’s total annual
expenses. We estimate that the proposed amendments to require respondents to include
fee and expense figures in qualifying advertisements would incrementally increase the
burden by 6 hours each year. We estimate that the proposed amendments to require
respondents to include information regarding a fund’s total annual expenses in
advertisements would incrementally increase the burden by 4 hours each year.

6

13,004 responses x 2 hours per response = 26,008 hours.
The internal time cost estimate is based on an estimated wage rate of approximately
$279.75 per hour. The industry burden is calculated by multiplying the total annual hour
burden to comply with rule 34b-1 by the estimated hourly wage rate of $279.95. The
estimated wage figure is based on published rates for compliance attorneys, paralegals,
and senior compliance examiners from the Securities Industry and Financial Markets
Association’s Report on 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, yielding effective hourly rates of $345, $205, and $224, respectively. The
estimated wage rate is further based on the estimate that attorneys would handle 50% of
hours spent on advertising regulation and that paralegals and compliance examiners
would handle the remaining 50% in equal parts, yielding a weighted wage rate of $279.75
(($345 x 0.50) + ($205 x 0.25) + ($224 x 0.25) = $279.75).

7

The estimated number of responses filed with the Commission in 2019.

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For purposes of the PRA, we estimate the proposed amendments would result in
3,370 hours of total annual incremental burden under 34b-1. 8 In connection with our
estimate of the total incremental burden of the proposed amendments we have estimated
only an internal burden cost and no annual external cost burden. At an estimated wage
rate of $336 per hour,9 we estimate that the incremental annual cost to registrants of the
hour burden for complying with the proposed amendments would be $1,132,320.10

8

We calculated the total incremental burden as follows: (337 responses that include
fee/expense figure disclosures x 6 hours = 2,022 hours) + (337 responses that disclose fee
waivers/expense reimbursement arrangements x 4 hours = 1,348 hours) = 3,370 burden
hours

9

These PRA estimates assume that the same types of professionals would be involved in
preparing these notices that we believe otherwise would be involved in preparing a fund’s
advertisements. The Commission’s estimates of the relevant wage rates 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 figures are modified by firm size, employee benefits, overhead, and adjusted to
account for the effects of inflation. See Securities Industry and Financial Markets
Association, Report on Management & Professional Earnings in the Securities Industry
2013.

10

3,370 hours per year x $336 per hour = $1,132,320 per year.

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RULE 34B-1 PRA ESTIMATES
Internal initial
burden hours

Internal
annual hour
burden1

Wage Rate2

Internal Time Costs

PROPOSED ESTIMA TES FOR RULE 34B-1
New general requirements re: fee
and expense figure disclosure

9 hours

Number of responses to rule 34b-1
that include fee/expense figure
disclosure

$2,016
$336
(blended rate for
compliance attorney
and senior programmer)

x 337
responses

Total annual burden of new
requirements for fee and expense
disclosure
New requirements for disclosure of
fee waivers/expense
reimbursement arrangements

6 hours3

2,022 hours

6 hour

$679,392
$336
(blended rate for
compliance attorney
and senior programmer)

4 hours4

Number of responses to rule 34b-1
that disclose fee waivers/expense
reimbursement arrangements

x 337
responses

Total annual burden of
requirements for disclosure of fee
waivers/expense reimbursement
arrangements

1,348 hours

Total annual burden

3,370 hours

x 337
responses

$1,344

x 337 responses

$452,928
$1,132,320

TOTA L ESTIMA TED BURDENS IN CLUDING AMEN DM EN TS
Current burden estimates

26,008 hours

$7,300,000

Revised burden estimate

29,378

$8,432,320

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13.

Cost to Respondents
Cost burden is the cost of services purchased to comply with rule 34b-1, such as

for the services of computer programmers, outside counsel, financial printers, and
advertising agencies. 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 with
advertisements and sales literature. The Commission currently attributes no external cost
burden to rule 34b-1.
14.

Cost to the Federal Government

The annual cost of reviewing and processing disclosure documents, including new
registration statements, post-effective amendments, proxy statements, and shareholder
reports of investment companies amounted to approximately $22.9 million in fiscal year
2016, based on the Commission’s computation of the value of staff time devoted to this
activity and related overhead. However, the vast majority of the responses that are
required to be filed under Section 24(b) of the Investment Company Act are in practice
filed with FINRA and deemed filed with the Commission pursuant to rule 24b-3. 11 As a
result, the estimated cost to the federal government related to rule 34b-1 responses is
estimated to be negligible.
15.

Change in Burden

As summarized in item 12 above, the estimated hourly burden for complying with
rule 34b-1 would increase from 26,008 hours to 29,378 hours (an increase of 3,370
hours).12 The estimated internal cost burden associated with rule 34b-1 would increase
from $7,300,000 to 8,432,320 (an increase of $1,132,320). The Commission continues to
11

See supra note 2.

12

26,008 hours +29,378 hours = 55,386hours.

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estimate that there is no external cost burden associated with this rule. These changes in
burden also reflect the Commission’s revision and update of burden estimates for all
information collections under this OMB control number (whether or not associated with
rulemaking changes), and the Commission requested public comment on all information
collection burden estimates for this OMB control number.
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 Statement for Paperwork Reduction Act

Submission
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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