Rule 0-2 Supporting Statement

Rule 0-2 Supporting Statement.pdf

Rule 0-2 under the Investment Company Act of 1940, General Requirements of Papers and Applications

OMB: 3235-0636

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OMB CONTROL NUMBER: 3235-0636
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 0-2
A.

JUSTIFICATION
1.

Necessity for the Collection Information

Several sections of the Investment Company Act of 1940 (“Act” or “Investment
Company Act”) 1 give the Securities and Exchange Commission (“Commission”) the authority to
issue orders granting exemptions from the Act’s provisions. The section that grants broadest
authority is section 6(c), which provides the Commission with authority to conditionally or
unconditionally exempt persons, securities or transactions from any provision of the Investment
Company Act, or the rules or regulations thereunder, if and to the extent that such exemption is
necessary or appropriate in the public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the Act. 2 Congress enacted section
6(c) to give the Commission the flexibility to address unforeseen or changed circumstances in
the investment company industry. Rule 0-2 under the Investment Company Act, 3 entitled
“General Requirements of Papers and Applications,” prescribes general instructions for filing an
application seeking exemptive relief with the Commission.
Rule 0-2(c)(1) requires that every application for an order for which a form is not
specifically prescribed and which is executed by a corporation, partnership or other company and
filed with the Commission contain a statement of the applicable provisions of the articles of
incorporation, bylaws or similar documents, relating to the right of the person signing and filing
such application to take such action on behalf of the applicant, and a statement that all such
1

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

2

15 U.S.C. 80a-6(c).

3

17 CFR 270.0-2.

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requirements have been complied with and that the person signing and filing the application is
fully authorized to do so. If such authorization is dependent on resolutions of stockholders,
directors, or other bodies, such resolutions must be attached as an exhibit to or quoted in the
application. Any amendment to the application must contain a similar statement as to the
applicability of the original statement of authorization. When any application or amendment is
signed by an agent or attorney, rule 0-2(c)(1) requires that the power of attorney evidencing his
authority to sign shall state the basis for the agent’s authority and shall be filed with the
Commission. Every application subject to rule 0-2 must be verified by the person executing the
application by executing an instrument in substantially the form specified in the rule. Each
application subject to rule 0-2 must state the reasons why the applicant is deemed to be entitled
to the action requested, the name and address of each applicant, and the name and address of any
person to whom any questions regarding the application should be directed. Electronic filing of
all applications for orders under the Investment Company Act is mandatory. Each application
subject to rule 0-2 is a one-time request and the rule itself does not impose any ongoing
obligations or burdens on the part of an applicant.
On October 7, 2020, the Commission adopted 17 CFR 270.12d1-4 (“rule 12d1-4”). 4
Rule 12d1-4 permits registered funds or business development companies to acquire shares of
other funds in excess of the limits of section 12(d)(1) of the Act subject to several conditions that
are designed to limit the acquiring funds’ control over the acquired funds, limit the potential for
duplicative or excessive fees, and limit the construction of complex structures that may confuse
investors. Many of these fund of funds arrangements are permitted under current Commission
exemptive orders. Therefore, rule 12d1-4 will alleviate some of the burdens associated with rule
4

See Fund of Funds Arrangements, Investment Company Act Release No. 34045 (Oct. 7, 2020)
(the “FOF Release”).

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0-2 because it will reduce the number of entities that require exemptive relief in order to operate
and permit fund of funds structures that satisfy certain conditions to operate without the expense
and delay of obtaining an exemptive order.
2.

Purpose and Use of the Information Collection

Respondents to the collection are applying for orders of the Commission exempting them
from one or more provisions of the Investment Company Act. The Commission uses the
information required by rule 0-2 to decide whether the applicant should be deemed to be entitled
to the action requested by the application.
3.

Consideration Given to Information Technology

All applications for orders under any section of the Investment Company Act must be
filed electronically on the Commission’s electronic filing system (Electronic Data Gathering,
Analysis and Retrieval System or “EDGAR”). EDGAR is designed to automate the filing,
processing and dissemination of all disclosure filings. The system permits publicly held
companies to transmit filings to the Commission electronically. This automation has increased
the speed, accuracy, and availability of information, generating benefits to investors and
financial markets.
4.

Duplication

The Commission periodically evaluates collection of information requirements for
duplication, and reevaluates them whenever it proposes a rule or form, or a change in either. The
reporting requirements of rule 0-2 are not duplicated elsewhere.
5.

Effect on Small Entities

The requirements of rule 0-2 apply equally to all applicants seeking orders of the
Commission exempting them from one or more provisions under the Act, regardless of size. The

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burden on smaller entities may be greater; however, allowing small entities to seek exemption
from Investment Company Act provisions contributes to lessening the burden on these entities
overall. As required by the Regulatory Flexibility Act, 5 the Commission reviews all rules
periodically to identify ways to minimize reporting and recordkeeping requirements that may
affect small businesses.
6.

Consequences of Not Conducting Collection

The requirements of rule 0-2 apply only to applications for orders from the Commission
for which a form is not specifically prescribed. Applicants file applications as they deem
necessary. Because the Commission has no control over the number of applications submitted, it
cannot generally require less frequent collection unless it does not require the collection with
respect to every application. Eliminating rule 0-2 requirements for certain or all applications
would make it difficult for the Commission to review requests for exemptive relief. The
Commission will, however, when it deems it necessary and appropriate, codify prior exemptive
relief granted to applicants into rules, thus eliminating the need for respondents to file exemptive
applications in those instances and relieving them of the requirements of rule 0-2. 6
7.

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

Not applicable.
8.

Consultation Outside the Agency

The Commission and the staff of the Division of Investment Management participate in
an ongoing dialogue with representatives of the investment company industry through public
5
6

5 U.S.C. 601.

For example, in 2006 the Commission adopted rules 12d1-1, 12d1-2, and 12d1-3 which codified
and expanded upon a number of exemptive orders issued that permit funds to invest in other funds. See
Fund of Funds Investments, Investment Company Act Release No. 27399 (June 20, 2006) [71 FR 36640
(June 27, 2006)].

5
conferences, meetings and informal exchanges. These various forums provide the Commission
and the staff with a means of ascertaining and acting upon paperwork burdens confronting the
industry. The Commission requested public comment on the collection of information
requirements of rule 0-2 before it submitted the request for extension and approval to the Office
of Management and Budget. The Commission received no comments in response to this request.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
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). A System of Records Notice for applications under the
Investment Company Act can be found at https://www.sec.gov/about/privacy/sorn/secsorn2.pdf.
12.

Burden of Information Collection

Applicants for orders under the Investment Company Act can include registered
investment companies, affiliated persons of registered investment companies, and issuers seeking
to avoid investment company status, among other entities. Applicants file applications as they
deem necessary. Commission staff previously estimated that it receives approximately 184
applications per year under the Investment Company Act. Although each application typically is
submitted on behalf of multiple entities, the entities in the vast majority of cases are related
companies and are treated as a single respondent for purposes of this analysis. Each application
subject to rule 0-2 is a one-time request and the rule itself does not impose any ongoing

6
obligations or burdens on the part of an applicant. The time to prepare an application depends on
the complexity and/or novelty of the issues covered by the application.
Rule 12d1-4 will alleviate some of the burdens associated with rule 0-2 because it will
reduce the number of entities that require exemptive relief in order to operate. Estimated
burdens were reduced between the proposal and adoption of rule 12d1-4 because of the
intervening adoption of rule 6c-11, which also reduced the number of entities that require
exemptive relief in order to operate. 7 Based on staff experience, we estimate that approximately
one-third (rounded to 30%) of the annual burdens, both internal and external, associated with
rule 0-2 are attributable to fund of funds applications.
TABLE 1: RULE 0-2 PRA ESTIMATES
Number of
Responses

Annual hours

Annual internal time cost

Annual external cost burden

2016 approved inventory

184

5,340

$2,029,200.60

$14,090,000

2018 FOF Proposing Release
estimate

122

3,551

$1,349,418

$9,369,850

Approved inventory after rule 6c-11

184

3,738

$1,420,440.42

$9,863,000

Revised estimate

- 0.3

- 0.3

- 0.3

- 0.3

129

2,617 hours

$994,308.29

$6,904,100

TABLE 2: CHANGE IN RULE 0-2 PRA ESTIMATES
Annual Number of Responses
Previously approved: 184
Requested:
129
Change:
-55 responses
Annual Time Burden (Hours)
Previously approved: 3,738 hours
Requested:
2,617 hours
Change:
-1,121 hours
Annual Cost Burden ($)
Previously approved: $9,863,000
Requested:
$6,904,100
Change:
-$2,958,900

7

In 2019, the Commission reduced the 2016 approved burdens by 30%. See Exchange-Traded
Funds, Investment Company Act Release No. 33646 (Sep. 25, 2019) [84 FR 57162 (Oct. 24, 2019)]
(“2019 ETF Adopting Release”), at nn.691-692 and accompanying text. We are reducing the estimates
from the 2019 ETF Adopting Release a further 30% as rule 12d1-4 will reduce a different type of
application than those addressed by rule 6c-11.

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The estimate of annual burden hours is made solely for the purposes of the Paperwork
Reduction Act, and is not derived from a comprehensive or representative survey or study of the
costs of Commission rules and forms
13.

Cost to Respondents

Much of the work of preparing an application is performed by outside counsel. The cost
outside counsel charges applicants depends on the complexity of the issues covered by the
application and the time required for preparation. The approved total estimated annual cost
burden to applicants of filing all applications is $9,863,000. As discussed above, based on staff
experience, we estimate that approximately one-third (rounded to 30%) of the annual burdens,
both internal and external, associated with rule 0-2 are attributable to fund of funds applications.
As shown in Table 1 above, we estimate that the total estimated annual cost burden will decrease
to $6,904,100.
The estimate of annual cost burden is made solely for the purposes of the Paperwork
Reduction Act, and is not derived from a comprehensive or even representative survey or study
of the costs of Commission rules and forms.
14.

Cost to the Federal Government

The annual cost of reviewing and processing all applications under the Investment
Company Act for orders from the Commission for exemptive relief amounted to approximately
$9.6 million in fiscal year 2018, based on the Commission’s computation of the value of staff
time devoted to this activity and related overhead.

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15.

Changes in Burden

The estimated hourly burden associated with rule 0-2 decreased from 3,738 hours to
2,617 hours (a decrease of 1,121 hours), and the estimated annual cost burden decreased from
$9,863,000 to $6,904,100 (a decrease of $2,958,000).8 These decreases are due to the adoption
of rule 12d1-4, which we believe decreases the hour and cost burdens associated with rule 0-2.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exceptions to Certification Statement for Paperwork Reduction Act

Submission
Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

8

See supra Table 2.


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