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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 limits on the capital structure of registered investment companies and
companies that have elected to be treated as business development companies (“BDCs”) under
the Investment Company Act (collectively, “funds”), including, in part, by restricting the ability
of funds to issue “senior securities.” Protecting investors against the potentially adverse effects
of a fund’s issuance of senior securities, and in particular the risks associated with excessive
leverage of investment companies, is a core purpose of the Investment Company Act. 2 “Senior
security” is defined, in part, as “any bond, debenture, note, or similar obligation or instrument
constituting a security and evidencing indebtedness.” 3
On October 28, 2020, the Commission adopted a package of new rules and rule
amendments addressing funds’ use of derivatives, including new rule 18f-4. 4 The new rule is
designed to address the investor protection purposes and concerns underlying section 18 of the
Investment Company Act and to provide an updated and more comprehensive approach to the
regulation of funds’ use of derivatives and the other transactions addressed in the rule. We
1
15 U.S.C. 80a-1 et seq.
2
See, e.g., sections 1(b)(7), 1(b)(8), 18(a), and 18(f) of the Investment Company Act; see also Provisions Of
The Proposed Bill Related To Capital Structure (Sections 18, 19(B), And 21(C)), Introduced by L.M.C
Smith, Associate Counsel, Investment Trust Study, Securities and Exchange Commission, Hearings on
S.3580 Before a Subcommittee of the Senate Committee on Banking and Currency, 76th Congress, 3rd
session (1940), at 1028 (“Senate Hearings”).
3
See section 18(g) of the Investment Company Act.
4
Investment Company Act Release No. IC-34078 (Oct. 28, 2020) (the “Adopting Release”).
1
discuss below the collection of information burdens associated with rule 18f-4. In the Proposing
Release, the Commission solicited comment on the collection of information requirements
associated with proposed rule 18f-4. 5
Rule 18f-4 permits 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. A fund that relies on rule 18f-4 to enter into derivatives transactions
generally will be required to: adopt a derivatives risk management program; have its board of
directors approve the fund’s designation of a derivatives risk manager and receive direct reports
from the derivatives risk manager about the derivatives risk management program; and comply
with a VaR-based test designed to limit a fund’s leverage risk consistent with the investor
protection purposes underlying section 18 of the Investment Company Act. Rule 18f-4 includes
an exception from the derivatives risk management program requirement and limit on fund
leverage risk if a fund limits its derivatives exposure to 10% of its net assets (the fund may
exclude from this calculation derivatives transactions that it uses to hedge certain currency and
interest rate risks). A fund relying on this exception will be required to adopt policies and
procedures that are reasonably designed to manage its derivatives risks.
Rule 18f-4 also includes an exception from the VaR-based limit on leverage risk for a
leveraged/inverse fund that cannot comply with rule 18f-4’s limit on fund leverage risk and that,
as of October 28, 2020, is: (1) in operation, (2) has outstanding shares issued in one or more
public offerings to investors, and (3) discloses in its prospectus that it has a leverage multiple or
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) [85 FR 4446 (Jan. 24, 2020)] (“Proposing Release”).
2
inverse multiple that exceeds 200% of the performance or the inverse of the performance of the
underlying index (for purposes of this Supporting Statement, such a fund is an “over-200%
leveraged/inverse fund”). A fund relying on this exception must disclose in its prospectus that it
is not subject to rule 18f-4’s limit on fund leverage risk.
Finally, rule 18f-4 includes provisions that will permit funds to enter into reverse
repurchase agreements (and similar financing transactions) and “unfunded commitments” to
make certain loans or investments, and to invest in securities on a when-issued or forwardsettling basis, or with a non-standard settlement cycle, subject to conditions tailored to these
transactions.
The respondents to rule 18f-4 will be registered open- and closed-end management
investment companies and BDCs. Compliance with rule 18f-4 will be mandatory for all funds
that seek to engage, in reliance on the rule, in derivatives transactions and certain other
transactions that the rule addresses, which would otherwise be subject to the restrictions of
section 18 of the Investment Company Act.
2.
Purpose and Use of the Information Collection
Certain of the provisions of the 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 rule
is intended to address the investor protection purposes and concerns underlying section 18 of the
Investment Company Act and to provide an updated and more comprehensive approach to the
regulation of funds’ use of derivatives and the other transactions addressed in the rule.
6
44 U.S.C. 3501 et seq.
3
The information collection requirements of rule 18f-4 are designed to ensure that funds
maintain the required written derivatives risk management programs that promote compliance
with the federal securities laws and protect investors, and otherwise comply with the
requirements of the final rule. The information collections also assist the Commission’s
examination staff in assessing the adequacy of funds’ derivatives risk management programs and
their compliance with the other requirements of the final rule, and identifying weaknesses in a
fund’s derivatives risk management if violations occur or are uncorrected.
3.
Consideration Given to Information Technology
Rule 18f-4 will require a fund that enters into derivatives transactions to maintain certain
records, including records related to a fund’s derivatives risk management program and board
oversight and reporting. 7 Rule 18f-4 will require funds to maintain the required records for a
period of five years. In particular, a fund must retain a copy of its written policies and procedures
under the rule that are currently in effect, or were in effect at any time within the past five years,
in an easily accessible place. In addition, a fund will have to maintain all other records and
materials that the rule would require the fund to keep for at least five years (the first two years in
an easily accessible place). The Electronic Signatures in Global and National Commerce Act 8
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
7
See rule 18f-4(c)(6); see also section II.J of Adopting Release.
8
P.L. 106-229, 114 Stat. 464 (June 30, 2000).
4
rule. Rule 18f-4 imposes a requirement that funds have in place written derivatives risk
management policies and procedures. The information required by rule 18f-4 is not generally
duplicated elsewhere.
5.
Effect on Small Entities
The information collection requirements of 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. 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 18f-4 requires funds that are not limited derivatives users to adopt and maintain a
written derivatives risk management program. Under the rule, a fund’s derivatives risk manager
designated to administer the derivatives risk management program must provide a written report
to the effectiveness of the derivatives risk management program to the board at least annually
and must provide regular written reports at a frequency determined by the board. In addition, if a
fund determines that it is not in compliance with the VaR-based limit on fund leverage risk
within five business days of the exceedance, the derivatives risk manager must provide a written
report to the board explaining how and by when (i.e., the number of business days) the
derivatives risk manager reasonably expects that the fund will come back into compliance, with
regular written updates to the board until the fund is back into compliance with the rule.
5
Rule 18f-4 also requires funds relying on the limited derivatives user exception to
manage the risks associated with its derivatives transactions by adopting and implementing
written policies and procedures that are reasonably designed to manage the fund’s derivatives
risks. The rule also requires that the adviser for any limited derivatives user that exceeds the 10%
derivatives exposure threshold and does not reduce its exposure within five business days, must
provide a written report to the fund’s board of directors informing them whether the adviser
intends to reduce the exposure promptly, but within no more than 30 days of the exceedance, or
put in place a derivatives risk management program and comply with the VaR-based limit on
fund leverage risk as soon as reasonably practicable.
Not collecting information or collecting such information less frequently would be
incompatible with the objectives of rule 18f-4. The adoption and maintenance of a written
derivatives risk management program and/or policies and procedures designed to manage the
risks of the fund’s derivatives transactions, along with the reporting of information to the fund’s
board and the maintenance of certain records, are integral parts to detecting and correcting any
gaps in a fund’s derivatives risk management 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 18f-4 will require funds to maintain required records for a period of five years (the
first two years in an easily accessible place). Although this five-year period exceeds the threeyear guideline for most kinds of records under 5 CFR 1320.5(d)(2), the staff believes that this is
warranted because the rule’s the requirement to keep records documenting the derivatives risk
management program, including records documenting periodic review of the program and
6
written reports provided to the board of directors relating to the program, will help our staff
evaluate a fund’s compliance with the derivatives risk management program requirements.
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 18f-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 18f-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 18f-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
information exchanges. These various forums provide the Commission and staff with a means of
ascertaining and acting upon the paperwork burdens confronting the industry.
9.
Payment or Gift
No payment or gift to respondents was provided.
10.
Assurance of Confidentiality
Information provided to the Commission in connection with staff examinations or
investigations would be kept confidential subject to the provisions of applicable law. If
7
information collected pursuant to 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 PII collected/Not applicable.
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. Compliance with rule
18f-4 is mandatory for funds that enter into derivatives transactions and the other transactions
that the rule addresses.
A. Derivatives Risk Management Program
Rule 18f-4 requires certain funds relying on the rule to adopt and implement a written
derivatives risk management program, which includes policies and procedures reasonably
designed to manage the fund’s derivatives risks and a periodic review requirement. 9 We estimate
that 2,766 funds will be subject to the program requirement. 10
Table 1 below summarizes the initial and ongoing annual burden estimates associated
with the derivatives risk management program requirement under rule 18f-4 as adopted. While
the Commission did not receive any comments specifically addressing the estimated PRA
9
See rule 18f-4(c)(1); see also section II.B of Adopting Release (discussing the derivatives risk management
program requirements).
10
A fund that is a limited derivatives user will not be required to comply with the program requirement.
Funds that are limited derivatives users will be required to adopt policies and procedures that are
reasonably designed to manage their derivatives risks. See rule 18f-4(c)(4); section IV.B.6 of Adopting
Release (discussing collections of information related to limited derivatives users).
8
burdens in the Proposing Release associated with the derivatives risk management program, it
did receive comments suggesting that the implementation of the program, including the
associated collections of information as defined in the PRA, may be more burdensome than the
Commission estimated at proposal. 11 As such, we have increased the annual burden estimates
associated with the derivatives risk management program, as shown in Table 1 below.
Table 1: Derivatives Risk Management Program PRA Estimates
Internal
initial
burden
hours
Internal
annual
burden
hours1
Annual external
cost burden
Wage rate2
Internal time
costs
PROPOSED ESTIMA TES
Written derivatives risk
management program
development
Periodic review and revisions
of the program
12 hours
4 hours
×
$357 (derivatives risk
manager)
$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
$0
$0
Total annual burden per fund
18 hours
$7,128
$0
Number of funds
× 2,693
× 2,693
× 2,693
Total annual burden
48,474
hours
$19,195,704
$0
FINA L ESTIMA TES
Written derivatives risk
management program
development
Periodic review and revisions
of the program
11
45 hours
15 hours
×
$360 (derivatives risk
manager)
$5,400
45 hours
15 hours
×
$470 (assistant general
counsel)
$7,050
45 hours
15 hours
×
$368 (compliance
attorney)
$5,520
0 hours
8 hours
×
$360 (derivatives risk
manager)
$2,880
0 hours
8 hours
×
$470 (assistant general
counsel)
$3,760
See section II.B of Adopting Release.
9
$4,8903
$2,9344
0 hours
8 hours
$368 (compliance
attorney)
×
$2,944
Total annual burden per fund
69 hours
$27,554
$7,824
Number of funds
× 2,766
× 2,766
× 1,3835
Total annual burden
190,854
$76,214,364
$10,820,592
Notes:
1. For “Written Derivatives Risk Management Program
Development,” these estimates include initial burden estimates
annualized over a three-year period.
2. See footnote 1009 of Adopting Release.
3. This estimated burden is based on the estimated wage rate of
$489/hour, for 10 hours, for outside legal services. See footnote
1009 of Adopting Release (regarding wage rates with respect to
external cost estimates).
4. This estimated burden is based on the estimated wage rate of
$489/hour, for 6 hours, for outside legal services. See footnote
1009 of Adopting Release (regarding wage rates with respect to
external cost estimates).
5. We estimate that 50% of funds will use outside legal services
for these collections of information. This estimate takes into
account that funds may elect to use outside legal services (along
with in-house counsel) in connection with these requirements of
rule 18f-4, based on factors such as fund budget and the fund’s
standard practices for using outside legal services, as well as
personnel availability and expertise.
10
OMB CONTROL NUMBER: 3235-0776
B. Board Oversight and Reporting
Rule 18f-4 requires: (1) a fund’s board of directors to approve the designation of the
fund’s derivatives risk manager, (2) the derivatives risk manager to provide certain written
reports to the board. 12 We estimate that 2,766 funds will be subject to these requirements.
Table 2 below summarizes the initial and ongoing annual burden estimates associated
with the board oversight and reporting requirements under rule 18f-4. While the Commission did
not receive any comments specifically addressing the estimated PRA burdens in the Proposing
Release associated with the board oversight and reporting requirements, it did receive comments
suggesting that requiring the fund’s board of directors to approve the designation of the fund’s
derivatives risk manager would place increased burdens on the fund’s board of directors. 13
Accordingly, we have adjusted the proposal’s estimated annual burden hours and total time costs
to account for the potential for increased time burdens on the board of directors and to reflect the
Commission’s updated views on typical time burdens associated with similar board reporting
requirements in other Commission regulations.
12
See rule 18f-4(c)(3)(i)-(iii). Burdens associated with reports to the fund’s board of directors of material
risks arising from the fund’s derivatives transactions, as described in rule 18f-4(c)(1)(v), are discussed in
section IV.B.1 of Adopting Release.
13
See footnote 1016 of Adopting Release.
11
Table 2: Board Oversight and Reporting PRA Estimates
Internal initial
burden hours
Internal annual
burden hours1
Wage rate2
Internal time costs
Annual external
cost burden
PROPOSED ESTIMA TES
Approving the designation of the
derivatives risk manager
3 hours
Derivatives risk manager written
reports3
1 hour
×
$17,860 (combined rate for 4
directors)
$17,860
8 hours
×
$357 (derivatives risk
manager)
$2,856
1 hour
×
$17,860 (combined rate for 4
directors)
$17,860
Total annual burden per fund
10 hours
$38,5763
Number of funds
× 2,693
× 2,693
Total annual burden
26,930 hours
$103,885,168
FINA L ESTIMA TES
Approving the designation of the
derivatives risk manager
Derivatives risk manager written
reports
3 hours
2 hours
×
$4,770 (combined rate for 9
directors)4
$9,540
$1,4675
12 hours
18 hours
×
$360 (derivatives risk
manager)
$6,480
$1,9566
1.5 hours
2 hours
×
$4,770 (combined rate for 9
directors)4
$9,540
6 hours
×
$368 (compliance attorney)
6 hours
$2,208
Total annual burden per fund
28 hours
$27,768
$3,423
Number of funds
× 2,766
× 2,766
1,3837
Total annual burden
77,448 hours
$76,806,288
4,734,009
Notes:
1. This estimate includes initial burden estimates annualized over a three-year
period, plus any estimated ongoing annual burden hours.
2. See footnote 1011 of Adopting Release (regarding wage rates).
3. This reflects an increase to the estimate that appeared in the Proposing Release,
to account for a correction to the total internal time costs calculation as it appeared
in the Proposing Release.
4. This reflects a reduction of the proposed estimate, to account for: (1) inadvertent
quadrupling of the estimated rate in the proposal; and (2) updated assumptions
about the number of directors sitting on a fund’s board.
5. This estimated burden is based on the estimated wage rate of $489/hour, for 3
hours, for outside legal services. See footnote 1009 of Adopting Release (regarding
wage rates with respect to external cost estimates).
6. This estimated burden is based on the estimated wage rate of $489/hour, for 4
hours, for outside legal services. See footnote 1009 of Adopting Release (regarding
wage rates with respect to external cost estimates).
7. We estimate that 50% of funds will use outside legal services to assist with these
collections of information. This estimate takes into account that funds may elect to
use outside legal services (along with in-house counsel) in connection with these
requirements of rule 18f-4, based on factors such as fund budget and the fund’s
standard practices for using outside legal services, as well as personnel availability
and expertise.
12
C. VaR Remediation
Rule 18f-4 requires that if a fund is not in compliance within five business days,
following an exceedance of the VaR-based fund leverage limit, the derivatives risk manager
must provide certain written reports to the fund’s board. 14 In contrast, the proposed rule would
have required the derivatives risk manager to notify the fund’s board (and would not have
specifically required a written report for such notification) following the fund being out of
compliance with the VaR-based fund leverage limit for three business days. 15
Table 3 below summarizes the initial and ongoing annual burden estimates associated
with the VaR-related remediation reports required under rule 18f-4. For purposes of the PRA
analysis, we do not estimate that there will be any initial or ongoing external costs associated
with the VaR-related remediation requirements.
14
See rule 18f-4(c)(2)(ii)(A)-(C).
15
See section II.D.6.b of Adopting Release.
13
Table 3: VaR Remediation PRA Estimates
Internal initial
burden hours
Internal annual
burden hours
Wage rate1
Internal time costs
FINA L ESTIMA TES
0.1 hours2
×
$360 (derivatives risk
manager)
$36.00
0.1 hours2
×
$332 (senior portfolio
manager)
$33.20
$368 (compliance attorney)
$36.80
$4,770 (combined rate for 9
directors)
$95.40
VaR-related remediation reports
0.1 hours2
0.02 hours3
×
Total annual burden per fund
0.32 hours
$201.40
Number of funds
× 2,696
× 2,696
Total annual burden
863 hours
$542,974
Notes:
1. See footnote 1009 of Adopting Release (regarding wage rates).
2. This estimate is based on the assumption that, of the 2,696 funds that will be
required to comply with either of the VaR tests, on average 27 funds (or 1%), breach
the relative or absolute VaR test annually. Each of the derivatives risk manager, a
senior portfolio manager, and a compliance attorney will spend 10 hours preparing
and reviewing related remediation reports. However, because we estimate that only
1% of funds will breach the relative or absolute VaR test annually, the hours burden
is being decreased by 99%. 10 hours x 1%= 0.1 hours.
3. This estimate is based on the assumption that, of the 2,696 funds that will be
required to comply with either of the VaR tests, on average 27 funds (or 1%), breach
the relative or absolute VaR test annually. The board will spend 2 hours reviewing
related remediation reports. However, because we estimate that only 1% of funds
will breach the relative or absolute VaR test annually, the hours burden is being
decreased by 99%. 2 hours x 1%= 0.02 hours.
14
D. Disclosure Requirement for Certain Leveraged/Inverse Funds
Under the final rule, an over-200% leveraged/inverse fund currently in operation will not
have to comply with the VaR-based leverage risk limit. Such a fund is required to disclose in its
prospectus that it is not subject to rule 18f-4’s limit on fund leverage risk. 16 This requirement
represents a change from the proposal, in which we proposed to require that all leveraged/inverse
funds (i.e., not only over-200% leveraged/inverse funds) disclose that they are not subject to the
rule’s VaR-based leverage risk limit. As such, whereas in the proposal the Commission
estimated that 269 leveraged/inverse funds would be subject to this prospectus disclosure
requirement, we now estimate that 70 over-200% leveraged/inverse funds will be subject to this
requirement. 17
Table 4 below summarizes the initial and ongoing annual burden estimates associated
with the rule’s disclosure requirement for over-200% leveraged/inverse funds. We do not
estimate that there will be any initial or ongoing external costs associated with this disclosure
requirement. The Commission did not receive any comments relating to the estimated PRA
burdens set forth in the Proposing Release associated with the prospectus disclosure requirement
for leveraged/inverse funds. 18 As shown in Table 4 below, we are making a modest increase to
the estimated per-fund burden associated with the prospectus disclosure requirement for over200% leveraged/inverse funds to reflect updated views on the burdens related to similar
16
See rule 18f-4(c)(5)(iii).
17
See paragraph accompanying footnote 819 of Adopting Release (estimating 70 leveraged/inverse ETFs
(and 0 leveraged/inverse mutual funds) that currently seek to provide leveraged or inverse market exposure
exceeding 200% of the return or inverse return of the relevant index).
18
See footnote 612 of Adopting Release and accompanying text (discussing comment received on proposed
prospectus disclosure requirement generally).
15
prospectus disclosure requirements.
Table 4: Disclosure Requirement Associated with Certain Leveraged/Inverse Funds PRA
Estimates
Internal initial
burden hours
Internal annual
burden hours
Wage rate1
Internal time costs
PROPOSED ESTIMA TES
Leveraged/inverse fund prospectus
disclosure
0 hours
.25 hours
×
$309 (compliance manager)
$77
0 hours
.25 hours
×
$365 (compliance attorney)
$91
Total annual burden per fund
.5 hour2
$168
Number of funds
× 269
× 269
135 hours
$45,192
Total annual burden
FINA L ESTIMA TES
Leveraged/inverse fund prospectus
disclosure
1.5 hours
0.5 hours3
×
$312 (compliance manager)
$156
1.5 hours
hours3
×
$368 (compliance attorney)
$184
0.5
Total annual burden per fund
1 hour
$340
Number of funds
× 70
× 70
Total annual burden
70 hours
$23,800
Notes:
1. See footnote 1009 of Adopting Release (regarding wage rates).
2. This reflects a reduction of the annual burden hours estimate that appeared in
the Proposing Release, to account for inadvertent doubling of the estimated burden
hours in the Proposing Release.
3. This estimate includes initial burden estimates annualized over a three-year
period.
16
E. Disclosure Changes for Money Market Funds
In a change from the proposal, the final rule includes a provision that will permit money
market funds to invest in securities on a when-issued or forward-settling basis, or with a nonstandard settlement cycle (“delayed-settlement securities provision”). As in the proposal, money
market funds are excluded from the full scope of the final rule because they do not typically
enter into derivatives transactions, as defined in the rule. 19 To the extent a money market fund
currently discloses in its prospectus that it may enter into transactions covered by the final rule
other than transactions covered by the delayed-settlement securities provision, money market
funds will be subject to the burdens associated with making disclosure changes to their
prospectuses. We estimate that 420 funds could be subject to such disclosure changes. 20
Table 5 below summarizes the initial and ongoing annual burden estimates associated
with disclosure changes that money market funds could make because of rule 18f-4. For
purposes of this PRA analysis, we do not estimate that there will be any initial or ongoing
external costs associated with this disclosure change requirement. The Commission did not
receive any comments relating to the estimated PRA burdens set forth in the Proposing Release
associated with potential disclosure changes for money market funds. However, we have
adjusted the proposal’s estimated annual burden hours and total time costs to reflect the
Commission’s updated views on typical time burdens associated with similar disclosure
requirements in other Commission regulations.
19
See rule 18f-4(a) (defining the term “Fund” to “…not include a registered open-end company that is
regulated as a money market fund”).
20
See footnote 804 of Adopting Release and accompanying text. 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.
17
Table 5: Disclosure Changes for Money Market Funds PRA Estimates
Internal initial
burden hours
Internal annual
burden hours1
Wage rate2
Internal time costs
PROPOSED ESTIMA TES
Money market prospectus disclosure
changes
.75 hours
.25 hours
×
$309 (compliance manager)
$77
.75 hours
.25 hours
×
$365 (compliance attorney)
$91
Total annual burden per fund
.5 hours
$168
Number of funds
× 413
× 413
Total annual burden
207 hours
$69,384
FINA L ESTIMA TES
Money market prospectus disclosure
changes
3 hours
1 hour
×
$312 (compliance manager)
$312
3 hours
1 hour
×
$368 (compliance attorney)
$368
Total annual burden per fund
2 hours
$680
Number of funds
× 420
× 420
Total annual burden
840 hours
$285,600
Notes:
1. These estimates include initial burden estimates annualized over a three-year
period.
2. See footnote 1009 of Adopting Release (regarding wage rates).
18
F. Requirements for Limited Derivatives Users
Rule 18f-4 will 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. 21 In addition to the initial burden to document the policies and procedures, we
estimate that limited derivatives users will have an ongoing burden associated with any review
and revisions to their policies and procedures to ensure that they are “reasonably designed” to
manage the fund’s derivatives risks. Rule 18f-4 also requires that the adviser for any limited
derivatives user that exceeds the 10% derivatives exposure threshold and does not reduce its
exposure within five business days, must provide a written report to the fund’s board of directors
informing them whether the adviser intends to reduce the exposure promptly, but within no more
than 30 days of the exceedance, or put in place a derivatives risk management program and
comply with the VaR-based limit on fund leverage risk as soon as reasonably practicable. 22 We
estimate that 2,437 funds will be subject to these limited derivatives users requirements. 23
Table 6 below summarizes the initial and ongoing annual burden estimates associated
with the requirements for limited derivatives users under rule 18f-4. The Commission did not
receive comments relating to the estimated hour and costs burdens associated with the
preparation and maintenance of a limited derivatives user’s policies and procedures. However,
we have increased the proposal’s estimated burden hours and internal and external total time
costs to account for the potential that funds may implement additional policies and procedures
related to the changes we have incorporated into the final rule to address exceedances of the 10%
21
See rule 18f-4(c)(4); section II.E.3 of Adopting Release (discussing the policies and procedures
requirement for limited derivatives users).
22
See rule 18f-4(c)(4)(ii).
23
See paragraph following footnote 892 of Adopting Release.
19
derivatives exposure threshold. This increase also reflects the Commission’s updated views on
typical time burdens and costs associated with the development of fund risk management
policies and procedures.
Some commenters did state that many funds already have policies and procedures in
place to manage certain risks associated with their derivatives transactions. 24 We do not have
data to determine how many funds currently have written policies and procedures in place that
will satisfy the rule’s requirement. However, for purposes of our estimated hour and costs
burden, we assume that all limited derivatives users will incur a cost associated with this
requirement. Accordingly, our estimate may be over-inclusive, to the extent that it counts funds
that already have in place policies and procedures reasonably designed to manage the fund’s
derivatives risks. Our estimate also may be under-inclusive, to the extent that it does not count
funds that do not currently use derivatives, but that might want to implement policies and
procedures reasonably designed to manage derivatives risks in order to have future flexibility to
engage in derivatives transactions under the final’s rule’s limited derivatives user provision.
24
See footnote 1027 of Adopting Release.
20
Table 6: Requirements for Limited Derivatives Users PRA Estimates
Internal initial
burden hours
Internal annual
burden hours1
Wage rate2
Internal time costs
Annual external costs
burdens
PROPOSED ESTIMA TES
Written policies and procedures
Review of policies and procedures
3 hours
1 hour
×
$329 (senior portfolio
manager)
$329
3 hours
1 hour
×
$365 (compliance attorney)
$365
$82.25
$91.25
0 hours
.25 hours
$329 (senior portfolio
manager)
0 hours
.25 hours
$365 (compliance attorney)
$0
$0
Total annual burden per fund
2.5 hours
$867.50
Number of funds
× 2,398
× 2,398
Total annual burden
5,995 hours
$2,080,265
$0
FINA L ESTIMA TES
Written policies and procedures
Review of policies and procedures
18 hours
6 hours
×
$332 (senior portfolio
manager)
$1,992
18 hours
6 hours
×
$368 (compliance attorney)
$2,208
0 hours
3 hours
$332 (senior portfolio
manager)
$996
0 hours
3 hours
$368 (compliance attorney)
$1,104
$332 (senior portfolio
manager)
$33.20
$368 (compliance attorney)
$36.80
$4,770 (combined rate for 9
directors)
$95.40
0.1 hours3
Limited derivatives user-related
remediation reports
×
0.1 hours3
0.02 hours4
×
$1,9565
$9786
$0
Total annual burden per fund
18.22 hours
$6,465.40
$2,934
Number of funds
× 2,437
× 2,437
× 1,2197
Total annual burden
44,402 hours
$15,756,180
$3,576,546
Notes:
1. For “Written Policies and Procedures,” these estimates include initial burden estimates annualized over a three-year period.
2. See footnote 1009 of Adopting Release (regarding wage rates).
3. This estimate is based on the assumption that, of the 2,437 funds that will be limited derivatives users, on average 25 funds (or 1%), will be subject to the board
reporting requirement in the exception’s remediation provision annually. Each of the senior portfolio manager and compliance attorney will spend 10 hours preparing
and reviewing the related remediation reports. However, because we estimate that only 1% of funds will be subject to the board reporting requirement in the
exception’s remediation provision annually, the hours burden is being decreased by 99%. 10 hours x 1%= 0.1 hours.
4. This estimate is based on the assumption that, of the 2,437 funds that will be limited derivatives users, on average 25 funds (or 1%), will be subject to the board
reporting requirement in the exception’s remediation provision annually. The board will spend 2 hours reviewing related remediation reports. However, because we
estimate that only 1% of funds will be subject to the board reporting requirement in the exception’s remediation provision annually, the hours burden is being
decreased by 99%. 2 hours x 1%= 0.02 hours.
5. This estimated burden is based on the estimated wage rate of $489/hour, for 4 hours, for outside legal services. See footnote 1009 of Adopting Release
(regarding wage rates).
6. This estimated burden is based on the estimated wage rate of $489/hour, for 2 hours, for outside legal services. See footnote 1009 of Adopting Release
(regarding wage rates).
7. We estimate that 50% of funds will use outside legal services for these collections of information. This estimate takes into account that funds may elect to use
outside legal services (along with in-house counsel) in connection with these requirements of rule 18f-4, based on factors such as fund budget and the fund’s
standard practices for using outside legal services, as well as personnel availability and expertise.
21
Draft – November 16, 2020
G. Recordkeeping Requirements
Rule 18f-4 will require a fund that enters into derivatives transactions to maintain
certain records. As proposed, if the fund is not a limited derivatives user, the fund will be
required to maintain records related to the fund’s derivatives risk management program
and the VaR-based limit on fund leverage risk, including records related to board
oversight and reporting (including records of the written reporting that the rule requires to
occur between the derivatives risk manager and the fund’s board when the fund is out of
compliance with the applicable VaR test). 25 As a modification to the proposal the final
rule includes further obligations for a fund that is out of compliance with its applicable
VaR test to provide written reports to the board. These additional reports will be covered
by the final recordkeeping requirements.
If the fund is a limited derivatives user, the fund will be required to maintain a
written record of its policies and procedures that are reasonably designed to manage
derivatives risks. 26 As a conforming change in the final rule, a limited derivatives user
will also be required to maintain records of written reports provided to the board upon
any exceedance by the fund of the 10% derivatives exposure threshold, in accordance
with the rule. 27
Further, in light of the final rule providing two separate treatment options for a
fund that enters into a reverse repurchase agreement or similar financing transaction, we
have conformed the recordkeeping provision to require that a fund that enters into reverse
25
See rule 18f-4(c)(6)(i)(A) through (C).
26
See rule 18f-4(c)(6)(i)(D).
27
Id.
22
repurchase agreements or similar financing transactions to maintain a written record
documenting whether it is complying with the asset coverage requirements of section 18
with respect to these transactions, or alternatively whether it is treating these transactions
as derivatives transactions for all purposes under rule 18f-4. 28
Finally, a fund engaging in unfunded commitment agreements will be required to
maintain records documenting the sufficiency of its cash and cash equivalents to meet its
obligations with respect to each unfunded commitment agreement. 29
We estimate that 5,203 funds will be subject to recordkeeping requirements under
the final rule (although not all funds will be subject to all of the rule’s recordkeeping
requirements). 30 Below we estimate the average initial and ongoing annual burdens
associated with the recordkeeping requirements. This average takes into account that
28
See rule 18f-4(d)(2).
29
See rule 18f-4(e)(2).
30
We estimate that the number of funds that will be subject to the recordkeeping requirements
includes the number of funds that we estimate will be required to comply with the derivatives risk
management program requirement (2,766 funds, which number encompasses the 2,696 funds that
we estimate will be subject to the VaR test requirements) and the number of funds that we
estimate will qualify as limited derivatives users (2,437 funds). See footnote 1010 and sections
III.C.1-III.C.3 of Adopting Release. 2,766 funds + 2,437 funds = 5,203 funds.
Based on staff review of filings on Forms N-PORT and N-CEN for 2019, we estimate that 181
funds, or 1% of all funds subject to the final rule, will enter into reverse repurchase agreements or
similar financing transactions (excluding BDCs, which we do not believe enter into such
transactions to a significant degree) and will be subject to the recordkeeping requirements in the
final rule. We further estimate that approximately 8.5% of open-end funds, 30% of registered
closed-end funds, and 100% of BDCs, or 1,339 funds (10% of all funds subject to the rule) will
enter into unfunded commitments and will incur be subject to the recordkeeping requirements in
the final rule. To prevent over-counting, we are not adding these numbers of funds that engage in
reverse repurchase agreements and unfunded commitment agreements to the sum of 5,203 funds
discussed above, because we assume that these funds generally either would have to comply with
the derivatives risk management program requirement or would qualify as limited derivatives
users.
23
some funds such as limited derivatives users may have less extensive recordkeeping
burdens than other funds that use derivatives, or the other transactions that final rule 18f4 addresses, more substantially.
Table 7 below summarizes the proposed PRA estimates associated with the
recordkeeping requirements in rule 18f-4. The Commission did not receive any
comments related to the estimated PRA burdens set forth in the Proposing Release
associated with the rule’s recordkeeping requirements. However, we have adjusted the
proposal’s estimated annual burden hours and total time costs, on account of the
conforming modifications to the proposed recordkeeping requirements that we are
adopting, as well as to reflect the Commission’s updated views on typical time burdens
and personnel associated with similar recordkeeping requirements in other Commission
regulations.
24
Table 7: Recordkeeping PRA Estimates
Internal
initial
burden
hours
Internal
annual burden
hours1
Establishing recordkeeping
policies and procedures
1.5 hours
.5 hours
$62 (general clerk)
$31
1.5 hours
.5 hours
$95 (senior computer operator)
$47.50
Recordkeeping
0 hours
2 hours
×
$62 (general clerk)
$124
0 hours
2 hours
×
$95 (senior computer operator)
$190
Wage rate2
Internal time
costs
Initial external
cost burden
Annual
external cost
burden
$1,800
$600
$0
$0
PROPOSED ESTIMA TES
Total annual burden per
fund
5 hours
$392.50
$600
Number of funds
× 5,091
× 5,091
5,091
Total annual burden
25,455 hours
$1,998,2183
$3,054,600
FINA L ESTIMA TES
Establishing recordkeeping
policies and procedures for
derivatives risk
management program and
VaR requirements
Recordkeeping for
derivatives risk
management program and
VaR requirements
9 hours
3 hours
$63 (general clerk)
$189
9 hours
3 hours
$96 (senior computer operator)
$288
9 hours
3 hours
$368 (compliance attorney)
$1,104
0 hours
16 hours
×
$63 (general clerk)
$1,008
0 hours
16 hours
×
$96 (senior computer operator)
$1,536
0 hours
16 hours
$368 (compliance attorney)
$5,888
$1,8005
$0
$600
$0
Total annual burden per
fund
57 hours
$10,013
$600
Number of funds
× 2,7664
× 2,7664
2,766
Total annual burden
157,662 hours
$27,695,958
$1,659,600
Establishing recordkeeping
policies and procedures for
limited derivatives users
Recordkeeping for limited
derivatives users
1.5 hours
.5 hours
$63 (general clerk)
$31.50
1.5 hours
.5 hours
$96 (senior computer operator)
$48
1.5 hours
.5 hours
$368 (compliance attorney)
$184
0 hours
2 hours
×
$63 (general clerk)
$126
0 hours
2 hours
×
$96 (senior computer operator)
$192
0 hours
2 hours
$368 (compliance attorney)
$736
$1,800
$600
$0
$0
Total annual burden per
fund
7.5 hours
$1,317.50
$600
Number of funds
× 2,437
× 2,437
x2,437
Total annual burden
18,278 hours
$3,210,748
$1,462,200
25
Establishing recordkeeping
policies and procedures for
funds engaging in unfunded
commitment agreements
1.5 hours
.5 hours
$63 (general clerk)
$31.50
1.5 hours
.5 hours
$96 (senior computer operator)
$48
1.5 hours
.5 hours
$368 (compliance attorney)
$184
$0
$0
Recordkeeping for unfunded
commitment agreements
0 hours
0 hours
0 hours
2 hours
$63 (general clerk)
$126
2 hours
$96 (senior computer operator)
$192
2 hours
$368 (compliance attorney)
$736
Total annual burden per
fund
7.5 hour
$1,317.50
Number of funds
× 1,339
× 1,339
Total annual burden
10,043 hours
$1,764,133
Establishing recordkeeping
policies and procedures for
funds engaging in reverse
repurchase agreements
1.5 hours
.5 hours
$63 (general clerk)
$31.50
1.5 hours
.5 hours
$96 (senior computer operator)
$48
$0
$0
$0
1.5 hours
.5 hours
$368 (compliance attorney)
$184
0 hours
1 hour
$63 (general clerk)
$63
0 hours
1 hour
$96 (senior computer operator)
$96
0 hours
1 hour
$368 (compliance attorney)
$368
$0
Recordkeeping for reverse
repurchase agreements
Total annual burden per
fund
4.5 hour
$790.50
Number of funds
× 181
×181
Total annual burden
815 hours
$143,081
$0
Total annual burden for all
record keeping
requirements
186,798 hours
$32,813,920
$3,121,800
Number of funds
5,203
5,203
5,203
Average annual burden per
fund
35.90 hours
$6,307
$600
Notes:
1. These estimates include initial burden estimates annualized over a three-year period.
2. See footnote 1009 of Adopting Release (regarding wage rates).
3. This reflects an increase to the estimate that appeared in the Proposing Release, to account
for inadvertent halving of the internal time costs for the recordkeeping burdens in the
Proposing Release.
4. Note that this estimate may be over-inclusive because not all funds included in this
calculation will be subject to a derivatives risk management program and compliance with the
rule’s VaR requirements. For instance, certain leveraged/inverse funds will not be subject to
compliance with the rule’s VaR requirements.
26
$0
5. See footnote 1009 of Adopting Release (regarding wage rates). Estimates of external costs
for recordkeeping burdens reflect costs that funds may pay to third parties to assist in fulfilling
funds’ recordkeeping duties.
27
H. Rule 18f-4 Total Estimated Burden
As summarized in Table 8 below, we estimate that the total hour burdens and time
costs associated with rule 18f-4, amortized over three years, will result in an average
aggregate annual burden of 501,275 hours and an average aggregate annual monetized
time cost of $202,443,126. We also estimate that, amortized over three years, there will
be external costs of $22,252,947 associated with this collection of information.
Therefore, each fund that relies on the rule will incur an average annual burden of
approximately 96.34 hours, at an average annual monetized time cost of approximately
$38,909, and an external cost of $4,277 to comply with rule 18f-4. 31
31
These per-fund burden estimates likely overestimate the total burden of rule 18f-4 because not all
funds (e.g., limited derivatives users) would incur the various burdens set forth in the table.
28
Table 8: Rule 18f-4 Total PRA Estimates
Internal
hour burden
Internal
burden time cost
External
cost burden
Proposed Estimates
Derivatives risk management program
48,474 hours
$19,195,704
$0
Board oversight and reporting
26,930 hours
$103,885,1681
$0
Disclosure requirement associated
with limit on fund leverage risk
2,424 hours
$816,888
$0
Disclosure requirement associated
with alternative requirements for
certain leveraged/inverse funds
135 hours2
$45,192
$0
Disclosure changes for money market
funds
207 hours
$69,384
$0
Policies and procedures for limited
derivatives users
5,995 hours
$2,080,265
$0
Recordkeeping requirements
25,455 hours
$1,998,2183
$3,054,600
Total annual burden
109,620
$128,090,819
$3,054,600
Number of funds
÷ 5,091
÷ 5,091
÷ 5,091
21.53 hours
$25,160
$600
Average annual burden per fund
Final Estimates
Derivatives risk management program
190,854 hours
$76,214,364
$10,820,592
Board oversight and reporting
77,448 hours
$76,806,288
$4,734,009
VaR remediation
863 hours
$542,974
$0
Disclosure requirement associated
with alternative requirements for
certain leveraged/inverse funds
70 hours
$23,800
$0
Disclosure changes for money market
funds
840 hours
$285,600
$0
Requirements for limited derivatives
users
44,402 hours
$15,756,180
$3,576,546
Recordkeeping requirements
186,798 hours
$32,813,920
$3,121,800
Total annual burden
501,275
$202,443,126
$22,252,947
Number of funds
÷ 5,203
÷ 5,203
÷ 5,203
Average annual burden per fund
96.34 hours
$38,909
$4,277
Notes
1 This reflects an increase to the estimate that appeared in the Proposing Release ($31,739,698), to account for a
correction to the total internal time costs calculation as it appeared in the Proposing Release.
2. This reflects a reduction of the annual burden hours estimate that appeared in the Proposing Release (269 hours),
to account for inadvertent doubling of the estimated burden hours in the Proposing Release.
3. This reflects an increase to the estimate that appeared in the Proposing Release ($799,287), to account for
inadvertent halving of the internal time costs for the recordkeeping burdens in the Proposing Release.
29
13.
Cost to Respondents
The staff estimates that rule 18f-4 does not impose any material cost burdens on
funds, apart from the cost of the burden hours discussed above. Although rule 18f-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 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
Not applicable. 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
30
The collection of information will not employ statistical methods.
31
| File Type | application/pdf |
| Author | Nixon, Naseem |
| File Modified | 2021-01-26 |
| File Created | 2021-01-26 |