Rule 22c-2 Supporting Statement

OMB CONTROL NUMBER: 3235-0620

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 22c-2
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 22c-2 (17 CFR 270.22c-2) under the Investment Company Act of 1940 (15 U.S.C.
80a) (the “Investment Company Act” or “Act”) requires the board of directors (including a
majority of independent directors) of most registered open-end management investment
companies (“funds”) to either approve a redemption fee of up to two percent or determine that
imposition of a redemption fee is not necessary or appropriate for the fund. Rule 22c-2 also
requires a fund to enter into written agreements with their financial intermediaries (such as
broker-dealers and retirement plan administrators) under which the fund, upon request, can
obtain certain shareholder identity and trading information from the intermediaries. The written
agreement must also allow the fund to direct the intermediary to prohibit further purchases or
exchanges by specific shareholders that the fund has identified as being engaged in transactions
that violate the fund’s market timing policies. These requirements enable funds to obtain the
information that they need to monitor the frequency of short-term trading in omnibus accounts
and enforce their market timing policies.
The rule includes three “collections of information” within the meaning of the Paperwork
Reduction Act of 1995 (“PRA”). 1 First, the rule requires boards to either approve a redemption

1

44 U.S.C. 3501-3520.

2
fee of up to two percent or determine that imposition of a redemption fee is not necessary or
appropriate for the fund. Second, funds must enter into information sharing agreements with all
of their “financial intermediaries” 2 and maintain a copy of the written information sharing
agreement with each intermediary in an easily accessible place for six years. Third, pursuant to
the information sharing agreements, funds must have systems that enable them to request
frequent trading information upon demand from their intermediaries, and to enforce any
restrictions on trading required by funds under the rule.
2.

Purpose and Use of the Information Collection

The collections of information created by rule 22c-2 are necessary for funds to effectively
assess redemption fees, enforce their policies in frequent trading, and monitor short-term trading,
including market timing, in omnibus accounts. These collections of information are mandatory
for funds that redeem shares within seven days of purchase. The collections of information also
are necessary to allow Commission staff to fulfill its examination and oversight responsibilities.
3.

Consideration Given to Information Technology

Rule 22c-2 does not require the reporting of any information or the filing of any
documents with the Commission. The Electronic Signatures in Global and National Commerce

2

The rule defines a financial intermediary as: (i) Any broker, dealer, bank, or other person that
holds securities issued by the fund in nominee name; (ii) a unit investment trust or fund that
invests in the fund in reliance on section 12(d)(i)(E) of the Act; and (iii) in the case of a
participant directed employee benefit plan that owns the securities issued by the fund, a
retirement plan’s administrator under section 316(A) of the Employee Retirement Security Act of
1974 (29 U.S.C. 1002(16)(A) or any person that maintains the plans’ participant records.
Financial Intermediary does not include any person that the fund treats as an individual investor
with respect to the fund’s policies established for the purpose of eliminating or reducing any
dilution of the value of the outstanding securities issued by the fund. Rule 22c-2(c)(1).

3
Act 3 and the conforming amendments to rules under the Investment Company Act of 1940 and
the Securities Exchange Act of 1934 permit funds and their financial intermediaries to maintain
records electronically.
4.

Duplication

The Commission is not aware of any duplicate reporting or recordkeeping requirements
concerning rule 22c-2.
5.

Effect on Small Entities

As discussed above, rule 22c-2 provides funds and their boards with the ability to impose
a redemption fee designed to reimburse the fund for the direct and indirect costs incurred as a
result of short-term trading strategies, such as market timing. The rule was designed to reduce
the cost burdens of small entities. Rule 22c-2 requires some funds to develop or upgrade
software or other technological systems to enforce certain market timing policies, or make
trading information available in omnibus accounts.
6.

Consequences of Not Conducting Collection

The rule’s requirement that funds enter into agreements with their financial
intermediaries is a single event that will provide the fund with the option to receive certain
identity and transaction information with which the fund can monitor implementation of its
redemption fee program and direct the intermediary to enforce the fund’s market timing policies
in certain circumstances. The rule’s requirement that the board of directors determine whether a
redemption fee is necessary or appropriate for the fund is also a single event designed to ensure

3

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

4
that consideration is given to the interests of long-term investors. Further information collection
(i.e., requests for shareholder identification and trading information) is solely at the discretion of
the fund, and therefore is targeted to the individual needs of funds to protect shareholders.
7.

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

Rule 22c-2 requires funds to retain certain written records for more than three years. The
fund must maintain and preserve a written copy of any information sharing agreements then in
effect, or that has been in effect at any time in the previous six years, in an easily accessible
place. The long-term retention of these records is necessary for the Commission's inspections
program to determine compliance with rule 22c-2.
8.

Consultation Outside the Agency

In its releases proposing and adopting rule 22c-2 and its amendments, the Commission
requested public comment on the rule’s collection of information requirements and whether the
estimates contained in the proposal were reasonable. The Commission and the staff of the
Division of Investment Management participate in an ongoing dialogue with representatives of
the industry through public conferences, meetings, and informal exchanges. These various
forums provide the Commission and the staff with a means of ascertaining the magnitude of
paperwork burdens confronting the industry.
We received extensive comments on the projected costs of the rule both at the proposing
stage and after adoption. In many cases, funds and intermediaries, including a number of small
intermediaries, generally argued that the system functionality or start-up costs necessary to
assess and collect redemption fees on shares held through omnibus accounts, coupled with the
operational and maintenance costs, would be significant and in some cases greater than what we

5
originally estimated. The Commission adopted amendments to the rule intended to address these
concerns, and to alleviate any unnecessary burdens on funds and intermediaries.
The Commission requested public comment on the collection of information
requirements of rule 22c-2 before it submitted this 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

Responses provided to the Commission 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. Responses provided in the context of the Commission’s examination and
oversight program are generally kept confidential.
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.

6
12.

Burden of Information Collection
A.

Board Determination

Rule 22c-2(a)(1) requires the board of directors of all registered open-end management
investment companies and series thereof (except for money market funds, ETFs, or funds that
affirmatively permit short-term trading of its securities) to approve a redemption fee for the fund,
or instead make a determination that a redemption fee is either not necessary or appropriate for
the fund. Commission staff understands that the boards of all funds currently in operation have
undertaken this process for the funds they currently oversee, and the rule does not require boards
to review this determination periodically once it has been made. Accordingly, we expect that
only boards of newly registered funds or newly created series thereof would undertake this
determination. Commission staff estimates that 36 funds (excluding money market funds and
ETFs) are newly formed each year and would need to make this determination. 4
Based on conversations with fund representatives, 5 Commission staff estimates that it
takes 2 hours of the board’s time as a whole (at a rate of $4465 per hour) 6 to approve a
redemption fee or make the required determination on behalf of all series of the fund. In
addition, Commission staff estimates that it takes compliance personnel of the fund 8 hours (at a

4

This estimate is based on the average number of registrants filing initial Form N-1A or N-3 from
2017 to 2019. This estimate does not carve out money market funds, ETFs, or funds that
affirmatively permit short-term trading of their securities, so this estimate corresponds to the
outer limit of the number of registrants that would have to make this determination.

5

Unless otherwise stated, estimates throughout this analysis are derived from a survey of funds and
conversations with fund representatives.

6

The estimate of $4465 per hour for the board’s time as a whole is based on conversations with
representatives of funds and their legal counsel.

7
rate of $72 per hour) 7 to prepare trading, compliance, and other information regarding the fund’s
operations to enable the board to make its determination, and takes internal compliance counsel
of the fund 3 hours (at a rate of $373 per hour) 8 to review this information and present its
recommendations to the board. Therefore, for each fund board that undertakes this
determination process, Commission staff estimates it expends 13 hours 9 at a cost of $10,625. 10
As a result, Commission staff estimates that the total time spent for all funds on this process is
468 hours at a cost of $382,500. 11
B.

Information Sharing Agreements

Rule 22c-2(a)(2) requires a fund to enter into information-sharing agreements with each
of its financial intermediaries. Commission staff understands that all currently registered funds
have already entered into such agreements with their intermediaries. Funds enter into new
relationships with intermediaries from time to time, however, which requires them to enter into

7

The $72 per hour figure for a compliance clerk is from SIFMA’s Office Salaries in the Securities
Industry 2013, modified by Commission staff to account for an 1800-hour work-year and
inflation, and multiplied by 2.93 to account for bonuses, firm size, employee benefits and
overhead.

8

The $373 per hour figure for internal compliance counsel is from SIFMA's 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.

9

This calculation is based on the following estimates: (2 hours of board time + 3 hours of internal
compliance counsel time + 8 hours of compliance clerk time = 13 hours).

10

This calculation is based on the following estimates: ($8930 ($4465 board time × 2 hours =
$8930) + $576 ($72 compliance time × 8 hours = $576) + $1,119 ($373 attorney time × 3 hours =
$1,119) = $10,625).

11

This calculation is based on the following estimates: (13 hours × 36 funds = 468 hours); ($10,625
× 36 funds = $382,500).

8
new information sharing agreements. Commission staff understands that, in general, funds enter
into information-sharing agreement when they initially establish a relationship with an
intermediary, which is typically executed as an addendum to the distribution agreement. The
Commission staff understands that most shareholder information agreements are entered into by
the fund group (a group of funds with a common investment adviser), and estimates that there
are currently 840 currently active fund groups. 12 Commission staff estimates that, on average,
each active fund group enters into relationships with 3 new intermediaries each year.
Commission staff understands that funds generally use a standard information sharing
agreement, drafted by the fund or an outside entity, and modifies that agreement according to the
requirements of each intermediary. Commission staff estimates that negotiating the terms and
entering into an information sharing agreement takes a total of 4 hours of attorney time (at a rate
of $425 per hour) 13 per intermediary (representing 2.5 hours of fund attorney time and 1.5 hours
of intermediary attorney time). Accordingly, Commission staff estimates that it takes 12 hours at
a cost of $5,100 each year 14 to enter into new information sharing agreements, and all existing
market participants incur a total of 10,080 hours at a cost of $4,284,000. 15

12

ICI, 2020 INVESTMENT COMPANY FACT BOOK at Fig 1.8 (2020)
(https://www.ici.org/research/stats/factbook).

13

The $425 per hour figure for attorneys is from SIFMA’s Management & Professional Earnings in
the Securities Industry 2013, modified by Commission staff to account for an 1800-hour workyear and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits
and overhead.

14

This estimate is based on the following calculations: (4 hours × 3 new intermediaries = 12 hours);
(12 hours × $425 = $5,100).

15

This estimate is based on the following calculations: (12 hours × 840 fund groups = 10,080
hours); (10,080 hours × $425 = $4,284,000).

9
In addition, newly created funds advised by new entrants (effectively new fund groups)
must enter into information sharing agreements with all of their financial intermediaries.
Commission staff estimates that there are 41 new fund groups that form each year that will have
to enter into information sharing agreements with each of their intermediaries. 16 Commission
staff estimates that fund groups formed by new advisers typically have relationships with
significantly fewer intermediaries than existing fund groups, and estimates that new fund groups
will typically enter into 100 information sharing agreements with their intermediaries when they
begin operations. 17 As discussed previously, Commission staff estimates that it takes 4 hours of
attorney time (at a rate of $425 per hour) 18 per intermediary to enter into information sharing
agreements. Therefore, Commission staff estimates that each newly formed fund group will
incur 400 hours of attorney time at a cost of $170,000 19 and that all newly formed fund groups
will incur a total of 16,400 hours at a cost of $6,970,000 to enter into information sharing
agreements with their intermediaries. 20

16

ICI, 2020 INVESTMENT COMPANY FACT BOOK at Fig 1.8 (2020)
(https://www.ici.org/research/stats/factbook).

17

Commission staff understands that funds generally use a standard information sharing agreement,
drafted by the fund or an outside entity, and then modifies that agreement according to the
requirements of each intermediary.

18

The $425 per hour figure for an attorney is from SIFMA’s Management & Professional Earnings
in the Securities Industry 2013, modified by Commission staff to account for an 1800-hour workyear and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits
and overhead.

19

This estimate is based on the following calculations: (4 hours × 100 intermediaries = 400 hours);
(400 hours × $425 = $170,000).

20

This estimate is based on the following calculations: (41 fund groups × 400 hours = 16,400 hours)
($425 × 16,400 = 6,970,000).

10
Rule 22c-2(a)(3) requires funds to maintain records of all information-sharing agreements
for 6 years in an easily accessible place. Commission staff understands that most shareholder
information agreements are stored at the fund group level and estimates that there are currently
approximately 840 fund groups. 21 Commission staff understands that information-sharing
agreements are generally included as addendums to distribution agreements between funds and
their intermediaries, and that these agreements would be stored as required by the rule as a
matter of ordinary business practice. Therefore, Commission staff estimates that maintaining
records of information-sharing agreements requires 10 minutes of time spent by a general clerk
(at a rate of $64 per hour) 22 per fund, each year. Accordingly, Commission staff estimates that
all funds will incur 140 hours at a cost of $8,960 23 in complying with the recordkeeping
requirement of rule 22c-2(a)(3). This estimate is based on the following calculations: (10 minutes
× 840 fund groups = 8,400 minutes); (8,400 minutes / 60 = 140 hours); (140 hours × $64 =
$8,960).
Therefore, Commission staff estimates that to comply with the information sharing
agreement requirements of rule 22c-2(a)(2) and (3), it requires a total of 26,620 hours at a cost of
$11,262,960. 24

21

ICI, 2020 INVESTMENT COMPANY FACT BOOK at Fig 1.8 (2020)
(https://www.ici.org/research/stats/factbook).

22

The $64 per hour figure for a general clerk is derived from SIFMA’s Office Salaries in the
Securities Industry 2013 modified to account for an 1800-hour work-year and inflation, and
multiplied by 2.93 to account for bonuses, firm size, employee benefits, and overhead.

23

This estimate is based on the following calculations: (10 minutes × 840 fund groups = 8,400
minutes); (8,400 minutes / 60 = 140 hours); (140 hours × $64 = $8,960).

24

This estimate is based on the following calculations: (10,080 hours + 16,400 hours + 140hours =

11
The Commission staff estimates that on average, each fund group requests shareholder
information once a week, and gives instructions regarding the restriction of shareholder trades
every day, for a total of 417 responses related to information sharing systems per fund group
each year, and a total 350,280 responses for all fund groups annually. 25 In addition, as described
above, the staff estimates that funds make 36 responses related to board determinations, 2,520
responses related to new intermediaries of existing fund groups, 4,100 responses related to new
fund group information sharing agreements, and 840 responses related to recordkeeping, for a
total of 7,496 responses related to the other requirements of rule 22c-2. Therefore, the
Commission staff estimates that the total number of responses is 357,776 (350,280 + 7,496 =
357,776).
Table 1: Summary of Previous Annual Responses, Burden Hours, and Burden Hour
Costs Estimates for Each Information Collection

IC

IC Title

No. of
Responses

Burden
Hours

Burden Hour
Costs

IC1
IC2
IC3
IC4
IC5

Board determination
Info sharing agreements (existing funds)
Info sharing agreements (new funds)
Recordkeeping (info sharing agreements)
Shareholder information requests
Totals for all ICs

42
2550
4700
850
354,450
362,592

546
10,200
18,800
141.67
0
29,688

$440,706
$3,998,400.00
$7,369,600.00
$8358.53
0
$11,817,064.53

Annual
Cost
Burden

$40,750,000

26,620 hours); ($4,284,000 + $6,970,000 + $8,960 = $11,262,960).
25

This estimate is based on the following calculations: (52 + 365 = 417); (417 × 840 fund groups =
350,280).

12

Table 2: Summary of Revised Annual Responses, Burden Hours, and Burden Hour
Costs Estimates for Each Information Collection
No. of
Responses

IC

IC Title

IC1
IC2

Board determination
Info sharing agreements (existing
funds)
Info sharing agreements (new funds)
Recordkeeping (info sharing
agreements)
Shareholder information requests
Totals for all ICs

IC3
IC4
IC5

Change

Burden
Hours

Change

Burden
Hour Costs

Change

36
2,520

-6
-30

468
10,080

-78
-120

$382,500
$4,284,000

-$58,206
+$285,600

4,100
840

-600
-10

16,400
140

-2,400
-1.67

$6,970,000
$8,960

-$399,600
+$601.47

350,280
357,776

-4,170
-4,816

0
27,088

0
2,599.67

$0
$11,645,460

$0
-$171,604.53

Annual
Cost
Burden

Change

$40,270,564

$-479,436

The Commission staff estimates that the total hour burden for rule 22c-2 is 27,088 hours at a cost
of $11,645,460. 26
13.

Cost to Respondents

Rule 22c-2 requires funds to enter into information-sharing agreements with their
intermediaries that enable funds to, upon request (i) be provided certain information regarding
shareholders and their trades that are held through a financial intermediary or an indirect
intermediary, and (ii) require the intermediary to execute instructions from the fund restricting or
prohibiting further purchases or exchanges by shareholders that violate the fund’s frequent
trading policies. As a result of this requirement, some funds and intermediaries have had to
develop and maintain information sharing, monitoring, and order execution systems (collectively
“information sharing systems”). In general, costs related to these information-sharing systems
are borne at the fund group level.

26

This estimate is based on the following calculations: (468 hours (board determination) + 26,620
hours (information sharing agreements) = 27,088 total hours); ($382,500 (board determination) +
$11,262,960 (information sharing agreements) = $11,645,460).

13
The Commission understands that all currently operating funds and intermediaries have
either developed information systems themselves or purchased them from third parties.
However, these funds and intermediaries also incur certain ongoing costs related to these
systems’ maintenance and operation. The Commission staff understands that various
organizations have developed, enhancements to their systems that allow funds and intermediaries
to share the information required by the rule without developing or maintaining systems of their
own. Other organizations have developed “22c-2 solution” systems that funds may lease. The
Commission staff understands that most funds and intermediaries use these outside systems. In
general, the staff estimates that the typical charges involved in operating and maintaining
information sharing systems average .002626 dollars for every 100 account transactions
requested. These systems generally also provide analytics, spreadsheets, and other tools
designed to enable funds to analyze the data presented, as well as communication tools to
process fund instructions regarding the restrictions and prohibitions they may request.
Commission staff estimates that the costs of developing, maintaining and operating information
systems for funds and intermediaries that do not use outside provider’s systems is comparable to
the costs charged by outside providers. 27

27

We include the burden for funds that develop and operate these information sharing systems
internally rather than purchasing them from third parties as a cost rather than as an hourly burden
because Commission staff understands that, even when developing these systems themselves,
funds generally either use independent contractors or hire new personnel, and thereby incur this
burden as a cost, not an hourly expenditure.

14
The Commission staff estimates that, on average, each fund group requests information
for 100,000 transactions each week, incurring costs of $262.60 weekly, or $13,655.43 a year. 28
In addition, the Commission staff estimates that funds pay access fees to use these information
sharing systems (or comparable internal costs) of $30,000 each year. The Commission staff
therefore estimates that a fund group would typically incur $43,655.43 in costs each year related
to the operation and maintenance of information sharing systems required by rule 22c-2. The
Commission staff has previously estimated that there are 840 fund groups currently active, and
therefore estimates that all fund groups incur a total of $36,670,564 in ongoing costs each year
related to maintaining and operating information sharing systems. 29
In addition, newly formed funds and fund groups advised by advisers who are new
entrants would also need to incur certain additional costs related to the initial development or
purchase of these information-sharing systems. Commission staff estimates that it requires
$100,000 to purchase or develop and implement such an information sharing system for the first
time. Commission staff has previously estimated that 36 funds or fund groups are formed each
year managed by new advisers, and therefore estimates that all these funds would incur total
costs of $3,600,000. 30 Therefore the staff estimates that the total annual costs related to rule
22c-2 would be $40,270,564 ($36,670,564 + $3,600,000 = $40,270,564).

28

This estimate is based on the following calculations: (100,000 transaction requests × 0.002626 =
$262.60); ($262.60 × 52 weeks = $13,655.43).

29

This estimate is based on the following calculation: (840 fund groups × $43,655.43 =
$36,670,564).

30

This estimate is based on the following estimate: ($100,000 × 36 new fund groups = $3,600,000).

15
14.

Cost to the Federal Government

The rule does not impose any additional costs on the federal government.
15.

Changes in Burden

There has been a decrease in the estimates of burden hours for rule 22c-2. The decrease
primarily results from a decrease in the number of new fund groups that form each year.
Accordingly, the estimated hour burden has decreased to 27,088 hours from a previously
estimated 29,687.67, a decrease of 2,599.67 hours. There has been a decrease in the cost burden
associated with rule 22c-2. The decrease primarily results from the staff’s estimates of the time
costs that would result from the rule. As a result, the estimated cost burden has decreased to
$11,645,460 from $11,817,064.53 a decrease of $171,604.53.
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.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.