Supporting Statement - Rule 35d-1

OMB CONTROL NUMBER: 3235-0548
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 35d-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 35(d) of the Investment Company Act of 1940 (“Investment Company
Act”) 1 prohibits a registered investment company from adopting as part of the name or
title of such company, or of any securities of which it is the issuer, any word or words that
the Commission finds are materially deceptive or misleading and authorizes the
Commission, by rule, regulation, or order, to define such names or titles as are materially
deceptive or misleading. 2 Rule 35d-1 under the Investment Company Act defines as
“materially deceptive and misleading” for purposes of Section 35(d), among other things,
a name suggesting that a registered investment company or series thereof (a “fund”)
focuses its investments in a particular type of investment or investments, in investments
in a particular industry or group of industries, or in investments in a particular country or
geographic region, unless, among other things, the fund adopts a certain investment
policy. 3 Rule 35d-1 further requires either that the investment policy is fundamental or
that the fund has adopted a policy to provide its shareholders with at least 60 days prior
notice of any change in the investment policy (“notice to shareholders”).

1

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

2

15 U.S.C. 80a-34(d).

3

17 CFR 270.35d-1.

2.

Purpose and Use of the Information Collection

The rule’s notice to shareholders provision is intended to ensure that when
shareholders purchase shares in a fund based, at least in part, on its name, and with the
expectation that it will follow the investment policy suggested by that name, they will
have sufficient time to decide whether to redeem their shares in the event that the fund
decides to pursue a different investment policy.
3.

Consideration Given to Information Technology

The Commission’s electronic filing system (“EDGAR”) automates the filing,
processing, and dissemination of full disclosure filings. The system permits publicly held
companies to transmit their filings to the Commission electronically. This automation
has increased the speed, accuracy and availability of information, generating benefits to
investors and financial markets. The rule, however, does not require that a fund file the
notice to shareholders with the Commission.
4.

Duplication

The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication and reevaluates them whenever it proposes a rule or a
change in a rule. The information required by rule 35d-1 is not generally duplicated
elsewhere.
5.

Effect on Small Entities

The Commission reviews all rules periodically, as required by the Regulatory
Flexibility Act, to identify methods to minimize recordkeeping or reporting requirements

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affecting small businesses. 4 The current disclosure requirements under the rule do not
distinguish between small entities and other funds. The burden on smaller funds may be
greater than for larger funds. These costs could include expenses for computer time, legal
and accounting fees, information technology staff, and additional computer and telephone
equipment. The Commission believes, however, that imposing different requirements on
smaller funds would not be consistent with investor protection and the purposes of the
disclosure requirements.
6.

Consequences of Not Conducting Collection

The notice to shareholders provision of rule 35d-1 provides investors with 60 days
prior notice of any change to an investment policy covered by the rule, thereby providing
investors with time to decide whether to redeem their shares before the change to the
investment policy takes effect. If the disclosure requirement was removed, it would
impair investors’ ability to redeem shares in advance of a change to an investment policy
covered by the rule.
7.

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

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

Consultations Outside the Agency

The Commission and the Division of Investment Management staff participate in
an ongoing dialogue with representatives of the fund industry through public conferences,
meetings, and informal exchanges. These forums provide the Commission and the staff
with a means of ascertaining and acting upon paperwork burdens that may confront the
industry. The Commission requested public comment on the collection of information
4

5 U.S.C. 601 et seq.

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requirements in rule 35d-1 before it submitted this request for extension and approval to
the Office of Management and Budget. The Commission received no comments in
response to its request.
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Assurance of Confidentiality

No assurance of confidentiality was provided.
11.

Sensitive Questions

No information of a sensitive nature will be required under this collection of
information.
12.

Burden of Information Collection
The following estimate of average burden hours and costs are made solely for

purposes of the Paperwork Reduction Act of 1995 5 and are not derived from a
comprehensive or even representative survey or study of the cost of Commission rules
and forms. Providing prior notice to shareholders under rule 35d-1 is not mandatory. An
investment company may choose to have a name that does not indicate that the fund
focuses its investments in a particular type of investment or investments, or in
investments in a particular industry or group of industry. If an investment company does
choose such a name, it will only need to provide prior notice to shareholders of a change
in its 80% investment policy if it first has adopted a policy to provide notice and then has
decided to change this investment policy.

5

44 U.S.C. 3501 et seq.

4

The Commission believes that notices to shareholders meeting the requirements
of rule 35d-1 are typically short, one-page documents. The rule permits these notices to
be delivered together with other written materials sent to shareholders, such as
prospectuses, annual and semi-annual reports, and account statements. The number of
burden hours spent preparing and arranging delivery of these notices therefore is low.
The Commission estimates that the annual burden associated with the notice to
shareholders requirement of the rule to be 20 hours per affected fund. The Commission
anticipates that each affected respondent would incur these burden hours only once.
The Commission estimates that there are currently approximately 13,182 openend management investment companies and series of such investment companies and
approximately 676 closed-end investment companies that are registered with the
Commission and would fall within the definition of “Fund” contained in rule 35d-1. 6 The
Commission estimates that there are approximately 11,502 funds that have names that are
covered by the rule. 7 The Commission further estimates that 1% of these funds (115
funds) will, within the next three years, provide a notice to shareholders pursuant to a
policy adopted in accordance with this rule. 8 Therefore, the Commission estimates that,
on average, approximately 38 funds per year will provide a notice to shareholders
pursuant to a policy adopted in accordance with this rule. The Commission estimates that

6

This estimate is derived from a variety of sources, including the Investment Company
Institute and Commission records.

7

The Commission previously estimated that 83% have names that are covered by the rule.
See Investment Company Act Release No. 24828 (Jan. 17, 2001) [66 FR 8509, 8515
(Feb. 1, 2001)]. Using this estimate, the Commission estimates that approximately
11,502 funds have names that are covered by the rule (13,858 funds x 83% = 11,502).

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a fund would spend an average of 20 hours complying with the notice to shareholders
alternative provided by the rule, for an annual total of 760 internal burden hours. 9
The Commission, using an hourly wage rate of $425 for attorneys, 10 estimates that
the total annual cost of the hour burden imposed by the notice to shareholders provision
under rule 35d-1 is $323,000. 11
TABLE 1: SUMMARY OF REVISED ANNUAL RESPONSES, BURDEN HOURS, AND BURDEN
HOUR COSTS ESTIMATES
Annual Number of Responses

Annual Time Burden (hours)

Cost Burden (dollars)

Currently
Approved

Revised
Estimate

Change

Currently
Approved

Revised
Estimate

Change

Currently
Approved

Revised
Estimate

Change

33

38

5

660

760

100

$258,720

323,000

$64,280

Rule
35d-1

13.

Cost to Respondents

Cost burden is the external cost of services purchased to comply with rule 35d-1,
such as for the services of computer programmers, outside counsel, financial printers, and
advertising agencies. The cost burden does not include the cost of the internal hour
burden discussed in Item 12 above. The Commission currently attributes no external cost
burden to rule 35d-1.
14.

Cost to the Federal Government

8

Id. at 8517. (11,502 funds x 1% =115).

9

38 funds x 20 hours per fund = 760 hours.
The industry burden is calculated by multiplying the total annual hour burden to comply
with rule 35d-1 by the estimated hourly wage rate of $425. The estimated wage figure is
based on published rates for attorneys, modified 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. See Securities Industry and Financial Markets Association’s
Report on Management & Professional Earnings in the Securities Industry 2013.

10

11

760 hours x $425 per hour = $323,000.

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We expect any burdens to the federal government as a result of the notice to
shareholders provision to be minimal and do not expect an increase in staff time or annual
operating costs in connection with this collection of information requirements.
15.

Change in Burden

The Commission continues to estimate that there is no external cost burden
associated with this rule. The increase in the estimated annual internal burden hours from
660 hours to 760 hours is due to an increase in the estimated number of funds registered
with the Commission, thus an increase to the number of funds providing notice to
shareholders under the rule. The annual cost burden has increased from $258,720 to
$323,000. This $64,280 increase is attributable to (1) an increase in the number of funds
providing notice to shareholders and (2) changes in the costs of attorneys’ preparation of
the notice to shareholders.
16.

Information Collection Planned for Statistical Purposes
Not applicable.

17.

Approval to Omit OMB Expiration Date
Not applicable.

18.
Submission

Exceptions to Certification Statement for Paperwork Reduction Act

The Commission is not seeking an exception to the certification statement.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL
METHODS
The collection of information will not employ statistical methods.

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