Supporting Statement - Rule 35d-1 PRA_Names Adoption

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 policy to invest at least
80% of the value of its assets in the type of investment, or in investments in the industry,
country, or geographic region, suggested by its name (an “80% investment policy”). 3 The
names rule imposes a similar 80% investment policy requirement for funds that have
names suggesting that a fund’s distributions are exempt from federal income tax or from

1

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

2

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

3

17 CFR 270.35d-1. A policy that a fund must adopt under rule 35d-1 is referred to as an
“80% investment policy” and the fund’s investments invested in accordance with this
policy as the fund’s “80% basket.”

both federal and state income tax (“tax-exempt funds”). Rule 35d-1 further requires either
that the 80% investment policy be fundamental or, in the case of funds other than taxexempt funds, 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”).
On September 20, 2023, the Commission adopted rule and form amendments that
were designed to modernize and enhance the protections that rule 35d-1 provides (the
“amendments”). 4 Among other things, the amendments expanded the 80% investment
policy to apply to any fund name with terms suggesting that the fund focuses in
investments that have, or investments whose issuers have, particular characteristics. Also,
the amendments require a fund to report the value of the fund’s 80% basket and whether
an investment is included in the fund’s 80% basket as well as a new reporting item to
include the definition(s) of terms used in the fund’s name. The amendments require funds
that adopt an 80% investment policy to maintain written records documenting their
compliance with rule 35d-1, including records of any notice sent to the fund’s
shareholders pursuant to the rule.
The amendments also update the rule’s existing notice requirement to expressly
address funds that use electronic delivery methods to provide information to their
shareholders. The amendments require notices not only to describe a change in the fund’s
80% investment policy, but also a change to the fund’s name that accompanies the
investment policy change.

4

Investment Company Names, Investment Company Act Release No. 35000 (Sept.

20, 2023) (the “2023 Adopting Release”).
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2.

Purpose and Use of the Information Collection

Rule 35d-1 is designed to address certain broad categories of investment company
names that, in the Commission’s view, are likely to mislead an investor about a
company’s investments and risks. The rule’s provisions are intended to further that goal.
For example, 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. Further, the amendments’ expansion of
fund names covered by the rule is designed to help ensure that a fund’s investment
activity supports the investment focus its name communicates and, thus, the investor
expectations the name creates. The amendments’ recordkeeping requirements are
designed to help ensure compliance with the rule’s requirements and aid in oversight.
3.

Consideration Given to Information Technology

The Commission has historically acted to modernize the manner in which
information is disclosed to the public and provided to investors in order to keep up with
changes in the industry and technology. The amendments incorporate certain
modifications to the current notice requirement to expressly address funds that use
electronic delivery methods to provide information to their shareholders.
Further, 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
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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
affecting small businesses. 5 The disclosure requirements under the amended 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 creating or
purchasing certain data used in selecting investments consistent with the fund’s 80%
investment policy, legal and accounting fees, information technology staff, and creating
or revising recordkeeping processes. The Commission believes, however, that imposing
different requirements on smaller funds would not be consistent with investor protection
and the purposes of the rule’s 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

5

5 U.S.C. 601 et seq.

4

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. The recordkeeping requirements are generally designed to provide
Commission staff as well as the fund’s compliance personnel, the ability to evaluate the
fund’s compliance with 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

Before adopting the amendments to rule 35d-1, the Commission solicited and
evaluated public comments on the proposal and its collection of information
requirements. Specifically, the public was given the opportunity to comment on the
Commission’s estimates for the burdens associated with rule 35d-1, as proposed and as
compared to the existing approved burden inventory in the proposing release for the
amendments. The Commission’s solicitation of public comments included estimating and
requesting public comments on the burden estimates for all information collections under
this OMB control number (i.e., both changes associated with the rulemaking and other
burden updates). The Commission received one comment on rule 35d-1’s proposed
burdens estimates suggesting that the Commission had underestimated costs; other
comments that did not specifically address the proposed burden analysis also suggested
that the Commission had underestimated the costs associated with the proposed notice
and recordkeeping requirements. 6 These comments were considered by the Commission
as discussed in the 2023 Adopting Release, and the Commission adjusted the estimated

6

See 2023 Adopting Release at section V.B.
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annual burden hours and total time costs in consideration of those comments and to
reflect changes from the proposal. In addition, 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

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 7 and are not derived from a
comprehensive or even representative survey or study of the cost of Commission rules
and forms. The collection of information requirements include, as detailed in Table 1
below, the notice requirement and recordkeeping requirements for funds that are required

7

44 U.S.C. 3501 et seq.

6

to adopt an 80% investment policy. Compliance with these requirements is mandatory.
Responses to these requirements will not be kept confidential.
The table below summarizes the Commission’s estimates associated with the
amendments to the notice and recordkeeping requirements to rule 35d-1 that the 2023
Adopting Release addresses:
TABLE 1: PRA ESTIMATES FOR RULE 35D-1 AMENDMENTS
Initial hours

Annual hours1

Internal time
costs

Wage rate2

Annual external
cost burden

CURRENTLY APROVED BURDENS

Notice Requirement

0

20

$425
(estimate of wage rate in
most recently approved
supporting statement)

hours3

$8,500

Number of Funds

X 38 funds4

X 38 funds

Current Burden Estimates

760 hours

$323,000

$0

ESTIMATED BURDENS
Notice Requirement

0 hours

20 hours5

Number of Funds

X 34 funds6

Total New Burden for
Notice Requirement (I)

680 hours

Recordkeeping for Funds
with an 80% Policy7
Number of Funds
Total New Burden for
Recordkeeping (II)

9 hours8

$425
(blended rate for
attorneys)

$8,500
$5659
X 34 funds
$289,000

$406
(1:1 blend for compliance
attorney and senior
programmer)

75 hours
X 10,291
funds
771,825 hours

$19,210

$30,450
$565
X 10,291 funds
$313,360,950

$5,814,415

TOTAL ESTIMATED BURDENS INCLUDING AMENDMENTS
Total New Annual Burden
(I + II)

772,505 hours

$313,649,950

$5,833,625

Notes:
1. Includes initial burden estimates annualized over a 3-year period.
2. The estimated wage figure is based on published rates for the professionals described in this chart, modified to account for an 1800hour work-year and inflation. The estimates for the proposed burdens were 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.
3. The Commission estimates that these notices are typically short, one-page documents that are sent to shareholders with other written
materials. The Commission anticipates each respondent would only incur these burden hours once.
4. The currently-approved burden takes into account the Commission’s previous estimate, across approximately 13,182 open-end funds
and 676 closed-end funds then registered with the Commission, that there are approximately 11,502 funds that have names covered by
the rule or 83% of funds covered by the rule (13,858 funds x 83% = 11,502). The Commission estimated that 1% of these funds, or 115
funds, would, within the next three years, provide a notice to shareholders pursuant to rule 35d-1. Therefore, over the course of 3 years,

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the Commission estimated that, on average approximately 38 funds per year would provide a notice to shareholders under rule 35d-1.
5. The amendments make some changes to the current notice requirement, including requiring funds to provide additional specificity
about the content and delivery of notice. Because funds already have in place systems required to provide notice to shareholders, the
Commission believes that these alterations would not increase the burden hours needed to prepare the notice. Although the
amendments would permit unlisted registered closed-end funds and business development companies to make changes to their 80%
investment policies without a shareholder vote under certain circumstances, including that a fund provide certain notice to shareholders,
we have not increased our estimates as a result of this provision. The costs associated with providing notice under this exception are
comparable to the costs that a fund would incur by providing notices associated with the shareholder vote that would otherwise be
required for a closed-end fund/business development company to change its 80% investment policy under the amendments.
6. The currently-approved PRA burden for rule 35d-1 was based on the Commission’s estimate that 83% of funds were covered by rule
35d-1.The Commission now estimates, pursuant to its current economic analysis, that 60% of funds are currently subject to the 80%
investment policy requirement, and that 76% of funds would be subject to this requirement under the amendments. The Commission
estimates, across approximately 13,541 open-end and closed-end funds registered with the Commission, that there are approximately
10,291 funds that have names that would be covered by the amendments, or 76% of funds covered by the amendments (9,533 mutual
funds (other than money market funds) + 2,735 non-UIT ETFs + 355 money market funds = 12,975 open-end funds + 748 registered
closed-end funds + 125 BDCs + 45 UITs = 13,541 funds x 76% = 10,291 funds). The Commission estimates that 1% of these 10,291
funds, or 103 funds, would within the next three years provide a notice to shareholders pursuant to the amendments. Therefore, over the
course of 3 years, the Commission estimates that on average approximately 34 funds per year would provide a notice to shareholders
under the amendments.
7. For funds that adopt an 80% investment policy under the rule amendments, the recordkeeping requirements under rule 35d-1(b)(3)
would require records documenting the fund’s compliance under paragraphs (a) and (b) of rule 35d-1. Written records documenting the
fund’s compliance include: the fund’s record of which assets are invested in the 80% basket and the basis for including each such asset
in the fund’s 80% basket; the percentage of the value of the fund’s assets that are invested in the 80% basket; the reasons for any
departures from the fund’s 80% investment policy (including why the fund determined that circumstances are other-than-normal); the
dates of any departures from the 80% investment policy; and any notice sent to the fund’s shareholders pursuant to rule 35d-1(e).
8. This estimated initial burden for the recordkeeping requirement accounts for the time the Commission estimates that fund will need to
establish recordkeeping procedures for the records that must be kept.
9. This estimate is based on the estimated wage rate of $565, for 1 hour of outside legal services. The Commission’s estimate of the
relevant wage rates for external time costs, such as outside legal services, takes into account staff experience, a variety of sources
including general information websites, and adjustments for inflation.

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. Under the amendments, we estimate that a total cost
to all respondents of $5,833,625 as detailed in Table 1 above.

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14.

Cost to the Federal Government

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 amendments would result in a number of changes to the currently approved
burden. The new recordkeeping requirements for funds that adopt an 80% policy would
add an additional hour burden of 75 hours per year for 10,291 funds, or 771,825 hours
annually. While we estimate that the per-response hour burden associated with the notice
requirement would not change from the currently-approved per-response hour burden, we
have revised the number of responses to the notice requirement down from 38 responses
annually to 34 responses, based upon an updated assessment that a lower percentage
(76%, rather than 83%) of funds have names that would be subject to the rule. 8 The
Commission estimates that there would be an external cost burden associated with rule
35d-1’s notice and recordkeeping requirements of $5,833,625 (an increase from the
currently-approved estimate of $0). These changes in burden also reflect the
Commission’s revision and update of burden estimates for all information collections
under this OMB control number (whether or not associated with rulemaking changes),
and the Commission requested public comment on all information collection burden
estimates for this OMB control number.
16.

Information Collection Planned for Statistical Purposes
Not applicable.

8

See supra note 6 to Table 1.
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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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