Supporting Statement_Rule 22c-2

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”) 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
fee of up to two percent or determine that imposition of a redemption fee is not necessary or

1

44 U.S.C. 3501-3520.

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 Investment Company 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).

2

Act 3 and the conforming amendments to rules under the Investment Company Act 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.
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
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

3

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

3

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
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. 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
No payment or gift to respondents was provided.
10. 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
information collected pursuant to rule 22c-2 is reviewed by the Commission’s examination staff,
it will be accorded the same level of confidentiality accorded to other responses provided to the
4

Commission in the context of its examination and oversight program.
11. Sensitive Questions
No PII collected/Not applicable.
12. Burden of Information Collection
The following estimates of average burden hours and costs are made solely for purposes
of the PRA and are not derived from a comprehensive or even representative survey or study of
the cost of Commission rules and forms.
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 32 funds (excluding money market funds and
ETFs) are newly formed each year and would need to make this determination. 4

4

This estimate is based on the average number of registrants filing initial Form N-1A or N-3 from
2020 to 2022. 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

Commission staff estimates that it takes 2 hours of the board’s time as a whole (at a rate
of $4,770 per hour) 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 rate of $84 per hour) to prepare trading, compliance, and other
information regarding the fund’s operations to enable the board to make its determination, and
takes an internal compliance attorney of the fund 3 hours (at a rate of $440 per hour) 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 5 at a
cost of $11,532. 6 As a result, Commission staff estimates that the total time spent for all funds
on this process is 416 hours at a cost of $369,024. 7
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

5

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

6

This calculation is based on the following estimates: ($4,770 board time × 2 hours) + ($84
compliance time × 8 hours) + ($440 attorney time × 3 hours) = $11,532.
The hourly wages used are 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. The staff has estimated the average cost of board of director time as $4,770 per hour
for the board as a whole, based on information received from funds and their counsel.

7

This calculation is based on the following estimates: 13 hours × 32 funds = 416 hours; $11,532×
32 funds = $369,024.

6

relationships with intermediaries from time to time, however, which requires them to enter into
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 797 currently active fund groups. 8 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 $500 per hour) per intermediary. Accordingly, Commission staff estimates that it takes 12
hours at a cost of $6,000 annually for each fund group 9 to enter into new information sharing
agreements and, in the aggregate existing market participants incur a total of 9,564 hours at a
cost of $4,782,000. 10
In addition, newly created funds advised by new entrants (effectively new fund groups)

8

ICI, 2024 INVESTMENT COMPANY FACT BOOK at Fig 2.8 (2024)
(https://www.icifactbook.org/pdf/2024-factbook.pdf).

9

This estimate is based on the following calculations: 4 hours × 3 new intermediaries = 12 hours;
12 hours × $500 = $6,000).

10

This estimate is based on the following calculations: (12 hours × 797 fund groups = 9,564 hours);
9,564 hours × $500 = $4,782,000).

7

must enter into information sharing agreements with all of their financial intermediaries.
Commission staff estimates that there are 38 new fund groups that form each year that will have
to enter into information sharing agreements with each of their intermediaries. 11 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. 12 As discussed previously, Commission staff estimates that it takes 4 hours of
attorney time (at a rate of $500 per hour) 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 $200,000 13 and that all newly formed fund groups
will incur a total of 15,200 hours at a cost of $7,600,000 to enter into information sharing
agreements with their intermediaries. 14
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

11

ICI, 2024 INVESTMENT COMPANY FACT BOOK at Fig 2.8 (2024)
(https://www.icifactbook.org/pdf/2024-factbook.pdf).

12

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.

13

This estimate is based on the following calculations: 4 hours × 100 intermediaries = 400 hours;
400 hours × $500 = $200,000.

14

This estimate is based on the following calculations: (38 fund groups × 400 hours = 15,200 hours)
($500 × 15,200 = 7,600,000).

8

approximately 797 fund groups. 15 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 $75 per hour) per fund, each year. Accordingly, Commission staff estimates that all
funds will incur 133 hours at a cost of $9,975 16 in complying with the recordkeeping requirement
of rule 22c-2(a)(3). 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 24,897 hours at
a cost of $12,391,975. 17
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 331,552 responses for all fund groups annually. 18 In addition, as described
above, the staff estimates that funds make 32 responses related to board determinations, 2,391
responses related to new intermediaries of existing fund groups, 3,800 responses related to new

15

ICI, 2024 INVESTMENT COMPANY FACT BOOK at Fig 2.8 (2024)
(https://www.icifactbook.org/pdf/2024-factbook.pdf).

16

This estimate is based on the following calculations: (10 minutes × 797 fund groups = 7,970
minutes); (7,970 minutes / 60 = 133 hours); (133 hours × $75 = $9,975).

17

This estimate is based on the following calculations: (9,564 hours + 15,200 hours + 133 hours =
24,897 hours); ($4,782,000 + $7,600,000 + $9,975 = $12,391,975).

18

This estimate is based on the following calculations: (52 + 365 = 417); (417 × 797 fund groups =
331,552).

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fund group information sharing agreements, and 797 responses related to recordkeeping, for a
total of 7,020 responses related to the other requirements of rule 22c-2. Therefore, the
Commission staff estimates that the total number of responses is 338,572 (331,552 + 7,020 =
338,572). The Commission staff estimates that the total hour burden for rule 22c-2 is 25,313
hours at a cost of $12,392,344. 19 Information related to the estimated total burden is also
summarized in the table below.
Summary of Revised Annual Responses, Burden Hours, and Cost Estimates
IC Title

Annual No. of Responses
Previously Requested
Change
approved

Annual Time Burden (Hrs.)
Previously Requested
Change
approved

External Cost to Respondents ($)
Previously
Requested
Change
approved

Rule 22c-2

357,776

27,088

$40,270,564

338,572

-19,204

25,313

-1,775

42,809,868

$2,539,304

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

19

This estimate is based on the following calculations: 416 hours (board determination) + 24,897
hours (information sharing agreements) = 25,313 total hours; $369,024 (board determination) +
$12,391,975 (information sharing agreements) = $12,392,344.

10

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.
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

11

the costs charged by outside providers. 20
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. 21
In addition, the Commission staff estimates that funds pay access fees to use these information
sharing systems (or comparable internal costs) of $35,330 each year. The Commission staff
therefore estimates that a fund group would typically incur $48,985.43 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 797 fund groups currently active, and
therefore estimates that all fund groups incur a total of $39,041,388 in ongoing costs each year
related to maintaining and operating information sharing systems. 22
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
$117,765 to purchase or develop and implement such an information sharing system for the first
time. Commission staff has previously estimated that 32 funds or fund groups are formed each

20

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.

21

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

22

This estimate is based on the following calculation: (797 fund groups × $48,985.43 =
$39,041,388).

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year managed by new advisers, and therefore estimates that all these funds would incur total
costs of $3,768,480. 23 Therefore the staff estimates that the total annual costs related to rule 22c2 would be $42,809,868 ($39,041,388 + $3,768,480n= $42,809,868).
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 fund groups, both active and new fund groups.
Accordingly, the estimated hour burden has decreased to 25,313 hours from a previously
estimated 27,088, a decrease of 1,775 hours. There has been, however, an increase in the cost
burden associated with rule 22c-2. The estimated cost burden has increased to $12,392,344 from
$11,645,460. This $746,884 increase is attributable to an increase in the costs of internal
compliance personnel and directors associated with the compliance obligations of rule 22c-2.
16. Information Collection Planned for Statistical Purposes
Not applicable.
17. Approval to Omit OMB Expiration Date
Not applicable.
18. Exceptions to Certification Statement for Paperwork Reduction Act Submission
Not applicable.

23

This estimate is based on the following estimate: ($117,765 × 32 new fund groups = $3,768,480).

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

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