[Federal Register Volume 76, Number 219 (Monday, November 14, 2011)]
[Notices]
[Pages 70517-70519]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-29253]
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SECURITIES AND EXCHANGE COMMISSION
Proposed Collection; Comment Request
Upon Written Request, Copies Available From: Securities and
Exchange Commission, Office of Investor Education and Advocacy,
Washington, DC 20549-0213.
Extension:
Rule 22c-2, SEC File No. 270-541, OMB Control No. 3235-0620.
Notice is hereby given that pursuant to the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501 et seq.) the Securities and Exchange Commission
(the ``Commission'') is soliciting comments on the collection of
information summarized below. The Commission plans to submit this
existing collection of information to the Office of Management and
Budget for extension and approval.
Rule 22c-2 (17 CFR 270.22c-2 ``Mutual Fund Redemption Fees'') 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 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 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.
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\1\ 44 U.S.C. 3501-3520.
\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).
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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.
Rule 22c-2(a)(1) requires the board of directors of all registered
investment
[[Page 70518]]
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 approximately 117 funds or series
thereof (excluding money market funds and ETFs) are newly formed each
year and would need to make this determination.
Based on conversations with fund representatives,\3\ Commission
staff estimates that it takes approximately 2 hours of the boards'
time, as a whole, to approve a redemption fee or make the required
determination. In addition, Commission staff estimates that it takes
compliance personnel of the fund approximately 8 hours to prepare
trading, compliance, and other information regarding the fund's
operations to enable the board to make its determination, and takes
internal counsel of the fund approximately 3 hours 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 approximately 13 hours.\4\ As a
result, Commission staff estimates that the total time spent for all
funds on this process is 1521 hours.\5\
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\3\ Unless otherwise stated, estimates throughout this analysis
are derived from a survey of funds and conversations with fund
representatives.
\4\ This calculation is based on the following estimate: (2
hours of board time + 3 hours of internal counsel time + 8 hours of
compliance time = 13 hours).
\5\ This calculation is based on the following estimate: (13
hours x 117 funds = 1521 hours).
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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 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. Commission staff estimates that
there are approximately 6911 open-end fund series currently in
operation (excluding money market funds and ETFs). However, 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 669
currently active fund groups.\6\ Commission staff estimates that, on
average, each active fund group enters into relationships with
approximately 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 approximately 4 hours
of attorney time per intermediary (representing 2.5 hours of fund
attorney time and 1.5 hours of intermediary attorney time).
Accordingly, Commission staff estimates that each existing fund group
expends 12 hours each year \7\ to enter into new information sharing
agreements, and all existing fund groups incur a total of 8028
hours.\8\
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\6\ ICI, 2011 Investment Company Fact Book at Fig 1.7 (2011)
(http://www.ici.org/stats/latest/2011_factbook.pdf).
\7\ This estimate is based on the following calculation: (4
hours x 3 new intermediaries = 12 hours).
\8\ This estimate is based on the following calculation: (12
hours x 669 fund groups = 8028 hours).
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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 approximately 40 new funds or fund groups that
form each year that will have to enter into information sharing
agreements with each of their intermediaries.\9\ Commission staff
estimates that funds and 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 approximately 100 information sharing agreements with their
intermediaries when they begin operations.\10\ As discussed previously,
Commission staff estimates that it takes approximately 4 hours of
attorney time 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,\11\ and all
newly formed fund groups will incur a total of 16,000 hours to enter
into information sharing agreements with their intermediaries.\12\
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\9\ ICI, 2011 Investment Company Fact Book at Fig 1.7 (2011)
(http://www.ici.org/stats/latest/2011_factbook.pdf).
\10\ 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 to according the
requirements of each intermediary.
\11\ This estimate is based on the following calculation: (4
hours x 100 intermediaries = 400 hours).
\12\ This estimate is based on the following calculation: (40
fund groups x 400 hours = 16,000 hours).
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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 estimates that there are approximately 6911
open-end fund series currently in operation (excluding money market
funds and ETFs). However, the Commission staff anticipates that most
shareholder information agreements will be stored at the fund group
level and estimates that there are currently approximately 669 fund
groups. 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
approximately 10 minutes of time spent by a general clerk per fund,
each year. Accordingly, Commission staff estimates that all funds will
incur approximately 112 hours \13\ in complying with the recordkeeping
requirement of rule 22c-2(a)(3).
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\13\ This estimate is based on the following calculation: (10
minutes x 669 fund groups = 6690 minutes); (6690 minutes/60 = 112
hours).
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Therefore, Commission staff estimates that to comply with the
information sharing agreement requirements of rule 22c-2(a)(1) and (3),
it requires a total of 24,140 hours.\14\
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\14\ This estimate is based on the following calculation: (8028
hours + 16,000 hours + 112 hours = 24,140 hours).
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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
[[Page 70519]]
to information sharing systems per fund group each year, and a total
278,973 responses for all fund groups annually.\15\ In addition, the
staff estimates that funds make 117 responses related to board
determinations, 2007 responses related to new intermediaries of
existing fund groups, 4000 responses related to new fund group
information sharing agreements, and 669 responses related to
recordkeeping, for a total of 6793 responses related to the other
requirements of rule 22c-2. Therefore, the Commission staff estimates
that the total number of responses is 285,766 (278,973 + 6793 =
285,766). The Commission staff estimates that the total hour burden for
rule 22c-2 is 25,661 hours.\16\
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\15\ This estimate is based on the following calculations: (52 +
365 = 417); (417 x 669 fund groups = 278,973).
\16\ This estimate is based on the following calculation: (1521
hours (board determination) + 24,140 hours (information sharing
agreements) = 25,661 total hours).
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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.
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 25 cents 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.\17\ The Commission staff
estimates that, on average, each fund group requests information for
100,000 transactions each week, incurring costs of $250 weekly, or
$13,000 a year.\18\ In addition, the Commission staff estimates that
funds pay access fees to use these information sharing systems (or
comparable internal costs) of approximately $30,000 each year. The
Commission staff therefore estimates that a fund group would typically
incur approximately $43,000 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
approximately 669 fund groups currently active, and therefore estimates
that all fund groups incur a total of $28,767,000 in ongoing costs each
year related to maintaining and operating information sharing
systems.\19\
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\17\ 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.
\18\ This estimate is based on the following calculations:
(100,000 transaction requests x 0.0025[cent] = $250); ($250 x 52
weeks = $13,000).
\19\ This estimate is based on the following calculation: (669
fund groups x $43,000 = $28,767,000).
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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
approximately $100,000 to purchase or develop and implement such an
information sharing system for the first time. Commission staff has
previously estimated that approximately 40 funds or fund groups are
formed each year managed by new advisers, and therefore estimates that
all these funds would incur total costs of approximately
$4,000,000.\20\ Therefore the staff estimates that the total costs
related to rule 22c-2 would be approximately $32,767,000 ($28,767,000 +
$4,000,000 = $32,767,000).
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\20\ This estimate is based on the following estimate: ($100,000
x 40 new fund groups = $4,000,000).
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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. Complying with the
information collections of rule 22c-2 is mandatory for funds that
redeem their shares within 7 days of purchase. An agency may not
conduct or sponsor, and a person is not required to respond to a
collection of information unless it displays a currently valid control
number.
Written comments are invited on: (a) Whether the proposed
collection of information is necessary for the proper performance of
the functions of the agency, including whether the information will
have practical utility; (b) the accuracy of the agency's estimate of
the burden of the collection of information; (c) ways to enhance the
quality, utility, and clarity of the information collected; and (d)
ways to minimize the burden of the collection of information on
respondents, including through the use of automated collection
techniques or other forms of information technology. Consideration will
be given to comments and suggestions submitted in writing within 60
days of this publication.
Please direct your written comments to Thomas Bayer, Director/Chief
Information Officer, Securities and Exchange Commission, C/O Remi
Pavlik-Simon, 6432 General Green Way, Alexandria, VA 22312; or send an
email to: [email protected].
Dated: November 7, 2011.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-29253 Filed 11-10-11; 8:45 am]
BILLING CODE 8011-01-P