Document ID: SEC-2011-1745-0001
Agency: sec
Document Type: Notice
Title: Agency Information Collection Activities; Proposals, Submissions, and Approvals
Posted Date: 2011-11-14T05:00Z

[Federal Register Volume 76, Number 219 (Monday, November 14, 2011)]
[Notices]
[Pages 70517-70519]
From the Federal Register Online via the Government Printing 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: PRA_Mailbox@sec.gov.

    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