Rule 482 Supporting Statement - 03 - 2013-09-24

SUPPORTING STATEMENT
For the Paperwork Reduction Act Submission for
“Rule 482”
A.

JUSTIFICATION
1.

Information Collection Nessessity

Like most issuers of securities, when an investment company (“fund”) 1 offers its
shares to the public, its promotional efforts become subject to the advertising restrictions
of the Securities Act of 1933 (“Securities Act”). 2 In recognition of the particular
problems faced by funds that continually offer securities and wish to advertise their
securities, the Securities and Exchange Commission (“Commission”) has previously
adopted advertising safe harbor rules. The most important of these is rule 482 adopted
under the Securities Act, which, under certain circumstances, permits funds to advertise
investment performance data, as well as other information. 3 Rule 482 advertisements are
deemed to be “prospectuses” under Section 10(b) of the Securities Act. 4
Rule 482 contains certain requirements regarding the disclosure that funds are
required to provide in qualifying advertisements. These requirements are intended to
encourage the provision to investors of information that is balanced and informative,
particularly in the area of investment performance. For example, a fund is required to
include disclosure advising investors to consider the fund’s investment objectives, risks,
charges and expenses, and other information described in the fund’s prospectus, and
highlighting the availability of the fund’s prospectus and, if applicable, its summary
1

“Investment company” refers to both investment companies registered under the
Investment Company Act of 1940 (“Investment Company Act”) (15 U.S.C. 80a-1 et seq.)
and business development companies.

2

15 U.S.C. 77a et seq.

3

17 CFR 230.482.

4

15 U.S.C. 77j(b).

prospectus. In addition, rule 482 advertisements that include performance data of openend funds or insurance company separate accounts offering variable annuity contracts are
required to include certain standardized performance information, information about any
sales loads or other nonrecurring fees, and a legend warning that past performance does
not guarantee future results. Such funds including performance information in rule 482
advertisements are also required to make available to investors month-end performance
figures via website disclosure or by a toll-free telephone number, and to disclose the
availability of the month-end performance data in the advertisement. The rule also sets
forth requirements regarding the prominence of certain disclosures, requirements
regarding advertisements that make tax representations, requirements regarding
advertisements used prior to the effectiveness of the fund’s registration statement,
requirements regarding the timeliness of performance data, and certain required
disclosures by money market funds.
2.

Purpose and Use of the Information Collection

Rule 482 advertisements must be filed with the Commission or, in the alternative,
with the Financial Industry Regulatory Authority (“FINRA”). 5 This information
collection differs from many other federal information collections that are primarily for
the use and benefit of the collecting agency.
Rule 482 contains requirements that are intended to encourage the provision to
investors of information that is balanced and informative, particularly in the area of
investment performance. The Commission is concerned that in the absence of such
provisions fund investors may be misled by deceptive rule 482 advertisements and may
5

See rule 24b-3 under the Investment Company Act (17 CFR 270.24b-3), which provides
that any sales material, including rule 482 advertisements, shall be deemed filed with the
Commission for purposes of Section 24(b) of the Investment Company Act upon filing
with FINRA.
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rely on less-than-adequate information when determining in which funds they should
invest money. As a result, the Commission believes it is beneficial for funds to provide
investors with balanced information in fund advertisements in order to allow investors to
make better-informed decisions.
3.

Consideration Given to Information Technology

The Commission’s Electronic Data Gathering, Analysis, and Retrieval System
(“EDGAR”) automates the filing, processing, and dissemination of full disclosure filings.
This automation has increased the speed, accuracy, and availability of information,
generating benefits to investors and financial markets.
The vast majority of fund advertisements are filed with FINRA under Investment
Company Act rule 24b-3, which allows any sales material filed with FINRA to be
deemed to be filed with the Commission.6 Rule 482 advertisements that are required to
be filed with the Commission are to be filed electronically on EDGAR. 7 The public may
access filings on EDGAR through the Commission’s website (http://www.sec.gov) or at
EDGAR terminals located at the Commission’s public reference rooms.
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.
5.

Effect on Small Entities

The current disclosure requirements for fund advertisements do not distinguish
between small entities and other entities. To the extent smaller funds advertise, their

6

17 CFR 270.24b-3.

7

17 CFR 232.101(a)(1)(i) and (iv).
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burden to prepare advertisements may be greater than for larger funds due to economies
of scale. This burden would include the cost of reviewing an advertisement to confirm
that it meets the requirements of rule 482.
The Commission considered special requirements for small entities. The
Commission believes, however, that imposing different requirements on smaller fund
companies would not be consistent with investor protection. The use of different
standards for small entities may create a risk that investors may receive false or
misleading information. In addition, the Commission believes that uniform disclosure
standards for all fund advertisements should allow investors to compare funds more
easily when making an investment decision. Allowing different standards for small
entities may create confusion for investors who wish to compare funds. 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.
6.

Consequences of Not Conducting Collection

Since fund advertising is voluntary, the Commission does not determine the
frequency with which funds advertise pursuant to rule 482. Therefore, short of not
requiring any collection for advertisements governed by rule 482, the Commission cannot
require less frequent collection. Not requiring disclosure of the information required by
rule 482 would harm investors by denying them information that may be useful in
making investment decisions. If such advertisements did not contain this disclosure,
investors could receive inadequate information or could receive confusing, false, or
misleading information. As a result, investor confidence in the securities industry could
be adversely affected.

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7.

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

This collection is not inconsistent with 5 CFR 1320.5(d)(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 fund industry through
public conferences, meetings, and informal exchanges. These various forums provide the
Commission and the staff with a means of ascertaining and acting upon paperwork
burdens confronting the industry. The Commission requested public comment on the
collection of information requirements of rule 482 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 gifts are provided.
10.

Confidentiality

No assurance of confidentiality is provided.
11.

Sensitive Questions

No questions of a sensitive nature are required under rule 482. No Personally
Identifiable Information (PII) is collected.
12.

Burden of Information Collection

The following estimates of average burden hours are made solely for purposes of
the Paperwork Reduction Act of 1995 8 and are not derived from a comprehensive or even
representative survey or study of the cost of Commission rules and forms. Compliance
with the disclosure requirements of rule 482 is necessary to obtain the benefits of the safe

8

44 U.S.C. 3501 et seq.
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harbor offered by the rule. Responses to the disclosure requirements will not be kept
confidential.
The time burden estimate for complying with rule 482 is based on consultations
with industry representatives and on the Commission’s experience with the contents of
disclosure documents. The number of burden hours may vary depending on, among
other things, the complexity of the document, the number of funds included in a single
document, and whether preparation of the document is performed by fund staff or outside
counsel. The number of funds used to estimate the burden hours is an estimate based on
the Commission’s statistics.
Rule 482 is part of Regulation C under the Securities Act. 9 Regulation C
describes the disclosure that must appear in the registration statements under the
Securities Act and Investment Company Act. However, the burden associated with rule
482 is included within the collection entitled rule 482, and rule 482 is not considered part
of Regulation C for information collection purposes.
The Commission estimates that 59,245 10 responses to rule 482 are filed annually
by 3,430 investment companies offering approximately 16,428 portfolios, or
approximately 3.6 responses per portfolio annually. 11 The burden associated with rule
482 is presently estimated to be 5.16 hours per response. The annual hourly burden is
therefore approximately 305,704 hours. 12

9

17 CFR 230.400-498.

10

This estimated number of responses to rule 482 is composed of 58,976 responses filed
with FINRA and 269 responses filed with the Commission in 2012.

11

59,245 responses ÷ 16,428 portfolios = 3.6 responses per portfolio.

12

59,245 responses x 5.16 hours per response = 305,704 hours.
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Based on a Commission estimate of 305,704 hours and an estimated wage rate of
approximately $250.25 per hour, 13 the total cost to the industry of the hour burden for
complying with the requirements of rule 482 is approximately $76,502,426. 14
13.

Costs to Respondents

Cost burden is the cost of services purchased to comply with rule 482, 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 hour burden
discussed in Item 12 above. Estimates are based on the Commission’s experience with
advertisements and sales literature. The Commission currently attributes no external cost
burden to rule 482.
14.

Costs to Federal Government

Advertising regulation affects costs incurred by the federal government. 59,245
responses are filed annually pursuant to rule 482; however, these responses are generally
filed with FINRA and are generally not reviewed by the Commission. The annual cost of
reviewing and processing registration statements, post-effective amendments, proxy
statements, shareholder reports, and other filings of funds amounted to approximately

13

The Commission’s estimated relevant wage rate is based on salary information for the
securities industry compiled by the Securities Industry and Financial Markets
Association. The estimated wage figure rate figure is based on published hourly wage
rates for compliance attorneys, paralegals, and senior compliance examiners, modified to
account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm
size, employee benefits, and overhead, yielding effective hourly rates of $310, $175, and
$206, respectively. See Securities Industry and Financial Markets Association, Report on
Management & Professional Earnings in the Securities Industry 2012. The estimated
wage rate is further based on the estimate that attorneys would handle 50% of hours spent
on advertising regulation and that paralegals and compliance examiners would handle the
remaining 50% in equal parts, yielding a weighted wage rate of $250.25. ($310 x .50) +
($175 x .25) + ($206 x .25) = $250.25.

14

305,704 hours x $250.25 per hour = $76,502,426.
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$19.8 million in fiscal year 2012, based on the Commission’s computation of the value of
staff time devoted to this activity and related overhead.
15.

Changes in Burden

The estimated hourly burden associated with rule 482 has increased from 301,179
hours to 305,704 hours (an increase of 4,525 hours). The increase is due to an increase in
the estimated number of annual responses pursuant to rule 482.
16.

Information Collection Planned for Statistical Purposes

The results of any information collected will not be published.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the OMB expiration date.
18.

Exceptions to Certification Statement

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

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

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