Rule 31a-1 Extension (Supporting Statement) (2020)

OMB CONTROL NUMBER: 3235-0178
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
RULE 31a-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 31a-1 (17 CFR 270.31a-1) under the Investment Company Act of 1940 (15 U.S.C.
80a) (the “Act”) requires registered investment companies (“funds”) and certain of their
majority-owned subsidiaries to maintain and keep current the accounts, books, auditors’
certificates, and other documents that underlie and support the financial statements these entities
are required to file with the Commission under section 30 of the Act (15 U.S.C. 80a-30). Rule
31a-1(a) defines the entities that must comply with the rule. As mentioned, the rule encompasses
funds as well as every underwriter, broker, dealer, or investment adviser that is a majority-owned
subsidiary of a fund. Rule 31a-1(b) describes the specific records that must be maintained and
kept current by the entities identified in rule 31a-1(a). These records consist of the following:
(i) journals detailing purchases and sales of securities; (ii) general and auxiliary ledgers
reflecting all asset, liability, reserve, capital income, and expense accounts; (iii) a record of all
“long” and “short” positions carried by the fund for its own account; (iv) corporate charters,
certificates of incorporation or trust agreements, bylaws, shareholder and director meeting
minutes; (v) a record of each brokerage order made by the fund for the purchase or sale of
securities; (vi) a record of all other portfolio purchases or sales; (vii) a record of all options and
contractual commitments to purchase or sell securities or other property; (viii) a record of the
money balances in all ledger accounts in the form of trial balances; (ix) a quarterly record of the
specific basis for the allocation of orders to brokerages for the purchase or sale of portfolio
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securities and for the division of commissions among brokerages and record of the persons
responsible for such allocation and division; (x) a record identifying the person or persons who
authorized the purchase or sale of portfolio securities; and (xi) files of advisory material received
from the investment adviser or other person from whom the fund accepts investment advice.
Rule 31a-1(c) requires underwriters, brokers, and dealers that are majority-owned
subsidiaries of a fund to maintain the accounts, books, and other documents that are required to
be maintained by brokers and dealers by rule adopted under section 17 of the Securities
Exchange Act of 1934 (15 U.S.C. 78q) (the “1934 Act”). Rule 31a-1(d) requires depositors and
principal underwriters for any fund other than a closed-end fund to maintain the accounts, books,
and other documents that are required to be maintained by brokers and dealers by rule adopted
under section 17 of the 1934 Act, to the extent those records are necessary or appropriate to
record such persons’ transactions with such funds.
Rule 31a-1(e) requires investment advisers that are majority-owned subsidiaries of funds
to maintain the accounts, books, and other documents that are required to be maintained by
investment advisers under section 204 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-4)
(the “Advisers Act”). Finally, rule 31a-1(f) requires investment advisers that are not majorityowned subsidiaries of funds to maintain the accounts, books, and other documents that are
required under section 204 of the Advisers Act, to the extent those records are necessary or
appropriate to record such persons’ transactions with such funds.
2.

Purpose and Use of the Information Collection

The Commission regularly conducts inspections and examinations of funds and other
regulated entities to foster compliance with the securities laws, to detect violations of the law,
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and to keep the Commission informed of developments in the regulated community. The books
and records required to be maintained by rule 31a-1 constitute a major focus of the
Commission’s inspection and examination programs. Without the information contained in the
records required by rule 31a-1, the Commission could not readily determine whether funds are in
compliance with the Act’s provisions. The rule’s requirement to maintain such records avoids
the need for potentially more burdensome requirements such as mandatory filings of similar
information with the Commission.
3.

Consideration Given to Information Technology

The records required by rule 31a-1 are required to be preserved pursuant to rule 31a-2
under the Investment Company Act (17 CFR 270.31a-2). Rule 31a-2(f) permits funds to
maintain many types of records (and produce them for the Commission's inspections and
examinations as necessary) on photographic film, magnetic tape, disk, or other computer storage
media.
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 recordkeeping required by rule 31a-1 is not duplicated elsewhere in the Commission’s
rules. To the extent the rule requires the maintenance of books and records by underwriters,
brokers, dealers, and investment advisers to funds, the requirements are consistent with those that
apply to these entities under other federal securities laws and do not require the entities to
maintain duplicate records.

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5.

Effect on Small Entities

The Commission does not believe that compliance with rule 31a-1 is unduly burdensome
for large or small entities. The information collection requirements of rule 31a-1 are the same
for all funds, including those that are small entities. Most of the information required to be
maintained is the type that generally would be maintained as a matter of good business practice
and to prepare the fund’s financial statements. The Commission reviews all rules periodically, as
required by the Regulatory Flexibility Act (5 U.S.C. 610), to identify methods to minimize
recordkeeping or filing requirements affecting small businesses.
6.

Consequences of Not Conducting Collection

As noted above, without the information contained in the records required to be
maintained and kept current by rule 31a-1, it would be difficult or impossible to determine if a
fund was in compliance with the provisions of the Act. Funds’ maintenance of these records
avoids the need for potentially more burdensome requirements such as mandatory filings with
the Commission.
7.

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

Not applicable.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 31a-1 before it submitted this request for extension and approval to the
Office of Management and Budget. The Commission received no comments in response to its
request.

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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’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).
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

No information of a sensitive nature, including social security numbers, will be
required under this collection of information. The information collection does not
collect personally identifiable information (PII). The agency has determined that a
system of records notice (SORN) and privacy impact assessment (PIA) are not
required in connection with the collection of information.
12.

Burden of Information Collection

There are approximately 3,964 active investment companies registered with the
Commission, all of which are required to comply with rule 31a-1. 1 For purposes of estimating
1

This represents an estimate of the number of active investment companies registered with the
Commission as of March 31, 2020 based on data compiled by Commission staff.

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the burden imposed on the industry by rule 31a-1, the Commission staff estimates that, on
average, each of the registered investment companies has four series and that each series is
required to comply with the recordkeeping requirements of rule 31a-1. Thus, the Commission
staff estimates that a total of approximately 15,856 series must comply with the recordkeeping
requirements of rule 31a-1 (3,964 registrants x 4 series per registrant = 15,856 series).
Based on conversations with fund representatives, the Commission staff estimates that
each series spends approximately 1,750 hours per year complying with rule 31a-1, for a total of
7,000 hours annually per registrant (1,750 per year/per series x 4 series per registrant = 7,000
hours). The estimated total annual hours all investment companies spend in maintaining the
records required under the rule therefore is approximately 27,748,000 (7,000 hours per registrant
x 3,964 registrants = 27,748,000 hours).
Of the 1,750 hours spent annually by each series to comply with rule 31a-1, the
Commission staff estimates that:2

2

•

Ten percent (175 hours) are spent by clerical staff at an estimated hourly wage of $63
for a total of $11,025 per year (175 hours x $63 per hour = $ 11,025 per year);

•

Seventy-five percent (1,312.5 hours) are spent by fund accountants at an estimated
hourly wage of $173, for a total of $227,063 per year (1,312.5 hours x $173 per hour
= $227,063 per year);

•

Five percent (87.5 hours) are spent by attorneys at an estimated hourly wage of
$419or a total of $36,663 per year (87.5 hours x $419 per hour = $36,663 per year).

•

10 percent (175 hours) are spent by operations staff at an estimated hourly wage of
$368 or a total of $64,400 per year (175 hours x $368per hour = $64,400 per year).

See Securities Industry and Financial Markets Association, Report on Management and
Professional Earnings in the Securities Industry – 2013 (2013), modified by Commission staff
to account for an 1,800-hour work year and inflation, and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.

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Thus, the estimated annual cost each series spends to maintain the records required under rule
31a-1 is $339,151 ($11,025 + $227,063 + $36,663 + $64,400), for a total annual cost per
registrant of $1,356,604 ($339,151 per series x 4 series per registrant = $1,356,604), and a total
annual cost to the industry of $5.37 billion ($1,356,604 per registrant x 3,964 registrants =
$5,377,578,256). However, based on conversations with fund representatives, the Commission
staff estimates that at least 90% of the total annual burden hours and total annual costs would be
incurred by funds in any case to keep books and records that are necessary to prepare financial
statements for shareholders, to prepare their annual income tax returns, and as a normal business
practice. Therefore, the Commission staff estimates that the actual total annual burden hours and
costs associated with rule 31a-1 are approximately 2,774,800 hours (27,748,000 hours 24,973,200 hours) and $538 million ($5,377,578,256 – $4,839,820,430 = $537,757,826).3
Summary of Revised Annual Responses, Burden Hours, and Cost Estimates
IC Title

Rule 31a-1

Annual No. of Responses

Annual Time Burden (Hrs.)

External Cost to Respondents ($)

Previously
approved

Requested

Change

Previously
approved

Requested

Change

Previously
approved

Requested

Change

4,029
Investment
Companies

3,964
Investment
Companies

-65

2,820,300

2,774,800

-45,500

$0

$0

$0

These estimates are made solely for the purposes of the Paperwork Reduction Act and are not
derived from a comprehensive or even representative survey or study of the cost of Commission
rules.

3

We have subtracted the hours and costs that staff estimates funds maintain as a matter of
normal business practice and to prepare financial statements. These estimates are:
27,748,000 hours x 0.9 = 24,973,200 and $5,377,578,256 x 0.9 = $4,839,820,430.

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13.

Cost to Respondents

The Commission staff estimates that there is no cost burden of rule 31a-1 other than the
costs of the respondent to assist with the creation of records required by rule 31a-1, funds likely
would need to acquire and maintain these computer systems in any event for the normal
functioning of their daily operations and as part of the customary and usual investment company
business practice.
14.

Cost to the Federal Government

There are no costs to the Federal Government associated with rule 31a-1.
15.

Changes in Burden

The estimated total annual hour burden has decreased from 2,820,300 hours to 2,774,800
hours. This decrease is the result of a decrease in the number of registered funds from 4,029 to
3,964. This estimate is based on statistics compiled by Commission staff. 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.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exceptions to Certification Statement for Paperwork Reduction Act
Submission

Not applicable.
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B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

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