Supporting statement Rule 0-1

OMB CONTROL NUMBER: 3235-0531
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 0-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

The Investment Company Act of 1940 (the “Act”) 1 establishes a comprehensive
framework for regulating the organization and operation of investment companies (“funds”). A
principal objective of the Act is to protect fund investors by addressing the conflicts of interest
that exist between funds and their investment advisers and other affiliated persons. The Act
places significant responsibility on the fund board of directors in overseeing the operations of the
fund and policing the relevant conflicts of interest. 2 as subsequently amended on numerous
occasions, provides definitions for the terms used by the Commission in the rules and regulations
it has adopted pursuant to the Act. The rule also contains a number of rules of construction for
terms that are defined either in the Act itself or elsewhere in the Commission’s rules and
regulations. Finally, rule 0-1 defines terms that serve as conditions to the availability of certain
of the Commission’s exemptive rules. More specifically, the term “independent legal counsel,”
as defined in paragraph (a)(6) of rule 0-1, sets out conditions that funds must meet in order to

1

15 U.S.C. 80a.

2

For example, fund directors must approve investment advisory and distribution contracts. See 15
U.S.C. 80a-15(a), (b), and (c).

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rely on any of ten exemptive rules (“exemptive rules”) under the Act. 3
The Commission amended rule 0-1 to include the definition of the term “independent
legal counsel” in 2001. 4 This amendment was designed to enhance the effectiveness of fund
boards of directors and to better enable investors to assess the independence of those directors.
This requirement was added because independent directors can better perform the
responsibilities assigned to them under the Act and the rules if they have the assistance of truly
independent legal counsel.
If the board’s counsel has represented the fund’s investment adviser, principal
underwriter, administrator (collectively, “management organizations”) or their “control
persons” 5 during the past two years, rule 0-1 requires that the board's independent directors make
a determination about the adequacy of the counsel’s independence. A majority of the board’s
independent directors are required to reasonably determine, in the exercise of their judgment,
that the counsel’s prior or current representation of the management organizations or their
control persons was sufficiently limited to conclude that it is unlikely to adversely affect the
counsel’s professional judgment and legal representation. 6 Rule 0-1 also requires that a record

3

See 17 CFR 270.0-1(a)(7). The relevant exemptive rules are: rule 10f-3 (17 CFR 270.10f-3),
rule 12b-1 (17 CFR 270.12b-1), rule 15a-4(b)(2) (17 CFR 270.15a-4(b)(2)), rule 17a-7 (17 CFR
270.17a-7), rule 17a-8 (17 CFR 270.17a-8), rule 17d-1(d)(7) (17 CFR 270.17d-1(d)(7)), rule
17e-1(c) (17 CFR 270.17e-1(c)), rule 17g-1 (17 CFR 270.17g-1), rule 18f-3 (17 CFR 270.18f-3),
and rule 23c-3 (17 CFR 270.23c-3).

4

See Role of Independent Directors of Investment Companies, Investment Company Act Release
No. 24816 (Jan. 2, 2001) (66 FR 3735 (Jan. 16, 2001)).

5

A “control person” is any person – other than a fund – directly or indirectly controlling,
controlled by, or under common control, with any of the fund’s management organizations. See
17 CFR 270.01(a)(6)(iv)(B).

6

17 CFR 270.0-1(a)(6)(i)(A).

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for the basis of this determination is made in the minutes of the directors’ meeting. In addition,
the independent directors must have obtained an undertaking from the counsel to provide them
with the information necessary to make their determination and to update promptly that
information when the person begins to represent a management organization or control person,
or when he or she materially increases his or her representation. 7 Generally, the independent
directors must re-evaluate their determination no less frequently than annually.
2.

Purpose and Use of the Information Collection

Under rule 0-1, if a majority of a fund’s independent directors makes a determination that
the counsel’s representation of fund management organizations (or any of their control persons)
is or was so limited that it will not adversely affect the counsel’s ability to provide impartial
advice to the independent directors, the basis for that determination must be recorded in the
board’s meeting minutes. The records maintained under the rule are not submitted to the
Commission, but may be reviewed by the Commission staff upon request to ensure compliance
with the rule. If maintenance of these records were not required, the Commission could not
readily determine and review the factors considered by the independent directors in assessing the
independence of their counsel. 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.

7

17 CFR 270.0-1(a)(6)(i)(B).

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3.
Consideration Given to Information Technology
Minutes of a fund’s board meeting are required to be maintained in accordance with rule
31a-2.8 Under rule 31a-2(f), the board meeting minutes regarding legal counsel independence
under rule 0-1 may be maintained and preserved (and produced as necessary) on micrographic
media or electronic storage media. 9 As previously noted, rule 0-1 does not require the filing of
any documents with the Commission.
4.

Duplication

The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication, and reevaluates those requirements whenever it proposes a rule or
form or a change in either. Rule 0-1 does not require any duplicative recordkeeping or reporting.
5.

Effect on Small Entities

Rule 0-1 does not distinguish between large and small entities. We do not believe that
the minor recordkeeping provision in rule 0-1 is unduly burdensome for large or small entities.
6.

Consequences of Not Conducting Collection

It is necessary to have the basis for each determination made by independent directors
regarding independent legal counsel in the board’s meeting minutes because the relationships
giving rise to counsel’s underlying conflict, and the factors considered by independent directors,
will be different with each determination. If rule 0-1 did not require a basis for the
determination, the Commission staff would not be able to review the factors considered by
independent directors in assessing the independence of counsel.

8

17 CFR 270.31a-2.

9

17 CFR 270.31a-2(f).

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7.

Inconsistencies With Guidelines in 5 CFR 1230.5(d)(2)

Not applicable.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection of information
requirements in rule 0-1 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.
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 forums provide the Commission and the staff 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 will be required under this collection of information.
The information collection does not collect any 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.

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12.

Burden of Information Collection

Any fund that relies on one of the exemptive rules must comply with the requirements in
the definition of “independent legal counsel” under rule 0-1. We assume that, out of 3,373
funds, approximately 3,035 funds rely on at least one of the exemptive rules annually. 10 We
further assume that the independent directors of approximately one-third (1,010) of those funds
would need to make the required determination in order for their counsel to meet the definition
of independent legal counsel. 11 We estimate that each of these 1,010 funds would be required to
spend, on average, 0.75 hours annually to comply with the recordkeeping requirement associated
with this determination, for a total annual burden of approximately 758 hours. Based on this
estimate, the total annual cost for all funds’ compliance with this rule is approximately $175,523.
To calculate this total annual cost, the Commission staff assumed that approximately two-thirds
of the total annual hour burden (505 hours) would be incurred by a compliance manager with an
average hourly wage rate of $312 per hour, 12 and approximately one-third of the annual hour

10

Based on statistics compiled by Commission staff, we estimate that there are approximately 3,373
funds that could rely on one or more of the exemptive rules (this figure reflects the three-year
average of open-end and closed-end funds (3,269) and business development companies (104)).
Of those funds, we assume that approximately 90 percent (3,035) actually rely on at least one
exemptive rule annually.

11

We assume that the independent directors of the remaining two-thirds of those funds will choose
not to have counsel, or will rely on counsel who has not recently represented the fund’s
management organizations or control persons. In both circumstances, it would not be necessary
for the fund’s independent directors to make a determination about their counsel’s independence.

12

The estimated hourly wages used in this PRA analysis were derived from the Securities Industry
and Financial Markets Association’s Reports on Management and Professional Earnings in the
Securities Industry (2013) (modified to account for an 1800-hour work year and multiplied by
5.35 to account for bonuses, firm size, employee benefits and overhead) (adjusted for inflation),
and Office Salaries in the Securities Industry (2013) (modified to account for an 1800-hour work
year and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead
(adjusted for inflation).

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burden (253 hours) would be incurred by a compliance clerk with an average hourly wage rate of
$71 per hour.13
The estimate of average burden hours is made solely for the purposes of the Paperwork
Reduction Act. The estimate is not derived from a comprehensive or even a representative
survey or study of the costs of Commission rules.
Summary of Revised Annual Response, Burden Hours, and Cost Estimates
IC Title

Annual No. of Responses
Previously
Requested
approved

Change

Annual Time Burden (Hrs.)
Previously
Requested
Change
approved

External Cost to Respondents ($)
Previously
Requested
Change
approved

Rule 0-1

1036

-26

777

$0

13.

1010

758

-19

$0

$0

Estimate of Total Annual Cost Burden

The recordkeeping requirement of rule 0-1 does not entail any annual cost burden in
addition to the cost of the hourly burden discussed above.
14.

Estimate of Cost to the Federal Government

There are no costs to the Federal Government associated with the recordkeeping
requirement of rule 0-1.
15.

Explanation of Changes in Burden
The estimated burden hours associated with rule 0-1 have decreased from the

current allocation of 777 burden hours to 758 burden hours. The decrease in burden hours is due
to a decrease in the estimated number of funds that rely on at least one of the exemptive rules
under rule 0-1 annually. These changes in burden also reflect the Commission’s revision and
update of burden estimates for all information collections under this OMB control number

13

(505 x $312/hour) + (253 x $71/hour) =$175,523

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(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

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

Exception to Certification Statement

Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.