38a-1 Supporting Statement (Valuation RM 2020)

OMB CONTROL NUMBER: 3235-0586

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 38a-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 38a-1 under the Investment Company Act of 1940 (“Investment Company Act”) 1 is
intended to protect investors by fostering better fund compliance with securities laws. 2 The rule
requires every registered investment company and business development company (“fund”) to:
(i) adopt and implement written policies and procedures reasonably designed to prevent
violations of the federal securities laws by the fund, including procedures for oversight of
compliance by each investment adviser, principal underwriter, administrator, and transfer agent
of the fund; (ii) obtain the fund board of directors’ approval of those policies and procedures and
the policies and procedures of each investment adviser, principal underwriter, administrator, and
transfer agent of the fund; (iii) annually review the adequacy of those policies and procedures
and the policies and procedures of each investment adviser, principal underwriter, administrator,
and transfer agent of the fund, and the effectiveness of their implementation; (iv) designate a
chief compliance officer to administer the fund’s policies and procedures and prepare an annual
report to the board that addresses certain specified items relating to the policies and procedures;
and (v) maintain for five years the compliance policies and procedures and the chief compliance
officer’s annual report to the board.

1

15 U.S.C. 80a-1 et seq.

2

17 CFR 270.38a-1.

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On December 2, 2020, the Commission issued a release adopting rules 2a-5 and 31a-4
under the Investment Company Act.3 Rule 2a-5 addresses valuation practices and the role of the
board of directors with respect to the fair value of the investments of a fund, and provides
requirements for determining fair value in good faith for purposes of the Act. Rule 31a-4
provides the recordkeeping requirements that will be associated with fair value determinations.
Upon adoption of rules 2a-5 and 31a-4, rule 38a-1 by its terms will require the adoption and
implementation of written policies and procedures reasonably designed to prevent violations of
the requirements of rules 2a-5 and 31a-4 (“fair value policies and procedures”).
2.

Purpose and Use of the Information Collection

The purpose of the information collection requirements in rule 38a-1 is to ensure that
funds maintain comprehensive, written internal compliance programs that promote compliance
with the federal securities laws. The information collections also assist the Commission’s
examination staff in assessing the adequacy of funds’ compliance programs.
3.

Consideration Given to Information Technology

Rule 38a-1 does not require the reporting of any information or the filing of any
documents with the Commission. Rule 38a-1 does require funds to maintain written policies and
procedures. Each fund also is required to maintain for at least five years a copy of the annual
compliance report provided to the fund’s board of directors. The Electronic Signatures in Global
and National Commerce Act 4 and the conforming amendments to rules under the Investment
Company Act permit funds to maintain records electronically.
4.

Duplication

3

See Investment Company Act Release No.34128 (Dec. 3, 2020) [FR] (“Adopting Release”).

4

P.L. 106-229, 114 Stat. 464 (June 30, 2000).

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Rule 38a-1 imposes a broad requirement that funds have in place written compliance
policies and procedures. Funds also are subject to certain requirements elsewhere in the federal
securities laws that require them to maintain written policies and procedures. The staff believes,
however, that any duplication of recordkeeping requirements is limited. Moreover, rule 38a-1
does not require funds to maintain duplicate copies of records covered by these more targeted
requirements, and a firm’s compliance policies and procedures are not required to be maintained
in a single location. The staff believes, therefore, that any duplication of regulatory requirements
does not impose significant additional costs on funds. The Commission periodically evaluates
rule-based recordkeeping requirements for duplication and reevaluates them whenever it
proposes a rule or a change in a rule.
5.

Effect on Small Entities

Funds, regardless of their size, are subject to the requirements of rule 38a-1. Effective
internal compliance programs are essential for firms of all sizes. Rule 38a-1 affords funds the
flexibility to tailor their compliance program to the nature of their business. Small firms, which
generally have less complex and more limited operations, likely need less extensive compliance
programs than their larger counterparts. Thus, rule 38a-1 does not inappropriately burden small
entities. The Commission believes that it could not adjust the rule to lessen the burden on small
entities of complying with the rule without jeopardizing the interests of investors in small 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

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Less frequent information collection would be incompatible with the objectives of rule
38a-1. The annual reviews required under rule 38a-1 are integral to detecting and correcting any
gaps in the program before irrevocable or widespread harm is inflicted upon investors, and
extending the time between reviews increases the likelihood that such harm could go unchecked.
7.

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

Rule 38a-1 requires funds and advisers to maintain their internal compliance policies and
procedures and documents related to the annual review of those policies and procedures for at
least five years. Although this period exceeds the three-year guideline for most kinds of records
under 5 CFR 1320.5(d)(2)(iv), the staff believes that this is warranted because the rule
contributes to the effectiveness of the Commission’s examination and inspection program.
Because the period between examinations may be as long as five years, it is important that the
Commission have access to records that cover the entire period between examinations.
8.

Consultation Outside the Agency

As discussed above, upon the adoption of rules 2a-5 and 31a-4, rule 38a-1 by its terms
will require the adoption and implementation of written fair value policies and procedures
reasonably designed to prevent violations of the requirements of rules 2a-5 and 31a-4. Before
adopting rules 2a-5 and 31a-4, the Commission solicited and evaluated public comment on the
collection of information requirement. Specifically, the public was given the opportunity to
comment on the Commission’s estimates for the burdens of rules 31a-4 and 2a-5 as proposed.
While comments were received from filers, investors and other market participants, and were
considered by the Commission as discussed in the Adopting Release, most of these did not relate
to the proposed burden estimates for rules 2a-5 and 31a-4. However we have corrected certain
estimates, specifically to update the wage rates for relevant personnel. We have also updated the

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estimated number of respondents based upon updated data. 5 Lastly, we added an estimated
amount of external cost burdens to account for the likely costs that will be incurred relating to
both legal and accounting services necessary to adopt and implement fair value policies and
procedures in compliance with rule 38a-1. In addition, the Commission and the staff of the
Division of Investment Management participate in an ongoing dialogue with representatives of
the investment company industry through public conferences, meetings, and informal exchanges.
These forums provide the Commission and the staff with a means of ascertaining and acting
upon paperwork burdens confronting the industry.
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Confidentiality

If information collected pursuant to rule 38a-1 is reviewed by the Commission’s
examination staff, it 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.
11.

Sensitive Questions

No information of a sensitive nature is 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

The following estimates of average burden hours and costs are made solely for purposes
of the Paperwork Reduction Act of 1995 and are not derived from a comprehensive or even

5

See Adopting Release, supra footnote 3, at text following n.656.

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representative survey or study of the costs of Commission rules. In our most recent Paperwork
Reduction Act submission for rule 38a-1, we estimated for rule 38a-1a total hour burden of
235,720 hours, at a time cost of $86,784,720, and no external burden costs.6 Compliance with
rule 38a-1 is mandatory for funds.
As discussed above, upon the Commission’s adoption of rules 2a-5 and 31a-4, rule 38a-1
will require the adoption and implementation of written policies and procedures reasonably
designed to prevent violations of the requirements of the rules. To comply with rule 38a-1, these
policies and procedures must be tailored to rules 2a-5 and 31a-4’s requirements to ensure that a
board or valuation designee, as applicable, determines the fair value of fund investments in
compliance with the rules. Because rules 2a-5 and 31a-4 are new rules under the Act with new
fair value determination requirements, and given the intrinsic relationship of the rules to the
board’s own statutory functions relating to valuation, the fair value policies and procedures must
be approved by the board pursuant to rule 38a-1 and may not be considered material
amendments to existing fair value policies and procedures. Further, we believe that funds will
likely incur external legal and accounting services in developing the fair value policies and
procedures. Therefore, our revised PRA estimates includes external costs.
Table 1 below summarizes our current PRA estimates, revised from the previously
approved PRA estimates to account for the initial and ongoing burden estimates associated with
the new fair value policies and procedures.
TABLE 1: RULE 38A-1 PRA ESTIMATES
Internal
initial
burden
hours

Internal
annual
burden
hours

Wage rate1

Internal time
costs

Initial external
cost burden

Annual external
cost burden

FINAL ESTIMATES

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This estimate is based on the last time the rule’s information collection was submitted in 2020.

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Establishing and
implementing new 38a-1 fair
value policies and procedures

Reviewing and updating
policies and procedures

6 hours

4 hours2

x

$329 (senior
manager)

$1,316.00

6 hours

4 hours2

x

$466 (ass’t
general counsel)

$1,864.00

3 hours

2 hours3

x

$530 (chief
compliance officer)

$1,060.00

3 hours

2 hours3

x

$365 (compliance
attorney)

$730.00

3 hours

2 hours3

$4,770 (Board of
Directors as a
whole)4

$9,540

3 hours

x

$329 (senior
manager)

$987.00

3 hour

x

$466 (ass’t
general counsel)

$1,398.00

1 hour

x

$530 (chief
compliance officer)

$530.00

1 hour

X

$4,770 (Board of
Directors as a
whole)4

$4,770.00

$3,000.00

$1,000.00

$1,000.00

Total annual burden per fund

22 hours

$22,195.00

Number of affected funds

× 9,804

× 9,804

× 9,804

× 9,804

Total annual burden

215,688
hours

$217,599,780

$29,412,000

$19,608,000

$2,000.00

TOTAL ESTIMATED BURDENS FOR RULE 38a-1
Current burden estimates

235,720
hours

$86,784,720

$0

$0

Revised burden estimates

451,408
hours

$304,384,500

$29,412,000

$19,608,000

Notes:
1. Wage rates are based on salary information for the securities industry compiled by the Securities Industry and Financial Markets Association’s
Office Salaries in the Securities Industry 2013 (“SIFMA Report”), modified by Commission staff to account for an 1800-hour work year and inflation,
and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead.
2. Includes initial burden estimates annualized over a three-year period, plus 2 hours of ongoing annual burden hours.
3. Includes initial burden estimates annualized over a three-year period, plus 1 hour of ongoing annual burden hours.
4. The estimate for the cost of board time as a whole is derived from estimates made by the staff regarding typical board size and compensation,
based on information received from fund representatives and publicly available sources.

13.

Cost to Respondents

Cost burden is the cost of goods and services purchased to comply with rule 38a-1, such
as legal and accounting services. The cost burden does not include the hour burden discussed in
Item 12 above. Estimates are based on the Commission’s examination and oversight experience.
As summarized in Table 1 above, in our most recent Paperwork Reduction Act submission for
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rule 38a-1, Commission staff estimated about that there were no external cost burdens associated
with rule 38a-1. However, we believe that funds will likely incur external legal and accounting
services associated with developing the fair value policies and procedures. Therefore, our revised
PRA estimates includes $2,000 annual external costs.

14.

Cost to the Federal Government

Rule 38a-1 does not impose a cost on the federal government. Rule 38a-1 does not
require funds to file any documents with the Commission. However, the Commission staff may
records produced pursuant to the rule in order to assist the Commission in carrying out its
examination and oversight program.
15.

Change in Burden

The estimated total annual burden hours increased 215,688 hours, from 235,720 hours to
451,408 hours and an increase in external costs from $0 to $2,000. This increase in burden hours
and external costs is attributable to additional burdens associated with the Commission’s
adoption of rules 2a-5 and 31a-4.
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.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.
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