2021-06243. Proposed Collection; Comment Request

Upon Written Request, Copies Available From: Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736

Extension:

Rule 12d1-1

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 (“OMB”) for extension and approval.

An investment company (“fund”) is generally limited in the amount of securities the fund (“acquiring fund”) can acquire from another fund (“acquired fund”). Section 12(d) of the Investment Company Act of 1940 (the “Investment Company Act” or “Act”) ^[1] provides that a registered fund (and companies it controls) cannot:

• Acquire more than three percent of another fund's securities;
• invest more than five percent of its own assets in another fund; or
• invest more than ten percent of its own assets in other funds in the aggregate.^[2]

In addition, a registered open-end fund, its principal underwriter, and any registered broker or dealer cannot sell that fund's shares to another fund if, as a result:

• The acquiring fund (and any companies it controls) owns more than three percent of the acquired fund's stock; or
• all acquiring funds (and companies they control) in the aggregate own more than ten percent of the acquired fund's stock.^[3]

Rule 12d1-1 under the Act provides an exemption from these limitations for “cash sweep” arrangements in which a fund invests all or a portion of its available cash in a money market fund rather than directly in short-term instruments.^[4] An acquiring fund relying on the exemption may not pay a sales load, distribution fee, or service fee on acquired fund shares, or if it does, the acquiring fund's investment adviser must waive a sufficient amount of its advisory fee to offset the cost of the loads or distribution fees.^[5] The acquired fund may be a fund in the same fund complex or in a different fund complex. In addition to providing an exemption from section 12(d)(1) of the Act, the rule provides exemptions from section 17(a) of the Act and rule 17d-1 thereunder, which restrict a fund's ability to enter into transactions and joint arrangements with affiliated persons.^[6] These provisions would otherwise prohibit an acquiring fund from investing in a money market fund in the same fund complex,^[7] and prohibit a fund that acquires five percent or more of the securities of a money market fund in another fund complex from making any additional investments in the money market fund.^[8]

The rule also permits a registered fund to rely on the exemption to invest in an unregistered money market fund that limits its investments to those in which a registered money market fund may invest under rule 2a-7 under the Act, and undertakes to comply with all the other provisions of rule 2a-7.^[9] In addition, the acquiring fund must reasonably believe that the unregistered money market fund (i) operates in compliance with rule 2a-7, (ii) complies with sections 17(a), (d), (e), 18, and 22(e) of the Act ^[10] as if it were a registered open-end fund, (iii) has adopted procedures designed to ensure that it complies with these statutory provisions, (iv) maintains the records required by rules 31a-1(b)(1), 31a-1(b)(2)(ii), 31a-1(b)(2)(iv), and 31a-1(b)(9); ^[11] and (v) preserves permanently, the first two years in an easily accessible place, all books and records required to be made under these rules.

Rule 2a-7 contains certain collection of information requirements. An unregistered money market fund that complies with rule 2a-7 would be subject to these collection of information requirements. In addition, the recordkeeping requirements under rule 31a-1 with which the acquiring fund reasonably believes the unregistered money market fund complies are collections of information for the unregistered money market fund. The adoption of procedures by unregistered money market funds to ensure that they comply with sections 17(a), (d), (e), 18, and 22(e) of the Act also constitute collections of information. By allowing funds to invest in registered and unregistered money market funds, rule 12d1-1 is intended to provide funds greater options for cash management. In order for a registered fund to rely on the exemption to invest in an unregistered money market fund, the unregistered money market fund must comply with certain collection of information requirements for registered money market funds. These requirements are intended to ensure that the unregistered money market fund has established procedures for collecting the information necessary to make adequate credit reviews of securities in its portfolio, as well as other recordkeeping requirements that will assist the acquiring fund in overseeing the unregistered money market fund (and Commission staff in its examination of the unregistered money market fund's adviser).

The estimated average burden hours in this collection of information are made solely for purposes of the Paperwork Reduction Act and are not derived from a quantitative, comprehensive or even representative survey or study of the burdens associated with Commission rules and forms.

The number of unregistered money market funds that are affected by rule 12d1-1 is an estimate based on the number of private liquidity funds reported on Form PF as of the fourth calendar quarter 2019.^[12] The hour burden estimates for the condition that an unregistered money market fund comply with rule 2a-7 are based on the burden hours included in the Commission's 2019 PRA extension regarding rule 2a-7.^[13] However, we have updated the estimated costs associated using the following methodology:

• For professional personnel: SIFMA's Management & Professional Earnings in the Securities Industry 2013, modified for 2020 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;
• For a fund board of directors: SIFMA data does not include a board of directors. For board time, Commission staff currently uses a cost of $4,770 per hour, which was last adjusted for inflation in 2019. This estimate assumes an average of nine board members per year; and
• For clerical personnel: SIFMA's Office Salaries in the Securities Industry 2013, modified for 2020 by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 2.93 to account for bonuses, firm size, employee benefits, and overhead.

The estimated burden of information collection for rule 2a-7 is set forth in Table 1 below. We use these estimated burdens for registered money market funds to extrapolate the information collection burdens for unregistered money market funds under rule 12d1-1 in Table 2 below.

 

Based on the estimated burden of information collection for rule 2a-7 and Form PF filings, the estimated burden of information collection for rule 12d1-1 is set forth in Table 2 below.

 

Commission staff estimates that in addition to the costs described in Table 2 above, unregistered money market funds will incur costs to preserve records, as required under rule 2a-7. These costs will vary significantly for individual funds, depending on the amount of assets under fund management and whether the fund preserves its records in a storage facility in hard copy or has developed and maintains a computer system to create and preserve compliance records. In the 2019 rule 2a-7 PRA extension, Commission staff estimated that the amount an individual money market fund may spend ranges from $100 per year to $300,000. We have no reason to believe the range is different for unregistered money market funds. Based on Form PF data as of the fourth calendar quarter 2019, liquidity funds have $294 billion in gross asset value.^[32] The Commission does not have specific information about the proportion of assets held in small, medium-sized, or large unregistered money market funds. Because liquidity funds are often used as cash management vehicles, the staff estimates that each private liquidity fund is a “large” fund (i.e., more than $1 billion in assets under management). Based on a cost of $0.0000009 per dollar of assets under management (for large funds),^[33] the staff estimates compliance with rule 2a-7 for these unregistered money market funds totals $264,600 annually.^[34]

Consistent with estimates made in the rule 2a-7 submission, Commission staff estimates that unregistered money market funds also incur capital costs to create computer programs for maintaining and preserving compliance records for rule 2a-7 of $0.0000132 per dollar of assets under management. Based on the assets under management figures described above, staff estimates annual capital costs for all unregistered money market funds of $3.88 million.^[35]

Commission staff further estimates that, even absent the requirements of rule 2a-7, money market funds would spend at least half of the amounts described above for record preservation ($132,300) and for capital costs ($1.94 million). Commission staff concludes that the aggregate annual costs of compliance with the rule are $132,300 for record preservation and $1.94 million for capital costs.

The collections of information required for unregistered money market funds by rule 12d1-1 are necessary in order for acquiring funds to be able to obtain the benefits described above. Notices to the Commission will not be kept confidential. 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 David Bottom, Director/Chief Information Officer, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549; or send an email to: [e-mail].

Dated: March 22, 2021.

J. Matthew DeLesDernier,

Assistant Secretary.

Footnotes

1.  See 15 U.S.C. 80a.

2.  See 15 U.S.C. 80a-12(d)(1)(A). If an acquiring fund is not registered, these limitations apply only with respect to the acquiring fund's acquisition of registered funds.

3.  See 15 U.S.C. 80a-12(d)(1)(B).

4.  See 17 CFR 270.12d1-1.

5.  See rule 12d1-1(b)(1).

6.  See 15 U.S.C. 80a-17(a), 15 U.S.C. 80a-17(d); 17 CFR 270.17d-1.

7.  An affiliated person of a fund includes any person directly or indirectly controlling, controlled by, or under common control with such other person. See 15 U.S.C. 80a-2(a)(3) (definition of “affiliated person”). Most funds today are organized by an investment adviser that advises or provides administrative services to other funds in the same complex. Funds in a fund complex are generally under common control of an investment adviser or other person exercising a controlling influence over the management or policies of the funds. See 15 U.S.C. 80a-2(a)(9) (definition of “control”). Not all advisers control funds they advise. The determination of whether a fund is under the control of its adviser, officers, or directors depends on all the relevant facts and circumstances. See Investment Company Mergers, Investment Company Act Release No. 25259 (Nov. 8, 2001) [66 FR 57602 (Nov. 15, 2001)], at n.11. To the extent that an acquiring fund in a fund complex is under common control with a money market fund in the same complex, the funds would rely on the rule's exemptions from section 17(a) and rule 17d-1.

8.  See 15 U.S.C. 80a-2(a)(3)(A), (B).

9.  See 17 CFR 270.2a-7.

10.  See 15 U.S.C. 80a-17(a), 15 U.S.C. 80a-17(d), 15 U.S.C. 80a-17(e), 15 U.S.C. 80a-18, 15 U.S.C. 80a-22(e).

11.  See 17 CFR 270.31a-1(b)(1), 17 CFR 270.31a-1(b)(2)(ii), 17 CFR 270.31a-1(b)(2)(iv), 17 CFR 270.31a-1(b)(9).

12.  See the U.S. Securities and Exchange Commission's Division of Investment Management—Analytics Office Private Funds Statistics, Fourth Calendar Quarter (Oct. 2, 2020) available at https://www.sec.gov/​divisions/​investment/​private-funds-statistics/​private-funds-statistics-2019-q4.pdf.

13.  See Securities and Exchange Commission, Request for OMB Approval of Extension for Approved Collection for Rule 2a-7 under the Investment Company Act of 1940 (OMB Control No. 3235-0268) (approved May 28, 2019) (the “2019 rule 2a-7 PRA extension”). The 2019 rule 2a-7 PRA extension was the most recent rule 2a-7 submission that includes certain estimates with respect to aggregate annual hour and cost burdens for collections of information for registered money market funds.

14.  The estimated responses and hour burdens shown in this chart were included in the Securities and Exchange Commission, Request for OMB Approval of Extension for Approved Collection for Rule 2a-7 under the Investment Company Act of 1940 (OMB Control No. 3235-0268) (approved May 28, 2019) (the “2019 rule 2aa-7 PRA extension”). The 2019 rule 2aa-7 PRA extension was the most recent rule 2a-7 submission that includes certain estimates with respect to aggregate annual hour and cost burdens for collections of information for registered money market funds.

However, the cost burdens shown in this chart have been updated. The cost burdens for professional personnel are based on SIFMA's Management & Professional Earnings in the Securities Industry 2013, modified for 2020 by the 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 and the cost burdens for clerical personnel are based on SIFMA's Office Salaries in the Securities Industry 2013, modified for 2020 by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead. However, SIFMA data does not include a board of directors. For board time, Commission staff currently uses a cost of $4,770 per hour, which was last adjusted for inflation in 2019. This estimate assumes an average of nine board members per year.

15.  The number of funds based on Form N-MFP filings for the month ended September 30, 2018 and used in the 2019 rule 2a-7 PRA extension.

16.  For purposes of the 2019 rule 2a-7 PRA extension, we assumed that on average 25% (433 funds × .25 = 108 funds) of money market funds would review and update their procedures on annual basis).

17.  We have not amortized the one-time hour and cost burdens figures associated with new funds, because we estimated there would be 10 new funds each year. Therefore, the burden would occur each year instead of occurring over a three-year period. We have done this throughout this PRA.

18.  Commission staff estimates that there are 91 fund complexes subject to rule 2a-7. This estimate is based on Form N-MEP filings with the Commission for the month ended September 30, 2018.

19.  We estimated that approximately two new money market funds would seek to qualify as retail money market funds under rule 2a-7 and therefore be required to adopt written policies and procedures reasonably designed to limit beneficial owners to natural persons.

For purposes of the 2019 rule 2a-7 PRA extension, Form N-MFP data reflects that of the 30 new money market funds created between April of 2015 through September 2018, only six new money market funds elected to be retail funds—or approximately two per year ((6 funds/42 months) × 12 months). Based on these figures, we estimated that two new money market fund per year would elect to be a retail fund.

20.  The cost burdens shown in this chart for professional personnel are based on SIFMA's Management & Professional Earnings in the Securities Industry 2013, modified for 2020 by the 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 and the cost burdens for clerical personnel are based on SIFMA's Office Salaries in the Securities Industry 2013, modified for 2020 by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead. However, SIFMA data does not include a board of directors. For board time, Commission staff currently uses a cost of $4,770 per hour, which was last adjusted for inflation in 2019. This estimate assumes an average of nine board members per year.

We use these estimated burdens for registered money market funds to extrapolate the information collection burdens for unregistered money market funds under rule 12d1-1 in this Table 2.

21.  The number of liquidity funds is based on the following: 65 × the percentage of liquidity funds that are at least partially in compliance with the risk-limiting provisions of rule 2a-7 and used in the most recent supporting statement for rule 2a-7 100−37.2) = 62.8%. The result (rounded up to a whole number) is 41 liquidity funds. The number of liquidity funds is based on the U.S. Securities and Exchange Commission's Division of Investment Management—Analytics Office Private Funds Statistics, Fourth Calendar Quarter (Oct. 2, 2020) available at https://www.sec.gov/​divisions/​investment/​private-funds-statistics/​private-funds-statistics-2019-q4.pdf.

22.  The number of new unregistered money market funds is estimated from 2018-2019 historical Form PF filings by liquidity fund advisers. See Securities and Exchange Commission's Division of Investment Management—Analytics Office Private Funds Statistics, Fourth Calendar Quarter (Oct. 2, 2020) available at https://www.sec.gov/​divisions/​investment/​private-funds-statistics/​private-funds-statistics-2019-q4.pdf.

23.  We recognize that in many cases the adviser to an unregistered money market fund typically performs the function of the fund's board. Money Market Fund Reform; Amendments to Form PF Investment Company Act Rel. No. 31166 (Jul. 23, 2014), 79 FR 47735, 47809 (Aug. 14, 2014).

24.  For purposes of this PRA extension, we assumed that on average 25% (41 funds × .25 = approximately 10 funds) of liquidity funds would review and update their procedures on annual basis.

25.  This number has been derived from the number of advisers to liquidity funds. See U.S Securities and Exchange Commission, Division of Investment Management, Analytics Office, Private Fund Statistics, Fourth Quarter 2019 (Oct. 2, 2020), Table 2.

26.  See supra note 23.

27.  There are no liquidity funds of this type; liquidity funds only are offered to qualified investors.

28.  See supra note 23.

29.  Id.

30.  Id.

31.  In the context of registered money market funds, we have previously estimated an average of approximately 2 occurrences for 20 funds each year; however, this number may vary significantly in any particular year. For purposes of this PRA extension, we assumed there would be same proportion of unregistered money market funds experiencing events of default or solvency each year. (20/433 registered money market funds = approximately 5%. 5% × 41 liquidity funds = approximately 2 liquidity funds.)

32.  See U.S Securities and Exchange Commission, Division of Investment Management, Analytics Office, Private Fund Statistics, Fourth Quarter 2019 (Oct. 2, 2020), Table 3.

33.  The recordkeeping cost estimates are $0.0051295 per dollar of assets under management for small funds, and $0.0005041 per dollar of assets under management for medium-sized funds. The cost estimates are the same as those used in the most recently approved rule 2a-7 submission.

34.  This estimate is based on the following calculation: ($294 billion × $0.0000009) = $264,600 for large funds.

35.  This estimate is based on the following calculation: ($294 billion × 0.0000132) = $3.88 million.