2024-19628. Submission for OMB Review; Comment Request; Extension: Rule 10f-3

Document Headings

Document headings vary by document type but may contain the following:

1. the agency or agencies that issued and signed a document
2. the number of the CFR title and the number of each part the document amends, proposes to amend, or is directly related to
3. the agency docket number / agency internal file number
4. the RIN which identifies each regulatory action listed in the Unified Agenda of Federal Regulatory and Deregulatory Actions

See the Document Drafting Handbook for more details.

Securities and Exchange Commission

1. [SEC File No. 270-237, OMB Control No. 3235-0226]

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

Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange Commission (“Commission”) has submitted to the Office of Management and Budget a request for extension and approval of the collections of information discussed below.

Section 10(f) of the Investment Company Act of 1940 (the “Act”) prohibits a registered investment company (“fund”) from purchasing any security during an underwriting or selling syndicate if the fund has certain ( print page 71674) affiliated relationships with a principal underwriter for the security.^[1] Congress enacted this provision in 1940 to protect funds and their shareholders by preventing underwriters from “dumping” unmarketable securities on affiliated funds.

Rule 10f-3 under the Act permits a fund to engage in a securities transaction that otherwise would violate Section 10(f) if, among other things: (i) the fund's directors have approved procedures for purchases made in reliance on the rule, regularly review fund purchases to determine whether they comply with these procedures, and approve necessary changes to the procedures; and (ii) a written record of each transaction effected under the rule is maintained for six years, the first two of which in an easily accessible place.^[2]

Rule 10f-3 also conditionally allows managed portions of fund portfolios to purchase securities offered in otherwise off-limits primary offerings. To qualify for this exemption, Rule 10f-3 requires that the subadviser that is advising the purchaser be contractually prohibited from providing investment advice to any other portion of the fund's portfolio and consulting with any other of the fund's advisers that is a principal underwriter or affiliated person of a principal underwriter concerning the fund's securities transactions.

These requirements provide a mechanism for fund boards to oversee compliance with the rule. The required recordkeeping facilitates the Commission staff's review of Rule 10f-3 transactions during routine fund inspections and, when necessary, in connection with enforcement actions.

The staff estimates that approximately 745 funds engage in at least one Rule 10f-3 transaction each year, for a total of 745 such transactions.^[3] Rule 10f-3 requires that the purchasing fund create a written record of each transaction that includes, among other things, information about from whom the securities were purchased and the terms of the transaction. The staff estimates that it takes an average fund approximately 30 minutes per transaction at a time cost of $131 per transaction to document each transaction.^[4] Thus, annually funds spend approximately 373 hours ^[5] at an internal cost of $97,595 documenting these transactions.^[6]

The funds also must maintain and preserve these transactional records in accordance with the rule's recordkeeping requirement, and the staff estimates that it takes a fund approximately 20 minutes per transaction at a time cost of $28 per transaction to comply with this part of the rule.^[7] The staff estimates that annually, in the aggregate, funds spend approximately 248 hours ^[8] at a cost of $20,832 to comply with this aspect of Rule 10f-3's recordkeeping requirements.^[9]

In addition, fund boards must, no less than quarterly, examine each of these transactions to ensure that they comply with the fund's policies and procedures. The information or materials upon which the board relied in making its determination also must be maintained. The staff estimates that it takes a fund 1 hour per quarter at a cost of $262 per quarter to comply with the maintenance requirement of the rule.^[10] Thus annually, in the aggregate, funds spend approximately 2,980 hours ^[11] annually at a total internal cost of $780,760 to comply with this recordkeeping requirement.^[12]

The staff further estimates that reviewing and revising as needed written procedures for Rule 10f-3 transactions takes, on average for each fund, two hours of a compliance attorney's time at a cost of approximately $880 ^[13] per year.^[14] Thus, annually, in the aggregate, the staff estimates that funds spend a total of approximately 1,490 hours ^[15] at a cost of approximately $655,600 ^[16] on monitoring and revising Rule 10f-3 procedures.

Based on an analysis of Form N-CEN filings, the staff estimates that approximately 589 new funds enter into sub-advisory agreements each year.^[17] Based on discussions with industry representatives, the staff estimates that it will require approximately 0.75 attorney hours to draft and execute additional clauses in new subadvisory contracts in order for funds and subadvisers to be able to rely on the exemptions in Rule 10f-3.^[18] Assuming that all 589 new funds that enter into new subadvisory contracts each year make the modification to their subadvisory contracts required by the rule, we estimate that Rule 10f-3's subadvisory contract requirement will require a total of 442 burden hours annually for new funds, with an associated aggregate internal cost of approximately $221,200.^[19]

The staff estimates that complying with Rule 10f-3's requirements imposes an internal burden of 5,408 hours at an internal cost of approximately $1,755,155. This estimate does not include the time spent to report a fund's ( print page 71675) reliance on Rule 10f-3 on Form N-CEN, which is subject to a separate PRA information collection.

The collection of information required by Rule 10f-3 is necessary to obtain the benefits of the rule. Responses 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 OMB control number.

The public may view background documentation for this information collection at the following website: www.reginfo.gov. Find this particular information collection by selecting “Currently under 30-day Review—Open for Public Comments” or by using the search function. Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice by October 3, 2024 to (i) [e-mail] and (ii) Austin Gerig, Director/Chief Data Officer, Securities and Exchange Commission, c/o Oluwaseun Ajayi, 100 F Street NE, Washington, DC 20549, or by sending an email to: [e-mail].

Dated: August 27, 2024.

Vanessa A. Countryman,

Secretary.

Footnotes

1.  15 U.S.C. 80a-10(f).

2.  17 CFR 270.10f-3.

3.  These estimates are based on the average number of fund filings on Form N-CEN made with the Commission for fiscal years 2021 through 2023; although business development companies (“BDCs”) may also rely on Rule 10f-3, they do not file on Form N-CEN, so our estimates for purposes of this PRA exclude BDCs; further, because Form N-CEN does not require any specific information about Rule 10f-3 transactions, we assume for purposes of this PRA that that each fund reported to have relied on Rule 10f-3 engaged in one such transaction annually.

4.  The staff estimates that this task is shared between a compliance clerk ($84/hour) and a compliance attorney ($440/hour), for a blended hourly wage rate of $262 ($84 + $440 ÷ 2 = $262) and a half-hour blended wage rate of $131 ($262 ÷ 2 = $131); all hourly wage rates are derived from SIFMA's Management & Professional Earnings in the Securities Industry (2013), 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.

5.  This estimate is based on the following calculation: (0.5 hours × 745 transactions = approximately, 373 hours).

6.  This estimate is based on the following calculation: (745 transactions × $131 = $97,595).

7.  The wage figure of $28 is one third of an average compliance clerk's hourly wage rate of $84 ($84 ÷ 3 = $28).

8.  This estimate is based on the following calculations: (20 minutes × 745 transactions = 14,900 minutes; 14,900 minutes/60 = 248 hours).

9.  This estimate is based on the following calculation: (248 hours × $84 = $20,832).

10.  The staff estimates that a compliance clerk spends half an hour preparing the report and a compliance attorney spends half an hour reviewing the report, for a blended hourly wage rate of $262 per hour. See supra note 4.

11.  This estimate is based on the following calculation: (1 hour per quarter × 4 quarters × 745 funds = 2,980 hours).

12.  This estimate is based on the following calculation: (2,980 hours × $262 = $780,760).

13.  This estimate is based on the following calculation: (2 hours × $440 = $880).

14.  These averages take into account the fact that in most years, fund attorneys and boards spend little or no time modifying procedures and in other years, they spend significant time doing so.

15.  This estimate is based on the following calculation: (745 funds × 2 hours = 1,490 hours).

16.  This estimate is based on the following calculation: (745 funds × $880 = $655,600).

17.  Based on the average number of subadvisory agreements entered into by funds during fiscal years 2021-2023, as filed with the Commission on Form N-CEN, we estimate that approximately 559 new open-end funds and 30 new closed-end funds, or a total of 589 new funds enter into new subadvisory agreements each year (559 + 30 = 589 new funds); we understand that existing funds may also enter into new subadvisory agreements, but in many cases would benefit from having previously drafted Rule 10f-3 clauses in prior or existing subadvisory contracts.

18.  Because such clauses are identical to the clauses that a fund would need to insert in their subadvisory contracts to rely on Rules 12d3-1, 17a-10, and 17e-1, and because we believe that funds that use one such rule generally use all of these rules, we apportion this 3 hour time burden equally to all four rules; therefore, we estimate that the burden allocated to Rule 10f-3 for this contract change would be 0.75 hours (3 hours ÷ 4 rules = .75 hours/rule); the staff further estimates that the average hourly wage rate for an attorney to perform this service is $375/hour.

19.  These estimates are based on the following calculations: (0.75 hours × 589 new funds = approximately 442 burden hours); ($500 per hour × 442 hours = approximately, $221,200 total cost).