[Federal Register Volume 67, Number 214 (Tuesday, November 5, 2002)]
[Notices]
[Pages 67431-67432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28098]



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SECURITIES AND EXCHANGE COMMISSION


Submission for OMB Review; Comment Request

[Extension: Rule 31a-2, SEC File No. 270-174, OMB Control No. 3235-
0179; Rule 32a-4, SEC File No. 270-473, OMB Control No. 3235-0530]

    Upon Written Request, Copies Available From: Securities and 
Exchange Commission, Office of Filings and Information Services, 
Washington, DC 20549-0004.

    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 (``OMB'') a request for extension of the previously approved 
collections of information discussed below.
    Section 31(a)(1) of the Investment Company Act of 1940 (the 
``Act'') requires registered investment companies (``funds'') and 
certain principal underwriters, broker-dealers, investment advisers and 
depositors of funds to maintain and preserve records as prescribed by 
Commission rules.\1\ Rule 31a-1 specifies the books and records each of 
these entities must maintain.\2\ Rule 31a-2, which was adopted on April 
17, 1944, specifies the time periods that entities must retain books 
and records required to be maintained under rule 31a-1.\3\
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    \1\ 15 U.S.C. 80a-30(a)(1).
    \2\ 17 CFR 270.31a-1.
    \3\ 17 CFR 270.31a-2.
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    Rule 31a-2 requires the following:
    1. Every fund must preserve permanently, and in an easily 
accessible place for the first two years, all books and records 
required under rule 31a-1(b)(1)-(4).\4\
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    \4\ 17 CFR 270.31a-1(b)(1)-(4). These include, among other 
records, journals detailing daily purchases and sales of securities 
or contracts to purchase and sell securities, general and auxiliary 
ledgers reflecting all asset, liability, reserve, capital, income 
and expense accounts, separate ledgers reflecting, separately for 
each portfolio security as of the trade date all ``long'' and 
``short'' positions carried by the fund for its own account, and 
corporate charters, certificates of incorporation and by-laws.
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    2. Every fund must preserve for at least six years, and in an 
easily accessible place for the first two years: (a) all books and 
records required under rule 31a-1(b)(5)-(12);\5\ (b) all vouchers, 
memoranda, correspondence, checkbooks, bank statements, canceled 
checks, cash reconciliations, canceled stock certificates and all 
schedules that support each computation of net asset value of fund 
shares; and (c) any advertisement, pamphlet, circular, form letter or 
other sales literature addressed or intended for distribution to 
prospective investors.
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    \5\ 17 CFR 270.31a-1(b)(5)-(12). These include, among other 
records, records of each brokerage order given in connection with 
purchases and sales of securities by the fund, all other portfolio 
purchases, records of all puts, calls, spreads, straddles or other 
options in which the fund has an interest, has granted, or has 
guaranteed, records of proof of money balances in all ledger 
accounts, files of all advisory material received from the 
investment adviser, and memoranda identifying persons, committees or 
groups authorizing the purchase or sale of securities for the fund.
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    3. Every underwriter, broker or dealer that is a majority-owned 
subsidiary of a fund must preserve records required to be preserved by 
brokers and dealers under rules adopted under section 17 of the 
Securities Exchange Act (``section 17'') for the periods established in 
those rules.
    4. Every depositor of any fund, and every principal underwriter of 
any fund other than a closed-end fund, must preserve for at least six 
years records required to be preserved by brokers and dealers under 
rules adopted under section 17 to the extent the records are necessary 
or appropriate to record the entity's transactions with the fund.
    5. Every investment adviser that is a majority-owned subsidiary of 
a fund must preserve the records required to be maintained by 
investment advisers under rules adopted under section 204 of the 
Investment Advisers Act of 1940 (``section 204'') for the periods 
specified in those rules.
    6. Every investment adviser that is not a majority-owned subsidiary 
of a fund must preserve for at least six years records required to be 
maintained by registered investment advisers under rules adopted under 
section 204 to the extent the records are necessary or appropriate to 
reflect the adviser's transactions with the fund.
    The records required to be maintained and preserved under this part 
may be maintained and preserved for the required time by, or on behalf 
of, an investment company on (i) micrographic media, including 
microfilm, microfiche, or any similar medium, or (ii) electronic 
storage media, including any digital storage medium or system that 
meets the terms of this section. The investment company, or person that 
maintains and preserves records on its behalf, must arrange and index 
the records in a way that permits easy location, access, and retrieval 
of any particular record.\6\
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    \6\ In addition, the fund, or whoever maintains the documents 
for the fund must provide promptly any of the following that the 
Commission (by its examiners or other representatives) or the 
directors of the company may request: (A) a legible, true, and 
complete copy of the record in the medium and format in which it is 
stored; (B) a legible, true, and complete printout of the record; 
and (C) means to access, view, and print the records; and separately 
store, for the time required for preservation of the original 
record, a duplicate copy of the record on any medium allowed by this 
section. In the case of records retained on electronic storage 
media, the investment company, or person that maintains and 
preserves records on its behalf, must establish and maintain 
procedures: (i) To maintain and preserve the records, so as to 
reasonably safeguard them from loss, alteration, or destruction; 
(ii) to limit access to the records to properly authorized 
personnel, the directors of the investment company, and the 
Commission (including its examiners and other representatives); and 
(iii) to reasonably ensure that any reproduction of a non-electronic 
original record on electronic storage media is complete, true, and 
legible when retrieved.
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    The Commission periodically inspects the operations of all funds to 
ensure their compliance with the provisions of the Act and the rules 
under the Act. The Commission staff spends a significant portion of 
their time in these inspections reviewing the information contained in 
the books and records required to be kept by rule 31a-1 and to be 
preserved by rule 31a-2.
    There are approximately 4,500 active investment companies 
registered with the Commission as of April 30, 2002, all of which are 
required to comply with rule 31a-2. Based on conversations with 
representatives of the fund industry, the Commission staff estimates 
that each fund spends about 210 hours per year complying with rule 31a-
2, for a total annual burden for the fund industry of approximately 
945,000 hours.\7\
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    \7\ Commission staff surveyed several fund representatives to 
determine the current burden hour estimate. The staff found that an 
average fund spends approximately 210 hours per annum complying with 
rule 31a-2 (210 hours x 4,500 registered investment companies = 
945,000). Although the Commission did not change its collection of 
information requirements in rule 31a-2, the fund representatives' 
estimates reflect an annual increase of 182 hours per fund over the 
burden of 27.8 hours estimated in the 1998 PRA submission. The 
change in annual hours is based upon an increase in the estimated 
time each fund spends complying with the rule.
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    The Commission staff estimates the average cost of preserving books 
and records required by rule 31a-2, to be approximately $.000035 per 
$1.00 of net assets per year.\8\ With the total net assets of all funds 
at about $7 trillion,\9\ the staff estimates that compliance with rule 
31a-2 costs the fund industry approximately $245 million per year.\10\

[[Page 67432]]

The Commission staff estimates, however, based on past conversations 
with representatives of the fund industry, that funds could spend as 
much as half of this amount ($122.4 million) to preserve the books and 
records that are necessary to prepare financial statements, meet 
various state reporting requirements, and prepare their annual federal 
and state income tax returns.
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    \8\ The staff estimated the annual cost of preserving the 
required books and records by identifying the annual costs for 
several funds and then relating this total cost to the average net 
assets of these funds during the year. The staff estimates that the 
annual cost of preserving records is $70,000 per fund; the funds 
queried in support of this analysis had an average asset base of 
approximately $2 billion (70,000/2 billion=.000035).
    \9\ See Investment Company Institute, 2002 Mutual Fund Fact 
Book, at 61.
    \10\ This estimate is based on the annual cost per dollar of net 
assets of the average fund as applied to the net assets of all funds 
($7 trillion x .000035 = $244.7 million).
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    Rule 32a-4 [17 CFR 270.32a-4] is entitled ``Independent Audit 
Committees.'' The rule exempts a fund from the requirements of section 
32(a)(2) of the Investment Company Act that shareholders ratify or 
reject the selection of the independent public accountant of a 
registered management company or registered face-amount certificate 
company if the fund has an audit committee composed wholly of 
independent directors.
    Instead of relying on rule 32a-4, a fund could seek ratification or 
rejection by shareholders of the selection of its independent public 
accountant at each annual meeting. Under the rule, a fund is exempt 
from having to seek shareholder approval of its independent public 
accountant, if (i) the fund's board of directors establishes an audit 
committee composed solely of independent directors with responsibility 
for overseeing the fund's accounting and auditing processes,\11\ (ii) 
the fund's board of directors adopts an audit committee charter setting 
forth the committee's structure, duties, powers and methods of 
operation, or sets out similar provisions in the fund's charter or 
bylaws,\12\ and (iii) the fund maintains a copy of such an audit 
committee charter permanently in an easily accessible place.\13\
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    \11\ Rule 32a-4(a).
    \12\ Rule 32a-4(b).
    \13\ Rule 32a-4(c).
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    As conditions of relying on rule 32a-4, a fund's board of directors 
must adopt an audit committee charter and must preserve that charter, 
and any modifications to the charter, permanently in an easily 
accessible place. The information collection requirement in rule 32a-4 
enables the Commission to monitor the duties and responsibilities of an 
independent audit committee formed by a fund relying on the rule. 
Commission staff estimates that there are approximately 3,700 
management investment companies and face-amount certificate companies 
that could rely on the rule. We believe that approximately 9.7 percent 
(360) of those funds have taken advantage of the exemption since 
adoption of the rule, and approximately 2.7 % (100) of the funds that 
have not already done so choose to rely on the rule each year. For each 
of those funds choosing for the first time to rely on the rule, we 
estimate that the adoption of the audit committee charter requires, on 
average, 1 hour of directors' time, 2.5 hours of professional time and 
1 hour of support staff time, for a total one-time burden of 4.5 hours, 
and an estimated total one-time cost of $555.40, resulting in an annual 
aggregate time burden of 450 hours and an annual aggregate cost of 
$55,540.\14\
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    \14\ To calculate this cost, the Commission staff used an 
average hourly wage rate of $300 per hour for directors, an average 
hourly wage rate of $96.16 per hour for professionals, and an 
average hourly wage rate of $15 per hour for support staff ((100 x 1 
x $300/hour) + (100 x 2.5 x $96.16/hour) + (100 x 1 x $15/hour) = 
$55,540). See Securities Industry Association, Report on Management 
& Professional Earnings in the Securities Industry 2001 (Oct. 2001).
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    In addition to the hour burden described above, rule 32a-4 imposes 
certain costs on those funds that choose to rely on the exemption. 
These costs are minimal and are justified by the relief provided by the 
exemption. We estimate that each of the approximately 360 funds 
currently relying on the rule is required to spend approximately .5 
hours annually to comply with the requirement that it preserve 
permanently its audit committee charters, for an additional annual hour 
burden of 180 hours, and an additional annual cost for all funds of 
$12,439.20. \15\
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    \15\ In calculating this annual cost, the Commission staff 
estimated that one-third of the annual hour burden (60 hours) would 
be incurred by support staff with an average hourly wage rate of $15 
per hour, and two-thirds of the annual burden (120 hours) would be 
incurred by professionals with an average hourly wage rate of $96.16 
per hour ((60 x $15/hour) + (120 x $96.16/hour) = $12,439.20).
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    These estimates of average costs are 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. 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.
    General comments regarding the above information should be directed 
to the following persons: (i) Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Office of Management and Budget, New Executive Office Building, 
Washington, DC 20503; and (ii) Kenneth A. Fogash, Acting Associate 
Executive Director/CIO, Office of Information Technology, Securities 
and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. 
Comments must be submitted to OMB within 30 days of this notice.

    Dated: October 29, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-28098 Filed 11-4-02; 8:45 am]
BILLING CODE 8010-01-P