[Federal Register Volume 89, Number 121 (Monday, June 24, 2024)]
[Notices]
[Pages 52528-52529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13701]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

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


Proposed Collection; Comment Request; Extension: Rule 10f-3

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'') is soliciting comments on the collections 
of information discussed below. The Commission plans to submit these 
existing collections of information to the Office of Management and 
Budget (``OMB'') for extension and approval.
    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 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 80a-10(f).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \2\ 17 CFR 270.10f-3.
---------------------------------------------------------------------------

    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

[[Page 52529]]

spend approximately 373 hours \5\ at an internal cost of $97,595 
documenting these transactions.\6\
---------------------------------------------------------------------------

    \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 x 745 transactions = approximately, 373 hours).
    \6\ This estimate is based on the following calculation: (745 
transactions x $131 = $97,595).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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 x 745 transactions = 14,900 minutes; 14,900 minutes/60 = 248 
hours).
    \9\ This estimate is based on the following calculation: (248 
hours x $84 = $20,832).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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 x 4 quarters x 745 funds = 2,980 hours).
    \12\ This estimate is based on the following calculation: (2,980 
hours x $262 = $780,760).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \13\ This estimate is based on the following calculation: (2 
hours x $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 x 2 hours = 1,490 hours).
    \16\ This estimate is based on the following calculation: (745 
funds x $880 = $655,600).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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 x 589 new funds = approximately 442 burden hours); ($500 
per hour x 442 hours = approximately, $221,200 total cost).
---------------------------------------------------------------------------

    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 reliance on Rule 10f-3 on Form N-CEN, which is 
subject to a separate PRA information collection.
    Written comments are invited on: (a) whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the Commission, including whether the information 
shall have practical utility; (b) the accuracy of the Commission'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 by August 23, 2024.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information under the PRA unless it 
displays a currently valid OMB control number.
    Please direct your written comments to: David Bottom, Chief 
Information Officer, Securities and Exchange Commission, c/o John 
Pezzullo, 100 F Street NE, Washington, DC 20549 or send an email to: 
[email protected].

    Dated: June 17, 2024.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-13701 Filed 6-21-24; 8:45 am]
BILLING CODE 8011-01-P