The Burdens of Rule 17j-1

SEC Release for Paperwork Reduction Act Contains Interesting Conclusions

By John M. Baker, Esq.

It is truly a tribute to the ingenuity of the federal bureaucracy to observe the extensive notice and comment requirements of the Paperwork Reduction Act. In accordance with the Act, the SEC, like other federal agencies, regularly solicits comments on the collection of information under its rules and forms. The SEC recently solicited comments on the collection of information under 1940 Act Rule 17j-1, the rule requiring registered investment companies to have codes of ethics. 66 Fed. Reg. 34493 (June 20, 2001).

SEC estimates of burden hours are traditionally low; the suggestion that the industry, in the aggregate, spends only 3,700 hours per year preparing new or amended codes of ethics for presentation to fund boards is particularly amusing.

>>The Commission estimates that each year a total of 80,706 Access Persons and 17j-1 organizations are subject to the rule’s reporting requirements.6 Respondents provide approximately 113,896 responses each year. Each initial holdings report takes approximately forty-two minutes for each of the approximately 10,400 new Access Person each year to prepare. We estimate that each year Access Persons file approximately 30,000 quarterly transaction reports, each of which takes approximately twenty minutes to prepare. We estimate that each year approximately 75,000 Access Persons file annual holdings reports, each of which takes approximately forty-two minutes to prepare. We estimate that Access Persons file approximately 680 requests for preapproval of purchases of securities through initial public offerings and private placements, each of which takes approximately twenty-six minutes to prepare. In the aggregate, Access Persons spend approximately 70,000 hours per year complying with the reporting requirements under the rule.

We estimate that the industry spends approximately 37,000 hours notifying Access Persons of their reporting obligations and overseeing the reporting. We estimate that the industry spends approximately 3,600 hours per year preparing the annual reports regarding issues under the code of ethics and accompanying certifications to fund boards. We estimate that the industry spends approximately 2,500 hours a year preparing new codes of ethics for presentation to fund boards and approximately 1,200 hours per year preparing amendments for presentation to fund boards. We estimate that the industry spends approximately 370 hours per year documenting its approval of requests to purchase securities through initial public offerings or private placements. We estimate that the industry spends approximately 146,500 hours each year maintaining rule 17j-1 records and 13,500 hours maintaining and upgrading their electronic reporting and recordkeeping systems related to rule 17j-1. In the aggregate, 17j-1 organizations spend approximately 204,300 hours per year complying with their reporting and recordkeeping requirements under the rule and ensuring that Access Persons fulfill their reporting obligations. The total annual burden of the rule’s paperwork requirements is, therefore, estimated to be approximately 274,300 hours.

Comments on the information collection are due within 60 days of publication.

Copyright 2001, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to fundlaw-subscribe@egroups.com

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.