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Federal Register / Vol. 67, No.

214 / Tuesday, November 5, 2002 / Notices 67431

SECURITIES AND EXCHANGE memoranda, correspondence, The Commission periodically inspects


COMMISSION checkbooks, bank statements, canceled the operations of all funds to ensure
checks, cash reconciliations, canceled their compliance with the provisions of
Submission for OMB Review; stock certificates and all schedules that the Act and the rules under the Act. The
Comment Request support each computation of net asset Commission staff spends a significant
value of fund shares; and (c) any portion of their time in these
[Extension: Rule 31a–2, SEC File No. 270–
advertisement, pamphlet, circular, form inspections reviewing the information
174, OMB Control No. 3235–0179; Rule 32a–
4, SEC File No. 270–473, OMB Control No. letter or other sales literature addressed contained in the books and records
3235–0530] or intended for distribution to required to be kept by rule 31a–1 and
prospective investors. to be preserved by rule 31a-2.
Upon Written Request, Copies Available
3. Every underwriter, broker or dealer There are approximately 4,500 active
From: Securities and Exchange Commission,
Office of Filings and Information Services, that is a majority-owned subsidiary of a investment companies registered with
Washington, DC 20549–0004. fund must preserve records required to the Commission as of April 30, 2002, all
be preserved by brokers and dealers of which are required to comply with
Notice is hereby given that, pursuant rule 31a–2. Based on conversations with
under rules adopted under section 17 of
to the Paperwork Reduction Act of 1995 representatives of the fund industry, the
the Securities Exchange Act (‘‘section
(44 U.S.C. 3501–3520), the Securities Commission staff estimates that each
17’’) for the periods established in those
and Exchange Commission fund spends about 210 hours per year
rules.
(‘‘Commission’’) has submitted to the complying with rule 31a–2, for a total
4. Every depositor of any fund, and
Office of Management and Budget annual burden for the fund industry of
every principal underwriter of any fund
(‘‘OMB’’) a request for extension of the approximately 945,000 hours.7
other than a closed-end fund, must
previously approved collections of The Commission staff estimates the
preserve for at least six years records
information discussed below. average cost of preserving books and
required to be preserved by brokers and
Section 31(a)(1) of the Investment records required by rule 31a–2, to be
dealers under rules adopted under
Company Act of 1940 (the ‘‘Act’’) approximately $.000035 per $1.00 of net
section 17 to the extent the records are
requires registered investment assets per year.8 With the total net assets
necessary or appropriate to record the
companies (‘‘funds’’) and certain of all funds at about $7 trillion,9 the staff
entity’s transactions with the fund.
principal underwriters, broker-dealers, estimates that compliance with rule
5. Every investment adviser that is a
investment advisers and depositors of 31a–2 costs the fund industry
majority-owned subsidiary of a fund
funds to maintain and preserve records approximately $245 million per year.10
must preserve the records required to be
as prescribed by Commission rules.1
maintained by investment advisers
Rule 31a–1 specifies the books and format in which it is stored; (B) a legible, true, and
under rules adopted under section 204
records each of these entities must complete printout of the record; and (C) means to
of the Investment Advisers Act of 1940 access, view, and print the records; and separately
maintain.2 Rule 31a–2, which was
(‘‘section 204’’) for the periods specified store, for the time required for preservation of the
adopted on April 17, 1944, specifies the original record, a duplicate copy of the record on
in those rules.
time periods that entities must retain 6. Every investment adviser that is not any medium allowed by this section. In the case of
books and records required to be records retained on electronic storage media, the
a majority-owned subsidiary of a fund investment company, or person that maintains and
maintained under rule 31a–1.3 must preserve for at least six years preserves records on its behalf, must establish and
Rule 31a–2 requires the following: maintain procedures: (i) To maintain and preserve
records required to be maintained by
1. Every fund must preserve the records, so as to reasonably safeguard them from
registered investment advisers under loss, alteration, or destruction; (ii) to limit access to
permanently, and in an easily accessible
rules adopted under section 204 to the the records to properly authorized personnel, the
place for the first two years, all books
extent the records are necessary or directors of the investment company, and the
and records required under rule 31a– Commission (including its examiners and other
appropriate to reflect the adviser’s
1(b)(1)–(4).4 representatives); and (iii) to reasonably ensure that
transactions with the fund. any reproduction of a non-electronic original record
2. Every fund must preserve for at
The records required to be maintained on electronic storage media is complete, true, and
least six years, and in an easily
and preserved under this part may be legible when retrieved.
accessible place for the first two years: 7 Commission staff surveyed several fund
maintained and preserved for the
(a) all books and records required under representatives to determine the current burden
required time by, or on behalf of, an hour estimate. The staff found that an average fund
rule 31a–1(b)(5)–(12);5 (b) all vouchers,
investment company on (i) spends approximately 210 hours per annum
1 15 micrographic media, including complying with rule 31a–2 (210 hours × 4,500
U.S.C. 80a–30(a)(1). registered investment companies = 945,000).
2 17 CFR 270.31a–1. microfilm, microfiche, or any similar
Although the Commission did not change its
3 17 CFR 270.31a–2. medium, or (ii) electronic storage media, collection of information requirements in rule 31a–
4 17 CFR 270.31a–1(b)(1)–(4). These include, including any digital storage medium or 2, the fund representatives’ estimates reflect an
among other records, journals detailing daily system that meets the terms of this annual increase of 182 hours per fund over the
purchases and sales of securities or contracts to section. The investment company, or burden of 27.8 hours estimated in the 1998 PRA
purchase and sell securities, general and auxiliary submission. The change in annual hours is based
ledgers reflecting all asset, liability, reserve, capital, person that maintains and preserves upon an increase in the estimated time each fund
income and expense accounts, separate ledgers records on its behalf, must arrange and spends complying with the rule.
reflecting, separately for each portfolio security as index the records in a way that permits 8 The staff estimated the annual cost of preserving

of the trade date all ‘‘long’’ and ‘‘short’’ positions easy location, access, and retrieval of the required books and records by identifying the
carried by the fund for its own account, and annual costs for several funds and then relating this
corporate charters, certificates of incorporation and any particular record.6 total cost to the average net assets of these funds
by-laws. during the year. The staff estimates that the annual
5 17 CFR 270.31a–1(b)(5)–(12). These include, investment adviser, and memoranda identifying cost of preserving records is $70,000 per fund; the
among other records, records of each brokerage persons, committees or groups authorizing the funds queried in support of this analysis had an
order given in connection with purchases and sales purchase or sale of securities for the fund. average asset base of approximately $2 billion
of securities by the fund, all other portfolio 6 In addition, the fund, or whoever maintains the (70,000/2 billion=.000035).
9 See Investment Company Institute, 2002 Mutual
purchases, records of all puts, calls, spreads, documents for the fund must provide promptly any
straddles or other options in which the fund has an of the following that the Commission (by its Fund Fact Book, at 61.
interest, has granted, or has guaranteed, records of examiners or other representatives) or the directors 10 This estimate is based on the annual cost per

proof of money balances in all ledger accounts, files of the company may request: (A) a legible, true, and dollar of net assets of the average fund as applied
of all advisory material received from the complete copy of the record in the medium and Continued

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67432 Federal Register / Vol. 67, No. 214 / Tuesday, November 5, 2002 / Notices

The Commission staff estimates, exemption since adoption of the rule, Securities and Exchange Commission,
however, based on past conversations and approximately 2.7 % (100) of the 450 Fifth Street, NW, Washington, DC
with representatives of the fund funds that have not already done so 20549. Comments must be submitted to
industry, that funds could spend as choose to rely on the rule each year. For OMB within 30 days of this notice.
much as half of this amount ($122.4 each of those funds choosing for the first Dated: October 29, 2002.
million) to preserve the books and time to rely on the rule, we estimate that
Margaret H. McFarland,
records that are necessary to prepare the adoption of the audit committee
Deputy Secretary.
financial statements, meet various state charter requires, on average, 1 hour of
reporting requirements, and prepare directors’ time, 2.5 hours of professional [FR Doc. 02–28098 Filed 11–4–02; 8:45 am]
their annual federal and state income time and 1 hour of support staff time, BILLING CODE 8010–01–P

tax returns. for a total one-time burden of 4.5 hours,


Rule 32a–4 [17 CFR 270.32a–4] is and an estimated total one-time cost of
entitled ‘‘Independent Audit $555.40, resulting in an annual SECURITIES AND EXCHANGE
Committees.’’ The rule exempts a fund aggregate time burden of 450 hours and COMMISSION
from the requirements of section an annual aggregate cost of $55,540.14 [Release No. 34–46739; File No. SR–NASD–
32(a)(2) of the Investment Company Act In addition to the hour burden 2002–146]
that shareholders ratify or reject the described above, rule 32a-4 imposes
selection of the independent public certain costs on those funds that choose Self-Regulatory Organizations; Notice
accountant of a registered management to rely on the exemption. These costs of Filing and Immediate Effectiveness
company or registered face-amount are minimal and are justified by the of Proposed Rule Change by the
certificate company if the fund has an relief provided by the exemption. We National Association of Securities
audit committee composed wholly of estimate that each of the approximately Dealers, Inc. Amending NASD Rule
independent directors. 360 funds currently relying on the rule 3011 To Require Members To Identify
Instead of relying on rule 32a–4, a is required to spend approximately .5 and Provide Contact Information for
fund could seek ratification or rejection hours annually to comply with the Their Anti-Money Laundering
by shareholders of the selection of its requirement that it preserve Compliance Persons
independent public accountant at each permanently its audit committee
charters, for an additional annual hour October 29, 2002.
annual meeting. Under the rule, a fund
is exempt from having to seek burden of 180 hours, and an additional Pursuant to section 19(b)(1) of the
shareholder approval of its independent annual cost for all funds of $12,439.20. Securities Exchange Act of 1934
public accountant, if (i) the fund’s board 15 (‘‘Act’’),1 and rule 19b–4 2 thereunder,
of directors establishes an audit These estimates of average costs are notice is hereby given that on October
committee composed solely of made solely for the purposes of the 22, 2002, the National Association of
independent directors with Paperwork Reduction Act. The estimate Securities Dealers, Inc. (‘‘NASD’’ or
responsibility for overseeing the fund’s is not derived from a comprehensive or ‘‘Association’’), submitted to the
accounting and auditing processes,11 (ii) even a representative survey or study of Securities and Exchange Commission
the fund’s board of directors adopts an the costs of Commission rules. An (‘‘Commission’’) the proposed rule
audit committee charter setting forth the agency may not conduct or sponsor, and change as described in items I, II, and
committee’s structure, duties, powers a person is not required to respond to, III below, which items have been
and methods of operation, or sets out a collection of information unless it prepared by the NASD. NASD filed the
similar provisions in the fund’s charter displays a currently valid OMB control proposal pursuant to section 19(b)(3)(A)
or bylaws,12 and (iii) the fund maintains number. of the Act,3 and rule 19b–4(f)(6)
a copy of such an audit committee General comments regarding the thereunder,4 which renders the proposal
charter permanently in an easily above information should be directed to effective upon filing with the
accessible place.13 the following persons: (i) Desk Officer Commission. The Commission is
As conditions of relying on rule 32a– for the Securities and Exchange publishing this notice to solicit
4, a fund’s board of directors must adopt Commission, Office of Information and comments on the proposed rule change
an audit committee charter and must Regulatory Affairs, Office of from interested persons.
preserve that charter, and any Management and Budget, New I. Self-Regulatory Organization’s
modifications to the charter, Executive Office Building, Washington, Statement of the Terms of Substance of
permanently in an easily accessible DC 20503; and (ii) Kenneth A. Fogash, the Proposed Rule Change
place. The information collection Acting Associate Executive Director/
requirement in rule 32a–4 enables the CIO, Office of Information Technology, NASD proposes to amend NASD rule
Commission to monitor the duties and 3011 to require each member to provide
responsibilities of an independent audit 14 To calculate this cost, the Commission staff to NASD contact information for the
committee formed by a fund relying on
used an average hourly wage rate of $300 per hour individual or individuals responsible
for directors, an average hourly wage rate of $96.16 for implementing and monitoring the
the rule. Commission staff estimates that per hour for professionals, and an average hourly
there are approximately 3,700 wage rate of $15 per hour for support staff ((100 x day-to-day operations and internal
management investment companies and 1 x $300/hour) + (100 x 2.5 x $96.16/hour) + (100 controls of the member’s anti-money
face-amount certificate companies that
x 1 x $15/hour) = $55,540). See Securities Industry laundering (‘‘AML’’) compliance
Association, Report on Management & Professional program (‘‘AML Program’’). Below is the
could rely on the rule. We believe that Earnings in the Securities Industry 2001 (Oct.
approximately 9.7 percent (360) of those 2001). text of the proposed rule change. New
funds have taken advantage of the 15 In calculating this annual cost, the Commission text is in italics.
staff estimated that one-third of the annual hour * * * * *
burden (60 hours) would be incurred by support
to the net assets of all funds ($7 trillion x .000035 staff with an average hourly wage rate of $15 per
= $244.7 million). hour, and two-thirds of the annual burden (120
1 15 U.S.C. 78s(b)(1).
11 Rule 32a–4(a). 2 17 CFR 240.19b–4.
hours) would be incurred by professionals with an
12 Rule 32a–4(b). 3 15 U.S.C. 78s(b)(3)(A).
average hourly wage rate of $96.16 per hour ((60 x
13 Rule 32a–4(c). $15/hour) + (120 × $96.16/hour) = $12,439.20). 4 17 CFR 240.19b–4(f)(6).

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