

[Federal Register: September 6, 2007 (Volume 72, Number 172)]
[Notices]               
[Page 51272-51273]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06se07-104]                         

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SECURITIES AND EXCHANGE COMMISSION

 
Submission for OMB Review; Comment Request

Upon Written Request, Copies Available From: Securities and Exchange 
Commission, Office of Investor Education and Advocacy, Washington, DC 
20549-0213.

Extension:
    Rule 17f-4; SEC File No. 270-232; OMB Control No. 3235-0225.

    Notice is hereby given that, pursuant to the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange 
Commission (the ``Commission'') has submitted to the Office of 
Management and Budget (``OMB'') a request for extension of the

[[Page 51273]]

previously approved collection of information discussed below.
    Section 17(f) (15 U.S.C. 80a-17(f)) under the Investment Company 
Act of 1940 (the ``Act'') \1\ permits registered management investment 
companies and their custodians to deposit the securities they own in a 
system for the central handling of securities (``securities 
depositories''), subject to rules adopted by the Securities and 
Exchange Commission (``Commission'').
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    \1\ 15 U.S.C. 80a.
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    Rule 17f-4 (17 CFR 270.17f-4) under the Act specifies the 
conditions for the use of securities depositories by funds \2\ and 
custodians. The Commission staff estimates that 129 respondents 
(including 40 active funds, 73 custodians, and 16 possible securities 
depositories) \3\ are subject to the requirements in rule 17f-4. The 
rule is elective, but most, if not all, funds use depository custody 
arrangements.\4\
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    \2\ As amended in 2003, rule 17f-4 permits any registered 
investment company, including a unit investment trust or a face-
amount certificate company, to use a security depository. See 
Custody of Investment Company Assets With a Securities Depository, 
Investment Company Act Release No. 25934 (Feb. 13, 2003) (68 FR 8438 
(Feb. 20, 2003)). The term ``fund'' is used in this Notice to mean a 
registered investment company.
    \3\ The Commission staff estimates that, as permitted by the 
rule, 1% of all active funds deal directly with a securities 
depository instead of using an intermediary. The number of 
custodians is from Lipper Inc.'s Lana Database. Securities 
depositories include the 12 Federal Reserve Banks and 4 registered 
depositories.
    \4\ Based on responses to Item 18 of Form N-SAR (17 CFR 
274.101), approximately 99 percent of all funds now use depository 
custody arrangements. As of March 30, 2007, approximately 3990 funds 
out of the 4030 active funds relied on rule 17f-4.
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    Rule 17f-4 contains two general conditions. First, a fund's 
custodian must be obligated, at a minimum, to exercise due care in 
accordance with reasonable commercial standards in discharging its duty 
as a securities intermediary to obtain and thereafter maintain 
financial assets.\5\ This obligation does not contain a collection of 
information because it does not impose identical reporting, 
recordkeeping or disclosure requirements. Funds and custodians may 
determine the specific measures the custodian will take to comply with 
this obligation.\6\ If the fund deals directly with a depository, the 
depository's contract or written rules for its participants must 
provide that the depository will meet similar obligations.\7\ All funds 
that seek to rely on rule 17f-4 should have either modified their 
contracts with the relevant securities depository, or negotiated a 
modification in the securities depository's written rules when the rule 
was amended. Therefore, this was a one-time event and does not contain 
a collection of information.\8\
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    \5\ Rule 17f-4(a)(1). This provision incorporates into the rule 
the standard of care provided by section 504(c) of Article 8 of the 
Uniform Commercial Code when the parties have not agreed to a 
standard. Rule 17f-4 does not impose any substantive obligations 
beyond those contained in Article 8. Uniform Commercial Code, 
Revised Article 8--Investment Securities (1994 Official Text With 
Comments) (``Revised Article 8'').
    \6\ Moreover, the rule does not impose any requirement regarding 
evidence of the obligation.
    \7\ Rule 17f-4(b)(1)(i).
    \8\ The Commission staff assumes that new funds relying on rule 
17f-4 would choose to use a custodian instead of directly dealing 
with a securities depository because of the high costs associated 
with maintaining an account with a securities depository. Thus new 
funds would not be subject to this condition.
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    Second, the custodian must provide, promptly upon request by the 
fund, such reports as are available about the internal accounting 
controls and financial strength of the custodian.\9\ If a fund deals 
directly with a depository, the depository's contract with or written 
rules for its participants must provide that the depository will 
provide similar financial reports.\10\ Custodians and depositories 
usually transmit financial reports to funds twice a year.\11\ The 
Commission staff estimates that 73 custodians spend 920 hours (by 
support staff) annually in transmitting such reports to funds.\12\ In 
addition, approximately 40 funds (i.e., one percent of all funds) deal 
directly with a securities depository and may request periodic reports 
from their depository. Commission staff estimates that, for each of the 
40 funds, depositories spend 9 hours (by support staff) annually 
transmitting reports to the funds.\13\ The total annual burden estimate 
for compliance with rule 17f-4's reporting requirement is therefore 929 
hours.\14\
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    \9\ Rule 17f-4(a)(2).
    \10\ Rule 17f-4(b)(1)(ii).
    \11\ The 73 custodians would handle requests for reports from 
3950 fund clients (approximately 54 fund clients per custodian) and 
the depositories from the remaining 40 funds that choose to deal 
directly with a depository. It is our understanding based on staff 
conversations with representatives of custodians that custodians and 
depositories transmit these reports to clients as a good business 
practice regardless of whether they are requested. Therefore, for 
purposes of this Paperwork Reduction Act calculation, the Commission 
staff assumes that custodians transmit the reports to all fund 
clients.
    \12\ (73 custodians x 2 reports) = 146 reports x 54 fund clients 
per custodian = 7,884 transmissions. The staff estimates that each 
transmission would take approximately 7 minutes for a total of 920 
hours (7 minutes x 7,884 transmissions). The estimate of time to 
transmit reports is based on staff conversations with 
representatives of custodians.
    \13\ (16 depositories x 2 reports) = 32 reports x 2.5 fund 
clients per depository = 80 transmissions. The staff estimates that 
each transmission would take approximately 7 minutes for a total of 
9 hours (7 minutes x 80 transmissions).
    \14\ 920 hours for custodians and 9 hours for securities 
depositories.
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    If a fund deals directly with a securities depository, rule 17f-4 
requires that the fund implement internal control systems reasonably 
designed to prevent an unauthorized officer's instructions (by 
providing at least for the form, content, and means of giving, 
recording, and reviewing all officers' instructions).\15\ All funds 
that seek to rely on rule 17f-4 should have already implemented these 
internal control systems when the rule was amended. Therefore, this is 
a one-time event and does not contain an ongoing collection of 
information requirement.\16\
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    \15\ Rule 17f-4(b)(2).
    \16\ The Commission staff assumes that new funds relying on rule 
17f-4 would choose to use a custodian instead of directly dealing 
with a securities depository because of the high costs associated 
with maintaining an account with a securities depository. Thus new 
funds would not be subject to this condition.
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    Based on the foregoing, the Commission staff estimates that the 
total annual hour burden of the rule's collection of information 
requirement is 929 hours.
    The estimates of average burden hours are made solely for the 
purposes of the Paperwork Reduction Act. These estimates are 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 control number.
    Please direct general comments regarding the above information to 
the following persons: (i) Desk Officer for the Securities and Exchange 
Commission, Office of Management and Budget, Room 10102, New Executive 
Office Building, Washington, DC 20503 or e-mail to: 
Alexander_T._Hunt@omb.eop.gov; and (ii) R. Corey Booth, Director/Chief Information 

Officer, Securities and Exchange Commission, C/O Shirley Martinson, 
6432 General Green Way, Alexandria, VA 22312; or send an e-mail to: 
PRA_Mailbox@sec.gov. Comments must be submitted to OMB within 30 days 

of this notice.

     August 30, 2007.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-17584 Filed 9-5-07; 8:45 am]

BILLING CODE 8010-01-P
