
[Federal Register: July 8, 2010 (Volume 75, Number 130)]
[Notices]               
[Page 39290-39291]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jy10-127]                         

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

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. 350l-3520), the Securities and Exchange 
Commission (the ``Commission'') has submitted to the Office of 
Management and Budget a request for extension of the 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 Commission.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 80a.
---------------------------------------------------------------------------

    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 138 respondents 
(including 74 active funds, 48 custodians, and 16 possible securities 
depositories) \3\ are subject to the

[[Page 39291]]

requirements in rule 17f-4. The rule is elective, but most, if not all, 
funds use depository custody arrangements.\4\
---------------------------------------------------------------------------

    \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, 2% 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 98 percent of all funds now use depository 
custody arrangements. As of November 30, 2009, approximately 3770 
funds out of the 3844 active funds relied on rule 17f-4.
---------------------------------------------------------------------------

    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\ which is 
a collection of information for purposes of the Paperwork Reduction Act 
of 1995. All funds that deal directly with securities depositories in 
reliance 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, we estimate there is no ongoing burden associated with this 
collection of information.\8\
---------------------------------------------------------------------------

    \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 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.
---------------------------------------------------------------------------

    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\ which is a collection of 
information for purposes of the Paperwork Reduction Act of 1995. 
Custodians and depositories usually transmit financial reports to funds 
twice each year.\11\ The Commission staff estimates that 48 custodians 
spend approximately 885 hours (by support staff) annually in 
transmitting such reports to funds.\12\ In addition, approximately 74 
funds (i.e., two 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 74 funds, depositories 
spend approximately 17 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 902 
hours.\14\
---------------------------------------------------------------------------

    \9\ Rule 17f-4(a)(2).
    \10\ Rule 17f-4(b)(1)(ii).
    \11\ The 48 custodians would handle requests for reports from 
3770 fund clients (approximately 79 fund clients per custodian) and 
the depositories from the remaining 74 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 in the normal course 
of their activities as a good business practice regardless of 
whether they are requested. Therefore, for purposes of this PRA 
estimate, the Commission staff assumes that custodians transmit the 
reports to all fund clients. If all custodians and depositories 
transmit these reports to funds in the normal course of their 
activities, there would be no burden associated with this collection 
of information. See 5 CFR 1320.3(b)(2) (``The time, effort, and 
financial resources necessary to comply with a collection of 
information that would be incurred by persons in the normal course 
of their activities * * * will be excluded if the agency 
demonstrates that the reporting, recordkeeping, or disclosure 
activities needed to comply are usual and customary.'').
    \12\ (48 custodians x 2 reports) = 96 reports x 79 fund clients 
per custodian = 7584 transmissions. The staff estimates that each 
transmission would take approximately 7 minutes for a total of 885 
hours (7 minutes x 7584 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 4.6 fund 
clients per depository = 147 transmissions. The staff estimates that 
each transmission would take approximately 7 minutes for a total of 
approximately 17 hours (7 minutes x 147 transmissions).
    \14\ 885 hours for custodians and 17 hours for securities 
depositories.
---------------------------------------------------------------------------

    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, there is 
no ongoing burden associated with this collection of information 
requirement.\16\
---------------------------------------------------------------------------

    \15\ Rule 17f-4(b)(2).
    \16\ The Commission staff assumes that new funds relying on 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.
---------------------------------------------------------------------------

    Based on the foregoing, the Commission staff estimates that the 
total annual hour burden of the rule's collection of information 
requirement is 902 hours.
    The estimates of average burden hours are made solely for the 
purposes of the PRA. 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 send an email to Shagufta 
Ahmed at Shagufta_Ahmed@omb.eop.gov; and (ii) Charles Boucher, 
Director/CIO, 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.

    Dated: June 30, 2010.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16544 Filed 7-7-10; 8:45 am]
BILLING CODE 8010-01-P

