[Federal Register Volume 61, Number 209 (Monday, October 28, 1996)]
[Proposed Rules]
[Pages 55593-55602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27611]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-37850; File No. S7-27-96]
RIN 3235-AH04


Books and Records Requirements for Brokers and Dealers Under the 
Securities Exchange Act of 1934

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Commission is proposing for comment amendments to the 
broker-dealer books and records rules. The proposed amendments clarify, 
modify, and expand recordkeeping requirements with respect to purchase 
and sale documents, customer records, associated person records, 
customer complaints, and certain other matters. In addition, the 
proposed amendments specify certain types of books and records that 
broker-dealers must make available in their local offices. The 
Commission is proposing amendments to the books and records rules in 
response to certain concerns raised by members of the North American 
Securities Administrators Association (``NASAA''). The proposed 
amendments are intended to obligate broker-dealers to make and retain 
certain additional records that would be valuable to state regulators 
during examination and enforcement proceedings.

DATES: Comments must be received on or before December 27, 1996.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Stop 6-9, Washington, DC 20549. Comments may also be submitted 
electronically at the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-27-96. All comments 
received will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, NW., Washington, 
DC 20549. Electronically submitted comment letters will be posted on 
the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, (202) 942-
0131; Peter R. Geraghty, (202) 942-0177; or Matthew G. McGuire, (202) 
942-7103; Office of Risk Management and Control, Division of Market 
Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549.

[[Page 55594]]

SUPPLEMENTARY INFORMATION:

I. Introduction

    Section 17(a)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') requires registered broker-dealers to make, keep, furnish, and 
disseminate records and reports prescribed by the Commission ``as 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of'' the 
Exchange Act.\1\ Rules 17a-3 and 17a-4 under the Exchange Act specify 
minimum requirements with respect to the records that must be made by 
broker-dealers as well as the periods during which such records and 
other documents relating to the broker-dealer's business must be 
preserved.\2\
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    \1\ 15 U.S.C. 78q(a)(1).
    \2\ 17 CFR 240.17a-3 and 240.17a-4.
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    In 1993, a NASAA Committee (``NASAA Committee'') commenced work on 
a model state regulation to supplement the books and records 
requirements set forth in Rules 17a-3 and 17a-4. The NASAA Committee 
observed that the existing Commission books and records requirements do 
not obligate broker-dealers to make and retain certain types of records 
that would be valuable to state regulators during examination and 
enforcement proceedings. In addition, the NASAA Committee noted that 
several states had commenced independent efforts to develop 
supplemental books and records requirements and expressed concern about 
the potential difficulties that would result if inconsistent books and 
records requirements emerged from these independent efforts.
    The NASAA Committee determined that supplementary rules should be 
required with respect to purchase and sale documentation, registered 
representatives, customer investment objectives, customer complaints, 
exceptional or unusual numerical occurrences, background information on 
underwritten or recommended securities, communications, contracts and 
agreements, marketing materials, and licenses. In addition, the NASAA 
Committee determined that supplemental requirements should specify the 
types of records that broker-dealers must make available in each of 
their local offices and should contain requirements obligating broker-
dealers to cooperate with inspections and investigations by state 
regulators. The NASAA Committee released a final draft of its model 
regulation (``NASAA Model'') in August 1995, which it presented for 
membership approval at NASAA's October 1995 meeting.
    At the October meeting, the Commission Chairman stated that 
supplemental state books and records requirements would impose a 
substantial burden on broker-dealers because of the likelihood that 
each state's requirements would not be consistent with those adopted by 
other states. The Chairman further noted that modification of the 
Commission's books and records rules would be a considerably less 
burdensome means of accomplishing the NASAA members' objectives than 
would be the development of supplemental state requirements. The NASAA 
membership thereafter voted to defer taking further action with respect 
to the NASAA Model in order to give the Commission an opportunity to 
develop appropriate amendments to its books and records rules.\3\
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    \3\ The Commission notes that the National Securities Markets 
Improvement Act of 1996, signed by the President on October 11, 
1996, contains a provision that prohibits states from adopting 
supplement books and records requirements.
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II. Proposed Amendments and Discussion

    In preparing the proposed amendments to Rules 17a-3 and 17a-4, 
Commission staff members met with the NASAA Committee on several 
occasions to discuss the specific concerns of state securities 
regulators. The NASAA Committee advised that state examinations of 
broker-dealers are frequently hindered by the absence of relevant 
records in local offices, by long delays in producing required records 
from a central location, and by poorly organized records. In addition, 
the NASAA Committee reported that certain provisions of the 
Commission's current books and records rules have been interpreted 
differently by broker-dealers, regulators, hearing officers, and 
courts, and that clarification of the requirements of such provisions 
would assist regulatory enforcement initiatives. Finally, the NASAA 
Committee indicated that requiring broker-dealers to maintain certain 
additional types of books and records would facilitate state 
regulators' efforts to monitor and control the broker-dealer industry 
and would increase levels of customer protection.
    In general, the proposed amendments to Rule 17a-3 will require 
broker-dealers to generate local office blotters, to record 
supplemental information on brokerage order memoranda, to create 
customer account forms, and to maintain additional records concerning 
associated persons, customer complaints, and exceptional numerical 
occurrences. The proposed amendments to Rule 17a-4 will require broker-
dealers to preserve certain additional types of records, including 
advertising and marketing materials, registrations and licenses, audit 
and examination reports, records concerning recommended securities, and 
manuals relating to compliance, supervision, and procedures. In 
addition, the proposed amendments to Rule 17a-4 will clarify and modify 
the Commission's existing requirements concerning preservation of 
certain correspondence and contracts. Finally, the proposed amendments 
to Rule 17a-4 will supplement the existing standards concerning the 
organization of books and records, will require broker-dealers to 
designate a principal to be responsible for books and records 
compliance, and will require broker-dealers to make certain records 
available in each of their local offices. A discussion of the proposed 
amendments follows.

A. Blotters and Memoranda

    Rule 17a-3(a)(1) specifies the Commission's current requirements 
concerning records of purchases and sales of securities, receipts and 
deliveries of securities, and receipts and disbursements of cash. The 
proposed amendments will add a requirement that records of purchases 
and sales of securities for customer accounts be accessible with 
respect to the activities of each local office.
    The proposed amendments also specify certain additional information 
that broker-dealers will be required to include in the memoranda of 
brokerage orders currently required by Rule 17a-3(a)(6). Existing 
requirements specify that brokerage memoranda include information 
concerning the terms and conditions of the order, the account for which 
the order is entered, the times of entry and execution, and the 
execution price. The proposed amendments add requirements that each 
memorandum indicate which associated person entered the order and also 
indicate whether the order was solicited or unsolicited.

B. Additional Records Concerning Associated Persons

    Rule 17a-3(a)(12) currently specifies the types of records that a 
broker-dealer must maintain with respect to each of its associated 
persons. In addition to basic background information, the existing rule 
requires a broker-dealer to maintain records of each associated 
person's employment and disciplinary history. The proposed amendments 
will add a new Rule 17a-3(a)(20), which designates several 
supplementary types of associated person records that a

[[Page 55595]]

broker-dealer must maintain. These new records include registration and 
licensing materials, agreements between associated persons and the 
broker-dealer, customer complaint information, and client trading 
records for each associated person. It is the view of the Commission 
that many of these supplemental records consist of documents that 
broker-dealers would routinely keep in the course of operating their 
businesses. However, the NASAA Committee has indicated that a statutory 
specification of the precise records that broker-dealers must maintain 
with respect to associated persons will facilitate inspection and 
enforcement actions by regulatory authorities.
    In addition, proposed Rule 17a-3(a)(21) will add a requirement that 
broker-dealers maintain a list identifying each of their associated 
persons and designating the local office where each associated person 
conducts the greatest portion of his or her business. The NASAA 
Committee has indicated that state investigations are sometimes delayed 
because broker-dealers store associated person records in several 
offices. Proposed Rule 17a-3(a)(21), in conjunction with proposed Rule 
17a-4(l)(1), is intended to address this issue. In combination, these 
rules will require all records concerning each associated person to be 
stored where such associated person conducts most of his or her 
business.

C. Account Forms

    Proposed Rule 17a-3(a)(16) creates a new Commission requirement 
that broker-dealers maintain an account form for each customer account. 
The required account form will include basic identification and 
background information about a customer, as well as a designation of 
the customer's investment objective(s) and a specification of the 
approximate percentage of investment capital that the customer would 
like to allocate to speculative investments. The associated person 
responsible for each account and a principal of the broker-dealer must 
sign or initial each account form to indicate approval of the contents. 
It is the understanding of the Commission that most broker-dealers 
currently collect and maintain records of most of the information that 
they will be required to include on the proposed account forms.
    Proposed Rule 17a-3(a)(16) will apply with respect to both new and 
existing customer accounts. The Commission recognizes that it will be 
difficult as a practical matter for broker-dealers to prepare the 
required account forms for existing customers immediately upon adoption 
of the new rule. Accordingly, the Commission initially proposes a one-
year period from the date of adoption of the proposed rule as an 
appropriate time frame for broker-dealers to comply with respect to 
existing customer accounts. The Commission is expressly soliciting 
comments concerning the feasibility of this phase-in period.
    Proposed Rule 17a-3(a)(16) also will require that the material 
contents of a new or changed customer account form be sent to the 
customer for confirmation. In order to minimize burdens and allow 
maximum flexibility for broker-dealers who send communications to their 
customers from a central location, the proposed rule will permit a 
broker-dealer to send a customer an alternate document containing a 
copy of the material contents of the account form rather than a copy of 
the account form itself. In addition, the proposed rule will not 
require that the signatures or initials of the associated person and 
principal of the broker-dealer be included on any alternate document 
sent to a customer for confirmation.
    Proposed Rule 17a-3(a)(16) will require a designation on account 
forms of each customer's investment objective(s) from a list of defined 
objectives. In instances where a customer designates multiple 
objectives, one of which includes speculation, the proposed rule will 
require a specification of the approximate percentage or range of 
percentages of investment capital to be dedicated to speculation. The 
proposed amendments do not include a definition of the term 
``speculation.'' Accordingly, the Commission is expressly requesting 
comments concerning whether such a definition should be provided and 
suggesting possible definitions.
    The Commission recognizes that the percentage of speculative 
investments in a customer's portfolio could change as a result of 
numerous factors outside of a broker-dealer's control, including 
changes in the relative market prices of securities, changes in the 
characterizations of specific securities (e.g., non-speculative to 
speculative), or changes in a portfolio resulting from customer actions 
such as adding to or withdrawing funds from the account. Accordingly, 
broker-dealers might interpret the proposed rule as implying an 
obligation to monitor all customer accounts for adherence to the 
designated speculative percentage or might be concerned that the 
designated speculative percentage provided on the customer account form 
will serve as dispositive evidence of a broker-dealer's failure to 
fulfill its suitability obligations if at any time a customer's 
speculative holdings exceed such percentage.
    In response, the Commission notes that the requirements to 
designate a speculative percentage are not intended to create any 
monitoring obligation. In addition, while the designated percentage 
will be useful in assessing the suitability of recommendations made by 
a broker-dealer, it is only a factor to be considered in determining 
whether a broker-dealer has fulfilled its suitability obligations to a 
particular customer.
    The Commission recognizes that a customer's financial situation and 
investment preferences will vary over time. In order to ensure that the 
required account forms have enduring value as an indicator of customer 
choices, proposed Rule 17a-3(a)(16) includes a one-year updating 
requirement with respect to the investment objectives designated on 
each customer's account form. The Commission is aware of the potential 
burdens presented by the annual updating requirement. Accordingly, the 
Commission is expressly soliciting suggestions of less burdensome 
alternatives that would nevertheless provide broker-dealers and 
regulators with a reasonably current indication of each customer's 
investment objectives.
    The Commission also recognizes that the nature of the businesses of 
certain types of broker-dealers may render unnecessary the account form 
requirements of proposed Rule 17a-3(a)(16). Therefore, the Commission 
is expressly soliciting suggested standards for the exemption of 
categories of broker-dealers from the proposed account form 
requirements.

D. Complaints

    Rules 17a-3 and 17a-4 do not currently contain any express 
requirements concerning oral or written customer complaints that are 
delivered to a broker-dealer. The proposed amendments add a new Rule 
17a-3(a)(17), which will require broker-dealers to maintain files of 
written materials relating to customer complaints. In addition, 
proposed Rule 17a-3(a)(17) will require broker-dealers to make and keep 
written memoranda of oral customer complaints alleging certain types of 
fraud and theft.
    In drafting the Rule 17a-3(a)(17) memoranda requirement, the 
Commission attempted to respond to the NASAA Committee's view that such 
memoranda would be of considerable value to state regulators in their 
efforts to identify particularly problematic registered representatives 
and broker-

[[Page 55596]]

dealer offices. However, in order to avoid unnecessary burdens, the 
rule does not require a written memorandum where an oral customer 
complaint is the result of customer misunderstanding or 
misinterpretation and the complaint is quickly and completely explained 
or resolved to the customer's satisfaction. This exception to the 
written memorandum requirement specifies that a customer who makes such 
an oral complaint must be advised to send a written complaint if the 
customer remains unsatisfied with the broker-dealer's explanation or 
has further concerns regarding the matter.
    Proposed Rule 17a-3(a)(17) expressly specifies that the requirement 
to prepare a written memorandum concerning certain oral complaints does 
not convert the complaint into a reportable event for purposes of Form 
U-4 or other reporting requirements. In addition, proposed Rule 17a-
3(a)(17) requires broker-dealers to provide routine notification in 
account statements that customers should set their complaints in 
writing in order to establish an independent record of the complaint. 
This final requirement is intended to address the NASAA Committee's 
concern that some broker-dealers have adopted a practice of 
discouraging their customers from delivering written complaints.

E. Other Required Records

    In addition to the records described in the preceding paragraphs, 
the proposed amendments to Rule 17a-3 will require broker-dealers to 
create commission and compensation records and activity reports of 
unusual numerical occurrences, such as frequent trading in customer 
accounts, unusually high commissions, or an unusually high number of 
trade corrections or cancelled transactions. The proposed amendments 
will also modify the definition of ``associated person'' in Rule 17a-
3(a)(12)(ii) to codify an existing interpretation of such term.
    The proposed amendments will add several new items to the record-
preservation requirements of Rule 17a-4.4 The new types of records 
include copies of advertisements and marketing materials, information 
relating to underwritten or recommended securities, registrations and 
licenses, audit and examination reports, and manuals relating to 
compliance, supervision, and procedures. Furthermore, the proposed 
amendments will augment and clarify the existing record maintenance 
standards set forth in Rule 17a-4(b)(4) with respect to communications 
and in Rule 17a-4(b)(7) with respect to written agreements.
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    \4\  In addition, the proposed amendments include a modification 
of Rule 17a-4(b)(8) that corrects a typographical error.
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F. Record Retention Periods

    Rules 17a-4(a) and 17a-4(b) currently require broker-dealers to 
preserve specified types of records for six and three years, 
respectively. In addition, Rule 17a-4(a) records must be maintained for 
the first two years in an ``easily accessible place,'' while Rule 17a-
4(b) records must be maintained for the first two years in an 
``accessible place.''
    The NASAA Committee has indicated that the designated record 
retention periods in Rules 17a-4(a) and 17a-4(b) do not provide clear 
standards to state regulators concerning record accessibility 
requirements. In addition, the Commission believes that advances in 
record-storage technologies and decreased reliance on paper records by 
broker-dealers have minimized the relevance of the provisions in such 
rules that vary the accessibility requirements during the designated 
record retention periods. Accordingly, the proposed amendments modify 
Rules 17a-4(a) and 17a-4(b) to require broker-dealers to maintain the 
specified records in an ``easily accessible place'' for the entire 
retention period. The Commission expressly requests comments concerning 
any burdens that might be imposed on broker-dealers by this proposed 
modification.

G. Record Form and Access

    The NASAA Committee has advised the Commission that some 
inspections and investigations of broker-dealers are hindered by delays 
in producing records or by poorly maintained records. While the 
Commission is sensitive to the importance of this issue, the Commission 
and members of the NASAA Committee share the view that obligations to 
cooperate with inspections and investigations by state securities 
authorities should be addressed primarily through state regulations 
rather than through the Commission's books and records rules. 
Accordingly, the NASAA Committee has prepared a model production and 
access rule attached as Exhibit A to this document. The model 
production and access rule sets cooperation standards for broker-
dealers and references Rules 17a-3 and 17a-4 with respect to 
substantive record-keeping requirements. It is our understanding that 
the NASAA Committee intends to submit this model production and access 
rule to the NASAA membership for adoption.
    The proposed amendments will modify and augment the Commission's 
current record production and organization requirements set forth in 
Rule 17a-4(j) in order to make these requirements consistent with 
correlating provisions in NASAA's proposed model production and access 
rule. Similarly, the proposed amendments establish a definition for the 
term ``promptly'' in Rule 17a-4(j) that is consistent with the document 
production obligations in NASAA's proposed model production and access 
rule. The definition specifies that requested records must be produced 
immediately when the records are located in the office where the 
request is made and within three business days if the requested records 
are not located in such office.

H. Local Office Access; Designation of Principal

    Proposed Rule 17a-4(l) will adopt a new requirement that broker-
dealers make available certain records in each of their local offices. 
This proposed requirement was developed to address the NASAA 
Committee's concern that storage of records in distant locations can be 
an impediment to some inspections and investigations. The records that 
must be available in local offices consist of items that the NASAA 
Committee believes are essential to conducting effective inspections. 
Required records include certain blotters of the local office's 
activities, memoranda of brokerage orders, complaint and correspondence 
files, associated person records, and customer account forms. In order 
to accommodate centralized electronic record storage systems used by 
some broker-dealers and to minimize the overall burden of the local 
office requirements, proposed Rule 17a-4(l) specifies that the ability 
to display the necessary records electronically in a local office and 
immediately produce printed copies will satisfy the rule. The 
Commission also attempted to minimize the burden of this proposed rule 
by limiting the local office record availability period to three years. 
In addition, broker-dealers can comply with the proposed rule's 
requirements with respect to single-agent offices if the required local 
office records are made available in certain other offices of the 
broker-dealer.
    Finally, proposed Rule 17a-4(k) will require each broker-dealer to 
designate a principal for purposes of the books and records rules. The 
designated principal's responsibilities include indicating approval of 
records such as outgoing correspondence and marketing materials.

[[Page 55597]]

III. Request for Comments

    The Commission invites interested persons to submit written 
comments on the proposed amendments. As noted above, the Commission 
specifically requests comments from broker-dealers on the feasibility 
of the proposed one-year phase-in period with respect to the account 
form requirement for existing customers, on possible definitions for 
the term ``speculation,'' on possible alternatives to the annual 
account form investment objective updating requirement, on the 
desirability of exempting certain categories of broker-dealers from the 
proposed account form requirement, and on the desirability of modifying 
the record accessibility requirements of Rules 17a-4(a) and 17a-4(b).

IV. Costs and Benefits of the Proposed Amendments and Their Effects on 
Competition

    To assist the Commission in its evaluation of the costs and 
benefits that may result from the proposed amendments to Rules 17a-3 
and 17a-4, commenters are requested to provide analyses and data 
relating to costs and benefits associated with any of the proposals 
herein. The Commission preliminarily believes that compliance burdens 
presented by the proposed amendments will not be substantial and that 
the proposed amendments will significantly increase levels of customer 
protection.
    In addition, section 23(a) of the Exchange Act requires the 
Commission, in adopting rules under the Exchange Act, to consider the 
anti-competitive effects of such rules, if any, and to balance any 
impact against regulatory benefits gained in terms of furthering the 
purposes of the Exchange Act.5 The Commission preliminarily has 
considered the proposed amendments to Rules 17a-3 and 17a-4 in light of 
the standards cited in section 23(a)(2) and believes preliminarily 
that, if adopted, they would not likely impose any significant burden 
on competition not necessary or appropriate in furtherance of the 
Exchange Act, in that any burden imposed would be less than that 
imposed by individual, and possibly divergent, state regulations. The 
Commission solicits commenters' views regarding the effects of the 
proposed rules on competition.
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    \5\ See 15 U.S.C. 78w(a)(2).
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V. Summary of Initial Regulatory Flexibility Analysis

    In accordance with 5 U.S.C. 603, the Commission has prepared an 
Initial Regulatory Flexibility Analysis (``IRFA'') concerning the 
proposed amendments. The IRFA notes that the purpose of the proposed 
amendments is to facilitate the efforts of federal and state agencies 
in protecting investors and indicates that the Commission believes that 
the proposed amendments are necessary to ensure that registered broker-
dealers keep books and records that are sufficient to permit state and 
federal regulators to undertake complete operational examinations. The 
IRFA further indicates that the proposed amendments would affect all 
broker-dealers, including the approximately 5,250 small broker-dealers, 
but notes that the requirements of the proposed amendments were 
designed to minimize additional burdens. The IRFA indicates that the 
proposed amendments would require broker-dealers to adjust their 
recordkeeping and reporting practices, to update certain customer 
information records on an annual basis, and to modify their record 
storage systems. The IRFA adds that no federal securities laws 
duplicate, overlap, or conflict with the proposed amendments and states 
that the Commission does not believe that any less burdensome 
alternatives are available to accomplish the objectives of the proposed 
amendments.
    The Commission encourages the submission of written comments with 
respect to any aspect of the IRFA. Written comments will be considered 
in preparation of the Final Regulatory Flexibility Analysis, if the 
proposed amendments are adopted. Such comments will be placed in the 
same public file as that designated for the proposed amendments 
themselves. A copy of the IRFA may be obtained by contacting Matthew G. 
McGuire, Division of Market Regulation, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549, (202) 942-
7103.

VI. Paperwork Reduction Act

    Certain provisions of the proposed amendments contain ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995,6 and the Commission has submitted them to 
the Office of Management and Budget for review in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of 
information is: ``Proposed Books and Records Amendments.''
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    \6\ 44 U.S.C. 3501 et seq.
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A. Collection of Information Under Proposed Books and Records 
Amendments

    The Proposed Books and Records Amendments would require registered 
broker-dealers to maintain information with respect to purchase and 
sale documents, customer information, associated person information, 
customer complaints, and certain other matters.

B. Proposed Use of Information

    The information collected pursuant to the Proposed Books and 
Records Amendments would be used by the Commission, self-regulatory 
organizations, and representatives of state securities regulatory 
authorities. No governmental agency or third party would regularly 
receive any of the information described above. The Commission, self-
regulatory organizations, and state securities regulatory authorities 
would use the records required by the Proposed Books and Records 
Amendments in examinations and investigations of broker-dealers.

C. Respondents

    The Proposed Books and Records Amendments would apply with respect 
to all of the approximately 8,500 broker-dealers that are currently 
registered with the Commission. However, most of the provisions of the 
Proposed Books and Records Amendments would apply only with respect to 
the approximately 5,300 broker-dealers who do business with the general 
public.

D. Total Annual Reporting and Recordkeeping Burden

    The hour burden of the Proposed Books and Records Amendments would 
vary widely because of differences in the levels of activities of the 
respondents and because of differences in the current recordkeeping 
systems of the respondents. Most of the requirements of the Proposed 
Books and Records Amendments involve collections of information that 
typical broker-dealers already maintain as customary and usual business 
practices or in compliance with existing regulations. Accordingly, the 
additional annual burden created by most of the new requirements of the 
Proposed Books and Records Amendments will not be substantial.
    The Commission believes that the only provision of the Proposed 
Books and Records Amendments that will present a significant new burden 
to broker-dealers is the annual account form updating requirement of 
proposed Rule 17a-3(a)(16). Broker-dealers currently maintain 
approximately 46,000,000 customer accounts. The Commission estimates 
that approximately 10% of the customer accounts of a typical broker-
dealer will require updating each year and that it

[[Page 55598]]

will require approximately five minutes for a typical broker-dealer to 
update each such customer account. Thus, the Commission estimates that 
approximately 383,333 hours (five minutes times 4,600,000 updated 
customer accounts) would be required by the account form updating 
requirement of proposed Rule 17a-3(a)(16) in each year.
    Other than the account form updating requirement, the provisions of 
the Proposed Books and Records Amendments should create only minimal 
annual compliance burdens. Variables relating to the recordkeeping 
practices and levels of customer business of broker-dealers make it 
difficult to estimate the precise burden of the Proposed Books and 
Records Amendments. However, based on conversations with members of the 
securities industry and based on the Commission's experience in this 
area, the Commission estimates that, in addition to the requirement of 
updating account forms pursuant to the provisions of proposed Rule 17a-
3(a)(16), the Proposed Books and Records Amendments should result in an 
increase of approximately 2% of the time that a typical broker-dealer 
spends making records required by Rule 17a-3 and an increase of 
approximately 2% of the time that a typical broker-dealer spends making 
records required by Rule 17a-4.
    The current estimate of the time required to comply with the 
existing provisions of Rule 17a-3 is one hour per broker per working 
day. Thus, the Commission estimates that complying with the proposed 
amendments to Rule 17a-3 (other than updating account forms pursuant to 
proposed Rule 17a-3(a)(16)) should require an additional 42,330 hours 
per year (1.2 minutes per working day times 249 working days times 
8,500 broker-dealers). The current estimate of the time required to 
comply with the existing provisions of Rule 17a-4 is also one hour per 
broker per working day. Thus, the Commission also estimates that 
complying with the proposed amendments to Rule 17a-4 should require an 
additional 42,330 hours per year (1.2 minutes per working day times 249 
working days times 8,500 broker-dealers).
    In addition to the time necessary to make the required records, the 
Proposed Books and Records Amendments would also impose burdens on 
respondents in connection with storing the new types of records and in 
connection with complying with new record access requirements. 
Variations in the current record storage systems of respondents make it 
difficult for the Commission to provide any meaningful estimate of the 
costs of these burdens to a typical respondent. To the extent that the 
additional records required by the Proposed Books and Records 
Amendments can be stored and produced for inspection by electronic 
means, the additional costs should not be substantial.
    Finally, the Proposed Books and Records Amendments will impose 
burdens on respondents in connection with necessary modifications to 
their record storage systems. Variations in the current record storage 
systems of respondents make it difficult for the Commission to provide 
any meaningful estimate of the costs of these burdens to a typical 
respondent. However, the Commission notes that such burdens would be 
one-time expenses rather than recurring costs.

E. General Information about the Collection of Information

    The collection of information under the Proposed Books and Records 
Amendments would be mandatory. The information collected pursuant to 
Rules 17a-3(a) (17), (19), and (21) would be retained for six years. 
The information collected pursuant to Rules 17a-3(a)(18), 17a-4(b)(4), 
(7), (10), and (11), and 17a-4(e)(5) would be retained for three years. 
The information collected pursuant to Rule 17a-4(a)(16) would be 
retained for six years following the closing of the related customer's 
account. The information collected pursuant to Rule 17a-4(d) would be 
retained for the life of the enterprise or any successor enterprise. 
The information collected pursuant to Rule 17a-3(a)(20) would be 
retained for three years following the termination of employment or 
other connection with the broker-dealer of the related associated 
person. The information collected pursuant to Rule 17a-4(e)(6) would be 
retained for three years after the date of the termination of use of 
such information. In general, the information collected pursuant to the 
Proposed Books and Records Amendments would be held by the respondent. 
The Commission, self-regulatory organizations, and state securities 
regulatory authorities would only gain possession of the information 
upon request. Any information received by the Commission pursuant to 
the Proposed Books and Records Amendments would be kept confidential, 
subject to the provisions of the Freedom of Information Act, 5 U.S.C. 
552.

F. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    (i) Evaluate whether the proposed collection of information is 
necessary for the proposed performance of the functions of the agency, 
including whether the information shall have practical utility;
    (ii) Evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information;
    (iii) Enhance the quality, utility, and clarity of the information 
to be collected; and
    (iv) minimize the burden of collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and should also send a copy of their comments to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549, and refer to File No. S7-27-96. OMB is 
required to make a decision concerning the collections of information 
between 30 and 60 days after publication of this release in the Federal 
Register, so a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of this publication.

VII. Statutory Analysis

    The amendments are proposed pursuant to the authority conferred on 
the Commission by section 17(a)(1) of the Exchange Act.

List of Subjects in 17 CFR Part 240

    Brokers; Reporting and recordkeeping requirements; Securities.

    For the reasons set forth in the preamble, Title 17 Chapter II of 
the Code of Federal Regulation is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78k, 78l, 78m, 78n, 
78o, 78p, 78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 
80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
    2. Section 240.17a-3 is amended by adding a sentence at the end of 
paragraph (a)(1), revising paragraph

[[Page 55599]]

(a)(6), adding paragraphs (a)(16), (a)(17), (a)(18), (a)(19), (a)(20), 
and (a)(21), and (f) to read as follows, and removing and reserving 
paragraph (a)(12)(ii):


Sec. 240.17a-3  Records to be made by certain exchange members, brokers 
and dealers.

    (a) * * *
    (1) * * * The blotters (or other records of original entry) 
containing an itemized daily record of all purchases and sales of 
securities for accounts of customers of such member, broker or dealer 
shall be maintained so that such records are accessible with respect to 
the activities of each local office of such member, broker or dealer.
* * * * *
    (6) A memorandum of each brokerage order, and of any other 
instruction, given or received for the purchase or sale of securities, 
whether executed or unexecuted. Such memorandum shall show: The terms 
and conditions of the order or instructions and of any modification or 
cancellation thereof; the account for which entered; the time of entry; 
the price at which executed, if any; information identifying the 
associated person who entered the order on behalf of the customer; 
information identifying whether the transaction was solicited or 
unsolicited; and, to the extent feasible, the time of execution or 
cancellation. Orders entered pursuant to the exercise of discretionary 
authority by such member, broker or dealer, or any associated person 
thereof, shall be so designated. The term instruction shall be deemed 
to include instructions between partners and employees of a member, 
broker or dealer. The term time of entry shall be deemed to mean the 
time when such member, broker or dealer transmits the order or 
instruction for execution or, if it is not so transmitted, the time 
when it is received.
* * * * *
    (12) * * *
    (ii) [Reserved]
* * * * *
    (16) An ``account form'' for every customer account:
    (i) Each account form shall be approved by the associated person 
responsible for such account (who, in the case of a new account, shall 
be the associated person who opened such account) and a principal of 
the member, broker or dealer. Approval by the associated person and 
principal shall be indicated by signature or individual initials and 
date of signature or initialing on each account form. A member, broker 
or dealer shall send to each customer, no later than 30 calendar days 
after the date of the first transaction execution for the account of 
such customer, a copy of such customer's account form or an alternate 
document containing all required information set forth on such account 
form. The account form or alternate document shall include or be 
accompanied by a prominent statement advising the customer that, if any 
information on the account form or alternate document is incorrect, the 
customer should mark any corrections and return the account form or 
alternate document to the member, broker or dealer. Within 30 days of 
receipt from a customer of any corrections or changes to the contents 
of an account form or alternate document, a member, broker or dealer 
shall send a copy of the revised account form or alternate document to 
such customer and to the associated person who is responsible for such 
customer's account.
    (ii) Each account form shall contain the following information:
    (A) For natural persons, the customer's name, Social Security 
number (or other identifying tax number), address and telephone number, 
age, marital status and number of dependents, educational level, 
employment status including occupation and employer's name, annual 
income, and net worth (excluding value of primary residence). In the 
case of a joint account, such information shall be included for each 
individual on the joint account.
    (B) For customers other than natural persons, the name of the 
entity, its address, telephone number, Internal Revenue Service 
employer identification number, and the name and telephone number of 
the individual or individuals at that entity authorized to effect 
securities transactions in that account.
    (C) A designation of the customer's investment objective(s), from a 
list of objectives that shall include a definition of each category of 
objective in simple language. If speculation or a similar high-risk 
objective is among the alternatives presented, such objective must be 
presented as an independent category on the list of objectives and may 
not be presented on the list in combination with any other category of 
objective. Any definition of speculation or a similar high-risk 
objective shall state that such investments involve a high risk of loss 
that may exceed the losses in general market averages on any specific 
day or over a longer period of time. Where a customer designates 
multiple investment objectives, and one of the objectives is 
speculation or similar high-risk objective, the approximate percentage 
or range of percentages of investment capital dedicated to speculation 
or such similar high-risk objective shall be specified. No investment 
objective shall be marked or otherwise indicated on an account form 
unless specified or expressly authorized by the customer. The 
investment objectives on customer account forms shall be designated 
upon opening a new account and updated, if required, on an annual basis 
thereafter.
    (iii) The neglect, refusal, or inability of a customer to provide 
the required information for such customer's account form shall excuse 
a member, broker or dealer from obtaining such required information, 
provided that the member, broker or dealer maintains a written 
memorandum of such customer's neglect, refusal, or inability to provide 
the required information.
    (17)(i) Customer complaint files containing all correspondence, 
memoranda, and other documents received or generated in connection with 
any complaint by or on behalf of a customer. Customer complaint files 
shall also include a record showing what action, if any, has been taken 
by the member, broker or dealer in response to each complaint. Customer 
complaint files must be accessible by associated person name and local 
office location. Each local office shall maintain a customer complaint 
file that can be sorted by associated person name for all complaints 
involving that office. Local office customer complaint files shall 
include, at a minimum, the complaint and the response or resolution, if 
any.
    (ii) Any oral complaint from a customer received by an employee of 
a member, broker or dealer alleging facts that, if true, would 
constitute theft, conversion of funds or securities, unauthorized 
trading, churning, misrepresentation or lack of material disclosure, 
lack of suitability, or falsification of records, must be noted in a 
memorandum containing the name and address of the complainant, the 
customer account number, and the date of the complaint. The memorandum 
shall be prepared by a branch manager, principal, or compliance 
department employee of the member, broker or dealer. For purposes of 
Form U-4 and other reporting requirements, the preparation of such a 
memorandum shall not convert an oral complaint into a reportable event. 
It shall not be necessary to prepare a memorandum of an oral complaint 
in instances where:
    (A) The oral complaint is clearly the result of a misunderstanding 
or misinterpretation by the customer;
    (B) The nature of the misunderstanding or misinterpretation

[[Page 55600]]

is fully explained to the customer by an employee of the member, broker 
or dealer; and
    (C) The employee who explains the misunderstanding or 
misinterpretation also advises the customer that, if the customer is 
not satisfied with the explanation or has further concerns regarding 
the matter, the customer should send a written complaint to the broker-
dealer, and provides the customer with the appropriate address to send 
such written complaint.
    (iii) Every member, broker or dealer shall routinely notify its 
customers in a prominent notice on its customer account statements that 
customers should put their complaints in writing in order to establish 
an independent record of the complaint. Such notice shall also advise 
customers of the address and telephone number of the office or 
department of the member, broker or dealer where complaints should be 
directed.
    (iv) Customer complaint files need not include copies of litigation 
and arbitration documents if these documents are referenced in the 
customer complaint files and such documents are readily available to 
representatives of a securities regulatory authority.
    (18) Records of all commissions, overrides, and other compensation 
(including any bonus) identified by each transaction to the extent 
earned or accrued specifically for that transaction, the person or 
persons receiving the compensation, the customer account number, the 
date the transaction occurred, the amount of compensation, and the name 
of the security involved. To the extent that compensation is based on 
factors other than remuneration per trade, such as a total production 
system or bonus system, the member, broker or dealer must be able to 
demonstrate and to document, upon request, the method by which the 
compensation paid was earned.
    (19) Activity reports to identify exceptional numerical 
occurrences, such as frequent trading in customer accounts, unusually 
high commissions, or an unusually high number of trade corrections or 
cancelled transactions, for management's attention and information. For 
the purpose of this paragraph (a)(19), the systems and criteria used to 
generate such activity reports shall be determined by each member, 
broker or dealer, as long as the system and its parameters are 
reasonably designed to monitor levels of activity in accounts that may 
warrant further review and analysis by management. Actual copies of 
activity reports need not be retained by a member, broker or dealer if 
the member, broker or dealer maintains through electronic storage the 
data necessary to create or recreate promptly the required activity 
reports upon request by representatives of a securities regulatory 
authority.
    (20) The following records with respect to each associated person 
of such member, broker or dealer:
    (i) All registration application forms (Form U-4), termination 
forms (Form U-5), and amendments, which forms and amendments shall be 
manually executed, including complete documentation as to any ``yes'' 
answer pertaining to disciplinary history on Form U-4 (including items 
reported on a Disclosure Reporting Page).
    (ii) All licenses or other documentation showing registration with 
state securities jurisdictions or self-regulatory organizations.
    (iii) All contracts and other records pertaining to the 
relationship between each associated person and the member, broker or 
dealer.
    (iv) A summary of each associated person's compensation agreement 
with the member, broker or dealer, including commission schedules and 
details of any commission overrides.
    (v) Copies of all written inquiries and customer complaints 
concerning each associated person (for purposes of this paragraph 
(a)(20)(v), a member, broker or dealer shall not be required to include 
copies of litigation and arbitration documents among the required 
records so long as such documents are referenced in the records and are 
readily available for inspection by representatives of a securities 
regulatory authority).
    (vi) Records showing that upon every change in licensing affecting 
an associated person, such associated person has been notified of such 
change, including any restrictions or other provisions affecting the 
associated person's license.
    (vii) A client trading record listing all trades in chronological 
order for all customers of each associated person, including the items 
specified in paragraph (a)(1) of this section and the total dollar 
amount of remuneration per trade (if applicable) to the associated 
person (if remuneration is on other than a per-trade basis, such as on 
a total production system or a bonus system for each office, the 
records required by paragraph (a)(18) of this section shall apply in 
lieu of the requirement to maintain remuneration records on a per trade 
basis).
    (21) A current list identifying any internally assigned number for 
each associated person and a designation of the local office of the 
member, broker or dealer where each associated person conducts the 
greatest percentage of such associated person's business for such 
member, broker or dealer.
* * * * *
    (f) When used in this section:
    (1) The term associated person shall mean a partner, officer, 
director, salesman, trader, manager, or any employee handling funds or 
securities or effecting any transactions in, or inducing or attempting 
to induce the purchase or sale of any security, or otherwise soliciting 
transactions or accounts for such member, broker or dealer.
    (2) The term local office means any location where an associated 
person regularly conducts the business of handling funds or securities 
or effecting any transactions in, or inducing or attempting to induce 
the purchase or sale of any security, or otherwise soliciting 
transactions or accounts for a member, broker or dealer.
    (3) The term principal shall mean an individual registered with the 
National Association of Securities Dealers, Inc. as a principal or 
branch manager of a member, broker or dealer.
    (4) The term securities regulatory authority shall mean the 
Commission, a state securities regulatory agency, or a self-regulatory 
organization.
    3. Section 240.17a-4 is amended by revising paragraphs (a), (b)(1), 
(b)(4), (b)(7), (c), (d), (e)(1), (j), and the introductory text to 
paragraph (b)(8), and adding paragraphs (b)(10), (b)(11), (e)(5), 
(e)(6), (k), (l), and (m) and to read as follows:


Sec. 240.17a-4  Records to be preserved by certain exchange members, 
brokers and dealers.

    (a) Every member, broker and dealer subject to Sec. 240.17a-3 shall 
preserve for a period of not less than six years in an easily 
accessible place all records required to be made pursuant to 
Sec. 240.17a-3(a)(1), (2), (3), (5), (17), (19) and (21).
    (b) Every such member, broker and dealer shall preserve for a 
period of not less than three years in an easily accessible place:
    (1) All records required to be made pursuant to Sec. 240.17a-
3(a)(4), (6), (7), (8), (9), (10), and (18).
* * * * *
    (4) Originals of all communications received and copies of all 
communications sent by such member, broker or dealer (including inter-
office memoranda and communications) relating to its business, and a 
record that all outgoing communications have been approved by a 
principal of the member,

[[Page 55601]]

broker or dealer. Communications files shall be maintained in each 
local office with respect to communications sent from or received by 
that office, but communications sent from or received at a central 
location of a member, broker or dealer may be maintained at such 
central location. Records of principal approval of the outgoing 
communications of a member, broker or dealer may be kept at a central 
record storage location rather than at each local office. 
Correspondence sent with identical text, including any handwritten 
notes, to two or more customers may be recorded by one copy and a list 
of recipients. All communications pertaining to a specific customer 
account that are sent from or received at any local office of a member, 
broker or dealer shall be preserved with all other communications 
pertaining to that customer account that have been sent from or 
received at the same local office.
* * * * *
    (7) All written agreements (or copies thereof) entered into by such 
member, broker or dealer relating to his business as such, including 
agreements with respect to any account. Written agreements for purposes 
of this paragraph (b)(7) shall include all written contracts, options 
agreements, margin agreements, and discretionary trading agreements 
between the customer and the member, broker or dealer. The customer 
shall receive a copy of every written contract or agreement between the 
customer and the member, broker or dealer.
    (8) Records which contain the following information in support of 
amounts included in the report prepared as of the audit date on Form X-
17A-5 (Sec. 249.617 of this chapter) Part II or Part IIA and in annual 
audited financial statements required by Sec. 240.17a-5(d).
* * * * *
    (10) All advertisements, marketing materials, sales scripts, and 
other paper or electronic records, including audio and video tapes, 
used by the member, broker or dealer or any associated person to offer 
or sell any security. This provision includes documents and other 
records that are intended exclusively for internal use. All documents 
and other records used by the member, broker or dealer or any 
associated person to offer or sell any security shall be approved by a 
principal, a record of whose approval must be maintained.
    (11) Any information relating to the basis for any recommendation 
of a security by the member, broker or dealer with respect to each 
security that is underwritten by the member, broker or dealer and each 
security that the member, broker or dealer trades as principal and 
recommends to its customers. The requirement of this paragraph (b)(11) 
shall not be deemed to supersede the requirements of Sec. 240.15c2-11 
with respect to any securities for which a member, broker or dealer 
publishes quotations or submits such quotations for publication.
    (c) Every such member, broker and dealer shall preserve for a 
period of not less than six years after the closing of any customer's 
account any account cards or records that relate to the terms and 
conditions with respect to the opening and maintenance of such account 
and any account forms required by Sec. 240.17a-3(a)(16).
    (d) Every such member, broker and dealer shall preserve during the 
life of the enterprise and of any successor enterprise all Forms BD 
(Sec. 249.501 of this chapter), all Forms BDW (Sec. 249.501a of this 
chapter), and amendments to such Forms, which Forms and amendments 
shall be manually executed, all licenses or other documentation showing 
registration with state securities jurisdictions and self-regulatory 
organizations, and all organizational documents of the member, broker 
or dealer.
    (e) * * *
    (1) All records required under paragraphs (a)(12) and (a)(20) of 
Sec. 240.17a-3 until at least three years after the ``associated 
person'' has terminated his employment and any other connection with 
the member, broker or dealer.
* * * * *
    (5) All audit or examination reports that are required by law or 
that are completed by a party other than the member, broker or dealer 
for at least three years after the date of each such audit or 
examination report.
    (6) Compliance, supervisory, and procedures manuals describing the 
policies and practices of the member, broker or dealer with respect to 
operations, compliance with all applicable securities laws and 
regulations, and supervision of the activities of each natural person 
associated with the member, broker or dealer until at least three years 
after the termination of use of each such manual. Such manuals that 
pertain to the operation of a local office shall be kept at that 
office.
* * * * *
    (j)(1) Every member, broker or dealer subject to this section shall 
furnish promptly to representatives of a securities regulatory 
authority such authentic, accurate, legible, complete, and current 
(where a record requires updating) copies of those records of the 
member, broker or dealer that are required to be preserved under this 
section, as are requested by such representative of a securities 
regulatory authority. Records shall be organized in a systematic and 
easily recognizable order, such as chronologically or alphabetically. 
Each member, broker or dealer shall without delay make available to 
representatives of a securities regulatory authority an individual who 
is familiar with the records (or type of records) and qualified to 
explain them.
    (2) For purposes of this section, the term promptly shall mean 
immediately when the requested records are located in the office of the 
member, broker or dealer where the request for such records is made. In 
the case of requested records that are not located in the office of the 
member, broker or dealer where the request for such records is made, 
the term promptly shall mean within three business days.
    (k) Every member, broker or dealer shall designate a principal to 
ensure compliance with the provisions of this section and Sec. 240.17a-
3 that require approval of a record by a principal. Copies of documents 
provided to customers pursuant to the requirements of this section and 
Sec. 240.17a-3 need not show the approval of a principal.
    (l)(1) Records required to be preserved by the provisions of this 
section must be maintained at the headquarters office of a member, 
broker or dealer. The following records must be maintained for a period 
of at least three years also at each local office of a member, broker 
or dealer for such local office's activity: the blotters (or other 
records of original entry) containing an itemized daily record of all 
purchases and sales of securities for any accounts of customers 
required by Sec. 240.17a-3(a)(1); the memoranda required by 
Sec. 240.17a-3(a)(6); with respect to each associated person who 
conducts the greatest percentage of such associated person's business 
for such member, broker or dealer at such local office, all of the 
records required by Secs. 240.17a-3(a)(12) and 240.17a-3(a)(20) (except 
that records reflecting the amount of remuneration per trade required 
by Sec. 240.17a-3(a)(20)(vii) may be kept at a central location with 
the other records of the member, broker or dealer instead of at each 
local office); a copy of the list required by Sec. 240.17a-3(a)(21); 
all account forms, including any updated versions, required by 
Sec. 240.17a-3(a)(16); all local office customer complaint files 
required by Sec. 240.17a-3(a)(17) and all

[[Page 55602]]

local office communications required by paragraph (b)(4) of this 
section; and all local office compliance, supervisory, and procedures 
manuals required by paragraph (e)(6) of this section.
    (2) The capability of electronically displaying and immediately 
producing printed copies of the local office records described herein 
in a local office will be deemed to comply with the local office record 
maintenance requirements of this section. This capability shall not be 
deemed to supersede paragraph (f) of this section.
    (3) With respect to a single-agent office of a member, broker or 
dealer, local office records may be aggregated with the records of one 
or more other such offices in a regional record depository if the 
following requirements are met:
    (i) The regional record depository, which may be another office of 
the member, broker or dealer, is located within the same state as the 
single-agent office.
    (ii) The records stored in the regional record depository can be 
easily disaggregated and accessed for the single-agent office to the 
same extent as if the single-agent office kept separate records in 
compliance with the local office record-keeping requirements of this 
section.
    (m) When used in this section:
    (1) The term associated person shall have the meaning set forth in 
Sec. 240.17a-3(f)(1).
    (2) The term local office shall have the meaning set forth in 
Sec. 240.17a-3(f)(2).
    (3) The term principal shall have the meaning set forth in 
Sec. 240.17a-3(f)(3).
    (4) The term securities regulatory authority shall have the meaning 
set forth in Sec. 240.17a-3(f)(4).

    Dated: October 22, 1996.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

Exhibit A

(Note: This Exhibit will not appear in the Code of Federal 
Regulations)

Model State Regulation Governing Access to Records Required To Be 
Kept By Broker-Dealers (Prepared by NASAA)

    I. Required Books and Records.
    Every broker-dealer registered in this State shall comply with 
the record-keeping requirements of 17 CFR 240.17a-3 (hereinafter 
``Rule 17a-3'') and 17 CFR 240.17a-4 (hereinafter ``Rule 17a-4''), 
promulgated under the Securities Exchange Act of 1934.
    II. Access to Records.
    (a) Duty to produce.
    All records required to be maintained shall be kept within the 
possession and control of the broker-dealer, except as permitted in 
section (e) below with respect to a broker-dealer that has ceased 
transacting business in securities or that has terminated its 
registration. All records within the possession or control of a 
broker-dealer shall be produced to [the Administrator] or [the 
Administrator's] designee upon request. Every broker-dealer shall 
ensure that each office makes available to [the Administrator] or 
[the Administrator's] designee all local office records required by 
Rules 17a-3 and 17a-4.
    (b) Time in which to produce.
    It is the responsibility of each broker-dealer to make all 
required records quickly and easily accessible. Whenever records are 
required to be produced by this rule, the time limits set forth in 
this subparagraph shall control. When requested records are present 
on the premises of a broker-dealer, including paper records in a 
local office and electronic records retrievable over a computer 
terminal, they shall be produced immediately. When requested records 
are not present on the premises, such as microfilm in a central 
storage location outside this State, they shall be produced no later 
than the third business day after the date of the request. For good 
cause shown in writing, such as the unusually large scope of a 
request requiring production of a large volume of records, [the 
Administrator] may extend the time period for production.
    (c) Forms of record retention; duty to organize.
    Every broker-dealer shall ensure that all records required to be 
maintained shall be organized and made available for examination in 
one of the forms specified in Rules 17a-3 and 17a-4. Such records 
shall be authentic, accurate, legible, complete, and current (where 
a record requires updating). They shall be organized in a systematic 
and easily recognized order, such as chronologically or 
alphabetically, and they shall be easily accessible and readily 
explained. Each broker-dealer shall without delay make available to 
[the Administrator] or [the Administrator's] designee an individual 
who is familiar with the records (or type of records) and qualified 
to explain them. In the case of any records that require equipment 
to allow review or copying, the broker-dealer shall immediately make 
available such equipment in working order to the office that has 
responsibility to maintain the records.
    (d) Duty to cooperate.
    Every broker-dealer and broker-dealer employee shall cooperate 
with efforts by the [the Administrator] or [the Administrator's] 
designee to review for compliance with this regulation. [The 
Administrator] or [the Administrator's] designee may conduct 
announced or unannounced examinations at any office within or 
outside this State to review the business activities of the broker-
dealer. Every broker-dealer shall furnish access to all areas of its 
securities operations conducted on or off the premises and otherwise 
facilitate the examination. [The Administrator] or [the 
Administrator's] designee may further require that any records 
subject to examination by submitted [the Administrator's] agency to 
determine compliance with applicable laws and regulations.
    (e) Miscellaneous records.
    Every broker-dealer shall make available for examination all 
records in its possession or control that are in any way related to 
its business or that may lead to evidence pertaining to its business 
regardless of whether or not routine maintenance of such records is 
required by this regulation or Rules 17a-3 and 17a-4. Such records 
which are not in the immediate possession of the broker-dealer but 
which the broker-dealer has the ability to obtain must be obtained 
and produced [the Administrator] or [the Administrator's] designee 
on request, unless such records are equally available to [the 
Administrator].
    (f) Privileged records.
    If, in response to a request for records by [the Administrator] 
or [the Administrator's] designee during an examination or 
investigation, a broker-dealer refuses to produce any record on a 
claim of privilege, each such document must be identified in detail 
and the specific privilege identified an to each item. An assertion 
of privilege does not excuse a broker-dealer from maintaining 
records.
    (g) Records retention time periods; control by other parties.
    All records required by this rule shall be maintained for the 
time periods specified in the applicable provisions of Rules 17a-3 
and 17a-4. Should a broker-dealer cease transacting business in 
securities to terminate its registration, the broker-dealer shall 
continue to maintain the records for the time period specified in 
Rules 17a-3 and 17a-4. Should a terminated broker-dealer have 
another party maintain control of the broker-dealer's records, 
notice shall include the reason for the arrangement and the name, 
address, and telephone number of the other party.
    (h) Waiver of requirements.
    [The Administrator] may, for good cause as determined in [the 
Administrator] discretion, waive any requirements in this regulation 
with respect to any requirements in this regulation with respect any 
broker-dealer or class of broker-dealers.

[FR Doc. 96-27611 Filed 10-25-96; 8:45 am]
BILLING CODE 8010-01-P