[Federal Register Volume 62, Number 29 (Wednesday, February 12, 1997)]
[Rules and Regulations]
[Pages 6469-6474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3426]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-38245; File No. S7-21-93]
RIN 3235-AF91
Reporting Requirements for Brokers or Dealers Under the
Securities Exchange Act of 1934
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
amending its broker-dealer record preservation rule to allow broker-
dealers to employ, under certain conditions, electronic storage media
to maintain records required to be retained. The amendments reflect a
recognition of technological developments that will provide economic as
well as time-saving advantages for broker-dealers by expanding the
scope of recordkeeping options while at the same time continuing to
require broker-dealers to maintain records in a manner that preserves
their integrity. The Commission is also issuing an interpretation of
its record preservation rule relating to the treatment of
electronically generated communications.
EFFECTIVE DATE: The amendments become effective April 14, 1997.
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director (202/942-0132), Peter R. Geraghty, Assistant Director (202/
942-0177) or Barbara A. Stettner, Staff Attorney (202/942-0734),
Division of Market Regulation, Securities and Exchange Commission, 450
Fifth Street, NW., Mail Stop 5-1, Washington, DC 20549.
SUPPLEMENTARY INFORMATION
I. Introduction
On July 9, 1993, the Commission issued a release (``Proposing
Release'') requesting comment on proposed amendments to its broker-
dealer record
[[Page 6470]]
preservation rule, Rule 17a-4,1 that would allow broker-dealers to
employ, under certain conditions, optical storage technology.2 The
proposed amendments also would codify a staff no-action position that
allows broker-dealers to use microfiche as a storage medium.3
Simultaneous with the issuance of the Proposing Release, the Division
of Market Regulation (``Division''), with the concurrence of the
Commission, issued a no-action letter allowing broker-dealers to
utilize optical storage technology immediately, under certain
conditions.4 Based on the comments received and the experience
gained by the Commission under the no-action letter, the Commission is
adopting the proposed amendments with certain changes discussed herein.
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\1\ 17 CFR 240.17a-4. Rule 17a-4 sets forth the records to be
preserved by certain exchange members, brokers, and dealers.
\2\ Securities Exchange Act Release No. 32609 (July 9, 1993), 58
FR 38092 (July 15, 1993).
\3\ Letter from Nelson S. Kibler, Assistant Director, Division
of Market Regulation, SEC to Robert F. Price, Alex. Brown & Sons
(November 3, 1979).
\4\ Letter from Michael A. Macchiaroli, Associate Director,
Division of Market Regulation, SEC to Michael D. Udoff, Chairman, Ad
Hoc Record Retention Committee, Securities Industry Association
(``SIA'') (June 18, 1993).
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Set forth below is a summary of the proposed amendments, a summary
of the comment letters received in response to the Proposing Release, a
description of the final rule amendments, and an interpretation
relating to the retention of electronically generated communications.
The Commission is also providing notice of a staff related no-action
position regarding other recordkeeping requirements under the
Securities Exchange Act of 1934 (``Exchange Act'').
The Commission's Proposal
The Commission proposed to amend its record retention rule, Rule
17a-4, to expand broker-dealer record retention options by permitting
broker-dealers to use optical storage technology for information
required to be maintained under these rules. The Proposing Release
described optical storage technology as storage technology which
``allows for digital data recording in a non-rewriteable, non-erasable
format, such as write once, read many (``WORM'') * * *. Non-rewriteable
optical storage records digital information by employing a laser heat
source to burn a pattern on a metallic film on a disk surface that can
hold billions of bytes of data.''
In the Proposing Release, the Commission noted the importance for
recordkeeping of ready access, reliability, and permanence of records.
Therefore, the proposed rule included safeguards against data erasure,
provisions for immediate verification of the stored material, and
requirements for back-up facilities. Specifically, the conditions
included requirements that broker-dealers using optical disk storage
systems employ non-rewriteable, non-erasable technology that verifies
automatically the quality and accuracy of the optical storage recording
process, duplicate in a separate optical disk all information preserved
and maintained by means of optical storage technology, serialize the
original and duplicate optical disks, and time-date the information
placed on the optical disks. In addition, to facilitate full access to
records during examinations by the self-regulatory organizations
(``SROs'') and the Commission, broker-dealers would be required to
index the optical disks and place the index on optical disk, and would
be required to have the capability to readily reproduce records kept on
optical disks in any medium acceptable under the final rule amendment,
as required by the SROs and the Commission.
The Proposing Release also solicited comment regarding the adequacy
of optical disk technology to preserve handwritten records or records
that contain handwritten text, given the difficulties associated with
detecting alterations made to handwritten text preserved through
optical disk technology.5
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\5\ In response to these concerns, the Division's no-action
letter permitted optical storage of all paper records, including
handwritten records, except those records required to be made under
paragraphs (a)(6) and (a)(7) of Rule 17a-3 (proprietary and customer
order tickets).
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The Commission received 13 comment letters in response to the
Proposing Release.6 Several commenters explained that the
description of optical storage technology in the Proposing Release
included only one specific type of writing technology known as ablative
writing,7 and requested clarification that the final rule would
apply to other forms of optical disk technology that met the
requirements of the rule. In addition, a few commenters objected to
limiting the acceptable storage medium to optical disk technology and
recommended that the rule apply to other electronic storage media,
including optical tape.8 More recently, the SIA requested
clarification as to whether the Commission considers CD-ROM to be a
form of optical disk technology.9 Commenters that addressed the
issue of the adequacy of optical disk technology in preserving
handwritten records or records that contain handwritten text objected
to any restrictions on the types of records broker-dealers can maintain
using optical storage technology.
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\6\ The comment letters are available for public inspection and
copying in the Commission's public reference room located at 450
Fifth Street, NW., Washington, DC. (File No. S7-21-93).
\7\ Ablative technology means that, by use of a laser, a pattern
is burned onto a metallic film on an optical disk. Other methods of
optical disk technology utilize a laser to record information onto
the optical disk, but unlike ablative technology, the laser does not
necessarily ``burn'' a pattern onto the disk.
\8\ The SIA commented that optical tape provides the same
safeguards against data erasure and manipulation as optical disk
provides but allows for storage of greater amounts of data. Letter
from Michael D. Udoff, Chairman, Ad Hoc Record Retention Committee
of the SIA to Jonathan G. Katz, Secretary, SEC (September 30, 1993).
\9\ Letter from Mark A. Egert, Assistant General Counsel, SIA to
Michael A. Macchiaroli, Associate Director, Division of Market
Regulation, SEC (February 15, 1996) (arguing that CD-ROMs are simply
one of several different optical disk sizes that are commercially
available.)
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II. Description of Rule Amendments
A. Scope of Permissible Electronic Storage Media
In the Proposing Release, the Commission did not intend the
definition of optical storage technology to include only an ablative
methodology of storage. The Commission recognizes that other methods of
electronic storage technology exist, including optical tape and CD-ROM,
which are available in a WORM, non-rewriteable version.10 The
Commission is adopting a rule today which, instead of specifying the
type of storage technology that may be used, sets forth standards that
the electronic storage media must satisfy to be considered an
acceptable method of storage under Rule 17a-4. Specifically, because
optical tape, CD-ROM, and certain other methods of electronic storage
are available in WORM and can provide the same safeguards against data
manipulation and erasure that optical disk provides, the final rule
clarifies that broker-dealers may employ any electronic storage media
that meets the conditions set forth in the final rule.11
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\10\ The Commission understands that additional methods also
available in a WORM, non-rewritable version include, for example,
alloying, bubble-forming, moth-eye (Plasmon), phase-change, dye/
polymer, and magneto-optic.
\11\ The amendment the Commission is adopting today also permits
the use of ``micrographic media'' which is defined to include
microfilm or microfiche, or any similar media, which codifies an
earlier Commission staff no-action position. See Letter from Nelson
S. Kibler, supra note 3.
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B. Handwritten Records
In the Proposing Release, the Commission expressed concern and
requested comment regarding the use of optical disk technology to
preserve
[[Page 6471]]
handwritten records and records containing handwritten text. As
indicated in the Proposing Release, the Commission's primary concern
was that, from the standpoint of examinations and enforcement of the
securities laws, optical disk images (as well as microfilm or
microfiche images) make it difficult to detect forgery and alterations
made to handwritten text.
The Commission recognizes that microfilm is a form of record
retention for handwritten records that has been permitted since 1970,
and the Commission understands few broker-dealers currently keep
documents in hard copy or paper format. The Commission's experience
since 1970 relating to the retention of handwritten records on
microfilm has generally been positive. The Commission further
understands that many of the larger broker-dealers no longer create
traditional order tickets (with or without handwritten notations)
because such broker-dealers enter most orders directly through
electronic systems which automatically retain an electronic record of
the trade entry.
In view of the existing use of microfilm and microfiche for record
retention, the Commission believes that allowing preservation of
handwritten records in electronic storage media would not significantly
increase the difficulty of detecting forgery or alterations on these
records. Accordingly, the Commission is permitting storage of
handwritten records and records containing handwritten text using
electronic storage media meeting the requirements set forth in the
final rule adopted today.12 Nonetheless, in the future, if
difficulties arise in detecting abuses in handwritten records stored in
electronic format, the Commission may revisit this issue both with
regard to electronic storage media, as well as microfilm and
microfiche.13
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\12\ But see infra note 16 and accompanying text for certain
limited exceptions.
\13\ Recently, the Commission published its views with respect
to the use of electronic media by broker-dealers, transfer agents,
and investment advisers to deliver information as required under the
Exchange Act and the Investment Advisers Act of 1940. Securities
Exchange Act Release No. 37182 (May 9, 1996), 61 FR 24644 (May 15,
1996) (``May Interpretive Release''). As the Commission noted in the
May Interpretive Release, the staff of the Division also reminds
broker-dealers, transfer agents, and clearing agencies of their
responsibilities to prevent, and the potential liability associated
with, unauthorized transactions. In this regard, broker-dealers,
transfer agents, and clearing agencies should have reasonable
assurance that information preserved by means of electronic storage
media, including customer signatures, is authentic. See id. at note
29.
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C. Creation of a Duplicate Record
The Proposing Release would have required a broker-dealer to copy
all of the information contained on an original disk onto a separate,
duplicate disk. The SIA commented that broker-dealers should be
permitted to store the duplicate record on any medium acceptable under
Rule 17a-4. The SIA explained that clearing firms frequently have to
provide copies of records to their correspondent firms that may not
have optical disk technology. Therefore, according to the SIA, clearing
firms may be obligated to maintain certain records in another media for
the correspondents' use.14 The Commission agrees that it is
appropriate to permit storage of the duplicate record on any medium
acceptable under Rule 17a-4, and accordingly, the final amendments
reflect this change.15
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\14\ See Letter from Michael D. Udoff, supra note 8.
\15\ Another issue raised by several commenters concerns the
time at which the duplicate must be created. Broker-dealers will be
permitted to wait to make the duplicate until the original optical
disk is full, provided that broker-dealers maintain the duplicate
data on another acceptable medium such as paper or micrographic
media until it creates the duplicate optical disk.
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D. Audit System Requirement
The Proposing Release would have required a broker-dealer to ``have
in place an audit system providing for accountability regarding all
access to records maintained and preserved using optical storage
technology and any changes made to every original and duplicate optical
disk.'' Commenters sought clarification as to whether this provision
requires maintenance of a log of all persons who have the capability or
authority to access optical disks, or maintenance of a log indicating
each instance where data is added to a disk. The rule adopted by the
Commission today requires an audit system to be utilized only when
records required to be maintained under Rule 17a-4 are being entered or
when any additions to existing records are made. Therefore, an audit
record is not required when a record is accessed but cannot be altered
by the reader.
E. Third Party Down-Load Provider
The Proposing Release would require broker-dealers to have
arrangements with at least one third party that has the ability to
download information from the broker-dealer's electronic storage system
to another acceptable medium. The third party must submit undertakings
to the SRO for the broker-dealer indicating that it agrees to promptly
furnish information necessary for the Commission's staff and its
designees to download information from a broker-dealer's electronic
storage system to another acceptable medium, and take reasonable steps
to provide access to information contained on a broker-dealer's
electronic storage system. The Commission is adopting this requirement
substantially as proposed.
F. Escrow Agent
Under the Proposing Release, broker-dealers would be required to
keep current all information necessary to download records and indices
stored on optical disks. Alternatively, broker-dealers who use outside
service bureaus to preserve records could place in escrow and keep
current a copy of the information necessary to access the format (i.e.,
the logical layout) of the optical disks and to download records stored
on optical disks. This condition was intended to ensure access to
information preserved on optical disks when the broker-dealer is no
longer operational, when the broker-dealer refuses to cooperate with
investigative efforts of the Commission or the SROs, or when the
optical disk has not been properly indexed. The SIA commented that they
believed this requirement duplicated the required third party
undertaking in the proposed amendments. The third party undertaking was
intended to act as a back-up to the escrow requirement, and therefore
the Commission does not agree that it would be unnecessary and
duplicative to require broker-dealers to keep or escrow the information
necessary to download records from optical disk. Accordingly, the final
rule adopted today includes such proposed requirement.
III. Staff No-Action Position
The Commission also is providing notice that the staff of the
Division will not recommend enforcement action to the Commission if
broker-dealers, transfer agents, and clearing agencies fulfill their
record retention and preservation requirements set forth in the
following rules under the Exchange Act by using electronic storage
media as permitted by the final amendments to Rule 17a-4(f) described
herein:
Rule 3a51-1 (17 CFR 240.3a51-1)
Rule 15a-6 (17 CFR 240.15a-6)
Rule 15c1-7 (17 CFR 240.15c1-7)
Rule 15c2-5 (17 CFR 240.15c2-5)
Rule 15c2-11 (17 CFR 240.15c2-11)
Rule 15c3-1 (17 CFR 240.15c3-1)
Rule 15c3-3 (17 CFR 240.15c3-3)
Rule 15g-3 (17 CFR 240.15g-3)
Rule 15g-4 (17 CFR 240.15g-4)
Rule 15g-5 (17 CFR 240.15g-5)
[[Page 6472]]
Rule 15g-6 (17 CFR 240.15g-6)
Rule 17a-2 (17 CFR 240.17a-2)
Rule 17a-5 (17 CFR 240.17a-5)
Rule 17a-6 (17 CFR 240.17a-6)
Rule 17a-7 (17 CFR 240.17a-7)
Rule 17a-8 (17 CFR 240.17a-8)
Rule 17f-1 (17 CFR 240.17f-1)
Rule 17f-2 (17 CFR 240.17f-2)
Rule 17Ad-6 (17 CFR 240.17Ad-6)
Rule 17Ad-10 (17 CFR 240.17Ad-10)
Rule 17Ad-11 (17 CFR 240.17Ad-11)
Rule 17Ad-13 (17 CFR 240.17Ad-13)
Rule 17Ad-15 (17 CFR 240.17Ad-15)
The staff of the Division believes that the recordkeeping
requirements under Exchange Act Rules 15g-2 and 15g-9 16 should
not be met by means of electronic storage media, and the records
required by such rules should be maintained and preserved in paper
format for the prescribed time period. Rules 15g-2 and 15g-9 require
broker-dealers to obtain from a customer prior to effecting
transactions in penny stocks (1) a manually signed acknowledgement of
the receipt of a risk disclosure document, (2) a written agreement to
transactions involving penny stocks, and (3) a manually signed and
dated copy of a written suitability statement. Because the Commission,
in the May Interpretative Release, did not permit the use of electronic
media to satisfy the requirements of Rules 15g-2 and 15g-9, the staff
of the Division believes it would not be appropriate to permit the
storage of records required by such rules using electronic storage
media.17
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\16\ 17 CFR 240.15g-2 and 240.15g-9.
\17\ See May Interpretive Release at note 50.
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IV. Electronic Communications
Finally, the Commission is aware that many questions have been
raised regarding the applicability of Rule 17a-4(b)(4) to electronic
mail communications (``e-mail'') and Internet communications. In the
May Interpretive Release, the Commission discussed its beliefs
regarding the adaptation of SRO supervisory review requirements
governing communications with customers to accommodate the use of
electronic communications by broker-dealers. The Commission recommended
that the SROs work with broker-dealers with respect to the adaptation
of such rules and recommended that the SRO rules concerning the
supervisory requirements for electronic communications ``should be
based on the content and audience of the message and not merely the
electronic form of the communication.'' 18
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\18\ See id. at note 5. The Commission notes that the New York
Stock Exchange, Inc. (``NYSE'') has submitted a proposal to modify
its supervisory rules which will require prior supervisory review of
those communications with the general public and customers which
include advertisements, market letters, sales literature, and
similar types of communications, as well as research reports. The
proposal also requires members to develop reasonable procedures for
review of registered representatives' communications with the public
relating to their business. See File No. SR-NYSE-96-26.
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The Commission understands that broker-dealers use e-mail and the
Internet to communicate important information relating to the broker-
dealer's business internally, to customers, and to the general public.
The Commission is also aware that many broker-dealers use such
electronic systems to communicate about issues unrelated to the
business of the broker-dealer. Consistent with the Commission's
recommendation to the SROs regarding the appropriate standard for prior
supervisory review for electronic communications, the Commission
believes that for record retention purposes under Rule 17a-4, the
content of the electronic communication is determinative, and therefore
broker-dealers must retain only those e-mail and Internet
communications (including inter-office communications) which relate to
the broker-dealer's ``business as such.''
V. Summary of Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act, which became effective on January
1, 1981, imposes procedural steps applicable to agency rulemaking that
has a ``significant economic impact on a substantial number of small
entities.'' 19 The Chairman of the Commission has certified
pursuant to the Regulatory Flexibility Act that the final amendments to
Rule 17a-4 will not have a significant economic impact on a substantial
number of small entities because the amendments do not alter the
regulatory requirements for broker-dealers using currently accepted
media for record retention purposes (i.e., paper, microfilm, or
microfiche). A copy of the certification is attached to this release as
Appendix A.
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\19\ Although Section 601(b) of the Regulatory Flexibility Act
defines the term ``small entity,'' the statute permits agencies to
formulate their own definitions. The Commission has adopted
definitions of the term ``small entity'' for purposes of Commission
rulemaking in accordance with the Regulatory Flexibility Act. Those
definitions are set forth in Rule 0-10, 17 CFR 240.0-10. See
Securities Exchange Act Release No. 18452 (January 28, 1982), 47 FR
5215 (February 4, 1982). A broker-dealer is a ``small business'' or
``small organization'' under Rule 0-10 if the broker-dealer (i) had
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its
audited financial statements were prepared pursuant to 17 CFR
240.17-5(d) or, if not required to file such statements, a broker-
dealer that had total net capital (net worth plus subordinated
liabilities) of less than $500,000 on the last business day of the
preceding fiscal year (or in the time that it has been in business,
if shorter); and (ii) is not affiliated with any person (other than
a natural person) that is not a small business or small organization
as defined in 17 CFR 240.0-10.
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VI. Paperwork Reduction Act
In connection with the Proposing Release, on August 12, 1993,
notice was published in the Federal Register 20 that, pursuant to
the Paperwork Reduction Act of 1980 (``Old PRA''), 21 the
Commission had submitted to the Office of Management and Budget
(``OMB'') request for approval of the proposed amendments to Rule 17a-
4. No comments were received with respect to the notice. The OMB
control number, 3235-0279, was originally issued in 1993 and was
reauthorized on June 30, 1996. Comment was sought with respect to the
reauthorization and no comment was received. 22 The OMB number was
issued pursuant to the Old PRA, prior to the amendment of such act in
1995.
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\20\ 58 FR 42992 (August 12, 1993).
\21\ 44 U.S.C. 3501 et seq.
\22\ 61 FR 14586 (April 2, 1996).
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The Proposing Release included certain requirements that would be
unique to broker-dealers which chose to use optical storage systems and
which qualified as collections of information under the Old PRA. The
final rule amendments do not contain substantive modifications to the
collections of information originally set forth in the Proposing
Release. The collection of information is in accordance with the
clearance requirements of 44 U.S.C. 3507. The final amendments clarify
that broker-dealers may use any electronic storage media that meets the
requirements of the rule. Since the final rule amendment expands the
scope of recordkeeping options and does not alter the options currently
permitted under the rule, broker-dealers may chose to continue to store
information using paper, microfilm, or microfiche, or may chose to
employ electronic storage media as permitted by the final rule
amendments. If broker-dealers chose the electronic storage media
option, then compliance with the collection of information requirement
is mandatory.
A. Collection of Information Under Rule 17a-4
Under the final rule amendments, users of electronic storage media
must have in place an audit system that provides for accountability
regarding inputting of records required to be maintained and preserved
pursuant to
[[Page 6473]]
Rules 17a-3 and 17a-4 to electronic storage media and inputting of any
changes made to every original and duplicate record maintained and
preserved thereby. Although the Commission is not specifying the
contents of each audit system, data automatically or otherwise stored
(in the computer or in hard copy) regarding inputting of records and
changes to existing records will be part of that system. The Commission
envisions that names of individuals actually inputting records and
making particular changes, and the identity of documents changed and
the identity of new documents created, are the kind of information that
automatically would be collected pursuant to the audit system
requirement. The results of the audit system must be available for
examination by the staffs of the Commission and the appropriate SROs
and must be preserved for the time required for the audited records.
In addition, the entity employing the electronic storage media must
organize and index all information maintained on both original and
duplicate electronic storage media, and each index must be duplicated.
The entity employing the technology must also maintain, keep current,
and provide promptly upon request by the Commission or SROs all
information necessary to access records and indexes stored on
electronic storage media, or escrow and keep current a copy of the
physical and logical file format, the field format of all different
information types written on the electronic storage media and the
source code, together with appropriate documentation and information
necessary to access records and indexes.
The recordkeeping requirements described above are unlikely to
prove burdensome to users because the recordkeeping requirements are
specifically tied to the design and use of electronic storage media. To
the extent that the final rule amendments create any burden on users,
however, such burden should be small, even negligible, relative to the
reduced recordkeeping burden that will result from broker-dealers'
ability to use electronic storage media.
B. Proposed Use of the Information
The information contained in the records required to be preserved
by those subject to Rule 17a-4 will be used by examiners and other
representatives of the Commission and the SROs to ensure that broker-
dealers are in compliance with applicable financial responsibility,
antifraud, and antimanipulation rules as well as other rules and
regulations of the Commission and the SROs. The collections of
information generally will not be made publicly available. The ultimate
purpose of the final amendment is the protection of investors.
VII. Statutory Analysis
Pursuant to the Securities Exchange Act of 1934 and particularly
section 17(a)(1) thereof, 15 U.S.C. 78q(a)(1), the Commission is
adopting amendments to Sec. 240.17a-4 of Title 17 of the Code of
Federal Regulations in the manner set forth below.
List of Subjects in 17 CFR Part 240
Brokers, Reporting and recordkeeping requirements, Securities.
Text of Final Rule
In accordance with the foregoing, Title 17, chapter II, part 240 of
the Code of Federal Regulations is 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, 78k-1, 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-4 is amended by revising paragraph (f) to read
as follows:
Sec. 240.17a-4 Records to be preserved by certain exchange members,
brokers and dealers.
* * * * *
(f) The records required to be maintained and preserved pursuant to
Secs. 240.17a-3 and 240.17a-4 may be immediately produced or reproduced
on ``micrographic media'' (as defined in this section) or by means of
``electronic storage media'' (as defined in this section) that meet the
conditions set forth in this paragraph and be maintained and preserved
for the required time in that form.
(1) For purposes of this section:
(i) The term micrographic media means microfilm or microfiche, or
any similar medium; and
(ii) The term electronic storage media means any digital storage
medium or system and, in the case of both paragraphs (f)(1)(i) and
(f)(1)(ii) of this section, that meets the applicable conditions set
forth in this paragraph (f).
(2) If electronic storage media is used by a member, broker, or
dealer, it shall comply with the following requirements:
(i) The member, broker, or dealer must notify its examining
authority designated pursuant to section 17(d) of the Act (15 U.S.C.
78q(d)) prior to employing electronic storage media. If employing any
electronic storage media other than optical disk technology (including
CD-ROM), the member, broker, or dealer must notify its designated
examining authority at least 90 days prior to employing such storage
media. In either case, the member, broker, or dealer must provide its
own representation or one from the storage medium vendor or other third
party with appropriate expertise that the selected storage media meets
the conditions set forth in this paragraph (f)(2).
(ii) The electronic storage media must:
(A) Preserve the records exclusively in a non-rewriteable, non-
erasable format;
(B) Verify automatically the quality and accuracy of the storage
media recording process;
(C) Serialize the original and, if applicable, duplicate units of
storage media, and time-date for the required period of retention the
information placed on such electronic storage media; and
(D) Have the capacity to readily download indexes and records
preserved on the electronic storage media to any medium acceptable
under this paragraph (f) as required by the Commission or the self-
regulatory organizations of which the member, broker, or dealer is a
member.
(3) If a member, broker, or dealer uses micrographic media or
electronic storage media, it shall:
(i) At all times have available, for examination by the staffs of
the Commission and self-regulatory organizations of which it is a
member, facilities for immediate, easily readable projection or
production of micrographic media or electronic storage media images and
for producing easily readable images.
(ii) Be ready at all times to provide, and immediately provide, any
facsimile enlargement which the Commission or its representatives may
request.
(iii) Store separately from the original, a duplicate copy of the
record stored on any medium acceptable under Sec. 240.17a-4 for the
time required.
(iv) Organize and index accurately all information maintained on
both original and any duplicate storage media.
(A) At all times, a member, broker, or dealer must be able to have
such indexes available for examination by the staffs of the Commission
and the self-
[[Page 6474]]
regulatory organizations of which the broker or dealer is a member.
(B) Each index must be duplicated and the duplicate copies must be
stored separately from the original copy of each index.
(C) Original and duplicate indexes must be preserved for the time
required for the indexed records.
(v) The member, broker, or dealer must have in place an audit
system providing for accountability regarding inputting of records
required to be maintained and preserved pursuant to Secs. 240.17a-3 and
240.17a-4 to electronic storage media and inputting of any changes made
to every original and duplicate record maintained and preserved
thereby.
(A) At all times, a member, broker, or dealer must be able to have
the results of such audit system available for examination by the
staffs of the Commission and the self-regulatory organizations of which
the broker or dealer is a member.
(B) The audit results must be preserved for the time required for
the audited records.
(vi) The member, broker, or dealer must maintain, keep current, and
provide promptly upon request by the staffs of the Commission or the
self-regulatory organizations of which the member, broker, or broker-
dealer is a member all information necessary to access records and
indexes stored on the electronic storage media; or place in escrow and
keep current a copy of the physical and logical file format of the
electronic storage media, the field format of all different information
types written on the electronic storage media and the source code,
together with the appropriate documentation and information necessary
to access records and indexes.
(vii) For every member, broker, or dealer exclusively using
electronic storage media for some or all of its record preservation
under this section, at least one third party (``the undersigned''), who
has access to and the ability to download information from the
member's, broker's, or dealer's electronic storage media to any
acceptable medium under this section, shall file with the designated
examining authority for the member, broker, or dealer the following
undertakings with respect to such records:
The undersigned hereby undertakes to furnish promptly to the
U.S. Securities and Exchange Commission (``Commission''), its
designees or representatives, upon reasonable request, such
information as is deemed necessary by the Commission's or designee's
staff to download information kept on the broker's or dealer's
electronic storage media to any medium acceptable under Rule 17a-4.
Furthermore, the undersigned hereby undertakes to take
reasonable steps to provide access to information contained on the
broker's or dealer's electronic storage media, including, as
appropriate, arrangements for the downloading of any record required
to be maintained and preserved by the broker or dealer pursuant to
Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 in a
format acceptable to the Commission's staff or its designee. Such
arrangements will provide specifically that in the event of a
failure on the part of a broker or dealer to download the record
into a readable format and after reasonable notice to the broker or
dealer, upon being provided with the appropriate electronic storage
medium, the undersigned will undertake to do so, as the Commission's
staff or its designee may request.
* * * * *
By the Commission.
Dated: February 5, 1997.
Margaret H. McFarland,
Deputy Secretary.
Note: Appendix A to the Preamble will not appear in the Code of
Federal Regulations.
Appendix A--Regulatory Flexibility Act Certification
I, Arthur Levitt, Chairman of the Securities and Exchange
Commission, hereby certify pursuant to 5 U.S.C. 605(b) that the
final amendments to Rule 17a-4 set forth in Securities Exchange
Release No. 34-38245 will not have a significant economic impact on
a substantial number of small entities. Specifically, the amendments
do not alter the regulatory requirements for broker-dealers using
currently accepted media for record retention purposes (i.e., paper,
microfilm, or microfiche). Instead, the amendments expand the record
retention media options by allowing broker-dealers to utilize
certain electronic storage media to store records required under 17
CFR 240.17a-3 and 240.17a-4. Accordingly, the amendments will not
change the impact of current regulatory record preservation
requirements on a substantial number of small entities.
Dated: January 31, 1997.
Arthur Levitt,
Chairman.
[FR Doc. 97-3426 Filed 2-11-97; 8:45 am]
BILLING CODE 8010-01-P