[Federal Register Volume 63, Number 196 (Friday, October 9, 1998)]
[Proposed Rules]
[Pages 54404-54417]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27120]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-40518; File No. S7-26-98]
RIN 3235-AH04


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

AGENCY: Securities and Exchange Commission.

ACTION: Reproposed rule.

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SUMMARY: The Securities and Exchange Commission is reproposing for 
comment amendments to its broker-dealer books and records rules, Rule 
17a-3 and Rule 17a-4, under the Securities Exchange Act of 1934. The 
original proposal was made in 1996 in response to concerns raised by 
members of the North American Securities Administrators Association 
about the adequacy of the Commission's books and records rules as to 
sales practices. The reproposed amendments incorporate comments 
received in response to the original proposal. These amendments are 
designed to clarify and expand recordkeeping requirements with respect 
to purchase and sale documents, customer records, associated person 
records, customer complaints, and certain other matters. The reproposed 
amendments also specify the books and records that broker-dealers would 
have to make available at their local offices. The reproposed books and 
records rules are specifically designed to assist securities regulators 
when conducting sales practice examinations.

DATES: Comments must be received on or before November 9, 1998.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Mail Stop 6-9, Washington, D.C. 20549. Comments may also be 
submitted electronically at the following E-mail address: rule-
[email protected]. All comment letters should refer to File No. S7-26-
98. All comments received will be available for public inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Electronically

[[Page 54405]]

submitted comment letters will be posted on the Commission's Internet 
web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 942-0131; Thomas K. McGowan, Assistant Director, at 
(202) 942-4886; or Deana A. La Barbera, Attorney, at (202) 942-0734; 
Office of Risk Management and Control, Division of Market Regulation, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 
10-1, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    Section 17(a)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') 1 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.2 Rules 17a-3 and 17a-4 under 
the Exchange Act specify minimum requirements with respect to the 
records that broker-dealers must make as well as the periods during 
which those records and other documents relating to the broker-dealer's 
business must be preserved.3 The Commission, self-regulatory 
organizations (``SROs''), and state securities regulators must have 
timely access to these records to conduct effective examinations and 
enforcement actions.
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    \1\ 15 U.S.C. 78a et seq.
    \2\ 15 U.S.C. 78q(a)(1).
    \3\ 17 CFR 240.17a-3 and 240.17a-4.
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    The reproposed recordkeeping requirements are intended to enable 
securities regulators to conduct more efficient and effective broker-
dealer examinations primarily for compliance with sales practice 
requirements. For situations in which examiners uncover potential 
violations of law, the reproposed recordkeeping requirements would 
provide regulators with essential tools for enforcement investigations, 
and, when necessary, enforcement proceedings. In addition, the 
reproposed amendments that would require that records be kept at each 
local office of a broker-dealer would improve the ability of securities 
regulators, including state securities regulators, to conduct 
examinations of sales practice activities of individual offices of a 
broker-dealer.
    In 1993, the North American Securities Administrators Association 
(``NASAA''), through its Broker-Dealer Operations Committee (``NASAA 
Committee''), commenced work on a model state regulation that would 
require broker-dealers to make and preserve books and records that 
would be valuable in examination and enforcement proceedings. The NASAA 
Committee presented a final draft of its model regulation for 
membership approval at NASAA's October 1995 meeting. At that meeting, 
the Commission's Chairman, Arthur Levitt, stated that supplemental 
state books and records requirements would impose a substantial burden 
on broker-dealers because of the possibility that each state's 
requirements would be inconsistent with those adopted by other states 
and that modification of the Commission's rules would be a less 
burdensome means of accomplishing NASAA's goals. At Chairman Levitt's 
request, NASAA's membership voted to defer taking further action with 
respect to the NASAA Committee's proposed model regulations to give the 
Commission an opportunity to develop appropriate amendments to its 
books and records rules.
    On October 11, 1996, the National Securities Market Improvement Act 
of 1996 (``NSMIA'') was adopted.4 NSMIA prohibited states 
from establishing books and records rules that differ from, or are in 
addition to the Commission's rules.5 NSMIA also provided 
that the Commission must consult periodically with state securities 
regulators concerning the adequacy of the Commission's books and 
records rules.6
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    \4\ Pub. L. 104-290, 110 Stat. 3416 (1996).
    \5\ 15 U.S.C. 78o(h).
    \6\ Id.
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II. Proposing Release

    On October 22, 1996, the Commission proposed amendments 
7 to the books and records rules that were designed to 
further the Commission's role in protecting investors and to address 
the NASAA Committee's concern that the Commission's current books and 
records requirements do not obligate broker-dealers to make and retain 
records specifically designed to facilitate sales practice examinations 
and enforcement activities.
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    \7\ Exchange Act Release No. 37850 (Oct. 22, 1996), 61 FR 55593 
(Oct. 28, 1996) (``Proposing Release'').
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    The amendments to Rule 17a-3 proposed in 1996 would have required 
broker-dealers to generate local office blotters, record supplemental 
information on brokerage order memoranda, create customer account 
forms, and maintain additional records concerning associated persons, 
customer complaints, and exceptional activity in customer accounts. The 
proposed amendments to Rule 17a-4 would have required broker-dealers to 
preserve additional 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. Further, the proposed 
amendments to Rule 17a-4 would have clarified and modified the 
Commission's existing requirements concerning preservation of certain 
correspondence and contracts. Finally, the proposed amendments to Rule 
17a-4 would have supplemented the existing standards concerning the 
organization of books and records, required broker-dealers to designate 
a principal to be responsible for books and records compliance, and 
required broker-dealers to make certain records available at each of 
their local offices.
    The Commission received approximately 178 written comments in 
response to the Proposing Release. Broker-dealers, trade associations, 
and law firms representing broker-dealers submitted 110 comment letters 
generally opposing some or all of the proposed amendments. State 
securities regulators and NASAA accounted for 33 comment letters 
generally supporting the proposed amendments. The balance of the 
comment letters were received from other individuals or entities 
interested in the Proposing Release.
    Most broker-dealers opposed the proposed amendments because they 
believed the costs associated with implementing them would outweigh any 
increase in investor protection. Many broker-dealer commenters 
particularly opposed the proposed amendments requiring certain records 
to be kept at each local office and suggested that the records be 
maintained at one centralized location with the understanding that the 
records would be provided to regulators at a local office on a timely 
basis. Some broker-dealers were particularly concerned with the local 
office retention requirement because it would apply to one-person 
offices. These broker-dealers believed that these offices could be more 
effectively supervised if records were held at one centralized 
location. Small broker-dealers and those affiliated with insurance 
companies suggested that they be exempt from the provisions of the 
proposed amendments.
    The letters submitted by the state securities regulators and NASAA, 
on the other hand, strongly supported the proposed amendments in their 
entirety. These commenters believed that the amendments would enable 
state securities regulators to conduct more thorough and efficient 
broker-dealer

[[Page 54406]]

examinations, particularly of local offices in their respective states. 
NASAA commented that state-level examinations have revealed that 
broker-dealers, hearing officers, and state courts had divergent 
interpretations of the Commission's books and records rules, that state 
examinations were often hindered by the absence of key records in local 
offices, that many branch records were poorly organized and 
inefficiently maintained, and that where records were maintained at a 
central location, there often were significant delays in the production 
of requested records. These commenters believed the amendments to Rules 
17a-3 and 17a-4 would enable state securities regulators to more 
effectively conduct broker-dealer examinations, especially examinations 
of local branch offices of broker-dealers operating in their respective 
states.

III. Reproposed Amendments and Discussion

    In response to numerous comments, the Commission is reproposing the 
amendments, which have been modified from the original proposal, to 
reduce the burden on broker-dealers without substantially detracting 
from the original objective of establishing rules that would facilitate 
examinations and enforcement activities of the Commission, SROs, and 
state securities regulators. Some of the reproposed rules may be 
duplicative of SRO recordkeeping rules; 8 nevertheless, the 
Commission is reproposing the rules because it believes certain 
recordkeeping requirements should be directly enforced by the 
Commission and should be available for states to include under their 
own laws.
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    \8\ For example, the Commission would require broker-dealers to 
maintain information, such as investment objectives, about customers 
that would overlap certain provisions of National Association of 
Securities Dealers (``NASD'') Conduct Rule 3110 and New York Stock 
Exchange (``NYSE'') Rule 405.
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A. Memoranda of Brokerage Orders and Dealer Transactions

    Rules 17a-3(a)(6) and 17a-3(a)(7) currently require that brokerage 
order memoranda and dealer purchase and sale memoranda (``order 
tickets'') include information concerning the terms and conditions of 
the order, the account for which the order is entered, the time of 
entry, the execution price, and to the extent feasible, the time of 
execution (or cancellation) of the order.9 The Proposing 
Release would have required that each order ticket also identify the 
associated person who entered the order and indicate whether the order 
was solicited or unsolicited.
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    \9\ A number of firms have asked for guidance on the meaning of 
the term ``to the extent feasible.'' The time of execution should be 
included on the order ticket except for situations in which it may 
be impossible to determine the precise time when the transaction was 
executed; however, in that case the broker-dealer must note the 
approximate time of execution. Exchange Act Release No. 3040 (Oct. 
13, 1941), 11 FR 10984.
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    As reproposed, an order ticket would still have to identify the 
associated person who entered the order, but it would not have to note 
whether the transaction was solicited or unsolicited. Further, the 
reproposed amendments to Rules 17a-3(a)(6) and (7) would require that 
an order ticket contain the identity of any person, other than the 
associated person, who entered or accepted the order on behalf of a 
customer. This requirement would allow securities examiners to 
determine whether particular persons, including unregistered persons, 
are engaged in sales practice violations.
    The reproposed amendments provide flexibility in how a broker-
dealer would have to record the identity of the person entering the 
order. Under the reproposed amendments, if a broker-dealer uses an 
electronic system to generate order tickets that does not have a field 
available to capture the identity of a person, other than the 
associated person, entering an order on a customer's behalf, the 
broker-dealer would not have to modify its system to enter that detail 
on the order ticket; alternatively, the broker-dealer could create a 
separate record identifying the person.
    The Commission seeks comment on how this rule should be applied to 
firms whose customers use an e-mail address, an electronic trading 
system, a general telephone number, or other system or procedure to 
submit orders. The Commission also seeks comment on whether certain 
firms, such as firms that accept unsolicited orders only or firms that 
do not designate a specific associated person for each account, should 
be exempt from this rule.
    The reproposed amendments also would add a requirement that a 
broker-dealer record on the order ticket the time at which the broker-
dealer receives a customer order, even if the order is subsequently 
executed. The current rule requires this information only when the 
order is not executed. This amendment would enable examiners to review 
more easily a broker dealer's compliance with its best execution 
obligations and the requirement that a broker-dealer not trade ahead of 
its customers.10
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    \10\ See 17 CFR 240.11Ac1-1 and 240.11Ac1-4. See also NASD 
Conduct Rules 2110 and 2320.
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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 Proposing Release 
would have required that each broker-dealer keep additional records 
concerning its associated persons, including registration and licensing 
materials, and that certain of these records be kept at each local 
office.
    The reproposed amendments would not require that Forms U-4 and U-5, 
amendments to those forms, or state or SRO licenses be kept at local 
offices of the broker-dealer, or that a broker-dealer maintain records 
concerning an associated person's change in licensing status. As 
several commenters pointed out, this information is readily available 
through the Central Registration Depository (``CRD'').
    The proposed amendments also would have required that each broker-
dealer maintain records with respect to agreements between associated 
persons and the broker-dealer, customer complaint information, and 
client trading records for each associated person. The reproposal 
largely retains these requirements albeit in new proposed subsections 
of the rule.11 These requirements would assist examiners in 
reviewing the sales practices of individual associated persons.
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    \11\ The requirement regarding customer complaints has been 
moved to reproposed Rule 17a-3(a)(17). Other requirements relating 
to records for each associated person have been moved to Reproposed 
Rule 17a-3(a)(12) so that most of the records required to be kept 
about associated persons are located in the same paragraph of Rule 
17a-3.
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    The reproposed amendments would require that each broker-dealer 
maintain a list of any internal identification numbers and CRD numbers 
assigned to associated persons and a list of associated persons working 
at, out of, or being supervised at or from each local 
office.12 This information will assist examiners especially 
with respect to conducting an examination of a particular local office.
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    \12\ The proposed amendments would have required broker-dealers 
to maintain a list identifying the local office where each 
associated person conducts the greatest portion of his or her 
business. This provision has been discarded in favor of the 
reproposed amendments to Rule 17a-3(a)(12).
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    Finally, the reproposed amendments would delete the definition of 
associated person from Rule 17a-

[[Page 54407]]

3(a)(12)(ii). Given that the term associated person is defined in 
several provisions of the Exchange Act, a separate definition under the 
rule is unnecessary and potentially confusing.13 Exchange 
Act provisions essentially define an associated person to include any 
partner, officer, director, or branch manager of a broker-dealer, and 
any person occupying a similar status or performing similar functions. 
In addition, the term associated person includes any person directly or 
indirectly controlling, controlled by, or under common control with a 
broker-dealer, or any employee of a broker-dealer. The Commission 
interprets the term associated person to include any independent 
contractor, consultant, franchisee, or other person providing services 
to a broker-dealer equivalent to those services provided by the persons 
specifically referenced in the statute.14 Consistent with 
this position, the reproposed amendments would require broker-dealers 
to keep records regarding all such persons.
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    \13\ See Sections 3(a)(18) and (21). See also Sections 3(a)(32) 
and 3(a)(45).
    \14\ The Commission has taken the position that independent 
contractors involved in the sale of securities on behalf of a 
broker-dealer (who are not themselves registered as broker-dealers) 
must be ``controlled by'' the broker-dealer, and, therefore, are 
associated persons of the broker-dealer. See, e.g., In the Matter of 
William v. Giordano, 61 S.E.C. Dkt. 345, Exchange Act Release No. 
36742 (Jan. 19, 1996)(In finding that an officer of a broker-dealer 
firm failed reasonably to supervise an independent contractor, the 
Commission found that the independent contractor was an ``associated 
person'' of the firm within the meaning of Section 3(a)(18) of the 
Exchange Act). See also Letter from SEC Division of Market 
Regulation, to Gordon S. Macklin, NASD; Charles J. Henry, CBOE; 
Robert J. Birnbaum, AMEX; and John J. Phelan, NYSE, [1982-1983 
Transfer Binder] Fed. Sec. L. Rep. (CCH) P77,303 at 78,116 (June 18, 
1982); Hollinger v. Titan Capital Corp., 974 F.2d 1564, 1572-76 (9th 
Cir. 1990), cert. denied, 111 S. Ct. 1621 (1991). A similar analysis 
would be applicable to other persons, such as consultants and 
franchisees, performing securities activities with or for the 
broker-dealer.
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    These records would not be required, however, for persons whose 
functions are solely clerical, ministerial, or not directly related to 
the securities business. For example, records would need to be retained 
for a consultant performing duties equivalent to those of an officer or 
a director of a broker-dealer, such as a chief financial officer; 
however, no records would be required for a consultant providing 
services related to a broker-dealer's health care plan. These records 
would be useful in determining whether individuals affiliated with a 
broker-dealer are engaged in sales activities and whether individuals 
who have been barred from association with broker-dealers are 
continuing their association.

C. Customer Account Records

    The proposed amendments would have required broker-dealers to 
maintain for each customer account an account form that included basic 
identification and background information about the customer, including 
the customer's investment objectives. The Commission is reproposing 
Rule 17a-3(a)(16) with certain modifications to reflect the comments 
received regarding the proposed rule.
    The reproposed amendments replace the term ``account form'' with 
``record of each account of a customer.'' The term was changed in 
response to comments that the word ``form'' could be interpreted to 
mean paper records only and that many broker-dealers store customer 
information electronically.
    The reproposed amendments would apply only to accounts that have 
natural persons as the beneficial owners. With respect to joint 
accounts composed of natural persons, the Commission specifically 
solicits comment as to whether the required information should be kept 
for each individual participant in a joint account or only for those 
individuals with authority to execute transactions in the account.
    As proposed, if a customer's investment objectives included 
speculation or other high risk objectives, the broker-dealer would have 
had to record the percentage of the customer's investment capital 
dedicated to such objectives. The proposed rule also would have 
required that the portion of the account form regarding the customer's 
investment objectives be updated annually. In response to this 
proposal, many commenters stated that a customer's investment 
objectives can change frequently; thus, a record of specific investment 
objectives could quickly become inaccurate. Commenters also stated that 
using the phrase ``speculation or similar high-risk objective'' to 
categorize a customer's investment objectives would be imprecise. The 
reproposed amendments would still require that a customer's investment 
objectives or risk tolerance be noted; however, as reproposed, each 
broker-dealer would be able to use whatever formulation it chooses to 
categorize each customer's investment objectives or risk tolerance. 
Further, the reproposed amendments would not require that a customer's 
investment objectives be updated annually; rather, as discussed below, 
the investment objectives would need to be updated at least once every 
36 months. These requirements would allow examiners to more effectively 
review for compliance with suitability requirements.
    The Proposing Release would have required broker-dealers to furnish 
to each customer a copy of the customer's account form within 30 days 
of the first trade for the account or within 30 days of a change or 
correction to the contents of the account form. The reproposed 
amendments modify the original proposal and would require that the 
customer account record be furnished to a customer within 30 days of 
opening the account and thereafter at least once every 36 months or 
when the account record is updated to reflect a change in the 
customer's name, address, or investment objectives. This requirement 
would provide customers the opportunity to verify and update the 
information in their records and correct any misunderstandings or 
errors. If the account record is updated to reflect a change of 
address, the broker-dealer would have to furnish the account record to 
the new address and a notice of the change of address to the old 
address. The Commission requests comment on whether a broker-dealer 
should include a customer's social security number when sending an 
updated account record to the customer.
    The neglect, refusal, or inability of a customer to provide or 
update any required information for the customer's account record would 
excuse the broker-dealer from obtaining the required information. 
However, when opening the customer account, the broker-dealer would be 
required to make a record of the explanation for the absence of the 
information. Although the customer's refusal to provide this 
information to the broker-dealer would excuse the firm from obtaining 
the information under proposed rule 17a-3(a)(16), the firm would still 
be required to comply with any applicable securities regulatory 
authority rules regarding obtaining customer information.
    For accounts existing on the effective date of the rule, the 36 
month period would begin on the effective date of the rule amendment. 
If a customer's name, address, or investment objectives do not change 
within that 36 month period, the broker-dealer would have to furnish to 
the customer a copy of the customer's updated account record no later 
than 36 months from the effective date of the amendment. If a 
customer's name or address does change during the period, however, the 
broker-dealer would have to furnish to the customer a copy of the 
customer's updated account record within 30 days of the customer 
informing the broker-dealer of the change. In this situation, a new 36 
month period would begin on the date

[[Page 54408]]

the updated information is furnished to the customer, provided, the 
entire account record is furnished to the customer. Likewise, any other 
subsequent change in the customer's name or address also would begin a 
new 36 month period.
    For an account opened after the effective date of this rule 
amendment, the broker-dealer would be required to send an account 
record within 30 days of the opening of the account. Thereafter, the 36 
month period would begin on the date the account is opened. 
Additionally, a new 36 month period would begin any time a broker-
dealer furnishes a complete updated account record to a customer. 
Broker-dealers would be free, of course, to update account record 
information more frequently than the rule requires.
    Reproposed Rule 17a-3(a)(16) would add a requirement that 
information be kept as to whether the customer is an associated person 
of a broker-dealer. If an account is a discretionary account, the 
record would have to contain the dated signature of each customer 
granting the discretionary authority over the account and the dated 
signature of each person to whom discretionary authority was granted. 
These requirements would assist examiners in identifying possible 
trading or sales practice violations, such as churning, trading ahead 
of customers, front-running, or possible manipulative activities 
involving controlled or nominee accounts.
    The reproposed amendments would also require a broker-dealer to 
create a record indicating whether it has complied with applicable 
securities regulatory authority rules governing the information 
required when opening or updating a customer account.15 This 
provision, for example, would apply to Exchange Act Rule 15g-9 which 
requires broker-dealers to follow certain procedures before effecting 
customer transactions in the penny stock market, Municipal Securities 
Rulemaking Board Rule G-8(a)(xi) which requires broker-dealers and 
municipal securities dealers to obtain certain customer information 
before effecting transactions in municipal securities, NASD Rule 3110 
which requires broker-dealers to maintain certain customer account 
information, such as a customer's address and residence, NASD Rule 
2860(b)(16) regarding the opening of options accounts, NASD Rule 2310 
regarding information that must be obtained prior to making investment 
recommendations to customers, NYSE Rule 405 which requires NYSE members 
to use due diligence to learn the essential facts relative to every 
customer, and Chicago Board of Options Exchange Rule 9.7 which sets 
forth the requirements for opening a customer options account. This 
requirement would help the Commission staff and state securities 
regulators in reviewing for compliance with securities regulatory 
authority rules relating to customer information and sales practice 
violations. The Commission requests comment on whether there are other 
SRO or Commission rules relating to opening or updating customer 
accounts that would or should be included under this proposed 
recordkeeping requirement. Because many broker-dealers likely already 
keep such records, would this requirement impose any additional burden 
on broker-dealers? Are there any alternatives that would be less 
burdensome?
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    \15\ Reproposed Rule 17a-3(a)(16)(ii).
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D. Customer Complaints

    The Proposing Release would have required broker-dealers to 
maintain files of written materials relating to customer complaints and 
to make and keep written memoranda of oral customer complaints alleging 
certain types of fraud and theft. The reproposed amendments would not 
require broker-dealers to document oral complaints or require each 
local office to maintain a customer complaint file of all 
correspondence, memoranda, and other documents received in connection 
with the complaint. Instead, each broker-dealer would have to keep a 
record of written complaints against each associated 
person.16 In addition, a broker-dealer would have to 
maintain for each local office a record of written complaints against 
each associated person that conducts business at that local 
office.17 The records would have to include, among other 
things, a description of the nature of the complaint, the name of the 
complainant, and the disposition of the complaint. As an alternative to 
maintaining a record of each customer complaint, a broker-dealer may 
keep a copy of the written complaint along with a record of the 
disposition of the complaint. These complaint retention requirements 
would enable examiners to detect patterns of customer abuses, both 
within particular offices and firm wide.
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    \16\ Reproposed Rule 17a-3(a)(17).
    \17\ See Reproposed Rule 17a-3(f).
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    Reproposed Rule 17a-3(a)(17)(ii) would require that broker-dealers 
create a record indicating that each customer has been notified of the 
address and telephone number of the department of the broker-dealer to 
which any complaints may be directed. This requirement would expand on 
an existing interpretation of the Commission's financial responsibility 
rules and the Securities Investor Protection Act of 1970, which states 
that, for purposes of custody of securities, for a broker-dealer to 
qualify as an introducing firm, its customers must be treated as 
customers of the clearing firm.18 Furthermore, under that 
interpretation, the clearing firm must issue account statements 
directly to customers and each account statement must contain the name, 
address, and telephone number of a responsible individual at the 
clearing firm whom a customer can contact with inquiries and complaints 
regarding the customer's account. This reproposed requirement would 
apply to all firms carrying or clearing customer accounts in addition 
to those firms in an introducing/clearing arrangement.
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    \18\ Exchange Act Release No. 31511 (Nov. 24, 1992), 57 FR 56973 
(Dec. 2, 1992).
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E. Other Required Records

    The Proposing Release would have required broker-dealers to create 
commission and compensation records for each associated person. The 
reproposed amendments would require essentially the same information as 
originally proposed, but would allow broker-dealers greater flexibility 
in how they can retain the records.19 For example, in lieu 
of retaining the individual compensation records, broker-dealers would 
be permitted to store electronically the data necessary to produce the 
records.20 Broker-dealers that choose this option would be 
required to produce the records upon request. Additionally, the 
reproposed amendments would clarify that records must be kept for non-
monetary as well as monetary compensation. This would assist examiners 
in detecting sales practice violations tied to a firm's compensation 
practices.
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    \19\ Reproposed Rule 17a-3(a)(18).
    \20\ See Reproposed Rule 17a-3(f).
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    The Proposing Release would have required broker-dealers to produce 
reports to monitor unusual occurrences in customer accounts such as 
frequent trading, unusually high commissions, or an unusually high 
number of trade corrections or cancellations. The reproposed amendments 
would not require broker-dealers to make these types of reports, but 
instead, would require broker-dealers to retain these reports, if 
created, or be able to recreate them upon request.21 Because 
this provision would now be a record

[[Page 54409]]

retention requirement, it has been moved to Rule 17a-4. These 
requirements would assist examiners in identifying violations such as 
churning and unauthorized trading. The Commission requests comment on 
whether the requirement that these reports be kept for three years is 
appropriate.
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    \21\ Reproposed Rule 17a-4(b)(11).
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F. Local Office

    The definition of a local office is significant because broker-
dealers must create records regarding activities in each local office 
and maintain a copy of certain records at that local office. This 
section discusses the reproposed definition of local office, the 
records that would be required to be maintained at each local office, 
alternative means of record retention for local offices, and state 
record depositories for those offices that do not qualify as local 
offices.
1. Definition of Local Office
    The reproposed amendments would modify the definition of ``local 
office'' to include locations where two or more associated persons 
regularly conduct a securities business.22 This definition 
has been modified from the Proposing Release, which would have included 
one-person offices in the definition, primarily in response to comments 
from broker-dealers that have many one-person offices or have 
associated persons who work from their homes. In these instances, 
records currently are stored at centralized locations maintained by the 
broker-dealers. Commenters stated that requiring records to be 
maintained at a one-person office or at an associated person's home 
would be extremely burdensome and could interfere with a broker-
dealer's supervisory duties. By reproposing the definition of local 
office to include an office with two or more associated persons, the 
Commission has attempted to eliminate those situations in which a 
broker-dealer has minimal presence at a particular location, such as 
one associated person at a bank branch, while still providing 
securities regulatory authorities with local access to office records 
of a broker-dealer.
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    \22\ Reproposed Rule 17a-3(g)(1).
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    The Commission requests comment on whether, and if so, how many and 
why, a higher number of associated persons would be appropriate for the 
definition of local office. The Commission requests commenters to 
provide, if applicable, information on the number of offices in each 
state that would fall within the reproposed definition of a local 
office, the number of offices that would fall within the definition 
suggested by the commenter, and the total number of offices for that 
broker-dealer firm. Commenters also should specify what percentage of 
the firm's business is conducted at the local offices as defined under 
the reproposed amendments and under any alternative definitions 
suggested by the commenter.
2. Local Office Records
    The reproposed amendments would require broker-dealers to make and 
keep separately for each local office records including blotters, 
broker and dealer order tickets, customer account records, customer 
complaints, evidence of compliance with securities regulatory authority 
rules, a list of state record depositories, names of persons capable of 
explaining the records, and names of any principals responsible for 
establishing policies and procedures, and records relating to the 
associated persons at each local office including employment 
agreements, identification numbers, compensation agreements, sales 
records relating to associated person compensation, and chronological 
sales records.23 Keeping these records regarding each local 
office would assist securities regulators by enabling them to conduct 
focused localized examinations of particular offices and identify 
abusive activities that may be isolated to that office.
---------------------------------------------------------------------------

    \23\ Reproposed Rule 17a-3(f).
---------------------------------------------------------------------------

3. Record Retention at Local Offices
    The reproposed amendments would require broker-dealers to make 
available at the respective local office certain records, including 
blotters of the local office's activities, memoranda of brokerage 
orders and dealer transactions, customer account records, customer 
complaints, and associated person records (collectively ``Local Office 
Records'').24 The Commission is now proposing that Local 
Office Records be kept at the local office for the most recent one year 
period. Requiring a year's worth of Local Office Records at the local 
office should provide securities regulators with sufficient records to 
conduct examinations of local offices while not imposing unnecessary 
burdens on broker-dealers. After a year, broker-dealers would still be 
required to keep Local Office Records at their headquarters office or 
some other centralized location, subject to the accessibility 
requirements of Rules 17a-4(a) and (b).
---------------------------------------------------------------------------

    \24\ Reproposed Rule 17a-4(k).
---------------------------------------------------------------------------

    The Commission is seeking comment on whether state securities 
regulators should have authority to waive the requirement that a 
broker-dealer keep Local Office Records at local offices within their 
respective states. The Commission also seeks comment on whether the 
reproposed record retention period of one year for local offices is 
appropriate.
4. Alternative Means of Record Retention
    The Commission recognizes that some broker-dealers have 
recordkeeping systems that are more technologically advanced than 
others. These systems should enable broker-dealers to provide 
securities regulators with records at a local office in a timely manner 
without actually keeping the records at a local office. Therefore, the 
Commission is proposing an alternative means for satisfying the local 
office recordkeeping requirements. A broker-dealer's capability to 
produce printed copies of Local Office Records in a local office the 
same day the request for the records is made, or within a reasonable 
time under certain unusual circumstances, would satisfy the local 
office recordkeeping requirements.25 By proposing an unusual 
circumstance exception, the Commission is addressing situations in 
which the broker-dealer has made a good faith effort to produce the 
records, but meets an unexpected delay in the production of the 
records. For example, the broker-dealer may experience a computer 
communication failure that cannot be immediately rectified by a local 
office. In contrast, the absence of a person authorized by the broker-
dealer to deliver the records would not be an acceptable reason for 
delaying delivery of the requested records.
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    \25\ Reproposed Rule 17a-4(k)(1).
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5. Promptly Furnishing Records at Local Offices
    As proposed, the definition of the term ``promptly'' would have 
specified that requested records must be produced immediately for 
records located in the office where a request is made and within three 
business days for records that are not located in the office. These 
amendments were proposed so that securities regulators would have 
prompt access to records while they were conducting examinations at 
local offices. The reproposed amendments have been modified to reduce 
the burden that the proposed amendments would have placed on broker-
dealers by allowing broker-dealers to use the alternative means of 
record retention discussed above.26
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    \26\ Id.

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[[Page 54410]]

G. State Record Depositories for Offices Not Meeting the Local Office 
Definition

    The reproposed rules modify the proposed definition of local office 
to include offices with two or more associated persons. As to offices 
with only one associated person, the Commission is reproposing that 
those records may be stored at a state record depository. The state 
record depository would have to be located in the same state in which 
the office (or offices) not meeting the definition of local office is 
located. Further, with respect to an associated person who works out of 
more than one office, a state record depository would have to be 
located in each state in which the associated person conducts business. 
The Commission recognizes that this may place an additional burden on 
some broker-dealers; however, the Commission believes that to support 
examinations by state securities regulators, these associated person 
records must be available in the state in which that person is active. 
The Commission requests comment on whether, to what extent, and under 
what circumstances a state should be permitted to waive the state 
record depository requirement for broker-dealers conducting business in 
its state.

H. Records Regarding Approval of Communications

    The proposed amendments would have required a record be kept 
indicating whether outgoing communications had been approved by a 
principal. The reproposed amendments modify that proposal to require 
that a broker-dealer retain any written approvals of outgoing 
communications sent and any written procedures it uses for reviewing 
outgoing communications. This change reflects the recent amendments to 
SRO rules which permit member firms to establish reasonable procedures 
for reviewing a registered representative's communications with the 
public.27 The Commission also is proposing to add a 
requirement that broker-dealers maintain a record of any written 
procedures for reviewing marketing materials and a record listing each 
principal of a broker-dealer responsible for establishing policies and 
procedures to ensure compliance with applicable regulations of a 
securities regulatory authority that require approval of a record by a 
principal.28 These requirements are designed to allow easier 
examination for sales practice abuses, such as unauthorized trading, 
suitability, churning, and other misrepresentations.
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    \27\ See Exchange Act Release No. 39510 (Dec. 31, 1997), 63 FR 
1131 (Jan. 8, 1998) and Exchange Act Release No. 39511 (Dec. 31, 
1997), 63 FR 1135 (Jan. 8, 1998).
    \28\ Reproposed Rule 17a-4(b)(10).
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I. Audit and Examination Reports

    The proposed amendments would have required broker-dealers to keep 
for at least three years all audit or examination reports prepared by a 
person other than the broker-dealer. Several commenters stated that 
this requirement is not warranted because it might discourage self-
critical evaluations of a firm's business, particularly if the firm 
would be required to share the report with regulators that may not have 
authority to protect the confidentiality of the reports. In light of 
this, the Commission is reproposing the requirement that each broker-
dealer keep for three years all reports requested or required by a 
securities regulatory authority and any securities regulatory authority 
examination reports.29 This requirement would help avoid 
unnecessary duplication in examinations. The Commission requests 
comment on whether there are any reasons why broker-dealers should not 
be required to keep such reports (for example, confidentiality concerns 
arising from particular state law requirements).
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    \29\ Reproposed Rule 17a-4(e)(5).
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J. Technical Amendments

    On February 5, 1997, the Commission amended Rule 17a-4 to allow 
broker-dealers to employ, under certain conditions, electronic storage 
media to maintain its records.30 The Commission is now 
proposing technical amendments to that rule.31 The 
Electronic Storage Media Release provided that a broker-dealer that 
employs micrographic or electronic storage media must be ready at all 
times to immediately provide a facsimile enlargement upon request by 
the Commission or its representatives.32 It also provided 
that for a broker-dealer that uses electronic storage media, a third 
party download provider must file undertakings with that broker-
dealer's designated examining authority indicating that it will furnish 
promptly to the Commission, its designees or representatives, the 
information necessary to download information kept on a broker-dealer's 
electronic storage media.33 Because SROs and state 
securities regulators are neither representatives nor designees of the 
Commission but, to the extent that they have jurisdiction over the 
broker-dealer serviced by the third party download provider, are 
organizations that should have access to facsimile enlargements and 
download information, the Commission is proposing technical amendments 
to provide them with access to these records.
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    \30\ Exchange Act Release No. 38245 (Feb. 5, 1997), 62 FR 6469 
(Feb. 12, 1997) (``Electronic Storage Media Release'').
    \31\ Rule 17a-4(f).
    \32\ See Rule 17a-4(f)(3)(i).
    \33\ See Rule 17a-4(f)(3)(vii).
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IV. General Request for Comments

    The Commission invites interested persons to submit written 
comments on all the reproposed amendments. Also, the Commission 
specifically requests comments concerning the definition of local 
office; the one year record retention period for local office records; 
and the retention and production of external audit, examination, and 
consulting reports.
    The Commission requests comment regarding whether there are 
alternative books and records requirements that would facilitate 
examination of local offices and review of sales and trading practices. 
Are there any other records, in addition to compensation records, that 
the Commission should require broker-dealers to retain that would show 
sales incentives?
    Is it necessary for Commission rules to also provide for state 
regulator access to books and records? Are there other measures the 
Commission could undertake to promote cooperation and coordination with 
state securities regulators regarding examinations and enforcement 
actions regarding broker-dealers? Are there alternatives to the local 
office requirements that would similarly expedite examinations away 
from a broker-dealer's home office?
    With respect to the proposed requirement that broker-dealers be 
able to demonstrate compliance with certain SRO and state securities 
regulatory requirements, is there an alternative way for securities 
regulators to obtain this information? Are there other types of records 
that would contain information that securities regulators may use to 
identify potential regulatory concerns?

V. Effects on Efficiency, Competition, and Capital Formation

    Section 23(a) of the Exchange Act requires the Commission, in 
adopting rules under the Exchange Act, to consider any impact on 
competition and to not adopt a rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the 
Act.34 Pursuant to Section 3(f) of the Exchange Act, when 
the Commission

[[Page 54411]]

considers whether an action is necessary or appropriate in the public 
interest, the Commission considers whether the action will promote 
efficiency, competition, and capital formation, in addition to the 
protection of investors. The Commission is considering the reproposed 
amendments to Rules 17a-3 and 17a-4 in light of these standards, and 
the Commission believes that any burden imposed by the reproposed 
amendments should be justified by the enhanced investor protection 
described above. In addition, by improving examination capabilities, 
the reproposed amendments should improve investor confidence in broker-
dealer firms and help maintain fair and orderly markets. The 
requirements would apply to all broker-dealers that conduct business 
with the general public. Larger broker-dealers would have 
correspondingly greater obligations under the amendments. Accordingly, 
any burden on broker-dealer competition should be slight, especially in 
light of the significant regulatory benefits and investor protection 
purposes discussed above. The Commission solicits comment on any effect 
on efficiency, competition, or capital formation the reproposed 
amendments may have.
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    \34\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

VI. 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 reproposed amendments to Rules 17a-3 
and 17a-4, commenters are requested to provide information relating to 
costs and benefits associated with any of the proposals herein.
    The requirements of reproposed rules 17a-3 and 17a-4 are discussed 
together rather than separately because the underlying purposes for 
both making and keeping the reproposed records are so closely related. 
However, because the Commission requests specific comment on the costs 
and benefits, including specific estimates of hour and dollar burdens 
that may result from these reproposed amendments, commenters may wish 
to discuss each rule and the subparts of each rule individually.

A. Benefits

    The reproposed amendments should result in increased efficiency and 
effectiveness of broker-dealer examinations especially with respect to 
local offices. The enhanced recordkeeping requirements would also 
provide critical information necessary for securities regulatory 
authorities to discover and take appropriate action for various 
securities violations, particularly, sales practice violations.
    Generally, the reproposed amendments would require additional 
information in four main areas including (1) customer information, (2) 
associated person information, (3) transaction information (i.e., 
purchases and sales), and (4) local office information. The reproposed 
rules relating to additional customer information (i.e., the account 
record) would provide a clear and relatively current record of customer 
information, including a customer's financial profile and investment 
objectives. This record would provide securities regulators with 
information to enable them to determine whether transactions in 
particular securities were suitable for a customer.
    The reproposed amendments relating to associated person information 
can be further broken down into two categories including compensation 
records and complaint records organized according to associated person. 
First, the compensation records would help provide securities 
regulators with insight into why associated persons may have conducted 
certain transactions. For example, the compensation records would allow 
securities regulators to determine whether financial or other 
incentives existed that may have led an associated person to engage in 
excessive transactions. Second, the complaint records organized 
according to registered representative would allow securities 
regulators to determine whether an associated person has engaged or is 
continuing to engage in certain securities violations such as sales 
practice abuses.
    The reproposed amendments relating to transactions would require 
broker-dealers to include on order tickets, among other things, the 
time the order was received, the identity of the associated person 
responsible for the account, and the identity of any other person who 
accepted or entered the order. First, the requirement that an order 
ticket note the time the order was received would allow securities 
regulators to determine whether the broker-dealer executed the 
transaction in a timely manner and in compliance with applicable 
regulations. Second, indicating on the order ticket the identity of the 
associated person responsible for the account as well as the identity 
of any other person who entered or accepted the order would provide 
securities regulators with insight into a variety of abusive 
activities. For example, securities regulators would be better able to 
identify situations in which a person who was barred from the industry 
was, nevertheless, continuing to associate with a broker-dealer by 
entering orders under another person's name. Additionally, the records 
could help reveal that a broker-dealer was engaging in boiler room 
activities in situations in which numerous associated persons were 
accepting and entering orders under one associated person's name.
    With respect to local office information, the requirement that 
certain records be kept for each local office would allow securities 
regulators to conduct a focused localized exam of a particular office 
and identify abusive activities that may be isolated to that office. 
Further, requiring broker-dealers to store certain records at local 
offices would allow securities regulators to conduct more effective and 
thorough examinations because they would be able to conduct the 
examinations on-site where they could review the pertinent records and 
interview various employees regarding the contents of those records. 
Additionally, making the records available at the local office is 
important to reduce the potential for alteration or fabrication of 
records when requested. Finally, requiring broker-dealers to maintain 
or make available particular records at local offices would help 
facilitate examinations by state securities regulators because the 
records would be located within that regulator's jurisdiction.

B. Costs

    Many of the records required under the reproposed amendments 
already are required under SRO rules, thus, tempering the impact of the 
reproposed amendments on broker-dealers. However, the Commission 
recognizes that compliance with the reproposed rules may require 
broker-dealers to make certain adjustments to their current systems and 
methods of record creation and storage.
    The Commission believes that the bulk of the additional costs of 
the reproposed amendments would result from three areas: (1) the 
requirement that account records be updated; (2) the requirement that 
certain records regarding local offices be made; and (3) the 
requirement that records be stored at or made available at local 
offices or state record depositories.35 Accordingly, the 
Commission has included certain provisions in the reproposed amendments 
that should lessen the impact on broker-dealers. For example, rather 
than storing hard copies of certain records, local offices may use a

[[Page 54412]]

system, which could range from ordinary E-Mail to a Local Area Network 
system to an intranet system, capable of producing printed copies of 
the records at the local office. The Commission believes that many 
broker-dealers already have in place systems that are capable of 
transmitting the information between offices immediately or on the same 
business day. This provision should provide securities regulators with 
timely access to records without requiring broker-dealers to actually 
produce and store in hard copy format every record required under the 
reproposed rules. The Commission seeks comment on alternative systems 
or methods of storing records or providing local offices and state 
record depositories with timely access to records.
---------------------------------------------------------------------------

    \35\ The Paperwork Reduction Act section of this release 
contains additional information relating to costs.
---------------------------------------------------------------------------

    In some instances, the reproposed amendments provide that broker-
dealers may choose between alternative methods of recordkeeping. For 
example, the reproposed amendments relating to the contents of an order 
ticket would add the requirement that order tickets contain, among 
other things, the identity of each associated person and any other 
person who entered or accepted the order. However, if the broker-
dealer's system is incapable of receiving an entry for any other person 
or if the alteration to the system would be costly, the broker-dealer 
would not have to alter its system; rather, the broker-dealer may make 
a separate record of the additional persons who enter or accept orders.

VII. 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 
reproposed amendments. The IRFA notes that the purpose of the 
reproposed amendments is to enhance the ability of securities 
regulators to protect investors through more effective and efficient 
examinations and enforcement proceedings. The Commission believes that 
the reproposed amendments are necessary to ensure that registered 
broker-dealers keep books and records that are sufficient to permit 
securities regulators to conduct complete sales practice and 
operational examinations. The IRFA further states that the reproposed 
amendments would affect all broker-dealers, including the approximately 
1,389 small broker-dealers, but notes that the requirements of the 
reproposed amendments were designed to minimize additional burdens. It 
also states that the reproposed amendments may require broker-dealers 
to adjust their record making and keeping practices and to update 
certain customer information records every 36 months. The IRFA states 
that no federal securities laws duplicate, overlap, or conflict with 
the reproposed amendments and that the Commission does not believe that 
any less burdensome alternatives are available to accomplish the 
objectives of the reproposed amendments.
    The Commission encourages the submission of written comments with 
respect to any aspect of the IRFA. If the reproposed amendments are 
adopted, written comments will be considered in preparation of the 
Final Regulatory Flexibility Analysis. Comments will be placed in the 
same public file as that designated for the reproposed amendments. A 
copy of the IRFA may be obtained by contacting Deana A. La Barbera, 
Division of Market Regulation, Securities and Exchange Commission, 450 
Fifth Street, N.W., Mail Stop 10-1, Washington, D.C. 20549, (202) 942-
0734.

VIII. Paperwork Reduction Act

    Certain provisions of the reproposed amendments contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995.36 The Commission has 
submitted the reproposed amendments to the Office of Management and 
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 
CFR 1320.11 under the title ``Reproposed Books and Records 
Amendments.''
---------------------------------------------------------------------------

    \36\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Collection of Information Under Reproposed Books and Records 
Amendments

    As discussed previously in this release, the Reproposed Books and 
Records Amendments would require registered broker-dealers to maintain 
additional records 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 Reproposed Books and 
Records Amendments would be used by the Commission, self-regulatory 
organizations, and other securities regulatory authorities for 
examinations and enforcement proceedings regarding broker-dealers and 
associated persons. No governmental agency would regularly receive any 
of the information described above. Instead, the information would be 
stored by the registered broker-dealer and made available to the 
various securities regulatory authorities for examinations and 
enforcement proceedings. To comply with the reproposed amendments that 
require broker-dealers to update customer account records at least 
every 36 months, broker-dealers would have to furnish their customers 
with a copy of the account record. This requirement and the estimated 
burden associated with it are discussed in detail in section D below.

C. Respondents

    The Reproposed Books and Records Amendments would apply to all the 
approximately 7,769 active broker-dealers 37 that are 
registered with the Commission. Most of the provisions of the 
Reproposed Books and Records Amendments would apply only to the 
approximately 5,400 broker-dealers that conduct business with the 
general public; this is because most of the provisions relate to a 
broker-dealer's and its associated persons' dealings with customers 
(e.g., the requirement that broker-dealers update customer account 
records).
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    \37\ Of approximately 8,500 broker-dealers registered with the 
Commission, approximately 450 are not yet active because their 
registration is pending SRO approval and approximately 300 are 
inactive because they have ceased doing a securities business and 
have filed a Form BDW with the Commission.
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D. Total Annual Reporting and Recordkeeping Burden

    The hour burden of the Reproposed 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. Therefore, the estimates in this section 
are based on averages among the various types and sizes of broker-
dealer firms. Most of the requirements of the Reproposed Books and 
Records Amendments involve collections of information that typical 
broker-dealers already maintain under customary and usual business 
practices or in compliance with SRO rules.
    The reproposed amendments modify Rule 17a-3 by, among other things, 
requiring broker-dealers to update customer account records at least 
every 36 months. Broker-dealers currently maintain approximately 
60,000,000 customer accounts. Because the account records must be 
updated at least once every 36 months, the Commission estimates that, 
on average, the account records of one-third of the total accounts 
(i.e. 20,000,000) would have to be updated each year. To comply with 
this

[[Page 54413]]

requirement, broker-dealers would have to furnish customers with the 
existing account record and request that the customer make any 
necessary changes. However, the Commission believes that not every 
account record will be changed in response to the broker-dealer's 
request for updated information because the account record may still be 
current or the customer may elect not to respond. The Commission 
estimates that approximately 10% of the requests for updated 
information will result in changes to the record resulting in 2,000,000 
(10% of \1/3\ of total customer accounts) updated account records each 
year. The Commission estimates that it will take, on average, 10 
seconds to furnish the account record to each customer. The Commission 
further estimates that it will take, on average, five minutes for a 
broker-dealer to update each account record. This estimate takes into 
account the amount of time it would take to receive the returned data 
and input any changes into the account record. Additionally, this time 
estimate takes into account that certain SRO rules already require 
broker-dealers to maintain current information about their customers 
and that broker-dealers maintain current account record information in 
the ordinary course of business.
    Therefore, the Commission estimates that the requirement that 
broker-dealers update account records would require approximately 
222,223 hours each year; this is derived from 55,556 hours to furnish 
the account records to customers (20,000,000 account records  x  10 
seconds / 60 seconds / 60 minutes) plus 166,667 hours each year to 
receive and input the updated information (2,000,000 account records 
x  5 minutes / 60 minutes)38
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    \38\ The Commission staff estimates that the approximate 
administrative and labor costs to broker-dealers to comply with this 
requirement would be $25 per hour (based on an annual salary of 
$52,000) resulting in a total annual cost of $5,555,575 (based on 
$25 per hour multiplied by 222,223 burden hours). This estimate does 
not include any systems costs.
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    In addition to the account record updating requirement, the 
Reproposed Books and Records Rules would require broker-dealers to keep 
certain records regarding their associated persons, including 
agreements pertaining to the associated person's relationship with the 
broker-dealer, compensation arrangements, identification numbers, the 
office at which each associated person's records are 
stored,39 each associated person's compensation for each 
transaction,40 and a chronological sales 
record.41 With the exception of the compensation record and 
chronological sales record, the records are the type of records that 
would be updated infrequently. Additionally, the Commission believes 
that all these records are the type of records that broker-dealers 
would keep in the ordinary course of business. Therefore, the 
Commission estimates that, on average, these records would require a 
broker-dealer to spend approximately 30 minutes each year to ensure 
that it is in compliance with the reproposed amendments.
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    \39\ Reproposed Rule 17a-3(a)(12).
    \40\ Reproposed Rule 17a-3(a)(18).
    \41\ Reproposed Rule 17a-3(a)(20).
---------------------------------------------------------------------------

    The reproposed amendments also would require broker-dealers to make 
records which indicate that they have complied with any applicable 
regulations of securities regulatory authorities,42 and 
which list persons who can explain the information in the broker-
dealer's records,43 each principal responsible for 
establishing compliance policies and procedures,44 and each 
office designated as a state record depository.45 The 
Commission believes that the information required under each of these 
rules would be readily available to broker-dealers and is the type of 
information that would change infrequently. Therefore, the Commission 
estimates that, on average, a broker-dealer would spend approximately 
10 minutes each year to ensure that it is in compliance with these 
requirements.
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    \42\ Reproposed Rule 17a-3(a)(19).
    \43\ Reproposed Rule 17a-3(a)(21).
    \44\ Reproposed Rule 17a-3(a)(22).
    \45\ Reproposed Rule 17a-3(a)(23).
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    The reproposed amendments also would require that broker-dealers 
keep a record of customer complaints.46 Broker-dealers 
already are required to keep this information under existing SRO rules; 
however, under the reproposed rules, the record must be made available 
at the local office or state record depository. The Commission believes 
that because broker-dealers already maintain these records, any 
additional burden resulting from this requirement would be nominal. 
Therefore, the Commission estimates that, on average, the burden would 
be 20 minutes per broker-dealer each year to ensure that it is in 
compliance with this rule.
---------------------------------------------------------------------------

    \46\ Reproposed Rule 17a-3(a)(17).
---------------------------------------------------------------------------

    The reproposed amendments relating to order tickets would require 
that broker-dealers note the time the order was received and the name 
of any person other than the associated person responsible for the 
account who accepted or executed the order.47 The Commission 
believes that, in the ordinary course of business, most broker-dealers 
already note on the order ticket the time the order was received; 
therefore, this requirement would not impose an additional burden on 
broker-dealers.
---------------------------------------------------------------------------

    \47\ Reproposed Rules 17a-3(a)(6) and (a)(7).
---------------------------------------------------------------------------

    The degree of the burden imposed by the requirement that any 
additional person be noted on the order ticket depends largely upon the 
business practices of the individual firms and their current 
recordkeeping systems; therefore, it is difficult for the Commission to 
provide an accurate estimate of the burden associated with this 
requirement. The Commission believes, however, that any additional 
burden would be nominal because the requirement may be satisfied by a 
minor notation on the order ticket or on a separate record.
    In total, the Commission estimates that compliance with the 
Reproposed Books and Records Rules for Rule 17a-3 would require an 
additional 229,992 hours per year ((222,223 hours (annualized account 
record updating) + 7,769 hours 48 (one hour per broker-
dealer each year for the balance of the additional rules)). Therefore, 
the current OMB inventory of 1,941,062 hours for Rule 17a-3 would 
increase by 229,992 hours to 2,171,054 hours.
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    \48\ The Commission staff estimates that the approximate cost to 
broker-dealers to comply with this requirement would be $48.08 per 
hour (based on an annual salary of $100,000) including the value of 
professional staff compensation and related overhead resulting in a 
total annual cost of $373,534 (based on $48.08 per hour multiplied 
by 7,769 burden hours). This estimate does not include any systems 
costs.
---------------------------------------------------------------------------

    The Reproposed Books and Records Rules would modify Rule 17a-4 by 
requiring broker-dealers to maintain additional books and records, 
including materials used by a broker-dealer to offer or sell 
securities, copies of reports produced to review activity in customer 
accounts, and a record listing all persons who are qualified to explain 
a broker-dealer's books and records. The reproposed amendments to Rule 
17a-4 also would require broker-dealers to make available certain 
records at the local offices or state record depositories. The 
reproposed amendments provide that broker-dealers may retain the 
records in a system capable of producing the records upon request, 
which should minimize additional record retention burdens on broker-
dealers. Also, as discussed above, most of the additional records 
already are maintained by the broker-dealers; therefore, the majority 
of the additional burden would result from the requirement that broker-
dealers retain

[[Page 54414]]

records at local offices or state record depositories.
    Based on the information above, the Commission estimates that, on 
average, each broker-dealer would spend one business day each year to 
ensure that it is in compliance with the reproposed amendments to Rule 
17a-4 and to ensure that the records are available at local offices and 
state record depositories. Therefore, the current OMB inventory for 
Rule 17a-4 of 2,127,125 hours would be increased by 62,152 hours (7,769 
active broker-dealers  x  8 hours) resulting in a total of 2,189,277 
hours.49
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    \49\ The Commission staff estimates that the approximate 
professional labor costs to the broker-dealer industry to comply 
with this requirement would be $48.08 per hour (based on an annual 
salary of $100,000) resulting annual cost of $2,988,268 (based on 
$48.08 per hour multiplied by 62,152 burden hours). This estimate 
does not include any systems costs.
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E. General Information About the Collection of Information

    The collection of information under the Reproposed Books and 
Records Amendments would be mandatory. The information collected 
pursuant to Rules 17a-3(a)(17), (21), (22), and (23) would be retained 
for six years. The information collected pursuant to Rules 17a-
3(a)(18), (19), and (20), 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-3(a)(16) would be retained for six years after 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. 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 the 
information. In general, the information collected pursuant to the 
Reproposed Books and Records Amendments would be held by the 
respondent. The Commission, self-regulatory organizations, and other 
securities regulatory authorities would only gain possession of the 
information upon request. Any information received by the Commission 
pursuant to the Reproposed 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 
Commission, 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 the collection of information on those 
required 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, 
D.C. 20503, and should also send a copy of their comments to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Mail Stop 6-2, Washington, D.C. 20549, and refer to File 
No. S7-26-98. 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, therefore, comments to OMB are 
best assured of having full effect if OMB receives them within 30 days 
of this publication.

IX. Statutory Analysis

    The amendments are proposed pursuant to the authority conferred on 
the Commission by the Exchange Act, including Sections 17(a) and 23(a).

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, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 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 revising paragraphs (a)(6), 
(a)(7), and (a)(12)(ii), and adding paragraphs (a)(12)(iii), 
(a)(12)(iv), (a)(12)(v), (a)(16), (a)(17), (a)(18), (a)(19), (a)(20), 
(a)(21), (a)(22), (a)(23), (f) and (g) to read as follows:


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

    (a) * * *
    (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. The 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 the order 
was received; the time of entry; the price at which executed; the time 
of execution or cancellation, to the extent feasible; and, except as 
otherwise provided in this paragraph, the identity of each associated 
person responsible for the account and any other person who entered or 
accepted the order on behalf of the customer. If a person other than 
the associated person responsible for the account entered the order 
into an electronic system that generates the required memorandum and 
the system is not capable of receiving an entry of the identity of any 
person other than the responsible associated person, the member, broker 
or dealer shall create a separate record which identifies each other 
person upon request. An order entered pursuant to the exercise of 
discretionary power by the member, broker or dealer, or associated 
person or other employee thereof, shall be so designated. The term 
instruction shall include instructions between partners and employees 
of a member, broker or dealer. The term time of entry shall mean the 
time when the member, broker or dealer transmits the order or 
instruction for execution.
    (7) A memorandum of each purchase and sale for the account of the 
member, broker, or dealer showing the price and, to the extent 
feasible, the time of execution; and, in addition, where the purchase 
or sale is with a customer other than a broker or dealer, a memorandum 
of each order received showing the terms and conditions of the order or 
instructions and of any modification or cancellation thereof; the 
account for which entered; the time the order was received; the time of 
entry; the price at which executed; the time of execution or 
cancellation, to the extent feasible; and, except as otherwise provided 
in this paragraph, the identity of each associated person responsible 
for the account and any other person

[[Page 54415]]

who entered or accepted the order on behalf of the customer. If a 
person other than the associated person responsible for the account 
entered the order into an electronic system that generates the required 
memorandum and the system is not capable of receiving an entry of the 
identity of any person other than the responsible associated person, 
the member, broker or dealer shall create a separate record which 
identifies each other person upon request. Orders entered pursuant to 
the exercise of discretionary power by the member, broker or dealer, or 
associated person or other employee thereof, shall be so designated. 
The term instruction shall include instructions between partners and 
employees of a member, broker or dealer. The term time of entry shall 
mean the time when the member, broker or dealer transmits the order or 
instruction for execution.
* * * * *
    (12) * * *
    (ii) A record of all agreements pertaining to the relationship 
between each associated person and the member, broker or dealer.
    (iii) A record containing a summary of each associated person's 
compensation arrangement or plan with the member, broker or dealer, 
including commission schedules.
    (iv) A record identifying any internal identification number 
assigned to each associated person by a member, broker or dealer and 
the Central Registration Depository number, if any, assigned to each 
associated person.
    (v) A record listing each associated person on behalf of the 
member, broker or dealer including the office of the member, broker or 
dealer out of which the associated person works and the local office or 
state record depository the records pertaining to that associated 
person are preserved pursuant to Sec. 240.17a-4.
* * * * *
    (16) For each account that has a natural person as the beneficial 
owner (including a joint account with one or more natural persons as 
the beneficial owners):
    (i)(A) An account record containing the customer's name, Social 
Security number (or other tax identification number), address and 
telephone number, date of birth, marital status, number of dependents, 
employment status (including occupation and whether the customer is an 
associated person of a member, broker or dealer), annual income and net 
worth (excluding value of primary residence), and investment objectives 
or risk tolerance. In the case of a joint account, the information 
shall be included for each individual on the joint account. The account 
record shall indicate that it has been approved by the associated 
person responsible for the account and by a principal of the member, 
broker or dealer. If an account is a discretionary account, the record 
must contain the dated signature of each customer granting the 
discretionary authority and the dated signature of each person to whom 
discretionary authority was granted.
    (B)(1) Every member, broker or dealer shall furnish to each 
customer within 30 days of opening the account and thereafter at least 
once every 36 months (at intervals no greater than 36 months) a copy of 
the customer's account record or an alternate document with all 
information required by paragraph (a)(16)(i)(A) of this section. For an 
account existing on [the effective date of the final rule], the initial 
36 month period shall begin on [the effective date of the final rule]. 
For an account opened after [the effective date of the final rule] the 
initial 36 month period shall begin on the day the initial account 
record is sent to the customer
    (2) For each account record of a customer updated to reflect a 
change in the name, address, or investment objectives of the customer, 
a member, broker or dealer shall furnish to that customer, no later 
than 30 calendar days after the date it received notice of the change 
of name, address, or investment objectives, a copy of that customer's 
account record or an alternate document containing all required 
information set forth on the account record. If the account is updated 
to reflect a change of address, the member, broker or dealer shall 
furnish the account record to the new address and a notice of the 
change of address to the old address.
    (3) The account record or alternate document furnished to the 
customer shall include or be accompanied by a prominent statement 
advising the customer that, if any information on the account record or 
alternate document is incorrect, the customer should mark any 
corrections and return the account record or alternate document to the 
member, broker or dealer. Within 30 calendar days of receipt from a 
customer any corrections or changes to the contents of an account 
record or alternate document, a member, broker or dealer shall furnish 
a copy of the revised account record or alternate document to the 
customer and to the associated person who is responsible for that 
customer's account.
    (C) The neglect, refusal, or inability of a customer to provide or 
update any required information for the customer's account record shall 
excuse the member, broker or dealer from obtaining the required 
information. The member, broker or dealer shall make a record of its 
failure to obtain the required information when opening the account. 
The record shall contain an explanation of the neglect, refusal, or 
inability of the customer to provide the required information and the 
name of the person that recorded the neglect, refusal, or inability on 
behalf of the member, broker or dealer.
    (ii) A record, which need not be separate from the account record, 
for each account opened or updated after [the effective date of the 
final rule] indicating compliance with any applicable regulations of a 
securities regulatory authority that require certain information about 
a customer be obtained when opening or updating a customer account. 
This record shall include the date the member, broker or dealer 
fulfilled its obligations regarding the opening or updating of the 
customer account under any applicable regulations of a securities 
regulatory authority.
    (iii) A record indicating that the customer was furnished with a 
copy of any written agreement pertaining to the customer's account. If 
a member, broker or dealer furnishes to a customer a copy of any 
written agreement that does not include the customer's signature, upon 
request, the customer shall be furnished with a signed copy of the 
written agreement pertaining to the customer's account.
    (17)(i) A record as to each associated person of each written 
customer complaint received by the member, broker or dealer concerning 
that associated person. The record shall include, at least, the 
complainant's name, address, and account number; the date the complaint 
was received; the name of any associated person identified in the 
complaint; a description of the nature of the complaint; and the 
disposition of the complaint. Instead of the record, a member, broker 
or dealer may maintain a copy of the original complaint along with a 
record of the disposition of the complaint.
    (ii) A record indicating that each customer of the member, broker 
or dealer has been provided with a notice containing the address and 
telephone number of the department of the member, broker or dealer to 
which any complaints may be directed.
    (18) A record as to each associated person listing all purchases 
and sales of securities for which the associated person was 
compensated, the amount of compensation (whether monetary or

[[Page 54416]]

nonmonetary), and the specific security involved. To the extent that 
compensation is based on factors other than remuneration per trade, 
such as a total production credit or bonus system, the member, broker 
or dealer must be able to demonstrate and to document upon request the 
method by which the compensation is determined. In lieu of making these 
records, a member, broker or dealer may maintain, through electronic 
means, the data necessary to promptly create the records upon request.
    (19) A record indicating compliance with any applicable regulations 
of a securities regulatory authority which require that materials used 
by a member, broker or dealer or any associated person to offer or sell 
any security have been approved by a principal. These materials may 
include advertisements, marketing materials, sales scripts, and other 
paper or electronic material, such as audio or video tapes. This 
provision does not apply to those materials used only for internal 
purposes.
    (20) A record as to each associated person listing chronologically 
all customer purchase or sale transactions for which the associated 
person entered the orders or was primarily responsible for the 
customer's account.
    (21) A record listing all persons who, without delay, can explain 
the information contained in the records (or type of records) required 
pursuant to this section and those records required to be retained 
pursuant to Sec. 240.17a-4.
    (22) A record listing each principal of a member, broker or dealer 
responsible for establishing policies and procedures that are 
reasonably designed to ensure compliance with any applicable 
regulations of a securities regulatory authority that require 
acceptance or approval of a record by a principal.
    (23) A record listing each office of a member, broker or dealer 
indicating whether the office is a local office or has been designated 
as a state record depository, and listing each associated person 
working out of or storing records at that office.
* * * * *
    (f) Every member, broker or dealer shall make and keep current, 
separately for each office, the books and records described in 
paragraphs (a)(1), (a)(6), (a)(7), (a)(12), (a)(16), (a)(17), (a)(18), 
(a)(19), (a)(20), (a)(21), (a)(22) and (a)(23) of this section 
reflecting the activities of that office. This requirement may be 
satisfied by demonstrating that the data is maintained in a system 
which is capable of promptly generating the records for each office 
upon request.
    (g) When used in this section:
    (1) The term local office means any location where two or more 
associated persons regularly conduct 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.
    (2) The term principal means any individual registered with the 
National Association of Securities Dealers Regulation, Inc. as a 
principal or branch manager of a member, broker or dealer.
    (3) The term securities regulatory authority means the Commission, 
any state securities regulatory agency authorized by law to examine 
members, brokers or dealers subject to its jurisdiction, or any self-
regulatory organization.
    3. Section 240.17a-4 is amended by revising paragraph (a), the 
introductory text of paragraph (b), paragraphs (b)(1), (b)(4), and 
(b)(7), the introductory text of paragraph (b)(8), and paragraphs (d), 
and (j), and adding paragraphs (b)(10), (b)(11), (e)(5), (e)(6), (k) 
and (l) 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 (the first two years 
in an easily accessible place, subject to the provisions set forth in 
paragraph (k) of this section) all records required to be made pursuant 
to Sec. 240.17a-3(a) (1), (2), (3), (5), (16), (17), (21), (22) and 
(23).
    (b) Every member, broker and dealer subject to Sec. 240.17a-3 shall 
preserve for a period of not less than three years (the first two years 
in an easily accessible place, subject to the provisions set forth in 
paragraph (k) of this section):
    (1) All records required to be made pursuant to Sec. 240.17a-3(a) 
(4), (6), (7), (8), (9), (10), (18), (19) and (20).
* * * * *
    (4) Originals of all communications received and copies of all 
communications sent by the member, broker or dealer (including inter-
office memoranda and communications) relating to its business as such. 
The member, broker or dealer shall also retain any written approvals of 
communications sent and any written procedures it uses for reviewing 
the communications received or sent by the member, broker or dealer 
(including inter-office memoranda and communications) relating to its 
business as such.
* * * * *
    (7) All written agreements (or copies thereof) entered into by the 
member, broker or dealer relating to its business as such, including 
agreements with respect to any account.
    (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 materials used by the member, broker or dealer or any 
associated person, to offer or sell any security, even if intended only 
for internal use. These materials include advertisements, marketing 
materials, sales scripts, and other paper or electronic materials, such 
as audio and video recordings. The member, broker or dealer shall also 
retain any written procedures for reviewing these materials.
    (11) Copies of reports produced to review unusual activity in 
customer accounts. These reports include, but are not limited to, 
reports that 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. In lieu of retaining copies of the reports, a member, 
broker or dealer may maintain, by electronic means, the data necessary 
to promptly create the reports upon request.
* * * * *
    (d) Every member, broker and dealer subject to Sec. 240.17a-3 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), all amendments to the Forms, all 
licenses or other documentation showing the member's, broker's or 
dealer's registration with state securities jurisdictions and self-
regulatory organizations, and all partnership articles or, in the case 
of a corporation, all articles of incorporation or charter, minute 
books and stock certificate books.
    (e) * * *
    (5) All reports requested or required by a securities regulatory 
authority and any securities regulatory examination reports until at 
least three years after the date of the report.
    (6) All compliance, supervisory, and procedures manuals describing 
the policies and practices of the member, broker or dealer with respect 
to operations, compliance with all

[[Page 54417]]

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 the use of 
each manual.
* * * * *
    (j) Every member, broker or dealer subject to this section shall 
furnish promptly to a representative of the Commission legible, true, 
and complete copies of those records of the member, broker or dealer, 
that are required to be preserved under this section, or any other 
records of the member, broker or dealer subject to examination under 
Section 17(b) of the Act (15 U.S.C. 78q(b)) that are requested by the 
representative of the Commission.
    (k) Records required to be preserved by the provisions of this 
section must be maintained at the headquarters office or other 
centralized location of a member, broker or dealer. In addition, 
records required to be maintained by Sec. 240.17a-3(a)(1), (a)(6), 
(a)(7), (a)(12), (a)(16), (a)(17), (a)(18), (a)(19), (a)(20), (a)(21), 
and (a)(22) and paragraphs (b)(4) and (e)(6) of this section which:
    (1) Relate to a local office shall also be maintained at the local 
office as follows:
    (i) The most recent one year period of the records pertaining to a 
local office shall be maintained at the local office of a member, 
broker or dealer; or
    (ii) In lieu of maintaining records at the local office, a member, 
broker or dealer may comply with the local office record maintenance 
requirements of this section by having the capability of producing 
printed copies of the records at the local office during the same 
business day as the request for the records is made or, if unusual 
circumstances prevent the production of printed copies of the records 
within the same business day, with the permission of the securities 
regulator making the request, the records shall be made available 
within a reasonable time. This capability shall not be deemed to 
supersede paragraph (f) of this section.
    (2) Relate to an office of a member, broker or dealer that does not 
meet the definition of local office under Sec. 240.17a-3(g)(1), or 
relate to an associated person who works out of multiple offices of a 
member, broker or dealer, must be either maintained at the office, or 
aggregated with the records of one or more other such offices or 
associated persons at a state record depository designated by the 
member, broker or dealer if the following requirements are met:
    (i) The state record depository, which may be another office of the 
member, broker or dealer, is located within the same state as the 
office that does not meet the definition of local office, and with 
respect to maintaining records for an associated person who works out 
of multiple offices, the state record depository is located in each 
state in which the associated person conducts its business; and
    (ii) The records stored in the state record depository can be 
easily identified and accessed for each office that does not meet the 
definition of local office or for each associated person to the same 
extent as if each such office or associated person kept separate 
records in compliance with the local office recordkeeping requirements 
of this section.
    (l) When used in this section:
    (1) The term local office shall have the meaning set forth in 
Sec. 240.17a-3(g)(1).
    (2) The term principal shall have the meaning set forth in 
Sec. 240.17a-3(g)(2).
    (3) The term securities regulatory authority shall have the meaning 
set forth in Sec. 240.17a-3(g)(3).


Sec. 240.17a-4  [Amended]

    4. In Sec. 240.17a-4, paragraph (f)(3)(ii) is amended by removing 
the phrase ``the Commission or its representatives'' and in its place 
adding ``the staffs of the Commission, any self-regulatory organization 
of which it is a member, or any state securities regulator having 
jurisdiction over the member, broker or dealer''.
    5. In Sec. 240.17a-4, paragraph (f)(3)(vii) is amended by:
    a. Removing the phrase ``the U.S. Securities and Exchange 
Commission (``Commission''), its designees or representatives,'' and in 
its place adding ``the U.S. Securities and Exchange Commission 
(``Commission''), its designees or representatives, any self-regulatory 
organization of which it is a member, or any state securities regulator 
having jurisdiction over the member, broker or dealer,'';
    b. Removing the phrase ``the Commission's or designee's staff'' and 
in its place adding ``the staffs of the Commission, any self-regulatory 
organization of which it is a member, or any state securities regulator 
having jurisdiction over the member, broker or dealer'';
    c. Removing each place it appears the phrase ``the Commission's 
staff or its designee'' and in its place adding ``the staffs of the 
Commission, any self-regulatory organization of which it is a member, 
or any state securities regulator having jurisdiction over the member, 
broker or dealer''.

    Dated: October 2, 1998.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-27120 Filed 10-8-98; 8:45 am]
BILLING CODE 8010-01-P