[Federal Register Volume 64, Number 105 (Wednesday, June 2, 1999)]
[Proposed Rules]
[Pages 29608-29614]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13865]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-41442; File No. S7-17-99]
RIN 3235-AH74


Recordkeeping Requirements for Transfer Agents

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (Commission) is 
publishing for comment a proposal to allow registered transfer agents 
to use electronic storage media to produce and preserve the records 
that they are required to retain. In addition, the Commission is 
proposing to expressly allow registered transfer agents to use 
microfiche in addition to microfilm for record retention purposes. The 
proposed amendments are designed to increase the flexibility and 
efficiency of transfer agent recordkeeping.

DATES: Comments should be received on or before July 2, 1999.

ADDRESSES: Interested persons should submit three copies of their 
written data, views, and opinions to Jonathan G. Katz, Secretary, Mail 
Stop 0609, Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-0609. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-17-99; this file number 
should be used on the subject line if E-mail is used. Comment letters 
will be available for public inspection and copying at the Commission's 
Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549. 
Electronically submitted comment letters will be posted on the 
Commission's Internet site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant 
Director, or Theodore R. Lazo, Attorney, at 202/942-4187, Office of 
Risk Management and

[[Page 29609]]

Control, Division of Market Regulation, Securities and Exchange 
Commission, 450 Fifth Street, NW, Mail Stop 1001, Washington, DC 20549-
1001.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Background

    Section 17(a)(1) of the Securities Exchange Act of 1934 (Exchange 
Act) requires registered transfer agents to make, keep, and disseminate 
reports prescribed by the Commission as necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of the Exchange Act.\1\ Rules 17Ad-6 and 
17Ad-7 under the Exchange Act specify the records that registered 
transfer agents must make and keep and the amount of time that the 
records must be preserved.\2\ Depending on the type of record, the 
records covered by these rules generally must be maintained for two 
years,\3\ six years,\4\ or until one year after the termination of a 
transfer agency relationship.\5\
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    \1\ 15 U.S.C. 78q(a)(1).
    \2\ 17 CFR 240.17Ad-6 and 240.17Ad-7.
    \3\ 17 CFR 240.17Ad-7 (a) and (b).
    \4\ 17 CFR 240.17Ad-7(d).
    \5\ 17 CFR 240.17Ad-7(c).
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    Rule 17Ad-7(f) permits registered transfer agents to preserve the 
records listed in Rule 17Ad-6 on microfilm, subject to certain 
conditions.\6\ However, Rule 17Ad-7 provides no other alternative to 
maintaining records in hard copy. In light of advances in electronic 
recordkeeping technology, we believe that Rule 17Ad-7 should be amended 
to accommodate a wider range of storage media.
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    \6\ 17 CFR 240.17Ad-7(f).
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    The Securities Transfer Association has requested the Commission to 
allow transfer agents to use optical disk storage systems to fulfill 
their recordkeeping requirements under Rule 17Ad-7.\7\ We believe that 
this request has merit, and so we are proposing to amend Rule 17Ad-7 
under the Exchange Act to permit registered transfer agents to preserve 
records using electronic storage media. We also are proposing to amend 
Rule 17Ad-7 to permit the preservation of records on micrographic 
media.\8\ These proposals incorporate the essential provisions of our 
rule that permits broker-dealers to use alternative recordkeeping 
methods.\9\
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    \7\ Letter from Charles Rossi, President, Securities Transfer 
Association, to Arthur Levitt, Chairman, Commission (July 2, 1996). 
The letter is available for inspection and copying in the 
Commission's Public Reference Room in File No. S7-17-99.
    \8\ Under the proposed amendments, the term ``micrographic 
media'' would be defined to mean microfilm or microfiche, or any 
similar medium.
    \9\ See Securities Exchange Act Release No. 38245 (February 5, 
1997), 62 FR 6469 (Broker-Dealer Release) (adopting amendments to 
Rule 17a-4(f) to allow broker-dealers to use electronic storage 
media and micrographic media).
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B. Alternative Recordkeeping Methods

1. Electronic Storage Media
    There are different types of electronic storage media available for 
recordkeeping purposes. The principal focus of the proposed amendments 
is on optical storage technology, which allows for digital data 
recording in a non-rewriteable, non-erasable format that provides a 
permanent and unalterable record.\10\ Optical storage systems record 
digital information by using a laser to burn a pattern on a metallic 
film on a disk surface (known as an optical disk) that can hold 
billions of bytes of data. Optical disks are removable from the 
hardware that records the information onto the disk. Using optical disk 
storage, any record, whether it is computer generated (such as a 
computer report) or electronically digitized from another medium (such 
as paper or micrographics), can be recorded and then accessed and 
managed using computers.
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    \10\ This format is sometimes referred to as ``write once, read 
many'' or ``WORM.''
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2. Micrographic Media
    Microfilm and microfiche are types of micrographic media that 
photographically reduce the size of document images. However, 
microfiche images are stored on a sheet of film while microfilm images 
are stored on spooled film.

II. Proposed Amendments and Discussion

    The Commission believes that the use of optical disks and other 
electronic storage media for the preservation of records must be 
conditioned with safeguards against erasability, provisions for the 
immediate verification of the stored information, and mandatory backup 
facilities. The proposed amendments to Rule 17Ad-7 would contain 
additional conditions to ensure that the documents stored on the disk 
are indexed and may be accessed by Commission examiners or by examiners 
from another appropriate regulatory agency.\11\
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    \11\ The term ``appropriate regulatory agency'' is defined in 
section 3(a)(34) of the Exchange Act, 15 U.S.C. 78c(a)(34), and 
includes the Commission, the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation, and the 
Office of the Comptroller of the Currency.
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    Exchange Act Rule 17a-4 contains conditions on broker-dealers' use 
of electronic storage media that are similar to the ones we are 
proposing for transfer agents. However, we anticipate that transfer 
agents (unlike broker-dealers) would use electronic storage media to 
store canceled securities certificates. The storage and destruction of 
canceled securities certificates present issues unique to transfer 
agents' use of electronic storage media. As a result, we believe that 
these conditions are particularly necessary for transfer agents. In 
addition, we believe that these conditions are necessary because 
optical disk storage technology is relatively new and there does not 
appear to be an industry standard for its development and for 
compatibility among different optical disk storage systems.
    The proposed amendments to Rule 17Ad-7 would contain additional 
conditions to ensure that the documents stored on the disk are indexed 
and may be downloaded by Commission examiners or by examiners from 
another appropriate regulatory agency.\12\
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    \12\ The term ``appropriate regulatory agency'' is defined in 
section 3(a)(34) of the Exchange Act, 15 U.S.C. 78c(a)(34), and 
includes the Commission, the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation, and the 
Office of the Comptroller of the Currency.
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    The proposed amendments would require transfer agents that use 
electronic storage media to store the records in a non-rewriteable, 
non-erasable format. This requirement should ensure that the 
information stored on electronic storage media cannot be modified or 
removed without detection. As an additional protection, the proposed 
amendments would require that electronic storage media label the 
storage units used (e.g., the optical disks) in sequential order and 
record the date and time that information is electronically stored. In 
addition, transfer agents would be required to keep a duplicate of any 
records that are stored using electronic storage media. The duplicates 
may be kept on any type of medium that is acceptable under Rule 17Ad-
7.\13\
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    \13\ The Commission does not intend that the proposed amendments 
to Rule 17Ad-7 would override any state laws or regulations 
regarding destruction of canceled securities certificates.
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    In order to ensure efficient and complete access to records during 
examinations, transfer agents using electronic storage media would be 
required to create an index of the records that are electronically 
stored and store the index with those records. In addition, the 
proposed amendments would require transfer agents to maintain a 
duplicate index along with the duplicates of the indexed records 
separately from the originals. Transfer

[[Page 29610]]

agents would also be required to have the capacity to download records 
stored on electronic storage media so that the records could be 
promptly transferred to an alternate medium such as paper, microfilm or 
microfiche.
    In addition, the proposed amendments contain conditions on the use 
of electronic storage media that are designed to provide access to 
information stored on electronic storage media if a transfer agent is 
no longer operating, refuses to cooperate with the Commission or 
another appropriate regulatory agency, or has not properly or fully 
indexed electronically stored records. Accordingly, the proposed 
amendments to Rule 17Ad-7 would require transfer agents to preserve, 
keep current, and surrender upon request the information necessary to 
download records stored on electronic storage media. As an alternative, 
transfer agents that use another party to maintain their records (such 
as an outside service bureau) would be permitted to place in escrow and 
keep current a copy of the information necessary to access the format 
of the electronic storage media and to download records that are 
electronically stored. Moreover, before a transfer agent uses 
electronic storage media, the proposed amendments would require that at 
least one party other than the transfer agent (e.g., the transfer 
agent's electronic storage media vendor) file representations with the 
Commission that it has the ability to download information from the 
transfer agent's electronic storage system and that it would do so at 
the request of either the Commission or its appropriate regulatory 
authority.
    We understand that some broker-dealers now use electronic storage 
media and micrographic media to fulfill their recordkeeping 
requirements. We believe that the proposed amendments to Rule 17Ad-7 
will similarly increase the flexibility and efficiency of transfer 
agent recordkeeping.

III. General Request for Comments

    Any interested person wishing to submit comments on the proposed 
amendments to Rule 17Ad-7, as well as on other matters that might have 
an impact on the proposal, is requested to do so. We seek comment on 
whether the proposed requirements regarding the use of electronic 
storage media will create an undue burden on transfer agents or others. 
We seek comment on whether additional or fewer safeguards may be 
required in the context of transfer agents' use of electronic storage 
media. We also request comments on whether other new technologies are 
available for use in retaining records, and whether the rule should 
allow use of these technologies. If so, under what conditions?
    We specifically solicit comments as to whether the proposed 
amendments to Rule 17Ad-7 present any issues that are unique to 
transfer agents that did not arise with respect to the amendments to 
Rule 17a-4. In particular, we request commenters to address any issues 
that may arise from the use of electronic storage media to store 
canceled securities certificates. Are there legal issues associated 
with transfer agents destroying canceled securities certificates that 
have been electronically stored? For example, could the inability to 
produce an original certificate during a legal proceeding create 
evidentiary problems even if a facsimile of the certificate could be 
downloaded from the electronic storage media? Should transfer agents 
that use electronic storage media to store canceled securities 
certificates be permitted to destroy canceled securities certificates 
as soon as they are electronically stored, or should transfer agents be 
required to maintain the original certificates for some period of time 
after storing them electronically?
    Should Rule 17Ad-7 contain specific standards regarding image 
quality for electronic storage media used by transfer agents? Should 
Rule 17Ad-7 require that any electronic storage media used by transfer 
agents automatically verify the resolution quality of the 
electronically stored records? Should transfer agents using electronic 
storage media be required to periodically audit the resolution quality?

IV. Cost and Benefits of the Proposed Amendments

    The Commission is considering the costs and the benefits of the 
proposed amendments to Rule 17Ad-7. The Commission has identified 
certain costs and benefits relating to the proposed amendments, which 
are discussed below, and encourages commenters to discuss any 
additional costs or benefits. In particular, the Commission requests 
comment on the potential costs for any necessary modifications to 
information gathering, management, and recordkeeping systems or 
procedures as well as any potential benefits resulting from the 
proposals for issuers, transfer agents, regulators, or others. 
Commenters should provide analysis and empirical data to support their 
views on the costs and benefits associated with the proposed 
amendments.

A. Benefits

    The proposed amendments to Rule 17Ad-7 should provide specific 
benefits to U.S. investors, issuers, transfer agents, and other 
financial intermediaries. These benefits are not readily quantifiable 
in terms of dollar value. Allowing registered transfer agents to 
maintain their records using micrographic media and electronic storage 
media should increase the efficiency of their recordkeeping operations 
by reducing the need to maintain records in hard copy format. In 
addition, the use of micrographic media and electronic storage media 
should reduce storage burdens (e.g., the need for storage space) that 
transfer agents currently face in keeping paper records.

B. Costs

    The proposed amendments to Rule 17Ad-7 should not result in 
significant costs to any particular person or entity. We have 
identified costs associated with the proposed amendments. Transfer 
agents that use micrographic media or electronic storage media may 
incur some costs in transferring hard copy records to micrographic or 
electronic storage media. In addition, there could be some cost to 
registered transfer agents to fulfill the conditions that would be 
imposed on the use of electronic storage media. Specifically, the 
requirements that transfer agents using electronic storage media create 
a duplicate of the records electronically stored, that they create an 
index of the electronically stored records, and that they establish an 
audit system to account for inputting of and changes to electronically 
stored records all could result in costs to those transfer agents. 
However, any costs related to the use of micrographic media or 
electronic storage media should be at least partly offset by the 
resulting elimination of the need to maintain and store records in hard 
copy format. In addition, we note that transfer agents' use of 
micrographic media or electronic storage media would be voluntary.
    We request comment on these costs and invite commenters to submit 
their own estimates of the costs and benefits that would result from 
the proposed amendments to Rule 17Ad-7. In order to fully evaluate the 
costs and benefits associated with the proposed amendments, we request 
that commenters' estimates of the costs and benefits of the proposed 
amendments be accompanied by specific empirical data supporting the 
estimates.

[[Page 29611]]

V. Effect of the Proposed Amendments on Competition, Efficiency, 
and Capital Formation

    Section 23(a)(2) of the Exchange Act \14\ requires the Commission, 
in adopting rules under the Exchange Act, to consider the impact any 
such rule would have on competition, and to not adopt any rule that 
would impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. In addition, section 3 
of the Exchange Act \15\ as amended by the National Securities Markets 
Improvement Act of 1996 \16\ provides that whenever the Commission is 
engaged in rulemaking and is required to consider or determine whether 
an action is necessary or appropriate in the public interest, the 
Commission shall consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation.
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    \14\ 15 U.S.C. 78w(a)(2).
    \15\ 15 U.S.C. 78c.
    \16\ Pub. L. 104-290, 110 Stat. 3416 (1996).
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    We are considering the proposed amendments to Rule 17Ad-7 in light 
of the standards cited in sections 3 and 23(a)(2) of the Exchange Act. 
For the reasons stated herein, the proposed amendments (i) should 
promote efficiency by allowing registered transfer agents to benefit 
from advances in recordkeeping technology, (ii) should not adversely 
affect capital formation because they relate solely to post-issuance 
activity, and (iii) should not impose any burden on competition because 
they will apply equally to all registered transfer agents.
    We do not anticipate that the proposed amendments would have a 
significant effect on competition or impose any burden on competition 
that is not necessary or appropriate in furtherance of the Exchange 
Act. Under the proposed amendments, all registered transfer agents 
would be permitted to use micrographic media and electronic storage 
media to fulfill their recordkeeping obligations. In addition, the 
proposed conditions with respect to using electronic storage media 
would apply equally to all registered transfer agents. However, in 
order to fully evaluate fully the effects on competition of the 
proposed amendments, the Commission requests commenters to provide 
their views and specific empirical data as to any effects on 
competition that might result from the Commission's proposed amendments 
to Rule 17Ad-7.

VI. Summary of Regulatory Flexibility Analysis

    The Commission has prepared an initial regulatory flexibility 
analysis (``IRFA'') in accordance with 5 U.S.C. 603(a) regarding the 
proposed amendments to Rule 17Ad-7. The IRFA states that the proposed 
amendments are intended to allow registered transfer agents to take 
advantage of advances in electronic recordkeeping technology. The IRFA 
sets forth the statutory basis for the proposed amendments.
    The IRFA states that, for purposes of Commission rulemaking, 
paragraph (h) of Rule 0-10 under the Exchange Act defines the term 
``small business'' or ``small organization'' to include any transfer 
agent that: (1) Received less than 500 items for transfer and less than 
500 items for processing during the preceding six months (or in the 
time that it has been in business, if shorter); (2) transferred items 
only of issuers that would be deemed ``small businesses'' or ``small 
organizations'' as defined in Rule 0-10 under the Exchange Act; (3) 
maintained master shareholder files that in the aggregate contained 
less than 1,000 shareholder accounts or was the named transfer agent 
for less than 1,000 shareholder accounts at all times during the 
preceding fiscal year (or in the time that it has been in business, if 
shorter); and (4) is not affiliated with any person (other than a 
natural person) that is not a small business or small organization 
under Rule 0-10.\17\ The IRFA states that we estimates that 180 
registered transfer agents qualify as small entities and would be 
subject to the proposed amendments to Rule 17Ad-7.
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    \17\ 17 CFR 240.0-10(h).
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    The IRFA states that the proposed amendments would impose certain 
reporting, recordkeeping, and compliance requirements. The proposed 
amendments also would require each registered transfer agent that uses 
electronic storage media to set up a system to record the inputting of 
records to electronic storage media and the inputting of any changes to 
that are electronically stored.
    The proposed amendments would require transfer agents that use 
electronic storage media to store the records in a non-rewriteable, 
non-erasable format. In addition, the proposed amendments would require 
that electronic storage media label the storage units used in 
sequential order and record the date and time that the information is 
electronically stored. Transfer agents would be required to keep a 
duplicate of any records that are stored using electronic storage media 
which could be kept on any type of medium that is acceptable under Rule 
17Ad-7.
    Transfer agents using electronic storage media would be required to 
create an index of the records that are electronically stored and store 
the index with those records. In addition, transfer agents would be 
required to maintain a duplicate index along with the duplicate records 
separately from the originals. Transfer agents would also be required 
to have the capacity to download records stored on electronic storage 
media so that the records could be promptly transferred to an alternate 
medium such as paper, microfilm or microfiche.
    The proposed amendments would require transfer agents to preserve, 
keep current, and surrender upon request the information necessary to 
download records stored on electronic storage media. Moreover, before a 
transfer agent uses electronic storage media, the proposed amendments 
would require that at least one party other than the transfer agent 
(e.g., the transfer agent's electronic storage media vendor) file 
representations with the Commission that the third party has the 
ability to download information from the transfer agent's electronic 
storage system and that it would do so at the Commission's request.
    The IRFA notes that the reporting, recordkeeping, and compliance 
requirements contained in the proposed amendments to Rule 17Ad-7 would 
apply only to registered transfer agents that specifically choose to 
use electronic storage media. The IRFA notes further that some small 
transfer agents will not be able to afford the costs involved with 
storing records electronically and therefore will not choose to use 
electronic storage media. The IRFA states that the proposed amendments 
to Rule 17Ad-7 should not have a significant economic impact on a 
substantial number of small entities.
    The IRFA states that as an alternative to the proposed amendments 
we considered proposing different compliance and reporting requirements 
and timetables with respect to transfer agents' use of electronic 
storage media. However, the IRFA states that the Commission believes 
that the compliance and reporting requirements and timetables as 
proposed are necessary to ensure the accuracy and integrity of transfer 
agent records that are electronically stored and to ensure the access 
to such records by the Commission or another appropriate regulatory 
agency. The IRFA also states that the timetables contained in the 
proposed amendments are consistent

[[Page 29612]]

with the timetables that are already contained in Rule 17Ad-7.
    The IRFA states that we believe that it is not feasible to further 
clarify, consolidate, or simplify the proposed amendments for small 
entities. The IRFA also states that the Commission believes that the 
use of performance standards rather than design standards is not 
applicable to the proposed amendments.
    The IRFA states that we believe that creating an exemption from the 
requirements of the proposed amendments would not reduce the impact of 
the proposed amendments on small entities. The IRFA notes that Rule 
17Ad-4(b) under the Exchange Act \18\ already exempts small transfer 
agents from many of the recordkeeping requirements of Rules 17Ad-6 and 
17Ad-7. In addition, the IRFA notes that any burden imposed by the 
proposed amendments would apply only to those transfer agents that 
choose to use electronic storage media. The IRFA states that we believe 
that there are no rules that duplicate, overlap, or conflict with the 
proposed alternative versions of the rule.
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    \18\ 17 CFR 240.17Ad-4(b).
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    The IRFA contains information concerning the solicitation of 
comments with respect to the IRFA. In particular, the IRFA requests 
comment on whether the proposed amendments to Rule 17Ad-7 would have a 
significant economic impact on a substantial number of small entities 
and requests that any such comments be accompanied by specific 
empirical data. Cost-benefit information reflected in the ``Cost/
Benefit Analysis'' section of this Release also is reflected in the 
IRFA. A copy of the IRFA may be obtained by contacting Theodore R. 
Lazo, Securities and Exchange Commission, 450 Fifth Street, NW, Mail 
Stop 1001, Washington, DC 20549-1001.
    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission is also requesting information regarding 
the potential impact of the proposed amendments on the economy on an 
annual basis. Commenters should provide empirical data to support their 
views.

VII. Paperwork Reduction Act

    Certain provisions of the proposed amendments to Rule 17Ad-7 
contain ``collection of information'' requirements within the meaning 
of the Paperwork Reduction Act of 1995,\19\ and the Commission has 
submitted them to the Office of Management and Budget for review in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the 
collection of information is: ``Record Retention Requirements for 
Registered Transfer Agents.'' The OMB control number for the collection 
of information is 3235-0136. The collection of information requirements 
are necessary both to ensure the integrity of transfer agents' records 
that are maintained on electronic storage media and to ensure the 
Commission's ability to access such records.
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    \19\ 44 U.S.C. 3501 et seq.
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    Proposed Rules 17Ad-7(f)(1)(iii) and 17Ad-7(f)(1)(iv) contain a 
collection of information requirements that are intended to ensure that 
the Commission would have full and complete access to transfer agents' 
records during examinations. Proposed Rule 17Ad-7(f)(1)(iii) and 17Ad-
7(f)(1)(iv) would require transfer agents that use electronic storage 
media to create an index of all electronically stored records and to 
maintain a duplicate of each index. We do not propose to specify the 
format of the index that would be required to be maintained. However, 
the original and duplicate indexes would be required to be kept in 
separate locations in order to protect against loss or damage. The 
indexes would be required to be maintained for as long as the transfer 
agent was using electronic storage media.
    Proposed Rule 17Ad-7(f)(3) contains a collection of information 
requirement that is intended to ensure the integrity of transfer 
agents' records that are stored on electronic storage media. Proposed 
Rule 17Ad-7(f)(3) would require each registered transfer agent that 
uses electronic storage media to set up a system to record the 
inputting of records to electronic storage media and to record the 
inputting of any changes to records that are electronically stored. We 
do not propose to specify the contents of each audit system, but any 
data stored regarding inputting of records and changes to existing 
records would be part of that system. We anticipate that the names of 
the individuals that input and make changes to records and the 
identities of documents inputted and changed are the kinds of 
information that automatically should be collected pursuant to the 
audit system requirement. The results of the audit system would be 
required to be preserved for the time required for the audited records.
    Proposed Rules 17Ad-7(f)(4) and 17Ad-7(f)(5) contain collection of 
information requirements that would ensure the Commission's access to 
records of a transfer agent that was no longer operating, refused to 
cooperate with the investigative efforts of the Commission or another 
appropriate regulatory agency, or had not properly or fully indexed 
electronically stored records. Proposed Rule 17Ad-7(f)(4) would require 
each transfer agent that uses electronic storage media to maintain and 
provide upon request or to keep in escrow all information necessary to 
access records and indexes that are electronically stored. We do not 
propose to specify the types of information that the transfer agent 
would be required to maintain if such information is maintained on the 
transfer agent's premises. However, if the transfer agent chose to 
place such information in escrow, it would have to keep in escrow a 
copy of the physical and logical format of the electronic storage 
media, the field format of all different information types written on 
the electronic storage media and the source code, together with 
appropriate documentation and information necessary to access records 
and indexes. The information required by Proposed Rule 17Ad-7(f)(4) 
would be required to be maintained for as long as the transfer agent 
was using electronic storage media.
    Proposed Rule 17Ad-7(f)(5) would require that for each transfer 
agent using electronic storage media at least one party other than the 
transfer agent would have to file with the Commission written 
undertakings that it has the ability to download the transfer agent's 
electronically stored records and that it would do so at the request of 
either the Commission or its appropriate regulatory authority. This 
requirement is intended to assure that examining authorities would be 
able to access a transfer agent's electronically stored records if the 
transfer agent could not or would not download the records. We 
anticipate that this requirement could be fulfilled in the form of a 
letter to the Commission staff. This collection of information 
requirement does not contain any new recordkeeping requirements.
    The collection of information required by the proposed amendments 
to Rule 17Ad-7 should not result in any new significant burden to 
transfer agents. All information required as a condition of transfer 
agents' use of electronic storage media is specifically tied to a 
transfer agent's decision to use electronic storage media to satisfy 
its already existing recordkeeping obligations.
    The likely respondents to the collection of information are large 
registered transfer agents. At this time, we estimate that there are 40 
likely respondents to the collection of information requirements 
contained in the proposed amendments to Rule

[[Page 29613]]

17Ad-7. The proposed frequency of response to the collection of 
information requirements varies depending on the specific requirement. 
The collection of information requirements contained in Proposed Rules 
17Ad-7(f)(3)(vi) and 17Ad-7(f)(3)(vii) would require a one time 
response. The collection of information requirements contained in 
Proposed Rules 17Ad-7(f)(3)(iv) and 17Ad-7(f)(3)(v) would require 
continuing responses.
    The Commission estimates that the average amount of time needed to 
comply with the collection of information requirements of the proposed 
amendments to Rule 17Ad-7 would be 125 hours per year. However, this 
time burden would apply only to registered transfer agents that choose 
to use electronic storage media. Based on the Commission's estimate of 
40 likely respondents, we estimate that the proposed collection of 
information requirements would result in 5000 additional burden hours 
(40 x 125) and would increase the total number of burden hours for Rule 
17Ad-17 from 142,272 to 147,272.\20\
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    \20\ Based on an estimated average administrative labor cost of 
$50.00 per hour, the Commission's staff estimates that the total 
labor cost to the transfer agent industry for complying with the 
collection of information requirements contained in the proposed 
amendments would be $250,000 annually ($50.00 x 5000). The 
Commission's staff developed these estimates in consultation with 
representatives of the transfer agent industry.
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    If a transfer agent chooses to use electronic storage media, then 
providing the information will be mandatory. Responses to the 
collection of information requirements will not be kept confidential. 
An agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid Office of Management and Budget control number.
    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 proper performance of the functions of the agency, 
including whether the information shall have practical utility;
    (ii) Evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information;
    (iii) Enhance the quality, utility, and clarity of the information 
to be collected; and
    (iv) Minimize the burden of collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms for information technology.
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the following persons: 
Desk Officer for the Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Room 3208, New Executive Office Building, Washington, DC 20503; and 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW, Mail Stop 0609, Washington, DC 20549-0609, and refer 
to File No. S7-17-99. The Office of Management and Budget (OMB) is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication of this release in the Federal 
Register, so a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of this publication.

VIII. Statutory Bases

    The amendments to Rule 17Ad-7 are being proposed pursuant to 
sections 17A(a)(2) and 17A(d) of the Exchange Act (15 U.S.C. 78q-
1(a)(2) and 78q-1(d)).

Text of the Amendments

List of Subjects in 17 CFR part 240

    Reports and recordkeeping requirements, Securities, Transfer 
agents.

    In accordance with the foregoing, the Commission proposes to amend 
part 240 of Chapter II of Title 17 of the Code of Federal Regulation 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, 80-23, 80a-29, 80a-37, 80b-3, 80b-4, and 
80b-11, unless otherwise noted.
* * * * *
    2. Section 240.17Ad-7 is amended by revising paragraph (f) to read 
as follows:


Sec. 240.17Ad-7  Record retention.

* * * * *
    (f) Record retention using micrographic media or electronic storage 
media. Registered transfer agents may use micrographic media or 
electronic storage media that complies with the conditions in this 
paragraph to store the records that they are required to keep under 
Secs. 240.17Ad-6 and 240.17Ad-7.
    (1) If you as a registered transfer agent use either micrographic 
media or electronic storage media to store your records you must:
    (i) Have available at all times for examination by the staffs of 
the Commission and of your appropriate regulatory agency (if the 
Commission is not your appropriate regulatory agency) facilities for 
immediate projection or production of easily readable images of the 
records that you store on electronic storage media;
    (ii) Be ready at all times to immediately provide any facsimile 
enlargement of the records that you store on electronic storage media 
that the staffs of the Commission and of your appropriate regulatory 
agency (if the Commission is not your appropriate regulatory agency) or 
their representatives may request;
    (iii) Create an accurate index of the records that you store on 
electronic storage media, store the index with those records, and have 
the index available at all times for examination by the staffs of the 
Commission and of your appropriate regulatory agency (if the Commission 
is not your appropriate regulatory agency); and
    (iv) Maintain a duplicate of the index of the records that you 
store on electronic storage along with duplicates of the indexed 
records separately from the originals. You may store the duplicates of 
the indexed records on any medium permitted by this section. You must 
preserve the duplicate index and the duplicates of the indexed records 
for the same time that is required by this section for the indexed 
records, and you must have them available at all times for examination 
by the staffs of the Commission and of your appropriate regulatory 
agency (if the Commission is not your appropriate regulatory agency).
    (2) Any electronic storage media that you use to store your records 
must:
    (i) Preserve the records in a format that is not rewriteable and 
not erasable;
    (ii) Automatically verify the quality and accuracy of its recording 
process;
    (iii) Label all units of storage media used in sequential order and 
record the date and time that information is stored on the electronic 
storage media; and
    (iv) Have the capacity to readily download indexes and records 
preserved on the electronic storage media to any medium acceptable 
under this paragraph as required by the staffs of the Commission and of 
your appropriate regulatory agency (if the Commission is not your 
appropriate regulatory agency).
    (3) If you use electronic storage media to store your records, you 
must set up an audit system that accounts for the inputting of and any 
changes to every record that is stored on electronic storage media:

[[Page 29614]]

    (i) You must be able to have the results of the audit system 
available at all times for examination by the staffs of the Commission 
and of your appropriate regulatory agency (if the Commission is not 
your appropriate regulatory agency); and
    (ii) The audit results must be preserved for the time required for 
the audited records.
    (4) If you use electronic storage media to store your records you 
must either:
    (i) Maintain, keep current, and provide promptly upon request by 
the staffs of the Commission and of your appropriate regulatory agency 
(if the Commission is not your appropriate regulatory agency) all 
information necessary to access records and indexes stored on 
electronic storage media; or
    (ii) If you use another party to maintain your records, place in 
escrow and keep current a copy of the physical and logical format of 
the electronic storage media, the field format of all different 
information types written on the electronic storage media and source 
code, and the appropriate documentation and information necessary to 
access records and indexes.
    (5) Before you begin to use electronic storage media to preserve 
some or all of your records under this section, there must be at least 
one party other than you who has access to your electronic storage 
media system and has the ability to download information from your 
system and that party must file with the Commission and with your 
appropriate regulatory agency (if the Commission is not your 
appropriate regulatory agency) the following undertakings with respect 
to such records:

    The undersigned hereby undertakes to furnish promptly to the 
U.S. Securities and Exchange Commission (``Commission''), the 
transfer agent's appropriate regulatory agency (``ARA'') (if its ARA 
is not the Commission), and their designees or representatives, upon 
reasonable request, such information as is deemed necessary by the 
Commission's, ARA's, or designee's staff to download information 
kept on the registered transfer agent's electronic storage media to 
any medium acceptable pursuant to Rule 17Ad-7 under the Securities 
Exchange Act of 1934.
    Furthermore, the undersigned hereby undertakes to take 
reasonable steps to provide access to information contained on the 
registered transfer agent's electronic storage media, including, as 
appropriate, arrangements for the downloading of any record required 
to be maintained and preserved by the registered transfer agent 
pursuant to Rules 17Ad-6 and 17Ad-7 under the Securities Exchange 
Act of 1934 in a format acceptable to the Commission's staff and the 
ARA's staff or their designees. Such arrangements will provide 
specifically that in the event of the registered transfer agent's 
failure to download the record into a readable format and, after 
reasonable notice to the registered transfer agent, upon being 
provided with the appropriate electronic storage medium, the 
undersigned will undertake to download the record into a readable 
format as the Commission's staff and the ARA's staff or their 
designees may request.

    (6) For purposes of this section, the following definitions apply:
    (i) The term micrographic media means microfilm or microfiche or 
any similar medium; and
    (ii) The term electronic storage media means any digital storage 
medium or system that meets the conditions in this paragraph.
* * * * *
    By the Commission.
    Dated: May 25, 1999.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-13865 Filed 6-1-99; 8:45 am]
BILLING CODE 8010-01-P