[Federal Register Volume 66, Number 84 (Tuesday, May 1, 2001)]
[Rules and Regulations]
[Pages 21648-21660]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-11005]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR PART 240

[Release No. 34-44227; File No. 57-17-99]
RIN 3235-AH74


Recordkeeping Requirements for Transfer Agents

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
amending its transfer agent record retention rule, Rule 17Ad-7, under 
the Securities Exchange Act of 1934 (``Act''). The amendments will 
allow registered transfer agents to use electronic, microfilm, and 
microfiche records maintenance systems to preserve records that they 
are required to retain under Rule 17Ad-6. The new requirements apply 
only to those registered transfer agents that elect to store their 
records using these methods. The amendments are designed to increase 
the flexibility and efficiency of transfer agent recordkeeping. The 
amendments adopted today are consistent with the requirements of the 
Electronic Signatures and Global and National Commerce Act of 2000 
(``ESIGN'').

EFFECTIVE DATE: May 31, 2001.

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant 
Director, or David Karasik, Special Counsel, at 202-942-4187, Office of 
Risk Management and Control, Division of Market Regulation, Securities 
and Exchange Commission, 450 5th Street, NW., Washington, DC 20549-
1001.

SUPPLEMENTARY INFORMATION: The Commission today is adopting amendments 
to rule 17Ad-7 [17 CFR 240.17Ad-7(f)] under the Act.

I. Discussion of Amendments to Rule 17Ad-7

A. Background

    On May 25, 1999, the Commission issued a release requesting comment 
on proposed amendments to its transfer agent record retention rule, 
Rule 17Ad-7,\1\ that would allow registered transfer agents to use 
electronic and micrographic records storage systems subject to certain 
conditions (``Proposing Release'').\2\ The purpose of the proposal was 
to increase the flexibility and efficiency of transfer agent 
recordkeeping while maintaining necessary controls over accuracy, 
integrity, and access to those records. The proposed amendments would 
have codified, in most part, two staff no-action positions that 
permitted transfer agents to use optical storage technology.\3\ 
However, based on the comments received and the experience gained by 
the staff in considering appropriate records management solutions, the 
Commission is adopting the proposed amendments with certain changes 
discussed herein.
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    \1\ 17 CFR 240.17Ad-7. Unless otherwise noted, all references to 
Rule 17Ad-7 or Rule 17Ad-6 or to any paragraph of those rules will 
be to 17 CFR 240.17Ad-7 and 17 CFR 17Ad-6, respectively.
    \2\ Securities Exchange Act Release No. 41442 (May 25, 1999), 64 
FR 29608 (June 2, 1999).
    \3\ On February 2, 1993, the Commission's Divisions of Market 
Regulation and Investment Management issued a no-action letter that 
permitted registered transfer agents, investment advisors, and 
investment companies to retain their records using optical disk 
storage technology. Letter regarding DST Systems, Inc. (Feb. 2, 
1993). On February 12, 1997, the Commission announced in the release 
adopting amendments to Rule 17a-4 that the staff would take no 
action if transfer agents fulfilled their recordkeeping requirements 
by complying with the provisions of Rule 17a-4. Securities Exchange 
Act Release No. 38245 (Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997). 
The optical disk recordkeeping requirements of the 1997 no-action 
position were similar to those set forth in the 1993 no-action 
position but contained additional safeguards, such as a third party 
access requirement and eliminated certain requirements, such as the 
requirement that the storage system be reviewed and evaluated by two 
independent public accounting firms. The requirements of the 
Proposing Release were nearly identical to those of the 1997 no-
action position.
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B. The Transfer Agent Regulatory System

    Section 17A(a)(2)(A)(i) of the Act directs the Commission to use 
its authority under the Act ``to facilitate the establishment of a 
national system for the prompt and accurate clearance and settlement of 
transactions in securities. * * *''\4\ Transfer agents play a vital 
role in the operation of that system. Transfer agents cancel stock 
certificates presented for transfer, issue new stock certificates, and 
maintain the records

[[Page 21649]]

reflecting the ownership of securities as agent for the issuer. They 
also may disburse dividends and interest payments and send 
securityowner communications, such as proxy materials and annual 
reports. Some transfer agents maintain custody of securities on behalf 
of individual investors and securities depositories.
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    \4\ 15 U.S.C. 78q-1(a)(2)(A)(i).
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    In order to facilitate the prompt, accurate, and efficient 
clearance and settlement of securities transactions, the Commission, 
having due regard for the public interest, the protection of investors, 
the safeguarding of securities and funds, and the maintenance of fair 
competition among transfer agencies, is authorized to promulgate rules 
and regulations that are necessary or appropriate to implement the 
provisions of section 17A of the Act.\5\ Section 17A of the Act 
prohibits registered transfer agents from engaging in any activity in 
contravention of the rules and regulations that the Commission may 
prescribe as necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the Act.\6\ 
Section 17 of the Act requires every registered transfer agent to make, 
keep, and furnish copies of such records that the transfer agent's 
appropriate regulatory agency prescribes by rule.\7\ Finally, Section 
23(a) of the Act grants the Commission the power to make such rules and 
regulations as may be necessary or appropriate to implement the 
provisions of the Act.\8\
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    \5\ 15 U.S.C. 78q-1(a)(2)(A).
    \6\ 15 U.S.C. 78q-1(d).
    \7\ 15 U.S.C. 78q-(a)(3).
    \8\ 15 U.S.C. 78w(a).
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    Because the Commission's oversight of transfer agents is 
substantially dependent on its own transfer agent examination process, 
which in turn relies on the records that transfer agents make and 
retain, the Commission promulgated Rules 17Ad-6 and 17Ad-7 under the 
Act to specify the types of records that transfer agents must make and 
keep and the amount of time and manner in which these records must be 
preserved.\91\ The Commission's oversight of transfer agents would be 
seriously hindered if a transfer agent's records were inaccurate, 
inauthentic, or inaccessible. Accordingly, Rule 17Ad-7 seeks to protect 
investors and promote the integrity of the markets by protecting the 
accuracy, integrity, and accessibility of transfer agent records.
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    \9\ Depending on the type of record, the records covered by 
these rules generally must be maintained for two years, six years, 
or until one year after the termination of a transfer agency 
relationship. Rule 17Ad-7.
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II. The Rule Amendments as Adopted

    Rule 17Ad-7, as amended, allows transfer agents to use electronic 
or micrographic storage media to maintain their records. Specifically, 
the rule requires transfer agents to:
     Use storage mechanisms that are designed to ensure the 
accessibility, security, and integrity of the records, detect attempts 
to alter or remove the records, and provide means to recover altered, 
damaged, or lost records;
     Create an index of the records that are electronically or 
micrographically stored and store the index with the underlying 
records;
     Keep a duplicate of all records and indexes that are 
stored using electronic or micrographic storage media;
     Be able to promptly download electronically or 
micrographically stored records to an alternate medium such as paper, 
microfilm, or microfiche; and,
     Keep in escrow an updated copy of the software or other 
information that is necessary to access and download electronically 
stored records.
    The amended rule does not require transfer agents that wish to 
continue to maintain their records in hard copy format to maintain 
their records any differently than they are doing so today. The 
requirements adopted today apply only to those transfer agents that 
choose to retain their records electronically or micrographically.

III. Overview of Amendments to Rule 17Ad-7

    The new provisions of Rule 17Ad-7 define the term ``micrographic 
media'' to mean microfilm or microfiche or any similar medium and the 
term ``electronic storage media'' to mean any digital storage medium or 
system. \10\
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    \10\ Rule 17Ad-7(f)(1).
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    Registered transfer agents that choose to use electronic or 
micrographic records storage media must: have available at all times 
for examination by the Commission and the transfer agent's appropriate 
regulatory agency (``ARA'')\11\ facilities to project or produce easily 
readable images of the records that it stores on electronic or 
micrographic storage media; be ready to provide the stored records to 
the Commission and its ARA; create an index of the records that it 
stores on electronic storage media or micrographic media and store the 
index with those records; have the index available at all times for 
examination by the Commission and its ARA; have quality assurance 
procedures to verify the quality and accuracy of the electronic or 
micrographic recording process; and maintain separately from the 
originals a duplicate of the records and the index that the transfer 
agent stores on electronic storage media or micrographic media. \12\ 
The transfer agents may store the duplicates of the indexed records on 
any medium permitted by this rule. The electronic media that a transfer 
agent uses to store its records must: ensure the security and integrity 
of the records by means of manual and automated controls that assure 
the authenticity and quality of the electronic facsimile; detect 
attempts to alter or remove the records; provide means to recover 
altered, damaged, or lost records resulting from any cause; externally 
label all removable units of storage media using a unique identifier; 
internally label each file with its unique name, the date and time of 
file creation, the date and time of last modification or extension, and 
a file sequence number when the file spans more than one volume. \13\
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    \11\ In certain situations, the Commission is not a transfer 
agent's primary regulatory authority. The most common example of 
this is for transfer agents that are banks or subsidiaries of banks. 
In such a case, the transfer agent's ARA could be the Board of 
Governors of the Federal Reserve System, the Office of the 
Comptroller of the Currency, or the Federal Deposit Insurance 
Corporation.
    \12\ Rule 17Ad-7(f)(2).
    \13\ Rule 17Ad-7(f)(3).
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    Transfer agents that use electronic or micrographic records storage 
media to store their records must establish an audit system that 
accounts for the inputting of and any changes to every record that is 
stored on electronic or micrographic storage media. The results of such 
audit system must be available at all times for examination by the 
Commission and the transfer agent's ARA and be preserved for the same 
time that is required by this rule for the underlying records. \14\
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    \14\ Rule 17Ad-7(f)(4).
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    Also, transfer agents that use electronic storage media or 
micrographic media to store their records must: Maintain, keep current, 
and provide promptly upon request by the Commission and their ARA all 
information necessary to access the records and indexes stored on 
electronic storage media or micrographic media and place in escrow and 
keep current a copy of the physical and logical format of the 
electronic or micrographic 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. The escrow agent must file a 
statement with the Commission that it will make

[[Page 21650]]

this information available promptly upon request to the Commission's 
representatives or the ARA. \15\
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    \15\ Rule 17Ad-7(f)(5).
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    Finally, if a transfer agent uses another party to maintain or 
preserve the required records using electronic storage media or 
micrographic media, such third party shall file with the Commission an 
undertaking stating that such records are being maintained or preserved 
by the third party on behalf of the transfer agent and that such 
records will be surrendered promptly upon request of the transfer 
agent, the Commission's representatives, or the ARA to examine such 
records. The rule makes clear that the transfer agent retains ultimate 
responsibility for complying with the requirements of the rule. \16\
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    \16\ A transfer agent may use the services of a third party to 
maintain the records required to be retained under Rule 17Ad-6. An 
agreement with a third party can include instructions for the third 
party to fulfill some or all of the requirements of Rule 17Ad-7 
including, for example, the maintenance of duplicate records. 
However, an agreement with a third party to maintain a transfer 
agent's records shall not relieve the transfer agent from the 
responsibility to prepare and maintain records as specified in this 
rule or in Rule 17Ad-6. Rule 17Ad-7(f)(6).
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IV. Discussion of Proposal and Comment Letters

    The Commission received eleven comment letters in response to the 
Proposing Release. \17\ While most of the comments were generally 
favorable, all of the commenters offered specific observations and 
suggestions about the proposed conditions on transfer agents' use of 
electronic storage media. As discussed below, the Commission is 
adopting the proposed amendments to Rule 17Ad-7 with certain 
modifications suggested by the comment letters.
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    \17\ Letters from Charles Rossi, President, and Thomas L. 
Montrone, Vice President and Chairman, STA Optical Scanning 
Committee, The Securities Transfer Association, Inc. (``STA'') (July 
2, 1999); Kathleen C. Joaquin, Director--Transfer Agency & 
International Operations, Investment Company Institute (``ICI'') 
(July 1, 1999); Jay S. Neuman, Corporate Counsel, Federated 
Investors, Inc. (``Federated'') (July 1, 1999); Gerald L. Popovsky, 
Associate Counsel, ChaseMellon Shareholder Services, LLC 
(``ChaseMellon'') (July 2, 1999); Christine A. Owens, Corporate 
Government Relations Manager, StorageTek (``StorageTek'') (July 2, 
1999); Robert P. DeGregorie, Assistant General Counsel, The Chase 
Manhattan Bank (``Chase'') (July 2, 1999); Michael L. Michael, Vice 
President and Chief Compliance Officer, FMR Corp. (``Fidelity'') 
(July 13, 1999); W. Hardy Callcott, Sr. Vice President and General 
Counsel, Charles Schwab & Co., Inc. (``Schwab'') (July 14, 1999); 
Robert L. Hamilton (August 8, 1999); Thomas Ferguson, Senior Vice 
President, Plasmon/IDE (``Plasmon'') (April 27, 2000); and Michael 
Kilian, Senior Technologist, EMC Corporation (``EMC'') (October 31, 
2000). The comment letters and a Commission staff summary of the 
comment letters are contained in File No. S7-17-99 and are available 
for inspection in the Commission's Public Reference Section, 450 5th 
Street, NW, Washington, DC.
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A. Scope and Definitions

    In the Proposing Release, the Commission proposed to add 
subparagraph (f) to Rule 17Ad-7 to allow registered transfer agents to 
use micrographic media or electronic storage media to store the records 
that they are required to keep under Rule 17Ad-6. The term 
``micrographic media'' was defined as microfilm or microfiche or any 
similar medium. The term ``electronic storage media'' was defined as 
any digital storage medium or system that meets the standard of this 
rule. The commenters did not raise any issues with regard to the 
proposed scope or definitions.
    We are adopting these definitions substantially as proposed. For 
clarity, we have added another definition: the term ``ARA'' as used 
throughout the rule refers to a transfer agent's appropriate regulatory 
agency as that term is defined in 15 U.S.C. 78c(a)(34).

B. Record Integrity Standards

    The Proposing Release would have required that transfer agents use 
an electronic or micrographic storage media system that met certain 
standards intended to deter the alteration of records. Specifically, 
the Commission proposed that transfer agents preserving their records 
electronically must do so in a non-rewriteable, non-erasable format 
\18\ and that the storage system be able to automatically verify the 
quality and accuracy of the electronic recording process.\19\ The 
Commission also proposed that the electronic storage media system label 
the storage units in sequential order and record the date and time that 
information is electronically stored.\20\ Finally, as proposed, the 
storage system would 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.\21\
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    \18\ Also known as ``WORM'' or write once, read many.
    \19\ Proposed Rule 17Ad-7(f)(2)(ii).
    \20\ Proposed Rule 17Ad-7(f)(2)(iii).
    \21\ Proposed Rule 17Ad-7(f)(2)(iv).
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    The commenters had varying responses to these proposed standards. 
Schwab stated that the rule should not limit electronic storage media 
to WORM-based systems. StorageTek stated that the Commission should not 
favor a particular type of storage system because there are types of 
electronic storage systems other than optical disk systems that use 
WORM technology.
    Chase stated that, with respect to downloading records stored on 
electronic storage media, the rule should only require that the 
electronic storage media system have the capability to print images or 
provide images in a format suitable for transfer to another acceptable 
medium, thereby allowing transfer agents the flexibility to determine 
the most suitable way to provide imaged data to an examining authority. 
Chase further stated that it would be comfortable with the proposed 
requirement as long as paper is an acceptable alternate medium. In 
addition, with respect to the requirement that an electronic storage 
media system automatically verify the accuracy of the quality and 
accuracy of its recording process, Chase stated it is unaware of any 
system that can automatically insure image quality and accuracy. Chase 
also suggested that the rule should require only that the transfer 
agent have quality assurance procedures in place.
    Plasmon agreed with the Commission's interest in accommodating a 
wider range of storage media and suggested that there are at least four 
major varieties of optical disk media that should be considered for 
document storage applications. However, Plasmon contended that 
magnetic-optical disks offer the highest degree of data protection over 
the longest periods of time. Plasmon believes that linear (tape) media 
simply does not attain the same degree of data safety.
    EMC wrote that specifying that records be retained on non-erasable, 
non-rewritable media is overly prescriptive because it would 
effectively dictate the storage technology (i.e., WORM). It further 
argued that this technology has become obsolete and expensive to 
manage. Instead, EMC suggested that the focus of the Commission's rule 
should not be to create an immutable copy but rather on the ability of 
the storage system to create a copy that can be verified as authentic.
    Fidelity argued that the rule should not require sequential 
serialization of storage units but instead should allow more 
flexibility (e.g., serialization by unique media index and identifier 
numbers).
    The final rule incorporates many of the commenters' suggestions. 
For example, we have eliminated the proposed ``non-erasable, non-
rewriteable'' requirement and instead are adopting a goals-oriented set 
of requirements that electronic storage systems be designed to: ensure 
the security and integrity of the records by means of manual and 
automated

[[Page 21651]]

controls; detect attempts to alter or remove the records; and provide 
means to recover altered, damaged or lost records.\22\ The Commission 
believes that using a set of requirements to ensure security and 
integrity of records is appropriate in the transfer agent context, 
unlike the broker-dealer context, because of the lower risks from 
record alteration for transfer agents. There appear to be a lower 
incidence of altered transfer agent records and the Commission staff 
has brought few enforcement actions against transfer agents based on 
alteration of their records. In addition, transfer agents do not hold 
customer funds, open accounts, or recommend investments. Therefore, the 
Commission generally does not inspect transfer agents for financial and 
sales practice problems. Accordingly, requiring transfer agents to use 
WORM does not at this time seem necessary.
    We have also removed the requirement that the storage system be 
able to ``automatically verify the quality and accuracy'' of the 
recording process and instead substituted language requiring the 
storage system to ``have quality assurance procedures to verify the 
quality and accuracy of the electronic or micrographic recording 
process.'' \23\ In making the change, the Commission emphasizes the 
importance of the electronic recordkeeping system's ability to 
electronically store documents in a reliable and consistent manner.
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    \22\ Rule 17Ad-7(f)(3)(i).
    \23\ Rule 17Ad-7(f)(3)(ii).
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    Finally, in response to the comments discussed above, we have 
modified the requirement that the storage system label ``all units of 
storage media in sequential order'' in favor of a standard that 
requires the system to ``label all removable units of storage media 
using a unique identifier * * *'' and ``uniquely identify files and 
internally label each file with its unique name, the date and time of 
file creation, the date and time of last modification or extension, and 
a file sequence number when the file spans more than one volume.'' We 
believe that these changes will provide transfer agents greater 
flexibility to select appropriate and cost effective records organizing 
methodologies while still maintaining the ability of the transfer agent 
and the Commission to locate individual records and reconstruct the 
sequence of the records.
    The Commission notes that the amendments to the Rule are 
technology-neutral as they establish standards and set forth features 
that the electronic storage media must satisfy to be considered an 
acceptable storage medium rather than specifying the use of a 
particular technology.

C. Audit System

    In the Proposing Release, the Commission proposed to require 
transfer agents using electronic or micrographic storage media to 
establish an audit system that accounts for the entry of and changes to 
every record that is electronically or micrographically stored.\24\ As 
proposed, the results of the audit system would have to be available at 
all times for inspection by the transfer agent's ARA and the Commission 
and would have to be preserved for the same period of time as the 
underlying records.
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    \24\ Proposed Rule 17Ad-7(f)(3).
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    Fidelity contended that the audit system should not be required to 
record the names of the people who add or change records stored on 
electronic storage media because it is possible for audit systems to 
identify people through the use of identifier numbers.
    In response to these comments, we have modified the audit 
provisions to offer transfer agents flexibility over how to record and 
trace the identity of those who modify records. The rule does not 
specify the manner in which transfer agents should account for those 
who input or change the records. Rather, paragraph (f)(3) of the rule 
requires that transfer agents establish an audit system that can, at 
the least, readily identify when and by whom changes to records were 
made to the stored records.

D. Production of Stored Records

    The Proposing Release would have required transfer agents storing 
electronic or micrographic records to: (1) Have facilities for 
immediate projection or production of easily readable images of the 
records that are being stored electronically or micrographically; (2) 
be ready at all times to provide a facsimile enlargement of the records 
that are being stored electronically or micrographically; (3) create an 
index of the records that are being stored electronically or 
micrographically; and (4) maintain a duplicate of the index of the 
records.\25\
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    \25\ Proposed Rule 17Ad-7(f)(1).
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    Chase stated that the rule should not require that the index be 
stored on an optical disk or otherwise specify the location of the 
index. Chase further commented that being able to identify a needed 
image, locate the image, and retrieve it whenever necessary should be 
sufficient requirements for the index component of the rule. Fidelity 
stated that the requirement to maintain duplicates of records stored on 
micrographic media or electronic storage media should not be 
interpreted as a requirement to maintain backup storage systems.
    In order to help ensure efficient and complete access to a transfer 
agent's records during examinations by the Commission or the transfer 
agent's ARA, we are adopting these requirements substantially as 
proposed.\26\ The Commission notes that the rule does not specify the 
type of medium on which the index should be stored. The Commission, 
however, believes that it is important to keep the requirement that the 
index be stored with the indexed records so that Commission 
representatives will be able to locate records in cases where a 
transfer agent refuses to cooperate or is no longer operating. In 
addition, Commission agrees that the requirement to maintain duplicates 
of records stored on micrographic or electronic storage media is not a 
requirement to maintain backup storage systems.
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    \26\ Rule 17Ad-7(f)(2).
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E. Proposed Third Party Access Requirement

    In the Proposing Release, the Commission proposed that there be a 
mechanism to enable the Commission to access and download the 
electronically stored records in cases where a transfer agent is no 
longer operating, refuses to cooperate with the Commission or the 
transfer agent's ARA, or has not properly or fully indexed 
electronically stored records.\27\ Accordingly, the proposed amendments 
would have required transfer agents to preserve, keep current, and 
surrender upon request the information necessary to download records 
stored on electronic or micrographic storage media. Moreover, under the 
proposed amendments, before a transfer agent would have been able to 
use electronic storage media, it would have had to have at least one 
party other than itself (e.g., the transfer agent's electronic storage 
media vendor) file a statement with the Commission that it, the third 
party, had 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 the transfer agent's ARA.\28\
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    \27\ Proposed Rule 17Ad-7(f)(5).
    \28\ Proposed Rule 17Ad-7(f)(5).
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    ICI, Federated Investors, Chase, ChaseMellon, Schwab, and Fidelity 
commented on the proposed requirement that a third party file 
undertakings with the Commission and

[[Page 21652]]

the transfer agent's ARA before a transfer agent uses electronic 
storage media. ICI and Federated asked for the Commission to clarify 
whether the third party access undertakings pursuant to the 1997 no 
action position would be sufficient to comply with the proposed 
amendments to Rule 17Ad-7. ICI and Federated both opined that the 
provisions of the 1997 no-action position are substantially similar to 
the proposed amendments and therefore should be sufficient for a 
transfer agent to comply with.
    Chase, ChaseMellon, and Fidelity expressed concern that the 
proposed requirement raises security and confidentiality risks because 
it would require that the undertakings be filed by a third party that 
has direct access to the transfer agent's records. Schwab stated that 
it is unnecessary for a transfer agent that maintains its own records 
to contract with another party solely to comply with the requirement. 
Schwab also asserted that the requirement should be amended so that it 
is consistent with Rule 17a-4(f)(3)(vii) \29\ and should only apply to 
transfer agents that use electronic storage media exclusively for some 
or all of their record retention.
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    \29\ Rule 17a-4(f)(3)(vii) requires broker-dealers that use 
electronic or micrographic storage media to ``organize and index 
accurately all information maintained on both original and any 
duplicate storage media.'' The Commission notes that the third party 
``access'' provisions as proposed in Rule 17Ad-7 were modeled after 
those contained in Rule 17a-4(vii).
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    The Commission has revised the proposed rule to reflect its 
intention that the third party access requirement be no more burdensome 
than necessary to allow the Commission to access a transfer agent's 
records. The proposed requirement was intended to assist the Commission 
or the transfer agent's ARA to access the transfer agent's records 
during, for example, some type of emergency (such as a transfer agent's 
insolvency or refusal to cooperate), yet recognize the potential 
security concerns if transfer agents provide ``access'' to their 
records system to third parties. In consideration of the comments 
received, the final rule clarifies that the third party is not required 
to have a continuous or unlimited right to use or have access to the 
records.\30\ Instead, the transfer agent will be required to place in 
escrow with an independent third party \31\ its records management 
software that will enable the Commission or the transfer agent's ARA to 
access records and indexes. The escrow agent will only have in its 
possession the records management software but will not have access to 
the underlying records. The amended rule also requires the escrow agent 
to file an undertaking with the Commission and the transfer agent's ARA 
that it will make such records management software available to the 
Commission or the transfer agent's ARA promptly upon the request of the 
Commission or the ARA.
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    \30\ Rule 17Ad-7(f)(5)(ii).
    \31\ An ``independent'' third party is a third party that does 
not control, is not controlled by, and is not under common control 
with, the transfer agent.
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F. Effect on Previously Issued No Action Positions

    ICI and Federated requested that the Commission elucidate the 
effect that amendments to Rule 17Ad-7 will have on transfer agents that 
are currently using electronic storage media under the terms of 
previously issued no-action letters.\32\ ICI and Federated Investors 
believe that the terms of the no-action letters are sufficient to 
comply with the proposed amendments to the rule and that transfer 
agents using electronic storage media under the terms of no-action 
letters should not have to additionally comply with the third party 
undertaking requirement. ICI stated that if the Commission determines 
that new undertakings are necessary transfer agents should have a 
transition period of at least ninety days to obtain the required 
undertakings.
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    \32\ See supra footnote 3.
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    Fidelity requested that the Commission explain the effect of the 
proposed amendments on the no-action position relating to transfer 
agents that was issued when the Commission amended Rule 17a-4 to permit 
broker-dealers to use electronic storage media.\33\ Specifically, 
Fidelity stated that the no-action position allowed transfer agents to 
use electronic storage media under the terms of the amended Rule 17a-4 
to comply with their recordkeeping requirements under Rules 17Ad-6, 
17Ad-10, 17Ad-11, 17Ad-13, and 17Ad-15 under the Act but that the 
proposed amendments in the Proposing Release only applied to Rule 17Ad-
7.
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    \33\ Securities Exchange Act Release No. 38245 (Feb. 5, 1997), 
62 FR 6469 (Feb. 12, 1997).
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    The Commission notes that the amendments to Rule 17Ad-7 provide for 
the electronic or micrographic storage of all records that transfer 
agents are required to retain. The Commission also notes that the 
amendments to Rule 17Ad-7 will supersede all previously issued no-
action letters and will be effective May 31, 2001, as opposed to ninety 
days from the date of publication in the Federal Register as suggested 
by ICI.
    There are two reasons why the amendments to Rule 17Ad-7 will become 
effective on May 31, 2001. First, after May 31, 2001, and until the 
Commission's transfer agent record retention rule is effective, the 
differing provisions of ESIGN \34\ would be applicable, which could 
potentially lead to confusion. Second, the Commission believes that the 
minor changes required to be made to transfer agents' recordkeeping 
systems currently operating under the no-action positions will not be 
burdensome to implement.\35\
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    \34\ ESIGN is discussed in section V of this release.
    \35\ The Commission also is providing notice that the staff of 
the Division of Market Regulation will not recommend enforcement 
action to the Commission if until June 30, 2001, a transfer agent 
continues to use records storage technology permissible under either 
of two staff no-action positions. Securities Exchange Act Release 
No. 38245 (Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997) or Letter to 
Jules Moskowitz, DST Systems, Inc., from Judith C. Poppalardo, 
Division of Market Regulation and Thomas S. Harman, Division of 
Investment Management (February 2, 1993).
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G. Destruction of Canceled Certificates and Other Records

    StorageTek and Chase stated that transfer agents should be able to 
destroy canceled certificates where an electronic record has been made. 
StorageTek included an analysis with its comment letter that concluded 
that organizations should be able to copy original records and store 
them on electronic storage media without significant legal consequences 
if the original records are destroyed.
    The Commission has solicited comment on the issue of the 
destruction of canceled certificates in another proposing release and, 
thus, is not addressing that issue in the context of this 
rulemaking.\36\
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    \36\ Securities Exchange Act Release No. 43401 (Oct. 2, 2000), 
65 FR 59766 (Oct. 6, 2000). In that release, we proposed rules to, 
among other things, require transfer agents to establish written 
procedures for the cancellation, storage, transportation, and 
destruction of securities certificates. Should the Commission adopt 
these rules, maintaining such written procedures in either hard copy 
or on electronic or micrographic media would be permissible.
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V. The Electronic Signatures in Global and National Commerce Act of 
2000

A. Introduction

    On June 30, 2000, Congress enacted ESIGN.\37\ ESIGN, among other 
things, specifies that where a statute, regulation, or other rule of 
law requires records \38\ to be retained, such

[[Page 21653]]

requirement is met by retaining an electronic record that accurately 
reflects the information set forth in the record; remains accessible to 
all parties legally entitled to access such record; and is kept in a 
form capable of being accurately reproduced for later reference.\39\
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    \37\ The Electronic Signatures in Global and National Commerce, 
Pub. L. 106-229, 114 Stat. 464 (2000), 15 U.S.C. 7001 et seq.
    \38\ Section 106(9) of ESIGN, 15 U.S.C. 7006(9), defines the 
term ``record'' to mean ``information that is inscribed on a 
tangible medium or that is stored in an electronic or other medium 
and is retrievable in perceivable form.''
    \39\ ESIGN Sec. 101(d)(1).
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    While ESIGN does not define how these requirements are to be met, 
it preserves the Commission's ability to interpret and apply ESIGN 
consistent with the statutes it administers pursuant to its existing 
legal authority.\40\ To interpret ESIGN, the Commission may issue 
rules, orders, or guidance of general applicability under its organic 
statute.\41\ On February 28, 2001, the Commission announced several 
upcoming rulemaking activities regarding recordkeeping requirements 
under the federal securities laws that are consistent with ESIGN.\42\ 
Accordingly, under ESIGN section 107(b)(1)(B), the record retention 
provisions of Title I of ESIGN will become effective on June 1, 2001.
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    \40\ ESIGN Sec. 104(b).
    \41\ ESIGN Sec. 104(b)(1). See section 23(a) of the Act.
    \42\ See Securities Exchange Act Release No. 44014 (February 28, 
2001), 66 FR 13273 (March 5, 2001); http://www.sec.gov/news/digest.shtml>.
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B. The Commission's Statutory Responsibilities

    In order to facilitate the prompt, accurate, and efficient 
clearance and settlement of securities transactions, Congress 
authorized the Commission, having due regard for the public interest, 
the protection of investors, the safeguarding of securities and funds, 
and the maintenance of fair competition among transfer agencies, to 
promulgate rules and regulations that are necessary or appropriate to 
implement the provisions of the Act. For example, section 17(a)(3) 
requires every registered transfer agent to make, keep, and furnish 
copies of such records that the transfer agent's ARA prescribes by 
rule.\43\ Section 17A prohibits registered transfer agents from 
engaging in any activity in contravention of the rules and regulations 
that the Commission may prescribe as necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furtherance of the Act.\44\ Finally, Section 23(a) grants the 
Commission the power to make such rules and regulations as may be 
necessary or appropriate to implement the provisions of the Act.\45\ 
Thus, the Act authorizes the Commission to issue rules that require 
registered transfer agents to keep such records as the Commission may 
prescribe in the public interest or for the protection of investors, 
and to make such records available for inspection. This grant of 
authority recognizes the importance of transfer agent recordkeeping to 
the Commission's regulatory function and investor protection objective.
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    \43\ 15 U.S.C. 78q(a)(3).
    \44\ 15 U.S.C. 78q-1(d).
    \45\ 15 U.S.C. 78w(a).
---------------------------------------------------------------------------

    Rules 17Ad-6 and 17Ad-7 under the Act specify the type of records 
that registered transfer agents must make and keep and the length of 
time and manner in which these records must be preserved. Depending on 
the type of record, the records covered by these rules generally must 
be maintained for two years,\46\ six years,\47\ or until one year after 
the termination of a transfer agency relationship.\48\ Section 17(a)(1) 
of the Act \49\ requires registered transfer agents to make and keep 
certain records that the Commission prescribes to be necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. Rules 17Ad-6 and 
17Ad-7 under the Act specify the type of records that registered 
transfer agents must make and keep and the length of time and manner in 
which these records must be preserved. Rule 17Ad-7(f) currently permits 
registered transfer agents to preserve the records listed in Rule 17Ad-
6 either in hardcopy or on microfilm, subject to certain conditions. 
However, Rule 17Ad-7 provides no other alternatives to maintaining 
records. The amendments will allow registered transfer agents to 
electronically and micrographically preserve records that they are 
required to retain.
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    \46\ Rule 17Ad-7(a) and (b).
    \47\ Rule 17Ad-7(d).
    \48\ Rule 17Ad-7(c).
    \49\ 15 U.S.C. 78q(a)(1).
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    As discussed above, Rule 17Ad-7, as amended today, allows transfer 
agents to use electronic or micrographic storage media to store their 
records in a manner that will ensure the security and integrity of the 
records by means of manual and automated controls; will assure the 
authenticity and quality of the electronic facsimile; detect attempts 
to alter or remove the indexed records; and will provide means to 
recover altered, damaged, or lost indexed records.
    Transfer agents that use electronic or micrographic storage media 
are also required to create an index of the records that are 
electronically or micrographically stored and store the index with 
those records. In addition, the rule requires that the electronic 
storage system label the storage units with unique identifiers and 
record the date and time that information was electronically stored. 
Transfer agents are also required to keep a duplicate of any records 
that are stored using electronic or micrographic storage media on any 
type of medium that is acceptable under Rule 17Ad-7. Finally, transfer 
agents are required to maintain a duplicate index that is stored with 
the duplicate set of records separately from the original records.

C. ESIGN's Requirements

    When adopting regulations, orders, or guidance to interpret ESIGN's 
impact on the statutes it administers, the Commission is subject to 
certain requirements. First, the interpretation must be ``consistent'' 
with Section 101 of ESIGN.\50\ Second, the interpretation may not ``add 
to the requirements'' of Section 101.\51\ Third, in issuing the 
interpretation, the Commission must find that: (1) There is substantial 
justification for the interpretation; (2) the methods selected to carry 
out that purpose are substantially equivalent to the requirements 
imposed on non-electronic records; (3) the methods selected to carry 
out that purpose will not impose unreasonable costs on the acceptance 
and use of electronic records; and (4) the methods selected to carry 
out that purpose do not require or accord greater legal status or 
effect to the implementation or application of a specific technology or 
technical specification.52, 53
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    \50\ ESIGN Sec. 104(b)(2)(A). See also ESIGN Sec. 101(d).
    \51\ ESIGN Sec. 104(b)(2)(B).
    \52, 53\ ESIGN Sec. 104(b)(2)(C); 15 U.S.C. 78q, 78q-1 and 78w.
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    As discussed in the next section, the Commission finds that the 
electronic recordkeeping provisions of Rule 17Ad-7, as amended today, 
are consistent with the requirements established by ESIGN. Thus, 
registered transfer agents are required to comply with Rule 17Ad-7 as 
amended.

D. Analysis and Commission Findings

    The amendments to Rule 17Ad-7 require transfer agents to preserve, 
keep current, and surrender upon request the information necessary to 
download records stored on electronic or micrographic storage media. 
Transfer agents must also be able to promptly download electronically 
or micrographically stored records to an alternate medium, such as 
paper, microfilm or microfiche. Moreover, if a

[[Page 21654]]

transfer agent uses a third party to maintain its records, the 
amendments require the third party to file an undertaking with the 
Commission that the third party will permit the Commission or the 
transfer agent's ARA to examine such records upon request.
    The Commission's investor protection objective is substantially 
dependent on the Commission's oversight of transfer agents through its 
transfer agent examination process, which relies on the records that 
transfer agents make and retain. This objective would be seriously 
undermined if transfer agents records were inaccurate, inauthentic, or 
inaccessible. Through Rule 17Ad-7, the Commission seeks to protect 
investors by promoting the accuracy, integrity, and accessibility of 
transfer agent records.
    The Commission makes the following findings with respect to Rule 
17Ad-7:
1. Rule 17Ad-7 Is Consistent With Section 101 of ESIGN
    ESIGN provides that statutes or regulations that require the 
retention of certain contractual or transactional records may be 
complied with by storing such records electronically. Similarly, Rule 
17Ad-7 allows transfer agents to maintain various records that they are 
required to retain in an electronic or micrographic format. In 
addition, Rule 17Ad-7 permits electronic or micrographic storage of a 
broader category of records than ESIGN requires because it permits the 
electronic and micrographic storage of all records registered transfer 
agents are required to create and maintain, not just contractual or 
transactional records. Moreover, consistent with ESIGN, the rule's 
electronic and micrographic storage provisions do not specify the use 
of a particular technology or technical specification. The Commission 
believes that the amended rule will help to ensure that records 
necessary for the supervision and regulation of registered transfer 
agents are maintained in a manner that is accurate, accessible, and 
that is consistent with ESIGN.
2. Rule 17Ad-7 Does Not Add to the Requirements of Section 101 of ESIGN
    ESIGN requires electronic records to be stored in a manner that 
ensures that they are accurate, accessible, and capable of being 
accurately reproduced for later reference. The electronic and 
micrographic storage provisions of Rule 17Ad-7 are designed to ensure 
that registered transfer agents store electronic and micrographic 
records in a manner consistent with the statutory goals of ESIGN--
accurate, accessible and accurately reproduced records. For example, 
the quality assurance procedures requirement is designed to ensure that 
the records are accurate by providing verification that a record has 
been accurately stored in the electronic system. The indexing 
requirement is designed to ensure that the records are accessible by 
providing a means to search for specific records. The labeling 
provisions are intended to ensure both the accuracy and accessibility 
of the records by indicating the order in which records are stored, 
thereby making specific records easier to locate and authenticating the 
storage process.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78q, 78q-1 and 78w.
---------------------------------------------------------------------------

    Finally, the rule does not specify or require any type of records 
storage technology but instead permits a transfer agent to choose the 
method of electronic and micrographic storage subject to certain 
conditions. Thus, Rule 17Ad-7 provides flexibility and choice for 
registered transfer agents as new electronic and micrographic storage 
technologies are developed.
3. Rule 17Ad-7's Requirements Are Substantially Justified
    The amendments to Rule 17Ad-7 are substantially justified by the 
need to protect investors, ensure the soundness of the securities 
markets, and ensure the prompt and accurate clearance and settlement of 
securities transactions, which includes the transfer of record 
ownership. In order to ensure investor protection and compliance with 
its rules, the Commission requires, among other things, that registered 
transfer agents maintain records that document their transactions with 
customers and other entities with which they transact.\54\ Examiners 
review these records to determine whether registered transfer agents 
are complying with the requirements of the securities laws and 
regulations. A failure to maintain accurate, accessible, and correct 
records could lead to situations where a transfer agent does not know 
whether an investor actually owns a security and could also provide an 
opportunity for deliberate alteration of records. Accordingly, if 
investors are to be adequately protected and systemic risk in the 
securities industry mitigated, a transfer agent's records must provide 
an accurate account of its operations.
---------------------------------------------------------------------------

    \54\ Rule 17Ad-6(a).
---------------------------------------------------------------------------

    To achieve its vital regulatory interests, the Commission believes 
that a rule that permits the use of electronic and micrographic storage 
media must contain certain requirements.\55\ These requirements include 
prudent but reasonable safeguards to prevent the stored information 
from being modified or removed (accidentally or maliciously) without 
detection. To further this objective, the rule requires that transfer 
agents use electronic or micrographic records storage systems that are 
designed to insure the security and integrity of the records by means 
of manual and automated controls and can detect attempts to alter or 
remove the records. The rule also requires transfer agents to create 
duplicates of the original records. The duplicates must be accessible 
and verifiable as authentic. In addition, Rule 17Ad-7 requires 
registered transfer agents to maintain, keep current, and provide 
promptly upon request by the Commission or the transfer agent's ARA all 
information necessary to access the records and indexes stored on 
electronic or micrographic storage media. Finally, transfer agents must 
place in escrow a current copy of the electronic or micrographic 
storage media's software and all the other information necessary for 
the Commission or the transfer agent's ARA to access records and 
indexes.
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    \55\ Unlike broker-dealers, transfer agents are not subject to 
the rules and oversight of any self-regulatory organization. Since 
the Commission is the only entity that reviews transfer agent 
records, the rule's record integrity requirements are essential.
---------------------------------------------------------------------------

    These conditions also are necessary because electronic storage 
technology is relatively new and there currently does not appear to be 
an industry standard for its development and for compatibility among 
different electronic storage systems. In addition, the ability of the 
Commission to review a transfer agent's records would be severely 
compromised should a transfer agent refuse or not be available to 
cooperate with the Commission.
4. Rule 17Ad-7's Requirements Are Substantially Equivalent to Non-
Electronic Record Requirements
    Amended Rule 17Ad-7 is designed to ensure the retention of legible, 
authentic, and complete records. These same goals are applicable to all 
registered transfer agent records regardless of their form: registered 
transfer agents have in place similar record retention requirements 
whether they store their records electronically, micrographically, or 
in hard copy. While Rule 17Ad-7 contains specific provisions that are 
only applicable to electronic or micrographic formats, these provisions 
are designed to take into account the different characteristics among 
paper, electronic, and micrographic formats, while not imposing 
disproportionate burdens on any format.

[[Page 21655]]

    Another reason for requirements that apply to electronic storage 
derives from the differences in the way that paper, micrographic, and 
electronic media store images of records. Paper and micrographic 
systems store exact images while electronic systems often store the 
original information in digital form, which can potentially be tampered 
with. In addition, the use of electronic storage media requires 
technical expertise and knowledge of the media's proprietary hardware 
and software characteristics in order to access the records. Therefore, 
Rule 17Ad-7 requires transfer agents that use electronic and 
micrographic storage media place in escrow a copy of the physical and 
logical format of the storage media, the field format of all different 
information types written on the storage media and source code, and the 
appropriate documentation and information necessary to access records 
and indexes.\56\ In the absence of such requirement, a transfer agent 
could store records that only it had the technology and knowledge to 
access. If the transfer agent went out of business or refused to 
cooperate, it would be similar to a situation where a transfer agent 
has stored hard copy records in an inaccessible place, which has always 
been prohibited by the rule.
---------------------------------------------------------------------------

    \56\ Rule 17Ad-7(f)(5)(ii).
---------------------------------------------------------------------------

5. Rule 17Ad-7 Does Not Impose Unreasonable Costs on the Acceptance and 
Use of Electronic Records
    Amended Rule 17Ad-7 will not result in unreasonable costs to any 
particular person or entity. The amendments will broaden the options 
that transfer agents have for the storage and retention of the records 
they are required to maintain. Specifically, because the amendments do 
not require the use of any particular technology, transfer agents are 
not obligated to change their present recordkeeping and retention 
systems.
    Those transfer agents that choose to take advantage of the 
amendments to Rule 17Ad-7 will face certain fixed and variable costs to 
employ electronic or micrographic records management systems that would 
comply with the rule. However, it is practically impossible to estimate 
the costs for implementing a records management system for any given 
transfer agent, or the industry as a whole, that would be in compliance 
with Rule 17Ad-7. When a transfer agent selects the type of records 
management storage, such as micrographic (microfilm or microfiche) or 
electronic recording techniques (computers), it will likely consider 
solutions that will optimize its cost, based on factors such as risk 
and complexity, while enabling it to meet its regulatory obligations. 
Moreover, while the costs and types of these systems vary, numerous 
document storage vendors appear to make the market for these systems 
competitive. Further, Rule 17Ad-7 requires that any recordkeeping 
system, whether electronic or paper-based, selected by a registered 
transfer agent be designed to ensure the accuracy, integrity, and 
accessibility of the transfer agent's records.
    The Commission believes that the costs are justified by the 
benefits that electronic or micrographic storage media offer. For 
example, with electronic records maintenance systems: Documents are 
less likely to be lost or misfiled; documents are likely to be 
retrieved more quickly; audit trails can be automated; risk reduction 
is improved for natural disasters; file centralization is automatic 
(electronic records need not be removed from their storage in order to 
reference them); multiple persons can view the same document 
simultaneously; access authorization can be automated; the space 
required for document storage is drastically reduced; document indexing 
and cross-referencing can be automatic; and documents can be copied, 
faxed, printed, and emailed without the paper originals.
    Each transfer agent will ultimately evaluate the risk and cost 
effectiveness of its records management solution differently based upon 
the solution that is best for its business model, such as its business 
practices and volume, and will select a method that assures its ability 
to comply with Rule 17Ad-7. Moreover, the rule cannot envision the 
effect of future market competition, innovation, and the other 
solutions that transfer agents might employ. Because each transfer 
agent is able to select the method, whether electronic, micrographic, 
or paper-based, that works best for it based on its individual 
circumstances, Rule 17Ad-7 does not impose any unreasonable costs on 
the acceptance and use of electronic records.
6. Rule 17Ad-7 Does Not Require, or Accord Greater Legal Status or 
Effect to, the Implementation or Application of a Specific Technology 
or Technical Specification
    Rather than prescribe a single technological solution to records 
management, the rule incorporates a goal-oriented approach based on the 
statutory scheme for transfer agent regulation. The goals of the rule 
include: Long-term retention and access to records; detection of fraud, 
including forged or illegally modified records; making information more 
useful; and allowing transfer agents to use modern information 
technology to handle their ever-expanding number of records. While the 
rule contains certain standards to achieve the Commission's statutory 
functions, the rule enables transfer agents to select from numerous 
types of records storage systems to maintain the records that they are 
required to retain. The Commission is aware of many types of electronic 
and micrographic storage media technology available for recordkeeping 
purposes that would comply with the rule's requirements and anticipates 
that additional methods will continue to be developed.

E. Conclusion

    Rule 17Ad-7, as amended today, provides standards so that the 
transfer agents' use of record maintenance systems, including those 
using electronic and micrographic technologies, will accurately reflect 
the information contained in the original records and will be readily 
accessible to the Commission and other appropriate regulatory agencies. 
The rule does not specify a particular technology to carry out these 
standards. Therefore, the Commission finds that Rule 17Ad-7 is 
consistent with ESIGN's requirements.

VI. Paperwork Reduction Act

    Certain provisions of the amendments to Rule 17Ad-7 contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995,\58\ and the Commission has submitted 
them to the Office of Management and Budget (``OMB'') 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 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.
---------------------------------------------------------------------------

    \58\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment on the 
proposed collections of information. No comments were received that 
addressed the PRA submission.
    Rules 17Ad-7(f)(2)(iii) and 17Ad-7(f)(2)(iv) contain a collection 
of information requirements that are intended to ensure that the 
Commission has complete access to transfer agents' records during 
examinations. Rule

[[Page 21656]]

17Ad-7(f)(2)(iii) and 17Ad-7(f)(2)(v) will require transfer agents that 
use electronic or micrographic storage media to create an index of all 
electronically or micrographically stored records and to maintain a 
duplicate of each index. The Commission has not specified the format of 
the index that is required to be maintained. The original and duplicate 
indexes are required to be kept in separate locations in order to 
protect against loss, damage, or alteration. The indexes are required 
to be maintained for as long as the transfer agent uses electronic or 
micrographic storage media.
    Rule 17Ad-7(f)(4) contains a collection of information requirement 
that is intended to ensure the integrity of transfer agents' records 
that are stored on electronic or micrographic storage media. Rule 17Ad-
7(f)(4) requires each registered transfer agent that uses electronic or 
micrographic storage media to establish an audit system to account for 
the inputting of or changes made to the records (e.g., by unique 
identifier numbers) that are electronically or micrographically stored. 
While the rule does not specify the precise contents of each audit 
system, any data stored regarding inputting of records and changes made 
to existing records would be part of that audit system. The rule 
further requires that the results of the audit system be preserved for 
the period of time the underlying audited records are required to be 
preserved and that the results of the audit system be available to the 
Commission or ARA at all times.
    Rule 17Ad-7(f)(5) contains collection of information requirements 
that ensures the Commission's access to records of a transfer agent 
that is no longer operating, refuses to cooperate with the 
investigative efforts of the Commission or another appropriate 
regulatory agency, or has not properly or fully indexed electronically 
or micrographically stored records. Rule 17Ad-7(f)(5) requires each 
transfer agent that uses electronic or micrographic storage media to 
place in escrow and keep current a copy of the physical and logical 
format of the electronic storage or micrographic 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. The information 
required by Rule 17Ad-7(f)(5) will be required to be maintained for as 
long as the transfer agent is using electronic or micrographic storage 
media.
    Rule 17Ad-7(f)(6) requires that for each transfer agent that uses a 
third party to maintain or preserve the transfer agent's records with 
electronic or micrographic systems, the third party must file with the 
Commission a written statement to the effect that (1) such records are 
maintained or preserved by the third party on behalf of the transfer 
agent; (2) such records will be surrendered promptly on request of the 
transfer agent; and (3) the third party will permit Commission 
representatives or designees to examine such records. This requirement 
is intended to ensure that the appropriate examining authorities are 
able to access a transfer agent's electronically or micrographically 
stored records if the transfer agent does not maintain those records. 
This requirement can be fulfilled in the form of a letter to the 
Commission.
    The collection of information required by the 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 or micrographic storage media is specifically tied to a 
transfer agent's decision to use electronic or micrographic storage 
media to satisfy its recordkeeping obligations.
    The likely respondents to the collection of information are large 
registered transfer agents. At this time, the Commission estimates that 
there will be 500 respondents to the collection of information 
requirements contained in the amendments to Rule 17Ad-7. The frequency 
of response to the collection of information requirements varies 
depending on the specific requirement and whether the transfer agent 
stores its own records or uses the services of a third party. Thus, the 
collection of information requirements contained in Rules 17Ad-
7(f)(5)(ii) and 17Ad-7(f)(6) might require more than one response.
    The primary time burdens that are required by the amendments to 
Rule 17Ad-7 are the duplicate, labeling, index, audit trail, and 
statement-filing provisions. The Commission contemplates that the 
electronic and micrographic document storage systems that transfer 
agents are likely to utilize can automatically produce duplicate 
records, sequential labels, indexes, and audit trails. In the Proposing 
Release, the Commission estimated that each transfer agent would, on 
average, expend 125 hours per year to comply with the collection of 
information requirements of Rule 17Ad-7. The Commission solicited 
comments regarding this annual hourly burden but did not receive any 
comments. This time burden will apply only to registered transfer 
agents that choose to use electronic or micrographic storage media.
    In the Proposing Release, the Commission estimated that 
approximately 40 transfer agents were likely to use electronic or 
micrographic storage systems. However, based on further consultations 
with transfer agent industry officials, vendors of electronic records 
storage systems, and Commission staff members, the Commission now 
believes that the number of likely respondents will be 500.\59\ 
Accordingly, we estimate that the collection of information 
requirements will result in 62,500 additional burden hours (500 
transfer agents x 125 annual hours) to the transfer agent industry.\60\
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    \59\ The Commission is unable to predict the number of transfer 
agents that will use third parties to store their records and, thus, 
is unable to predict the number of third party undertakings that 
will be filed with the Commission.
    \60\ Based on an estimated average administrative labor cost of 
$50 per hour (based on the Securities Industry Association's wage 
survey for the year 2000 for programmers and senior programmers. An 
additional 35% for overhead was added to the hourly rates.), the 
Commission's staff estimate that the total labor cost to the entire 
transfer agent industry for complying with the collection of 
information requirements contained in the proposed amendments is 
$3,125,000 annually ($50 x 62,500). The Commission's staff developed 
these estimates in consultation with representatives of the transfer 
agent industry and the staff of the Commission's Office of Economic 
Analysis.
---------------------------------------------------------------------------

    If a transfer agent chooses to use electronic or micrographic 
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 OMB control number.

VII. Costs and Benefits of the Amendments to Rule 17Ad-7

    The Commission has identified certain costs and benefits relating 
to the rule amendments. No comments were received about the costs and 
benefits of the proposed rule and the commenters did not cite cost 
concerns as the basis for their suggestions. We expect that registered 
transfer agents will chose to adopt electronic or micrographic 
recordkeeping if it is cost effective for them to do so.

A. Benefits

    The Commission envisions that transfer agents choosing to automate 
their paper-based records systems in favor of electronic or 
micrographic

[[Page 21657]]

systems are likely to reduce their costs and risks associated with 
recordkeeping. While these benefits are not readily quantifiable in 
terms of a particular dollar value, many factors underlie the potential 
reduction of costs and gains in efficiency to transfer agents that 
elect to use micrographic or electronic storage systems:
     Documents are less likely to be lost or misfiled,
     Documents are likely to be retrieved more quickly,
     Audit trails can be automated,
     Risk reduction is improved for natural disasters,
     File centralization is automatic (file and records need 
not be removed from their storage in order to reference them),
     Multiple persons can view the same document 
simultaneously,
     Access authorization can be automated,
     Space required for document storage is drastically 
reduced,
     Document indexing and cross-referencing can be automatic, 
and
     Documents can be copied, faxed, printed, and e-mailed 
without the paper originals.

B. Costs

    The amendments to Rule 17Ad-7 will not impose costs on any 
particular person or entity. Although the amendments will broaden the 
options for transfer agents to use for the storage and retention of the 
records that they are required to maintain, the amendments require no 
technology changes or even the use of any technology, provided the 
transfer agent is capable of producing copies of documents that the 
Commission, or the transfer agent's ARA, requests.\61\ Therefore, 
transfer agents are not obligated to change their present recordkeeping 
and retention systems.
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    \61\ 17 CFR 240.17Ad-6 and 240.17Ad-7.
---------------------------------------------------------------------------

    We expect, as noted above, that numerous transfer agents will 
determine that it is cost-effective for them to choose to maintain 
their records electronically or micrographically. However, it is 
practically impossible to estimate the costs for implementing a records 
management system for any given transfer agent, or the industry as a 
whole, that would be in compliance with Rule 17Ad-7(f). When a transfer 
agent selects the type of records management technology, such as 
photographic (microfilm or microfiche) or digital recording techniques 
(computer technology), it will likely consider solutions that will 
optimize its cost, based on individualized factors such as risk and 
complexity. Each transfer agent will evaluate the risk and cost 
effectiveness of their records management solution differently based 
upon the solution that is best for their business model, such as their 
business practices and volume, and that assures their ability to comply 
with Rule 17Ad-7. Moreover, we cannot predict the effect of future 
market competition and innovation on the technologies that transfer 
agents might employ for their recordkeeping.
    Nevertheless, transfer agents that choose to change their 
recordkeeping system to electronic or micrographic storage systems may 
face the following costs. First, transfer agents that choose to store 
records electronically or micrographically will have to select the type 
of technology system they will use to store and maintain the required 
records. While the costs and types of these systems vary widely, 
numerous document storage vendors appear to make the market for these 
systems competitive. In addition, the expected life span of each system 
varies (e.g., some systems and their associated software might become 
obsolete sooner than others and some systems physically last longer 
than others). All systems, however, require physical and technological 
maintenance.
    Second, transfer agents that choose to use micrographic media or 
electronic storage media will incur some costs associated with 
transferring hard copy records to micrographic or electronic storage 
media. These costs are likely to depend upon the volume of hard copy 
records needed to be transferred to electronic or micrographic format, 
the amount of labor needed to convert the records, and the type of 
storage media involved.
    Third, transfer agents will incur costs in complying with the rule. 
Specifically, the rule requires that transfer agents using electronic 
or micrographic storage media create a duplicate of the records 
electronically or micrographically stored, that they create an index of 
the electronically or micrographically stored records, and that they 
establish an audit system to account for inputting of and changes to 
electronically or micrographically stored records. All of these 
requirements will result in costs to those transfer agents. Again, 
these costs are difficult to quantify in terms of labor and technology.

VIII. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition and Capital Formation

A. Consideration of Burden on Competition

    Section 23(a)(2) of the Act \62\ requires the Commission to 
consider the impact that any rule promulgated under the Act would have 
on competition. The Commission is further required to state ``the 
reasons for [its] determination that any burden on competition imposed 
by such rule or regulation is necessary or appropriate in furtherance 
of the purposes of [the Act].\63\
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    \62\ 15 U.S.C. 78w(a)(2).
    \63\ 15 U.S.C. 78w(a)(2).
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    In the Proposing Release, the Commission solicited comments on 
whether the amendments to Rule 17Ad-7 would have any effects on 
competition. The Commission received no comments in response to this 
solicitation.
    The Commission does not anticipate that the amendments will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the Act. The amended rule permits, but does not require, 
all registered transfer agents to use electronic and micrographic 
storage media to fulfill their recordkeeping obligations. In addition, 
the requirements that transfer agents must meet with respect to using 
electronic and micrographic storage media will apply to all registered 
transfer agents that choose to store their records electronically or 
micrographically. The amendments are intended to remove any remaining 
regulatory impediments facing transfer agents who decide to store 
records in an electronic or micrographic form. The Commission believes 
that by changing the regulatory scheme, transfer agents can have the 
certainty to adopt storage methods that best suits their business needs 
and can then be able to offer to the market a service they believe is 
more cost-effective and efficient.

B. Promotion of Efficiency, Competition, and Capital Formation

    Section 3 of the Act \64\ as amended by the National Securities 
Markets Improvement Act of 1996 \65\ 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

[[Page 21658]]

promote efficiency, competition, and capital formation.
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    \64\ 15 U.S.C. 78c.
    \65\ Pub. L. No. 104-290, 110 Stat. 3416 (1996).
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    In the Proposing Release, the Commission solicited comments on 
whether the amendments to Rule 17Ad-7 would have any effects on 
competition, efficiency and capital formation. The Commission received 
no comments in response to this solicitation.
    The amendments should promote efficiency. By allowing registered 
transfer agents to benefit from advances in recordkeeping technology, 
the time and labor in maintaining and accessing records should be 
reduced, resulting in operational and financial efficiencies. Although 
the amendments address how companies and its transfer agents keep 
records which are activities that occur after the issuance of 
securities, the amendments should also encourage capital formation. By 
allowing transfer agents to use a broader range of storage methods, 
transfer agents who decide to store records electronically or 
micrographically, will no longer have the facility or operational costs 
of a traditional paper based system. Transfer agents could then pass 
the cost savings to companies who can, in turn, see a similar reduction 
in their recordkeeping expenses. Lower recordkeeping expenses should 
assist companies in bringing their overall costs down and should 
benefit companies in their efforts in raising capital. The amendments, 
which apply equally to transfer agents, should also promote competition 
between the vendors who create and manufacture the new storage 
technologies and between the transfer agents who use the new methods. 
Vendors can compete with each other to develop systems that can allow 
transfer agents to mange the records on a more resourceful, economical 
basis. The improvement in storage technologies can then allow transfer 
agents to compete among one another in offering to companies a more 
cost-effective, efficient service.
    The amendments should: (1) Promote efficiency by allowing 
registered transfer agents to benefit from advances in recordkeeping 
technology, (2) not adversely affect capital formation because the 
amendments relate solely to post-issuance activity, and (3) not impose 
any burden on competition among transfer agents because the amendments 
will apply equally to all registered transfer agents.

IX. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the provisions of the Regulatory 
Flexibility Act (``RFA'').\66\ This FRFA relates to the adoption of 
amendments to Rule 17Ad-7(f), which conditions registered transfer 
agents' use of micrographic and electronic storage systems in 
fulfilling their record retention requirements.\67\ The FRFA notes that 
the new rule does not require transfer agents to maintain their records 
micrographically or electronically; however, those transfer agents 
choosing to do so must comply with the requirements of the rule.
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    \66\ 5 U.S.C. 604.
    \67\ An Initial Regulatory Flexibility Analysis (``IRFA'') 
summary regarding the amendments to Rule 17Ad-7 appeared in the 
Proposing Release.
---------------------------------------------------------------------------

A. Need for the Rules and Rule Amendments

    The amendments are designed to increase the flexibility and 
efficiency of transfer agent recordkeeping. Section 17(a)(1) of the Act 
\68\ requires registered transfer agents to make and keep certain 
records that the Commission prescribes to be necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act. Rules 17Ad-6 and 17Ad-7 
under the Act specify the type of records that registered transfer 
agents must make and keep and the amount of time and manner in which 
these records must be preserved. Depending on the type of record, the 
records covered by these rules generally must be maintained for two 
years,\69\ six years,\70\ or until one year after the termination of a 
transfer agency relationship.\71\ Rule 17Ad-7(f) \72\ currently permits 
registered transfer agents to preserve the records listed in Rule 17Ad-
6 on microfilm, subject to certain conditions. However, Rule 17Ad-7 
currently provides no other alternative to maintaining records in hard 
copy.
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    \68\ 15 U.S.C. 78q(a)(1).
    \69\ Rule 17Ad-7(a) and (b).
    \70\ Rule 17Ad-7(d).
    \71\ Rule 17Ad-7(c).
    \72\ Rule 17Ad-7(f).
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B. Significant Issues Raised by Public Comment

    The Commission received eleven comment letters in response to the 
Proposing Release. The commenters generally supported the goals of the 
Commission's proposals, although some expressed concerns with specific 
provisions and some suggested alternative approaches for addressing 
particular issues. The Commission has modified its proposal to 
incorporate many of these comments and suggested alternatives.
    The Commission also requested comment with respect to the IRFA in 
the Proposing Release. The Commission did not receive any comments 
concerning the IRFA.

C. Small Entities Subject to the Rule

    For purposes of Commission rulemaking, paragraph (h) of Rule 0-10 
under the Act \73\ defines the term ``small business'' or ``small 
organization,'' with reference to a transfer agent, to include any 
transfer agent that: (1) Received fewer than 500 items for transfer and 
fewer 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 business'' or 
``small organizations'' as defined in Rule 0-10 under the 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. The Commission estimates that 180 registered transfer 
agents qualify as small entities and would be subject to the amendments 
to Rule 17Ad-7.
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    \73\ 17 CFR 240.0-10(h).
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    The Commission estimates that approximately 150 transfer agents 
will receive fewer than 500 items for transfer during the preceding six 
months. However, the Commission believes that the amendments to Rule 
17Ad-7 will not significantly affect small entities. The Commission 
notes that Rule 17Ad-4(b) under the Act \74\ already exempts 
approximately 150 small transfer agents from several of the 
recordkeeping requirements of Rules 17Ad-6 (and as a result from 17Ad-
7). In addition, any burden imposed by the amendments applies only to 
those transfer agents that choose to use electronic or micrographic 
storage media; many transfer agents might not have to maintain their 
records any differently than they are doing so prior to today.\75\ The 
Commission also believes that it is not feasible to further clarify, 
consolidate, or simplify the amendments for small entities because a 
small entity choosing to store its records electronically or 
micrographically will not be disproportionately or unreasonably 
burdened by the new

[[Page 21659]]

requirements of Rule 17Ad-7. Finally, the Commission believes that 
creating any new exemptions for small business entities in Rule 17Ad-7 
would undermine the purpose of the Commission's transfer agent 
regulatory oversight responsibilities. Thus, small business entities 
are still required to maintain the same types of records as before; 
Rule 17Ad-7 merely provides alternate methods for doing so.
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    \74\ 17 CFR 240.17Ad-4(b).
    \75\ For example, Rule 17Ad-7(f) will be essentially 
inapplicable to transfer agents that solely maintain paper records.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    In the IRFA, the Commission requested comment on the costs of 
complying with each of the recordkeeping, reporting, and other 
requirements under the proposed rule amendments. It also requested 
comment as to whether there would be any ongoing costs associated with 
complying with the rule amendments and asked commenters to provide 
detailed estimates of these costs. The Commission did not receive any 
comments concerning this aspect of the IRFA.
    The amendments to Rule 17Ad-7 impose certain reporting, 
recordkeeping, and compliance requirements. For example, the amendments 
require each registered transfer agent that chooses to use electronic 
or micrographic storage media to set up a system to record the 
inputting of records to electronic storage media and the inputting of 
any changes to records that are electronically or micrographically 
stored. However, the reporting, recordkeeping, and compliance 
requirements contained in the amendments to Rule 17Ad-7 apply only to 
registered transfer agents that choose to use electronic storage media. 
Some small transfer agents might not be able to afford the costs 
currently involved with storing records electronically or 
micrographically and therefore will not choose to use these storage 
medias. However, it is likely that as additional technologies are 
developed, these costs will be reduced and it may become cost-effective 
for more small transfer agents to use electronic or micrographic 
storage media. Therefore, the amendments to Rule 17Ad-7 should not have 
a significant economic impact on a substantial number of small 
entities.

E. Agency Action to Minimize Effect on Small Entities

    As required by section 603 of the RFA, the Commission has 
considered adopting different compliance, reporting requirements, and 
effective dates with respect to transfer agents' use of electronic and 
micrographic storage media with the view that these measures would 
minimize the economic impact of the proposed rule amendments on small 
entities. However, the Commission believes that the compliance, 
reporting requirements, and effective dates as adopted today are 
necessary to ensure the accuracy and integrity of the records of those 
transfer agents that choose to store them electronically or 
micrographically and to ensure the access to such records by the 
Commission or another appropriate regulatory agency.

X. Statutory Basis

    The Commission is adopting amendments to Sec. 240.17Ad-7 of Chapter 
II of Title 17 of the Code of Federal Regulations pursuant to Sections 
17, 17A, and 23 \76\ in the manner set forth below.
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    \76\ 15 U.S.C. 78q, 78q-1(a)(2), 78q-1(d) and 78w(a).
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List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities, Transfer 
agents.

Text of Amendment

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is amended as follows:

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

    1. The authority citation for Part 240 is amended by adding the 
following specific citation:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
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, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 
and 80b-11, unless otherwise noted.
* * * * *
    Section 240.17Ad-7 also issued under 15 U.S.C. 78b, 78q, and 78q-1.
* * * * *

    2. The authority citation following Sec. 240.17Ad-7 is removed.

    3. Section 240.17Ad-7 is amended by revising paragraph (f) to read 
as follows:


Sec. 240.17Ad-7  Record retention.

* * * * *
    (f) (1) For purposes of this section:
    (i) The term micrographic media means microfilm or microfiche or 
any similar medium.
    (ii) The term electronic storage media means any digital storage 
medium or system.
    (iii) The term ARA means your appropriate regulatory agency as that 
term is defined in 15 U.S.C. 78c(a)(34).
    (2) If you as a registered transfer agent use electronic storage 
media or micrographic media to store your records, you must:
    (i) Have available at all times for examination by the staffs of 
the Commission and of your ARA facilities to project or produce 
immediately easily readable images of such records;
    (ii) Be ready at all times to provide such records that the staffs 
of the Commission and your ARA or their representatives may request;
    (iii) Create an accurate index of such records, store the index 
with those records, and have the index available at all times for 
examination by the staffs of the Commission and your ARA;
    (iv) Have quality assurance procedures to verify the quality and 
accuracy of the electronic or micrographic recording process; and
    (v) Maintain separately from the originals duplicates of the 
records and the index that you store on electronic storage media or 
micrographic media. You may store the duplicates of the indexed records 
on any medium permitted by this section. You must preserve the 
duplicate records and index 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 your ARA.
    (3) Any electronic storage media that you use to store your records 
must:
    (i) Ensure the security and integrity of the records by means of 
manual and automated controls that assure the authenticity and quality 
of the electronic facsimile, detect attempts to alter or remove the 
records, and provide means to recover altered, damaged, or lost records 
resulting from any cause;
    (ii) Externally label all removable units of storage media using a 
unique identifier that allows the manual association of that removable 
storage unit with its place and order in the recordkeeping system; and
    (iii) Uniquely identify files and internally label each file with 
its unique name, the date and time of file creation, the date and time 
of last modification or extension, and a file sequence number when the 
file spans more than one volume.
    (4) If you use electronic storage media or micrographic media to 
store your records, you must establish an audit system that accounts 
for the inputting of and any changes to every record that is stored on 
electronic storage media or micrographic media. The results of such 
audit system must:

[[Page 21660]]

    (i) Be available at all times for examination by the staffs of the 
Commission and your ARA; and
    (ii) Be preserved for the same time that is required by this 
section for the underlying records.
    (5) If you use electronic storage media or micrographic media to 
store your records, you must:
    (i) Maintain, keep current, and provide promptly upon request by 
the staffs of the Commission and your ARA all information necessary to 
access the records and indexes stored on electronic storage media or 
micrographic media; and
    (ii) Place in escrow with an independent third party and keep 
current a copy of the physical and logical format of the electronic 
storage or micrographic 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. The independent escrow agent must file an 
undertaking signed by a duly authorized person with the Commission and 
your ARA stating that:

    ``[Name of Third Party] hereby undertakes to furnish promptly 
upon request to the U.S. Securities and Exchange Commission, its 
designees, or representatives, upon reasonable request, a current 
copy of the physical and logical format of the electronic storage or 
micrographic 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 
the records and indexes of [Name of Transfer Agent]'s electronic 
records management system.

    (6) (i) If you use a third party to maintain or preserve some or 
all of the required records using electronic storage media or 
micrographic media, such third party shall file a written undertaking 
signed by a duly authorized person with the Commission and your ARA 
stating that:

    ``With respect to any books and records maintained or preserved 
on behalf of [Name of Transfer Agent], [Name of Third Party] hereby 
undertakes to permit examination of such books and records at any 
time or from time to time during business hours by representatives 
or designees of the U.S. Securities and Exchange Commission, and to 
promptly furnish to said Commission or its designee true, correct, 
complete, and current hard copies of any or all or any part of such 
books and records.''

    (ii) Agreement with a third party to maintain your records shall 
not relieve you from the responsibility to prepare and maintain records 
as specified in this section or in Sec. 240.17Ad-6.
* * * * *

    Dated: April 27, 2001.
    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-11005 Filed 4-27-01; 2:33 pm]
BILLING CODE 8010-01-U