[Federal Register Volume 66, Number 104 (Wednesday, May 30, 2001)]
[Rules and Regulations]
[Pages 29224-29229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13526]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 270 and 275
[Release Nos. IC-24991 and IA-2945; File No. S7-06-01]
RIN 3235-AI05
Electronic Recordkeeping by Investment Companies and Investment
Advisers
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission is adopting amendments
to rules under the Investment Company Act of 1940 and the Investment
Advisers Act of 1940 that permit registered investment companies and
registered investment advisers to preserve required records using
electronic storage media such as magnetic disks, tape, and other
digital storage media. The amendments expand the ability of advisers
and funds to use electronic storage media to maintain and preserve
records. This release and these rule amendments respond to the
enactment of the Electronic Signatures in Global and National Commerce
Act, which encourages federal agencies to accommodate electronic
recordkeeping.
EFFECTIVE DATE: May 31, 2001.
FOR FURTHER INFORMATION CONTACT: William C. Middlebrooks, Jr.,
Attorney, or Martha B. Peterson, Special Counsel, (202) 942-0690,
Office of Regulatory Policy, Division of Investment Management,
Securities and Exchange Commission, 450 5th Street, NW., Washington, DC
20549-0506.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is adopting amendments to rule 31a-2 (17 CFR 270.31a-
2) under the Investment Company Act of 1940 (15 U.S.C. 80a) (the
``Investment Company Act''), and rule 204-2 (17 CFR 275.204-2) under
the Investment Advisers Act of 1940 (15 U.S.C. 80b) (the ``Advisers
Act'').\1\
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\1\ Unless otherwise noted, all references to rule 31a-2 or rule
204-2, or to any paragraph of those rules, will be to 17 CFR
270.31a-2 and 17 CFR 275.204-2, as amended by this release.
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Executive Summary
The Commission is adopting amendments to rules regarding electronic
recordkeeping by registered investment companies (``funds'') and
registered investment advisers (``advisers''). The federal securities
laws require funds, advisers, and others to make and keep books and
records. The recordkeeping requirements are a key part of the
Commission's regulatory program for funds and advisers, as they allow
us to monitor fund and adviser operations, and to evaluate their
compliance with federal securities laws. Last year, Congress passed the
Electronic Signatures in Global and National Commerce Act (the
``Electronic Signatures Act,'' ``Act,'' or ``ESIGN'') to facilitate the
use of electronic records and signatures in interstate and foreign
commerce.\2\ Consistent with the purposes and goals of the Electronic
Signatures Act, we are adopting rule amendments that expand the
circumstances under which funds and advisers may keep records on
electronic storage media, and clarify and update our recordkeeping
rules. We are also interpreting rules 31a-2 and 204-2 to be the
exclusive means by which funds and advisers can comply with the
recordkeeping provisions of the Electronic Signatures Act.
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\2\ Electronic Signatures in Global and National Commerce Act,
Pub. L. No. 106-229, 114 Stat. 464 (2000) (15 U.S.C. 7001),
Preamble.
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I. Discussion
A. Amendments to Rules 31a-2 and 204-2
The Commission is amending rules 31a-2 and 204-2 to permit funds
and advisers to keep all of their records in an electronic format.
Prior to today's amendments, rules 31a-2 and 204-2 provided that funds
and advisers could keep records on electronic storage media only if the
records were originally created or received in an electronic format.\3\
The Commission's staff had issued no-action letters to conditionally
permit funds and advisers to convert records into an electronic format
and retain them electronically.\4\ In March of this year we proposed
rule amendments to incorporate these no-action letters into rules 31a-2
and 204-2, while eliminating many of the conditions that apply only to
electronic records created from non-electronic originals. We also
proposed to clarify the obligation of funds and advisers to provide
copies of their records to Commission examiners, and to incorporate
terminology used in electronic recordkeeping rules under the Securities
Exchange Act of 1934 into rules 31a-2 and 204-2.\5\ We received seven
comment letters addressing the proposal.\6\ Commenters supported most
of the proposed amendments, and we are adopting them substantially as
proposed, with a few changes in response to concerns expressed by
commenters.
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\3\ See Electronic Recordkeeping by Investment Companies and
Investment Advisers, Investment Company Act Release No. 24890 (Mar.
13, 2001) [66 FR 15369 (Mar. 19, 2001)] (``Proposing Release'') at
n.4 and accompanying text.
\4\ See Oppenheimer Management Corporation, SEC No-Action Letter
(Aug. 28, 1995); DST Systems, Inc., SEC No-Action Letter (Feb. 2,
1993).
\5\ Proposing Release, supra note 3, at nn. 7-12 and
accompanying text.
\6\ The comment letters are available for public inspection and
copying in the Commission's Public Reference Room, 450 Fifth Street,
NW., Washington, DC (File No. S7-06-01).
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Under revised rules 31a-2 and 204-2, funds and advisers are
permitted to maintain records electronically if they establish and
maintain procedures: (i) To safeguard the records from loss,
alteration, or destruction, (ii) to limit access to the records to
authorized personnel, the Commission, and (in the case of funds) fund
directors, and (iii) to ensure that electronic copies of non-electronic
originals are complete, true, and legible.\7\ In response to a
suggestion of one commenter, we are expanding rules 31a-2 and 204-2 to
include all records that are required to be
[[Page 29225]]
maintained and preserved by any rule under the Investment Company or
Advisers Acts (``other recordkeeping requirements'') so that it is
clear that if funds and advisers keep records electronically they must
comply with the conditions of these rules.\8\
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\7\ Rules 31a-2(f)(3) and 204-2(g)(3). We requested commenters
to address whether rules 31a-2 and 204-2 should require funds and
advisers to preserve records in a non-rewriteable, non-erasable
(also known as ``write once, read many,'' or ``WORM'') format.
Commenters concurred in our preliminary assessment, at the proposing
stage, that the costs of such a requirement would be likely to
outweigh the benefits (with respect to advisers and funds). Based on
our consideration of costs, benefits, and other factors described in
the proposing release we are not adopting such a requirement at this
time. We recognize that the standards for electronic recordkeeping
we are adopting for funds and advisers are different from the rules
that we have adopted for broker-dealers, which require brokerage
records to be preserved in a WORM format. We have not experienced
any significant problems with funds or advisers altering stored
records. Moreover, most advisory and mutual fund arrangements
involve multiple parties (e.g., brokers, custodians, transfer
agents), each with its own, often parallel, recordkeeping
requirement. As a result, our compliance examiners typically have an
alternative means to verify the accuracy of adviser and fund
records. In light of these factors, the costs of requiring funds and
advisers to invest in new electronic recordkeeping technologies may
not be justified.
\8\ Prior to the adoption of these amendments, rule 31a-2(f)(1)
was limited to records required to be maintained and preserved under
rules 31a-1(a) through (d) and 31a-2 (a) through (c), and rule 204-
2(g)(1) was limited to records required to be maintained under rule
204-2. Other rules under both Acts contain additional recordkeeping
requirements. See, e.g., rule 2a-7(c)(10) [17 CFR 270.2a-7(c)(10)]
(money market funds must keep a written copy of certain procedures
for not less than six years); rule 8b-16(c) (17 CFR 270.8b-16(c))
(funds must maintain certain documents concerning dividend
reinvestment plans in accordance with section 31 of the Investment
Company Act); rule 10f-3(b)(12)(ii) (17 CFR 270.10f-3(b)(12)(ii))
(funds must maintain and preserve for not less than six years a
written record of certain security transactions during the existence
of an underwriting or selling syndicate); rule 11a-3(a)(2)(i) (17
CFR 270.11a-3(a)(2)(i)) (funds must maintain and preserve records of
any determination of the costs incurred in connection with exchange
offers for not less than six years in accordance with section 31(b)
of the Investment Company Act); rule 12b-1(f) (17 CFR 270.12b-1(f))
(funds must preserve copies of any plan, agreement or report under
this rule for not less than six years); rule 17e-1(d)(2) (17 CFR
270.17e-1(d)(2)) (funds must maintain and preserve for at least six
years a written record of certain brokerage transactions); rule 17j-
1(f)(1) (17 CFR 270.17j-1(f)(1)) (each fund that is required to
adopt a code of ethics must make the corresponding records available
to the Commission or its representatives for inspection); rule 203A-
2(e)(4) (17 CFR 275.203A-2(e)(4)) (advisers must maintain a record
of the States in which the adviser has determined it would be
required to register for not less than five years); and rule 204-
1(c) (17 CFR 275.204-1(c)) (advisers must maintain copies of Part II
of Form ADV and any brochure delivered to client).
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We are also amending the rules to clarify the obligation of funds
and advisers to provide copies of their records to Commission
examiners. The amendments make clear that funds and advisers may be
requested to promptly provide (i) legible, true, and complete copies of
records in the medium and format in which they are stored, and
printouts of such records; and (ii) means to access, view, and print
the records.\9\
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\9\ Rules 31a-2(f)(2) and 204-2(g)(2). We have eliminated a
proposed requirement that funds and advisers provide means to search
and sort, as well as access, view, and print records. When their
recordkeeping systems have the capacity to automatically ``search''
and ``sort'' records, funds and advisers typically voluntarily make
those functions available to our examination staff. We did not
intend to require funds and advisers to add ``search'' and ``sort''
functions to systems that do not have that capability.
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We are not adopting a proposed amendment that would have stated
that records are to be provided in no case more than one business day
after a request.\10\ Some commenters were concerned that such an
amendment could preclude funds and advisers from reaching an
accommodation with the examination staff to produce certain documents
immediately and other documents, that are not immediately accessible,
on a delayed basis.\11\ We agree that such arrangements when entered
into and performed in good faith by funds or advisers can facilitate
the examination process. While the ``promptly'' standard imposes no
specific time limit, we expect that a fund or adviser would be
permitted to delay furnishing electronically stored records for more
than 24 hours only in unusual circumstances. At the same time, we
believe that in many cases funds and advisers could, and therefore will
be required to, furnish records immediately or within a few hours of
request.\12\
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\10\ See proposed rules 31a-2(f)(2)(ii) and 204-2(g)(2)(ii).
\11\ Rule 31a-2(a) generally requires records to be preserved in
an ``easily accessible'' place for only the first two years of the
retention period.
\12\ See Investment Company Act; Use of Magnetic Tape, Disk, or
Other Computer Storage Medium, Investment Company Act Release No.
15410 (Nov. 13, 1986) [51 FR 42207 (Nov. 24, 1986)].
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B. Electronic Signatures Act
Under the Electronic Signatures Act, an agency's recordkeeping
requirements may be met by retaining electronic records that accurately
reflect the information set forth in the record, and remain accessible
to all persons who are entitled to access, in a format that can be
accurately reproduced.\13\ The Act allows us to interpret this
provision pursuant to our authority under the Investment Company and
Advisers Acts.\14\ Our interpretation of the Electronic Signatures Act
must be consistent with the Act and not add to its requirements.\15\
The interpretation must be based on findings that (i) our interpreting
regulations are substantially justified; (ii) the methods selected to
carry out our purposes are substantially equivalent to the requirements
imposed on records that are not electronic records and will not impose
unreasonable costs on the acceptance and use of electronic records; and
(iii) the methods selected to carry out our purposes do not require, or
accord greater legal status or effect to, the implementation or
application of a specific technology or technical specification for
performing the functions of creating, storing, generating, receiving,
communicating, or authenticating electronic records or electronic
signatures.\16\ The Electronic Signatures Act also explicitly
authorizes agencies to interpret the Act's electronic recordkeeping
provisions to specify performance standards to assure accuracy, record
integrity, and accessibility of electronically retained records.\17\
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\13\ ESIGN section 101(d)(1).
\14\ Under the Electronic Signatures Act, a federal regulatory
agency (like the Commission) that is responsible for rulemaking
under any other statute (such as the Investment Company Act or the
Advisers Act) ``may interpret section 101 [of the Electronic
Signatures Act] with respect to such statute through the issuance of
regulations pursuant to a statute; or to the extent such agency is
authorized by statute to issue orders or guidance, the issuance of
orders or guidance of general applicability that are publicly
available and published (in the Federal Register in the case of an
order or guidance issued by a Federal regulatory agency).'' ESIGN
section 104(b).
\15\ ESIGN section 104(b)(2)(A) and (B).
\16\ ESIGN section 104(b)(2)(C).
\17\ ESIGN section 104(b)(3). Such performance standards may be
specified in a manner that imposes a requirement in violation of the
general prohibition against selecting methods that require or accord
greater legal status or effect to the implementation or application
of a specific technology or technical specification for performing
the functions of creating, storing, generating, receiving,
communicating, or authenticating electronic records or electronic
signatures if the requirement (i) serves an important governmental
objective and (ii) is substantially related to the achievement of
that objective.
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We interpret the Electronic Signatures Act with respect to the
Investment Company Act and Advisers Act to require funds and advisers
to comply with the requirements of rules 31a-2 and 204-2 when they keep
required records on electronic storage media. Funds and advisers,
therefore, can comply with the requirements of the Electronic
Signatures Act only by complying with the requirements of amended rules
31a-2 and 204-2. This interpretation includes any records, maintained
in an electronic format, that are required by any rule under the
Investment Company or Advisers Acts.\18\ In the proposing release, we
asked for comment on whether these interpretations were consistent with
the Electronic Signatures Act's requirements.\19\ Commenters generally
agreed that our interpretation of the Electronic Signatures Act was
reasonable. As discussed below, our rules and interpretation satisfy
all requirements of the Electronic Signatures Act.
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\18\ See supra note 8 and accompanying text.:
\19\ Proposing Release, supra note 3, at nn.13-15 and
accompanying text.:
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1. Consistency With Electronic Signatures Act
Rules 31a-2 and 204-2 and the other recordkeeping requirements are
consistent with the Electronic Signatures Act. The Act permits
federally required records to be retained in an electronic format, and
we are amending rules 31a-2 and 204-2 to permit funds and advisers to
maintain all required records electronically.
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2. No Additional Requirements
Rules 31a-2 and 204-2 and the other recordkeeping requirements do
not impose requirements in addition to those imposed by the Act. The
Electronic Signatures Act 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.\20\ The rules require
funds and advisers that maintain their records electronically to comply
with certain conditions that are consistent with the requirements of
the Act and that are designed to bring about fund and adviser
compliance with the Act's requirements.\21\
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\20\ ESIGN section 101(d)(1).:
\21\ The rules' general requirements that funds and advisers
have procedures to protect electronic records from alteration, loss,
or destruction, to limit unauthorized access, and verify the
integrity of electronic copies of hard copy originals ensure that an
electronic record is accurate from the outset, and limit the
possibility that an electronic record will be corrupted during its
retention period. The rules' requirements regarding indexing, and
the obligation of funds and advisers to provide records to examiners
and fund directors foster the accessibility of electronic records.
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3. Substantial Justification
Our rules require funds and advisers to maintain a wide variety of
documents that we use to verify compliance with federal securities
law.\22\ The value of these records is entirely dependent on their
integrity and accessibility. If funds and advisers are not required to
protect their records from inadvertent or intentional alteration or
destruction\23\ and provide examiners with meaningful access to all
required records,\24\ then the records become unreliable, and the
examination process moot. Therefore, we find that our interpretation of
the Electronic Signatures Act, that funds and advisers must comply with
rules 31a-2 and 204-2, is substantially justified.
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\22\ For example, funds must keep accounts, books and other
documents that form the basis for the fund's financial statements,
and itemized records detailing purchases and sales of securities,
receipts and deliveries of securities, receipts and disbursements of
cash, and all other debits and credits. See rule 31a-1. Advisers
must maintain records such as ledgers reflecting asset, liability,
reserve, capital, income, and expense accounts, memoranda of
instructions from clients, and written communications received and
sent relating to recommendations and advice, and receipt,
disbursement or delivery of funds or securities. See rule 204-2.
\23\ See rules 31a-2(f)(3)(iii) and 204-2(g)(3)(iii) (requiring
procedures to ensure the quality of electronic copies of non-
electronic records); rules 31a-2(f)(2)(iii) and 204-2(g)(2)(iii)
(requiring that funds and advisers separately store duplicates of
electronic records); rules 31a-2(f)(3)(ii) and 204-2(g)(3)(ii)
(requiring funds and advisers to limit access to electronic
records); rules 31a-2(f)(3)(i) and 204-2(g)(3)(i) (requiring funds
and advisers to adopt procedures to maintain and preserve electronic
records, so as to reasonably safeguard them from loss, alteration,
or destruction).
\24\ See rules 31a-2(f)(2)(ii)(A) and 204-2(g)(2)(ii)(A)
(requiring funds and advisers to provide promptly a legible, true,
and complete copy of an electronically stored record upon request
from the Commission or other parties entitled to access the
records); rules 31a-2(f)(2)(i) and 204-2(g)(2)(i) (requiring funds
and advisers to arrange and index their electronic and micrographic
records in a way that permits easy location and retrieval); and
rules 31a-2(f)(2)(ii)(C) and 204-2(g)(2)(ii)(C) (requiring funds and
advisers to provide means to access, view, and print electronic
records).
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4. Requirements Equivalent to Requirements for Other Record Formats
Rules 31a-2 and 204-2 and the other recordkeeping requirements
subject electronic records to conditions that are substantially
equivalent to conditions under which funds and advisers keep paper and
micrographic records. These conditions are designed to ensure that the
records exist in a form that is legible, authentic, complete, and
accessible. While all records, regardless of format, must comply with
certain conditions,\25\ other requirements, which would be superfluous
for paper records, apply only to electronic and micrographic
records.\26\
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\25\ See, e.g., rule 31a-2(a)(1) (funds to preserve required
records permanently, the first two years in an easily accessible
place); and rule 204-2(a) (all registered advisers must keep their
required records true, accurate, and current).
\26\ For example, the requirement that funds and advisers that
keep micrographic or electronic records provide promptly (i) a
legible, true, and complete copy of the record in the medium and
format in which it is stored, (ii) a legible, true, and complete
printout of the record, and (iii) means to access, view, and print
the records is unnecessary for paper records, which require no
special treatment to make them readable and reproducible.
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Funds and advisers that maintain records in an electronic format
must comply with several requirements that have no micrographic or
paper equivalent. For example, funds and advisers must have procedures
to reasonably protect electronic records from loss, alteration, or
destruction,\27\ to limit access to electronic records,\28\ and to
assure that electronic records that are created from hard copy are
complete, true, and legible.\29\ We believe that these additional
requirements are necessary because of the unique vulnerability of
unprotected electronic records to undetectable alteration and
falsification.
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\27\ Rules 31a-2(f)(3)(i) and 204-2(g)(3)(i).
\28\ Rules 31a-2(f)(3)(ii) and 204-2(g)(3)(ii).
\29\ Rules 31a-2(f)(3)(iii) and 204-2(g)(3)(iii).
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5. No Unreasonable Costs on Acceptance and Use of Electronic Records
We have permitted funds and advisers to retain records
electronically for over fifteen years.\30\ During this period
electronic recordkeeping by funds and advisers has become
widespread.\31\ We conclude that rules 31a-2 and 204-2 and the other
recordkeeping requirements have not and will not impose unreasonable
costs on the acceptance and use of electronic recordkeeping.
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\30\ The Commission amended rules 204-2 and 31a-2, in 1985 and
1986 respectively, to permit advisers and funds to store required
records in computer systems. See Amendment to Investment Advisers
Act Recordkeeping Rule, Investment Advisers Act Release No. 952
(Jan. 11, 1985) [50 FR 2542 (Jan. 17, 1985)]; Investment Company
Act; Use of Magnetic Tape, Disk, or Other Computer Storage Medium,
Investment Company Act Release No. 15410 (Nov. 13, 1986) [51 FR
42207 (Nov. 24, 1986)].
\31\ With today's amendments to rules 31a-2 and 204-2, the
conditions under which funds and advisers may convert and store hard
copy records as electronic records will be more flexible than the
conditions of the staff no-action letters. The conditions under
which other records may be stored electronically are unchanged. As a
result, we are confident that rules 31a-2 and 204-2, as amended,
will impose no greater burden on electronic recordkeeping than has
been imposed to date.
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6. Specific Technology or Technical Specification
The Electronic Signatures Act generally prohibits us from requiring
or according greater legal status or effect to the implementation or
application of a specific technology or technical specification.
However, the Act does permit us to specify performance standards to
assure the accuracy, integrity, and accessibility of required records,
even if our standards require funds and advisers to implement or apply
a specific technology or technical specification to their storage
system.\32\ Rules 31a-2 and 204-2 have been deliberately crafted to be
technologically neutral, leaving funds and advisers free to adopt any
combination of technological and manual protocols that meet the
requirements of the rules. In any event, even if the rules were
interpreted to favor a specific technology or technical specification,
they would nonetheless be a valid exercise of our interpretive
authority, as they serve the important governmental objective of
assisting us to oversee fund and adviser compliance with the federal
securities laws, and are substantially related to the achievement of
that objective.\33\ The continuing accessibility and integrity of fund
and adviser records are critical to the fulfillment of our oversight
responsibilities.
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\32\ ESIGN section 104(b)(3)(A).
\33\ ESIGN section 104(b)(3)(A).
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[[Page 29227]]
C. Effective Date
The effective date for these amendments is May 31, 2001. In most
cases, the Administrative Procedures Act (``APA'') requires that a rule
amendment be published in the Federal Register at least 30 days prior
to its effective date unless the promulgating agency can show good
cause for shortening this interim period.\34\ The Electronic Signatures
Act becomes effective on June 1, 2001, at which point funds and
advisers may opt to store required records electronically, so long as
the records are accessible and accurate.\35\ As described above, the
Electronic Signatures Act authorizes the Commission to interpret these
terms. A gap between the effective dates of the Electronic Signatures
Act and our rule amendments would needlessly create confusion about the
appropriate standards for electronic recordkeeping. During the period
between the effective dates, funds and advisers would be forced to
choose between maintaining their electronic records in accordance with
the Act's general but operative standards, or relying instead on the
more specific, but as yet not effective, standards set in rules 31a-2
and 204-2. We find that there is good cause for these amendments to
become effective on May 31, 2001.
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\34\ 5 U.S.C. 553(d)(3).
\35\ ESIGN section 101(d)(1).
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The APA also authorizes acceleration of the effective date of a
rule that ``relieves a restriction.'' \36\ The amendments to rules 31a-
2 and 204-2 allow funds and advisers to store all of their required
records electronically, regardless of how the documents originated or
were received, thus removing the prior restrictions placed on storage
of documents created or received on paper.
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\36\ 5 U.S.C. 553(d)(1).
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II. Cost-Benefit Analysis
In proposing the amendments to rules 31a-2 and 204-2, we considered
the costs and benefits that the amendments would generate. Although we
encouraged commenters to address the proposal's costs and benefits and
to submit their own estimates of what they might be, we received no
comment specifically addressing this issue.
We believe the amendments will impose few, if any, costs on funds
or advisers that are not already required. As described above, the
amended rules allow funds and advisers to maintain required records on
electronic storage media, regardless of whether the record was created
or received electronically. Our rules already permit funds and advisers
to retain records electronically if they were created or received
electronically, and these amendments do not materially change those
requirements. The only effect will be on funds and advisers who choose
to convert records into an electronic format, and they must simply do
so in the same fashion as they already keep electronically created or
received records. Electronic storage remains optional with the adoption
of these amendments. We assume that funds and advisers will not select
the electronic storage option provided for in the amended rules unless
doing so is less expensive (or otherwise more efficient and, therefore,
supported by business considerations). It remains our belief that the
amended rules will allow funds and advisers greater flexibility to make
business decisions about recordkeeping and, when appropriate, opt for
electronic storage with potential cost savings and other benefits.
In addition, we are adopting minor amendments to clarify the
obligation of funds and advisers to provide records to our examination
staff and, in the case of funds, fund directors, and minor technical
amendments to conform the language of rules 31a-2 and 204-2 to the
recordkeeping rules under the Securities Exchange Act of 1934. We
anticipate few, if any, costs to funds or advisers as a result of these
amendments.
III. Effects on Efficiency, Competition, and Capital Formation
Section 2(c) of the Investment Company Act requires the Commission,
when engaging in rulemaking that requires it to consider or determine
whether an action is consistent with the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. We requested
comment on this issue in the Proposing Release, and we have considered
these factors in determining to adopt the amendments as proposed. We
did not receive any comments directly addressing this issue.
The amendments to rules 31a-2 and 204-2 promote efficiency by
giving funds and advisers that establish procedures to assure record
soundness the option of maintaining their electronic records in the
format most suited to their business needs. The rules' standards are
flexible, and permit funds and advisers to modify their electronic
record retention practices to take advantage of advances in electronic
storage technology.
We do not believe that the rule amendments will have an impact on
competition. The rule amendments apply to all advisers and funds
equally and should provide no competitive advantage or burden to any
industry sector. The rule amendments should also have no impact on
competition within the computer industry. The amendments do not favor
the use of any particular form of electronic recordkeeping. They simply
require that whatever technology a fund or adviser chooses, the fund or
adviser have specific types of procedures to protect the integrity and
accessibility of the electronic records.
We believe that the amendments are unrelated to and will have
little or no effect on capital formation.
IV. Regulatory Flexibility Act Certification
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 605(b)), the Acting Chairman of the Commission has certified
that the proposed amendments to rules 31a-2 and 204-2 will not have a
significant economic impact on a substantial number of small entities.
While the amendments could potentially affect all funds and advisers,
including small entities, the economic impact of the amendments will be
insignificant. The Commission prepared an Initial Regulatory
Flexibility Analysis (``IRFA'') in accordance with 5 U.S.C. 603
regarding amendments to rule 31a-2 under the Investment Company Act and
rule 204-2 under the Advisers Act. The Proposing Release summarized the
IRFA and requested commenters to address matters discussed in the IRFA.
We received no comment on the IRFA. The Acting Chairman's certification
is attached to this release as Appendix A.
V. Paperwork Reduction Act
The amendments do not require a new collection of information. They
affect only the manner in which registrants can store information that
must be collected under rules 31a-2 and 204-2. In connection with rules
31a-2 and 204-2, the Commission previously submitted to the Office of
Management and Budget, pursuant to the Paperwork Reduction Act, a
request for approval and received OMB control numbers for the rules,
OMB Control Nos. 3235-0179 (rule 31a-2), and 3235-0278 (rule 204-2).
VI. Statutory Authority
The Commission is adopting amendments to rule 31a-2 under the
Investment Company Act pursuant to authority set forth in sections 31
and 38(a) of the Investment Company Act (15 U.S.C. 80a-30 and 80a-
37(a)).
[[Page 29228]]
The Commission is adopting amendments to rule 204-2 under the
Advisers Act pursuant to authority set forth in sections 204, 206(4),
and 211 of the Advisers Act (15 U.S.C. 80b-4, 80b-6(4), and 80b-11).
List of Subjects
17 CFR Part 270
Investment companies; Reporting and recordkeeping requirements;
Securities.
17 CFR Part 275
Reporting and recordkeeping requirements; Securities.
Text of Rule Amendments
For reasons set forth in the preamble, Title 17, Chapter II of the
Code of Federal Regulations is amended as follows:
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The Authority citation for Part 270 continues to read in part as
follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
unless otherwise noted;
* * * * *
2. Section 270.31a-2 is amended by:
a. Revising paragraphs (f)(1) and (f)(2);
b. Redesignating paragraph (f)(3) as (f)(4); and
c. Adding a new paragraph (f)(3) to read as follows:
Sec. 270.31a-2 Records to be preserved by registered investment
companies, certain majority-owned subsidiaries thereof, and other
persons having transactions with registered investment companies.
* * * * *
(f) Micrographic and electronic storage permitted.--(1) General.
The records required to be maintained and preserved under this part may
be maintained and preserved for the required time by, or on behalf of,
an investment company on:
(i) Micrographic media, including microfilm, microfiche, or any
similar medium; or
(ii) Electronic storage media, including any digital storage medium
or system that meets the terms of this section.
(2) General requirements. The investment company, or person that
maintains and preserves records on its behalf, must:
(i) Arrange and index the records in a way that permits easy
location, access, and retrieval of any particular record;
(ii) Provide promptly any of the following that the Commission (by
its examiners or other representatives) or the directors of the company
may request:
(A) A legible, true, and complete copy of the record in the medium
and format in which it is stored;
(B) A legible, true, and complete printout of the record; and
(C) Means to access, view, and print the records; and
(iii) Separately store, for the time required for preservation of
the original record, a duplicate copy of the record on any medium
allowed by this section.
(3) Special requirements for electronic storage media. In the case
of records on electronic storage media, the investment company, or
person that maintains and preserves records on its behalf, must
establish and maintain procedures:
(i) To maintain and preserve the records, so as to reasonably
safeguard them from loss, alteration, or destruction;
(ii) To limit access to the records to properly authorized
personnel, the directors of the investment company, and the Commission
(including its examiners and other representatives); and
(iii) To reasonably ensure that any reproduction of a non-
electronic original record on electronic storage media is complete,
true, and legible when retrieved.
* * * * *
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
3. The authority citation for Part 275 continues to read in part as
follows:
Authority: 15 U.S.C. 80b-2(a)(11)(F), 80b-2(a)(17), 80b-3, 80b-
4, 80b-6(4), 80b-6a, 80b-11, unless otherwise noted.
* * * * *
4. The authority citation following Sec. 275.204-2 is removed.
5. Section 275.204-2 is amended by revising paragraphs (g)(1) and
(g)(2), and by adding paragraph (g)(3), to read as follows:
Sec. 275.204-2 Books and records to be maintained by investment
advisers.
* * * * *
(g) Micrographic and electronic storage permitted.--(1) General.
The records required to be maintained and preserved pursuant to this
part may be maintained and preserved for the required time by an
investment adviser on:
(i) Micrographic media, including microfilm, microfiche, or any
similar medium; or
(ii) Electronic storage media, including any digital storage medium
or system that meets the terms of this section.
(2) General requirements. The investment adviser must:
(i) Arrange and index the records in a way that permits easy
location, access, and retrieval of any particular record;
(ii) Provide promptly any of the following that the Commission (by
its examiners or other representatives) may request:
(A) A legible, true, and complete copy of the record in the medium
and format in which it is stored;
(B) A legible, true, and complete printout of the record; and
(C) Means to access, view, and print the records; and
(iii) Separately store, for the time required for preservation of
the original record, a duplicate copy of the record on any medium
allowed by this section.
(3) Special requirements for electronic storage media. In the case
of records on electronic storage media, the investment adviser must
establish and maintain procedures:
(i) To maintain and preserve the records, so as to reasonably
safeguard them from loss, alteration, or destruction;
(ii) To limit access to the records to properly authorized
personnel and the Commission (including its examiners and other
representatives); and
(iii) To reasonably ensure that any reproduction of a non-
electronic original record on electronic storage media is complete,
true, and legible when retrieved.
* * * * *
Dated: May 24, 2001.
By the Commission.
Margaret H. McFarland,
Secretary.
[Note: Appendix A to the Preamble will not appear in the Code of
Federal Regulations.]
Appendix A; Regulatory Flexibility Act Certification
I, Laura S. Unger, Acting Chairman of the Securities and
Exchange Commission, hereby certify pursuant to 5 U.S.C. 605(b) that
amendments to rule 31a-2 (17 CFR 270.31a-2) under the Investment
Company Act of 1940 (the ``Investment Company Act'') and rule 204-2
(17 CFR 275.204-2) under the Investment Advisers Act of 1940 (the
``Advisers Act''), as amended, would not have a significant economic
impact on a substantial number of small entities in the United
States.
The Commission estimates that there are approximately 3,610
active registered investment companies, 3,010 of which are open-end
investment companies with the remaining 600 closed-end investment
companies. Of the total number of active registered investment
companies, 203 are small entities. There are also 762 Unit
[[Page 29229]]
Investment Trusts (``UITs''), about 12 of which are small entities,
as the term is defined by the Investment Company Act.\37\ The
Commission further estimates that approximately 1,500 out of 8,100
SEC-registered investment advisers are small entities, as the term
is defined by the Advisers Act.\38\
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\37\ 17 CFR 270.0-10.
\38\ 17 CFR 275.0-7.
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All investment companies registered with the Commission
(including both management investment companies and UITs) are
subject to the recordkeeping requirements of rule 31a-2, and all
registered advisers are subject to the recordkeeping requirements of
rule 204-2. Electronic storage remains optional with the adoption of
these amendments. Therefore, the amended rules will impact only
those small funds and small advisers that choose to store required
records electronically.
Despite the universal applicability of the rule changes on all
funds and advisers that store their records on electronic storage
media, the resulting economic impact of the amendments on small
entities will not be significant. As funds and advisers are not
required to store required records electronically, we anticipate
that only those entities, small or otherwise, that foresee a
financial or organizational benefit attaching to electronic storage,
will exercise the expanded storage options found in the amendments
to rules 31a-2 and 204-2. Accordingly, the amendments will not have
a significant economic impact on a substantial number of small
entities.
Dated: May 22, 2001.
Laura S. Unger,
Acting Chairman.
[FR Doc. 01-13526 Filed 5-29-01; 8:45 am]
BILLING CODE 8010-01-U