[Federal Register Volume 66, Number 105 (Thursday, May 31, 2001)]
[Rules and Regulations]
[Pages 29471-29475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13586]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR 257

[Release No. 35-27404; File No. S7-07-01]
RIN 3235-AI12


Electronic Recordkeeping by Public Utility Holding Companies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting amendments 
to revise rules under the Public Utility Holding Company Act of 1935 
regarding recordkeeping requirements for registered public utility 
holding companies and their mutual or subsidiary service companies. The 
current rules were most recently updated in 1984 and allow regulated 
companies to preserve records using storage media such as paper, 
magnetic tape, and microfilm. The amendments will expand the approved 
recordkeeping methods to allow the use of modern information technology 
resources. The Commission is adopting these rule amendments in response 
to the passage 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: Catherine A. Fisher, Assistant 
Director, Robert P. Wason, Chief Financial Analyst, or Victoria J. 
Adraktas, Attorney-Advisor, Office of Public Utility Regulation, (202) 
942-0545, Division of Investment Management, Securities and Exchange 
Commission, 450 5th Street, NW., Washington, DC 20549-0503.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') today is adopting amendments to rule 1 [17 CFR 
257.1],\1\ regarding the preservation and destruction of records of 
registered public utility holding companies and of mutual and 
subsidiary service companies, under the Public Utility Holding Company 
Act of 1935 [15 U.S.C. 79] (``Holding Company Act'').
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    \1\ Unless otherwise noted, all references to rule 1 will be to 
17 CFR 257.1.
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Executive Summary

    Federal law requires registered public utility holding companies 
and their mutual or subsidiary service companies to make and keep books 
and records.\2\ The recordkeeping requirements are a key part of the 
Commission's public utility holding company regulatory program because 
they allow us to monitor the operations of companies and to evaluate 
their compliance with federal law. The recordkeeping rule currently 
permits records to be preserved and maintained using storage media such 
as paper, magnetic tape, and microfilm. In light of the advances in 
information technology since the rule was promulgated in 1984 and in 
particular the rapid changes in technology in recent years, we believe 
that we should revise the standards for permissible recordkeeping media 
to allow the use of current electronic recordkeeping and storage 
resources in

[[Page 29472]]

maintaining required records.\3\ Moreover, because the proposed 
amendments do not specify the use of any particular technologies, they 
allow for the adoption of new technologies in the future. Finally, we 
are also interpreting rule 1 to be the exclusive means by which 
companies can comply with the recordkeeping provisions of the 
Electronic Signatures in Global and National Commerce Act (``Electronic 
Signatures Act,'' ``Act,'' or ``ESIGN'').
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    \2\ ``Company'' or ``companies'' means a service company subject 
to 17 CFR 250.93, or a holding company subject to 17 CFR 250.26, 
which is not an electric utility company or a gas utility company, 
and any predecessor or inactive or dissolved associate company, the 
records of which are in the possession or control of such company.
    \3\ We recognize that the standards for electronic recordkeeping 
we are adopting for registered public utility holding companies are 
different from rules we have adopted for broker-dealers, which 
require brokerage records to be preserved in a non-rewritable, non-
erasable (the ``write-once, read many'' or ``WORM'') format. There 
are, however, significant differences between the industries. In 
addition, we have not experienced any significant problems with 
registered holding companies altering stored records. In light of 
these factors, the costs of requiring registered public utility 
holding companies to invest in new electronic recordkeeping 
technologies may not be justified.
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    Last year, Congress passed the Act to facilitate the use of 
electronic records and signatures in interstate and foreign 
commerce.\4\ Consistent with the purpose and goals of the Electronic 
Signatures Act, we are amending the Holding Company Act rules to expand 
the circumstances under which companies may keep their records on 
electronic storage media. We are also updating our recordkeeping rules 
and amending them for clarification. The amendments are designed to 
update rule 1 to reflect and accommodate companies' use of modern 
information technology resources to maintain and index records.
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    \4\ Electronic Signatures in Global and National Commerce Act, 
Pub. L. 106-229 (see Preamble).
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I. Discussion

A. Amendments to Rule 1

    The Commission is amending rule 1 to permit companies to keep their 
records in an electronic format. We also proposed to clarify the 
obligation of companies 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 rule 
1.\5\ We received six comment letters addressing the proposal.\6\ 
Commenters supported 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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    \5\ See Electronic Recordkeeping by Public Utility Holding 
Companies, Holding Company Act Release No. 25357 (Mar. 19, 2001) [66 
FR 16158 (Mar. 23, 2001)] (``Proposing Release'') at section I.B.
    \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. S7-07-01).
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    We are expanding the variety of formats that companies may use to 
maintain required records to include electronic and micrographic 
storage media. Under the revised rule 1, companies 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 directors of the company, and (iii) to 
ensure that electronic copies of non-electronic originals are complete, 
true, and legible.\7\
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    \7\ Rule 1. One commenter expressed concern that the restriction 
on access to records required to be maintained would restrict 
companies from allowing access to records by properly authorized 
employees. We note that ``authorized personnel'' in the text of the 
rule is intended to permit companies to allow access to required 
records to any person the company chooses to provide access. The 
objective of this restriction is to ensure that companies adequately 
safeguard records from unauthorized access.
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    We are also amending the rules to clarify the obligation of 
companies to provide copies of their records to Commission examiners. 
The amendments make clear that companies 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.\8\
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    \8\ Rule 1(e)(2).
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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.\9\ Some commenters were concerned that such an 
amendment could preclude companies from agreeing to a schedule of 
record production with the examination staff to produce certain 
documents immediately and other documents, that are not immediately 
accessible, on a delayed basis. We agree that such arrangements when 
entered into and performed in good faith by the examined entity can 
facilitate the examination process. While the ``promptly'' standard 
imposes no specific time limit, we expect that a company 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 companies could, and therefore will be 
required to, furnish records immediately or within a few hours of 
request.
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    \9\ See proposed rule 1(e)(2)(ii).
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    In addition, commenters raised concerns that the amendment requires 
companies to maintain duplicate copies of records. We wish to clarify 
that this requirement only applies to records stored on electronic or 
micrographic media. It is not a requirement for records kept in any 
other type of media. These duplicates may be maintained in any media 
form.

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.\10\ The Act allows us to interpret this 
provision pursuant to our authority under the Holding Company Act.\11\ 
Our interpretation of the Electronic Signatures Act must be consistent 
with the Act and not add to its requirements.\12\ 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.\13\ The Electronic Signatures Act 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.\14\
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    \10\ ESIGN section 101(d)(1).
    \11\ Under the Electronic Signatures Act, a federal regulatory 
agency (like the Commission) that is responsible for rulemaking 
under any other statute (such as the Public Utility Holding Company 
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).
    \12\ ESIGN section 104(b)(2)(A) and (B).
    \13\ ESIGN section 104(b)(2)(C).
    \14\ 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. ESIGN section 104(b)(3).

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[[Page 29473]]

    We interpret the Electronic Signatures Act with respect to the 
Holding Company Act to require companies to comply with the 
requirements of rule 1 when they keep required records on electronic 
storage media. Companies, therefore, can comply with the requirements 
of the Electronic Signatures Act only by complying with the 
requirements of amended rule 1. In the proposing release, we asked for 
comment on whether these interpretations were consistent with the 
Electronic Signatures Act's requirements.\15\ Commenters generally 
agreed that our interpretation of the Electronic Signatures Act was 
reasonable. As discussed below, our rules and interpretation satisfy 
all the requirements of the Electronic Signatures Act.
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    \15\ See Proposing Release, supra at note 5.
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1. Consistency With Electronic Signatures Act
    Rule 1 is consistent with the Electronic Signatures Act. The Act 
permits federally required records to be retained in an electronic 
format, and we are amending rule 1 to permit companies to maintain all 
required records electronically.
2. No Additional Requirements
    Rule 1 imposes no 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.\16\ The 
rule requires companies 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 companies' 
compliance with the Act's requirements.\17\
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    \16\ ESIGN section 101(d)(1).
    \17\ The rules' general requirements that companies 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 rule's requirements regarding indexing, and 
the obligation of companies to provide records to examiners and 
directors foster the accessibility of electronic records.
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3. Substantial Justification
    Our rule requires companies to maintain a wide variety of documents 
that we use to verify compliance with the Holding Company Act. The 
value of these records is entirely dependent on their integrity and 
accessibility. If companies are not required to protect their records 
from inadvertent or intentional alteration or destruction \18\ and 
provide examiners with meaningful access to all required records,\19\ 
then the records become unreliable, and the examination process moot. 
Therefore, we find that our interpretation of the Electronic Signatures 
Act, that companies must comply with rule 1, is substantially 
justified.
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    \18\ See rule 1(e)(2)(ii) (requiring procedures to ensure the 
quality of electronic copies of non-electronic records); rule 
1(e)(2)(iii) (requiring that companies separately store duplicates 
of electronic records); rule 1(e)(3)(ii) (requiring companies to 
limit access to electronic records); and rule 1(e)(3)(i) (requiring 
companies to adopt procedures to maintain and preserve electronic 
records, so as to reasonably safeguard them from loss, alteration, 
or destruction).
    \19\ See rule 1(e)(2)(ii)(A) (requiring companies 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); rule 1(e)(2)(i) (requiring 
companies to arrange and index their electronic and micrographic 
records in a way that permits easy location and retrieval); and rule 
1(e)(2)(ii)(C) (requiring companies to provide means to access, 
view, and print electronic records).
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4. Requirements Equivalent to Requirements for Other Record Formats
    Rule 1 subjects electronic records to conditions that are 
substantially equivalent to conditions under which companies 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 rule 1 stipulates that all records, regardless of 
format, must comply with certain conditions, other requirements, which 
would be superfluous for paper records, apply only to electronic and 
micrographic records.\20\
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    \20\ For example, the requirement that companies 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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    Companies that maintain records in an electronic format must comply 
with several requirements that have no micrographic or paper 
equivalent. For example, companies must have procedures to reasonably 
protect electronic records from loss, alteration, or destruction,\21\ 
to limit access to electronic records,\22\ and to reasonably ensure 
that electronic records that are created from hard copy are complete, 
true, and legible.\23\ 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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    \21\ Rule 1(e)(3)(i).
    \22\ Rule 1(e)(3)(ii).
    \23\ Rule 1(e)(3)(iii).
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5. No Unreasonable Costs on Acceptance and Use of Electronic Records
    Rule 1 provides significant flexibility for companies subject to 
the Act's recordkeeping requirements. In particular, it permits the use 
of any electronic storage media. We conclude that rule 1 will not 
impose unreasonable costs on the acceptance and use of electronic 
recordkeeping.
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 companies to implement or apply a 
specific technology or technical specification to their storage 
system.\24\ Rule 1 has been deliberately crafted to be technologically 
neutral, leaving companies free to adopt any combination of 
technological and manual protocols that meet the requirements of the 
rule. In any event, even if the rule was interpreted to favor a 
specific technology or technical specification, it would nonetheless be 
a valid exercise of our interpretive authority, as it serves the 
important governmental objective of assisting us to oversee company 
compliance with the Holding Company Act, and are substantially related 
to the achievement of that objective.\25\ The continuing accessibility 
and integrity of company records are critical to the fulfillment of our 
oversight responsibilities.
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    \24\ ESIGN section 104(b)(3)(A).
    \25\ ESIGN section 104(b)(3)(A).
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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

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agency can show good cause for shortening this interim period.\26\ The 
Electronic Signatures Act becomes effective on June 1, 2001, at which 
point companies may opt to store required records electronically, so 
long as the records are accessible and accurate.\27\ 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, companies 
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 rule 1. We find that there is good cause for these amendments to 
become effective on May 31, 2001.
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    \26\ 5 U.S.C. 553(d)(3).
    \27\ 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.'' \28\ The amendments to rule 1 
allow companies to store all of their required records electronically, 
remove restrictions on the type of electronic storage media that may be 
used, and effectively eliminate most of the conditions previously 
placed on the ability of companies to convert paper records to an 
electronic format.
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    \28\ 5 U.S.C. 553(d)(1).
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II. Cost-Benefit Analysis

    In proposing the amendments to rule 1, 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.\29\
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    \29\ Commenters' submissions discussed the potential costs of 
keeping duplicates of all records required to be maintained 
regardless of their original format, which, as we clarify above, is 
not the intent of the amendment. In addition, commenters discussed 
the cost of the proposing release's inclusion of a 24 hour turn 
around period for document requests, which has been dropped from the 
amendment.
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    We believe the amendments will impose few if any costs on companies 
that are not already required. As described above, the amended rules 
allow companies to choose to maintain required records on electronic 
storage media. Electronic storage remains optional with the adoption of 
these amendments. We assume that companies will not select the 
electronic storage option provided for in the amended rule unless doing 
so is less expensive (or otherwise more efficient and, therefore, 
supported by business considerations). It remains our belief that the 
amended rule will allow companies 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 companies to provide records to our examination staff and 
minor technical amendments to conform the language of rule 1 to the 
recordkeeping rules under the Securities Exchange Act of 1934. We 
anticipate few if any costs to companies as a result of these 
amendments.

III. Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act 
[U.S.C. 605(b)], the Acting Chairman of the Commission certified that 
the amendments will not have a significant economic impact on a 
substantial number of small entities. The certificate was published in 
the Federal Register with the proposal. We received no comments on the 
certificate.

IV. Paperwork Reduction Act

    The amendments do not require a new collection of information. They 
affect only the manner in which, pursuant to rule 1, registrants can 
store the information that must be collected under rule 26 [17 CFR 
250.26]. In connection with rule 26, the Commission previously 
submitted to the Office of Management and Budget, pursuant to the 
Paperwork Reduction Act, a request for approval and received an OMB 
control number for the rule, OMB Control No. 3235-0183.

V. Statutory Authority

    The Commission is adopting amendments to rule 1 of the Holding 
Company Act pursuant to authority set forth in sections 15 and 20(a) of 
the Holding Company Act [15 U.S.C. 79(o) and 15 U.S.C. 79(t)].

List of Subjects in 17 CFR Part 257

    Holding companies, Reporting and recordkeeping requirements.

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 257--PRESERVATION AND DESTRUCTION OF RECORDS OF REGISTERED 
PUBLIC UTILITY HOLDING COMPANIES AND OF MUTUAL AND SUBSIDIARY 
SERVICE COMPANIES

    1. The authority citation for Part 257 is added to read as follows:

    Authority: 15 U.S.C. 79(o) and 79(t), unless otherwise noted.


    2. The authority citations following Secs. 257.1 and 257.2 are 
removed.

    3. Section 257.1 is amended by:
    a. Removing paragraphs (e) through (h);
    b. Adding new paragraph (e); and
    c. Redesignating paragraphs (i) through (m), as paragraphs (f) 
through (j).
    The addition reads as follows:


Sec. 257.1  General instructions.

* * * * *
    (e)(1) Micrographic and electronic storage permitted. The records 
required to be maintained and preserved under Sec. 250.26 of this 
chapter may be maintained and preserved for the required time by, or on 
behalf of, a company on, among other formats:
    (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 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 a record that is stored on 
micrographic or electronic storage media.
    (3) Special requirements for electronic storage media. In the case 
of records on electronic storage media, the 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

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them from loss, alteration, or destruction;
    (ii) To limit access to the records to properly authorized 
personnel, the directors of the 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 and 
true, and legible when retrieved.
* * * * *

    Dated: May 24, 2001.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13586 Filed 5-30-01; 8:45 am]
BILLING CODE 8010-01-P