[Federal Register Volume 68, Number 61 (Monday, March 31, 2003)]
[Notices]
[Pages 15488-15490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7617]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47570; File No. S7-26-98]
RIN 3235-AH04


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

AGENCY: Securities and Exchange Commission.

ACTION: Notice of OMB approval of collections of information.

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SUMMARY: The Securities and Exchange Commission adopted amendments to 
Rules 17a-3 and 17a-4 (17 CFR 240.17a-3 and 240.17a-4) under the 
Securities Exchange Act of 1934 (17 U.S.C. 78, et seq.) on October 26, 
2001. The amendments clarify and expand recordkeeping requirements with 
respect to purchase and sale documents, customer records, associated 
person records, customer complaints, and certain other matters, and 
require broker-dealers to maintain or promptly produce certain records 
at each office to which those records relate. Certain provisions of 
these amendments contain ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act (44 U.S.C. 3501 et 
seq.), and the Commission submitted the proposed collections of 
information to the Office of Management and Budget (``OMB'') for 
review. OMB has approved the collection of information requirements 
contained in the amendments to the Books and Records Rules.

DATES: The effective date of the amendments to Exchange Act Rules 17a-3 
and 17a-4 is May 2, 2003.

FOR FURTHER INFORMATION CONTACT: Bonnie L. Gauch, Attorney, at (202) 
942-0765, in the Division of Market Regulation, Securities and Exchange 
Commission, 450 5th Street, NW., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: 

I. Amendments to Rules 17a-3 and 17a-4

    Rules 17a-3 and 17a-4\1\ under the Securities Exchange Act of 
1934\2\ (the ``Exchange Act'')(hereinafter the ``Books and Records 
Rules''), specify minimum requirements with respect to the records that 
broker-dealers must make, and how long those records and other 
documents relating to a broker-dealer's business must be kept. The 
Securities and Exchange Commission (the ``Commission'') amended the 
Books and Records Rules on October 26, 2001.\3\ The amendments to Rule 
17a-3 included revisions to the information that must be recorded on 
order tickets, and new requirements to: create certain records relating 
to associated persons; collect certain account record information and 
verify that information with customers periodically; create a record of 
customer complaints; create a record indicating compliance with 
applicable advertising rules; and create records identifying persons 
responsible for establishing procedures and persons able to explain the 
broker-dealer's records to a regulator. The amendments to Rule 17a-4 
require that a broker-dealer: maintain a record of advertisements and 
other ``communications with the public;'' clarify the definitions of 
organizational documents; and set recordkeeping requirements for new 
records required to be created pursuant to the

[[Page 15489]]

amendments to 17a-3, certain exception reports and special regulatory 
reports, and written compliance, supervisory and procedure manuals. 
Finally, the amendments to Rules 17a-3 and 17a-4 also set forth, (i) 
the definition of ``office,'' (ii) what records must be created as to 
each office, and (iii) what records must be maintained at each office.
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    \1\ 17 CFR 240.17a-3 and 240.17a-4.
    \2\ 17 U.S.C. 78, et al.
    \3\ Securities Exchange Act Release No. 44992, 66 FR 55818 (Nov. 
2, 2001) (the ``Adopting Release'').
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II. Collection of Information Requirements

    As explained in the Adopting Release, certain provisions of the 
amendments to the Books and Records Rules contain ``collection of 
information'' requirements \4\ within the meaning of the Paperwork 
Reduction Act of 1995.\5\ In the Adopting Release, the Commission 
estimated the burden hours for these collection of information 
requirements and solicited comments on the collection of information 
requirements and the burden estimate. The Commission submitted the 
proposed collection of information requirements to OMB for review as 
required pursuant to 44 U.S.C. 3507 and 5 CFR 1320.11. The titles for 
the collections of information are: (1) ``Rule 17a-3; Records to be 
Made by Certain Exchange Members, Brokers and Dealers;'' and (2) ``Rule 
17a-4; Records to be Preserved by Certain Exchange Members, Brokers and 
Dealers.'' The Commission did not receive any comments on the 
collection of information requirements of the amendments to the Books 
and Records Rules.
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    \4\ 66 FR 55818, at 55834 through 55837 (Nov. 2, 2001).
    \5\ 44 U.S.C. 3501 et seq.
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    The purpose of requiring that broker-dealers create and maintain 
the records specified in the amendments to the Books and Records Rules 
is to enhance the ability of regulators to protect investors. These 
records and the information contained therein will be used by examiners 
and other representatives of the Commission, State \6\ securities 
regulatory authorities, and the self-regulatory organizations 
(``SROs'') to determine whether broker-dealers are in compliance with 
the Commission's antifraud and anti-manipulation rules, financial 
responsibility program, and other Commission, SRO, and State laws, 
rules, and regulations.
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    \6\ 15 U.S.C. 78c(a)(16).
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A. Respondents

    As of the end of 2000, broker-dealers reported that they maintained 
a total of approximately 97,600,000 customer accounts. The Commission 
estimates that the total number of accounts that would need to be 
contacted for updating is approximately 70,500,000. Approximately 70 of 
the 7,217 active, registered broker-dealers \7\ maintain over 100,000 
accounts, and the remaining broker-dealers (7,147) maintain less than 
100,000 accounts each. Of the approximately 70,500,000 accounts that 
may be affected by these Adopted Amendments to Rule 17a-3, 
approximately 68,385,000 (or 97%) are maintained at these large broker-
dealers, and 2,115,000 (or 3%) are maintained at broker-dealers with 
fewer than 100,000 accounts each.
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    \7\ Of approximately 7,739 broker-dealers registered with the 
Commission, approximately 341 are not yet active because their 
registration is pending SRO approval and approximately 181 are 
inactive because they have ceased doing a securities business and 
have filed a Form BDW with the Commission. Of these 7,217 active, 
registered broker-dealers, three are registered OTC Derivatives 
Dealers. OTC Derivatives Dealers are a special class of broker-
dealers that limit their business to dealer activities in eligible 
over-the-counter derivative instruments and that meet certain 
financial responsibility and other requirements.
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B. Total Annual Reporting and Recordkeeping Burden of Amendments to 
Rule 17a-3

    New paragraph (a)(17) of Rule 17a-3 requires that broker-dealers 
collect certain account information for each account, and send account 
information to customers for verification within 30 days of account 
opening and at least every 36 months thereafter. This new paragraph is 
designed to: (1) Assure that broker-dealers have customer account 
information to provide to regulators which enable the regulators to 
review for compliance with suitability rules, and (2) reduce the number 
of misunderstandings between customers and broker-dealers regarding the 
customer's situation or investment objectives. The Commission estimates 
that the total annual burden of new paragraph (a)(17) of Rule 17a-3 
will be 1,283,786 hours.\8\
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    \8\ The Commission estimates that, as their processes are more 
automated, it will take large broker-dealers an average of 1\1/2\ 
additional minutes per account every three years, thus requiring 
large broker-dealers to spend an additional 569,875 hours per year 
(68,385,000 account records /3 years x 1.5 minutes /60 minutes) to 
send account information to customers. As small broker-dealers 
utilize processes that are more manual in nature, the Commission 
estimates that it will take small broker-dealers an average of 7 
minutes per account every three years, thus requiring small broker-
dealers to spend an additional 82,250 hours per year (2,115,000 
account records /3 years x 7 minutes /60 minutes) to send account 
records to customers. Thus, the total additional burden on the 
industry to send account records to customers is approximately 
652,125 hours per year.
    The Commission estimates that approximately 20% of the customers 
from whom information is requested will update their account 
records, resulting in 4,700,000 updated account records each year 
(70,500,000 /3 years x 20%). Thus, the Commission estimates that it 
would take, on average, 5 minutes for large broker-dealers to update 
each account and 10 minutes for small broker-dealers to update each 
account, resulting in an additional burden of approximately 403,417 
hours per year ((4,559,000 account records x 5 minutes /60 minutes) 
+ (141,000 account records x 10 minutes /60 minutes)).
    If a customer has provided the broker-dealer with updated 
account record information, under Paragraphs (a)(17)(B)(2) and (3) 
of Rule 17a-3 the broker-dealer must send a copy of the revised 
account record to the customer within 30 days after the broker-
dealer received notification of the change or, under (a)(17)(B)(3), 
the broker-dealer may send the notification with the next statement 
mailed to the customer. The Commission estimates that, in addition 
to the 70,500,000 updated account records discussed above, 
approximately 3,525,000 customers (5% of the 70,500,000 accounts for 
which firms will be required to make the account record) will 
initiate changes to their account records on a yearly basis, just as 
they do now, with no prompting from any account record mailing. The 
Commission estimates, as stated above, that it will take large 
broker-dealers 1\1/2\ minutes and smaller broker-dealers 7 minutes 
to send out account information to each customer who updated their 
account. The Commission estimates that 8,225,000 (4,700,000 + 
3,525,000) customers will update their account record, and that 
broker-dealers will spend an additional 228,244 hours each year 
((7,978,250 account records x 1.5 minutes /60 minutes) + (246,750 
account records x 7 minutes /60 minutes)) sending the updated 
account records to customers.
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    Amendments to paragraph (a)(12) and new paragraph (a)(19) of Rule 
17a-3 require broker-dealers to keep certain records regarding their 
associated persons. These amendments will allow securities regulators 
to identify where associated persons work, read various records which 
may identify the associated persons solely through the use of 
identification numbers, and quickly identify compensation trends and 
focus examinations. The Commission estimates that, on average, these 
amendments would require each broker-dealer to spend approximately 30 
minutes each year to ensure that it is in compliance with these 
amendments to Rule 17a-3, which would result in a total annual 
compliance burden of about 3,609 hours.\9\
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    \9\ (7,217 broker-dealers x 30 minutes) /60 minutes.
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    The amendments to Rule 17a-3 also require broker-dealers to make 
records: That indicate that they have either complied with or adopted 
procedures designed to establish compliance with applicable regulations 
of certain securities regulatory authorities,\10\ that list persons who 
can explain the information in the broker-dealer's records,\11\ and 
that list principals responsible for establishing compliance policies 
and procedures.\12\ These

[[Page 15490]]

requirements are designed to assist securities regulators in conducting 
efficient examinations. The Commission estimates, therefore, that on 
average each broker-dealer would spend 10 minutes each year to ensure 
compliance with these requirements, yielding a total additional burden 
of about 1,203 hours.\13\
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    \10\ 17 CFR 240.17a-3(a)(17)(iii) and 17 CFR 240.17a-3(a)(20).
    \11\ 17 CFR 240.17a-3(a)(21).
    \12\ 17 CFR 240.17a-3(a)(22).
    \13\ (7,217 broker-dealers x 10 minutes) /60 minutes.
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    Thus, the Commission estimates that the total annual burden of the 
amendments to Rule 17a-3 will be 1,288,598 hours. The Commission 
further estimates that broker-dealers would incur a one-time burden to 
update certain forms, to include additional information on the new 
account form and provide customers with an address as to where they 
should direct complaints, of 28,856 hours.\14\ Finally, based on 
comments received in response to the reproposing release,\15\ the 
Commission estimates that broker-dealers will incur $21.2 million in 
start-up costs for systems and equipment development, and up to $24.8 
million in annual costs for postage and systems development in order to 
comply with the amendments to Rule 17a-3. On January 30, 2002, OMB 
approved the collections of information contained in the amendments to 
rule 17a-3.
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    \14\ 7,217 total active registered broker-dealers x 4 hours 
each. This includes the time it would take for a broker-dealer to 
draft the additional language and incorporate it into its present 
forms.
    \15\ Exchange Act Release No. 40518 (Oct. 2, 1998), 63 FR 54404 
(Oct. 9, 1998).
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C. Total Annual Reporting and Recordkeeping Burden of Amendments to 
Rule 17a-4

    The amendments to Rule 17a-4 require that certain information be 
kept for prescribed periods of time. The Commission estimates that 
compliance with the amendments for Rule 17a-4 would require an 
additional 28,868 hours each year.\16\ On April 18, 2002, OMB approved 
the collections of information contained in the amendments to Rule 17a-
4.
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    \16\ The Commission estimates that, on average, each broker-
dealer (7,217) would spend four hours each year to ensure that it is 
in compliance with the amendments to Rule 17a-4 and to produce 
required records promptly at an office when so required.
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III. Additional Information

    The amendments to Rules 17a-3 and 17a-4 (OMB Control Nos. 3235-0033 
and 3235-0279, respectively) were adopted pursuant to the authority 
conferred on the Commission by the Exchange Act, including sections 
17(a) and 23(a). 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 control number. We are providing this notice 
to inform the public that the Commission has received OMB approval and 
OMB has issued a control number for this collection.
    It is mandatory for all brokers and dealers to create records as 
required pursuant to Rules 17a-3 and to retain those and other 
specified records as set forth in Rule 17a-4.
    The records required by the amendments to the Books and Records 
Rules are not filed with the Commission, but are available to the 
examination staffs of the Commission, State regulatory authorities, and 
the SROs. Subject to the provisions of the Freedom of Information Act, 
5 U.S.C. 552 (``FOIA'') and the Commission's rules thereunder (17 CFR 
200.80(b)(4)(iii)), the Commission generally does not publish or make 
available information contained in reports, summaries, analyses, 
letters, or memoranda arising out of, in anticipation of, or in 
connection with an examination or inspection of the books and records 
of any person or any other investigation.

    Dated: March 26, 2003.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-7617 Filed 3-28-03; 8:45 am]
BILLING CODE 8010-01-P