[Federal Register Volume 68, Number 91 (Monday, May 12, 2003)]
[Rules and Regulations]
[Pages 25281-25283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11727]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 241

[Release No. 34-47806]


Electronic Storage of Broker-Dealer Records

AGENCY: The Securities and Exchange Commission.

ACTION: Interpretation.

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SUMMARY: The Securities and Exchange Commission is publishing its views 
on the operation of its rule permitting broker-dealers to store 
required records in electronic form. Under the rule, electronic records 
must be preserved exclusively in a non-rewriteable and non-erasable 
format. This interpretation clarifies that broker-dealers may employ a 
storage system that prevents alteration or erasure of the records for 
their required retention period.

EFFECTIVE DATE: May 12, 2003.

FOR FURTHER INFORMATION: Michael A. Macchiaroli, Associate Director, 
202/942-0131; Thomas K. McGowan, Assistant Director, 202/942-4886; or 
Randall W. Roy, Special Counsel, 202/942-0798, Division of Market 
Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is publishing guidance with respect to paragraph 
(f)(2)(ii)(A) of Rule 17a-4, which requires broker-dealers maintaining 
records electronically to use a digital storage medium or system that 
``[p]reserve[s]

[[Page 25282]]

the records exclusively in a non-rewriteable, non-erasable format.'' 
\1\
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    \1\ 17 CFR 240.17a-4(f)(2)(ii)(A).
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I. Introduction

    Broker-dealers are allowed to preserve records on ``electronic 
storage media.'' \2\ Rule 17a-4 defines that term as ``any digital 
storage medium or system.'' \3\ Paragraph (f)(2)(ii)(A) of Rule 17a-4 
requires that the electronic storage media preserve the records 
exclusively in a non-rewriteable and non-erasable format.\4\ The staff 
has received oral requests from broker-dealers for guidance on whether 
this requirement limits them to using optical platters, CD-ROMs, DVDs 
or similar physical mediums to achieve this result.
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    \2\ 17 CFR 240.17a-4(f).
    \3\ 17 CFR 240.17a-4(f)(1)(ii).
    \4\ Under the rule, the electronic storage media also must 
verify automatically the quality and accuracy of the storage media 
recording process; serialize the original and, if applicable, 
duplicate units of storage media, and time-date for the required 
period of retention the information placed on such electronic 
storage media; and have the capacity to readily download indexes and 
records preserved on the electronic storage media to any medium 
acceptable under paragraph (f) as required by the Commission or the 
self-regulatory organizations of which the member, broker, or dealer 
is a member.
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II. Background

    Section 17(a)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') authorizes the Commission to issue rules requiring broker-
dealers to make and keep for prescribed periods, and furnish copies 
thereof, such records as necessary or appropriate in the public 
interest, for the protection of investors or otherwise in furtherance 
of the purposes of the Exchange Act.\5\ Pursuant to this authority, the 
Commission adopted Rules 17a-3 and 17a-4. Rule 17a-3 requires broker-
dealers to make certain records, including trade blotters, asset and 
liability ledgers, income ledgers, customer account ledgers, securities 
records, order tickets, trade confirmations, trial balances, and 
various employment related documents.\6\ Rule 17a-4 specifies the 
manner in which the records created in accordance with Rule 17a-3, and 
certain other records produced by broker-dealers, must be 
maintained.\7\ It also specifies the required retention periods for 
these records.\8\ For example, many of the records, including 
communications that relate to the broker-dealer's business as such, 
must be retained for three years; certain other records must be 
retained for longer periods.\9\
    In combination, Rules 17a-3 and 17a-4 require broker-dealers to 
create, and preserve in an easily accessible manner, a comprehensive 
record of each securities transaction they effect and of their 
securities business in general. These requirements are integral to the 
Commission's investor protection function because the preserved records 
are the primary means of monitoring compliance with applicable 
securities laws, including antifraud provisions and financial 
responsibility standards. Recent events involving the deletion of 
emails by broker-dealers have affirmed the need to have measures in 
place to protect record integrity.
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    \5\ 15 U.S.C. 78q(a)(1).
    \6\ 17 CFR 240.17a-3.
    \7\ 17 CFR 240.17a-4.
    \8\ Id.
    \9\ See e.g. 17 CFR 240.17a-4(a)-(e).
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    In 1997, the Commission amended paragraph (f) of Rule 17a-4 to 
allow broker-dealers to store records electronically.\10\ The rule, by 
its terms, does not limit broker-dealers to using a particular type of 
technology such as optical disk. Instead, it allows them to employ any 
electronic storage media, subject to certain requirements, including 
that the media ``[p]reserve the records exclusively in a non-
rewriteable, non-erasable format.''\11\ This requirement does not mean 
that the records must be preserved indefinitely. Like paper and 
microfilm, electronic records need only be maintained for the relevant 
retention period specified in the rule.
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    \10\ Exchange Act Release No. 38245 (Feb. 5, 1997), 62 FR 6469 
(Feb. 12, 1997) (``Adopting Release'').
    \11\ 17 CFR 240.17a-4(f)(2)(ii)(A).
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III. Storing Records in a Non-Rewriteable, Non-Erasable Manner for a 
Specified Period

    Broker-dealers and vendors of electronic record storage systems 
have asked whether broker-dealers may use, consistent with Rule 17a-
4(f), systems they describe as storing records in a manner that 
prevents the records from being overwritten, erased or otherwise 
altered without relying solely on the system's hardware features. 
Specifically, these systems use integrated hardware and software codes 
that are intrinsic to the system to prevent the overwriting, erasure or 
alteration of the records. Thus, while the hardware storage medium used 
by these systems (e.g., magnetic disk) is inherently rewriteable, the 
integrated codes intrinsic to the system prevent anyone from 
overwriting the records. Moreover, the codes used by these systems 
cannot be turned off to remove this feature. Thus, broker-dealers and 
venders claim these systems achieve the non-rewriteable and non-
erasable requirement without relying solely on the systems' hardware 
features, such as is the case with optical platters, CD-ROMs and DVDs 
where digital information is permanently written onto the medium and, 
consequently, can never be changed or deleted.
    One method using such a system stores a specified expiry or 
retention period with each record or file system. The system blocks 
record deletion or alteration by any manner of intervention until the 
expiry is reached or the retention period has lapsed. At expiry, or 
after the retention period, the records may be deleted from the system, 
thereby freeing space for reuse.

IV. Discussion

    It is the view of the Commission that Rule 17a-4 does not require 
that a particular type of technology or method be used to achieve the 
non-rewriteable and non-erasable requirement in paragraph 
(f)(2)(ii)(A). Specifically, when we adopted Rule 17a-4(f), we stated:

    The Commission is adopting a rule today, which, instead of 
specifying the type of storage technology that may be used, sets 
forth standards that the electronic storage media must satisfy to be 
considered an acceptable method of storage under Rule 17a-4.\12\

    \12\ Adopting Release, 62 FR at 6470.
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    A broker-dealer would not violate the requirement in paragraph 
(f)(2)(ii)(A) of the rule if it used an electronic storage system that 
prevents the overwriting, erasing or otherwise altering of a record 
during its required retention period through the use of integrated 
hardware and software control codes. Rule 17a-4 requires broker-dealers 
to retain records for specified lengths of time. Therefore, it follows 
that the non-erasable and non-rewriteable aspect of their storage need 
not continue beyond that period.
    The Commission's interpretation does not include storage systems 
that only mitigate the risk a record will be overwritten or erased. 
Such systems--which may use software applications to protect electronic 
records, such as authentication and approval policies, passwords or 
other extrinsic security controls--do not maintain the records in a 
manner that is non-rewriteable and non-erasable. The external measures 
used by these other systems do not prevent a record from being changed 
or deleted. For example, they might limit access to records through the 
use of passwords. Additionally, they might create a ``finger print'' of 
the record based on its content. If the record is changed, the 
fingerprint will indicate that it was altered (but the original

[[Page 25283]]

record would not be preserved). The ability to overwrite or erase 
records stored on these systems makes them non-compliant with Rule 17a-
4(f).
    Any system used by a broker-dealer must comply with every 
requirement in paragraph (f) of the rule. Among other requirements in 
paragraph (f), the broker-dealer would need to have in place an audit 
system providing for accountability regarding the inputting of records 
into the storage system.\13\ The audit procedures for a storage system 
using integrated software and hardware codes to comply with paragraph 
(f) would need to provide accountability regarding the length of time 
records are stored in a non-rewriteable and non-erasable manner. This 
should include senior management level approval of how the system is 
configured to store records for their required retention periods in a 
non-rewriteable and non-erasable manner. It would be prudent to 
configure such a storage system so that records input without an expiry 
or a retention period, by default, would be assigned a permanent 
retention period. This would help to ensure the records are maintained 
in accordance with the retention periods specified in Rule 17a-4 or 
other applicable Commission rules.
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    \13\ 17 CFR 240.17a-4(f)(3)(v).
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    Moreover, there may be circumstances (such as receipt of a 
subpoena) where a broker-dealer is required to maintain records beyond 
the retention periods specified in Rule 17a-4 or other applicable 
Commission rules. Accordingly, a broker-dealer must take appropriate 
steps to ensure that records are not deleted during periods when the 
regulatory retention period has lapsed but other legal requirements 
mandate that the records continue to be maintained, and the broker-
dealer's storage system must allow records to be retained beyond the 
retentions periods specified in Commission rules.

V. Conclusion

    For the foregoing reasons, the Commission finds this interpretation 
to be consistent with section 17 of the Exchange Act and Rule 17a-4 
thereunder.

List of Subjects in 17 CFR Part 241

    Securities.

Amendment to the Code of Federal Regulations

0
For the reasons set out in the preamble, the Commission is amending 
title 17, chapter II of the Code of Federal Regulations as set forth 
below:

PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES 
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
Part 241 is amended by adding Release No. 34-47806 and the release date 
of May 7, 2003 to the list of interpretive releases.

    By the Commission.

    Dated: May 7, 2003.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11727 Filed 5-9-03; 8:45 am]
BILLING CODE 8010-01-P