[Federal Register Volume 68, Number 119 (Friday, June 20, 2003)]
[Proposed Rules]
[Pages 36951-36955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15648]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-48036; File No. S7-13-03]
RIN 3235-AI88


Recordkeeping Requirements for Registered Transfer Agents

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The U.S. Securities and Exchange Commission is proposing for 
public comment two amendments to its rule concerning recordkeeping 
requirements for registered transfer agents. The amendments would add 
language to make clear that registered transfer agents may use 
electronic, microfilm, and microfiche media as a substitute for hard 
copy records, including cancelled stock certificates, for purposes of 
complying with the Commission's transfer agent recordkeeping rules and 
that a third party on behalf of a registered transfer agent may place 
into escrow the required software information.

DATES: Comments should be received on or before July 21, 2003.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by hard copy or e-mail, but not by 
both methods. Comments sent by hard copy should be submitted in 
triplicate to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 5th Street, NW., Washington, DC 20549-0609. Comments 
may also be submitted electronically at the following e-mail address: 
[email protected]. All comment letters should refer to File No. S7-
13-03. This file number should be included on the subject line if e-
mail is used. Comment letters will be available for public inspection 
and copying in the Commission's Public Reference Room, 450 5th Street, 
NW., Washington, DC 20549. Electronically submitted comment letters 
also will be posted on the Commission's web site (http://www.sec.gov).\1\
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    \1\ We do not edit personal, identifying information such as 
names or e-mail addresses from electronic submissions. Submit only 
information you wish to make publicly available.

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

SUPPLEMENTARY INFORMATION: The U.S. Securities and Exchange Commission 
(``Commission'') is requesting public comment on a proposed amendment 
to Rule 17Ad-7(f) under the Securities Exchange Act of 1934 (``Act'') 
(17 CFR 240.17Ad-7(f)).

I. Discussion of Amendments to Rule 17Ad-7(f)

    On April 27, 2001, the Commission adopted amendments \2\ to its 
transfer agent record retention rule, Rule 17Ad-7,\3\ that (1) allowed 
registered transfer

[[Page 36952]]

agents to use electronic storage media \4\ to maintain records that 
they are required by Rule 17Ad-6 to retain and (2) modified the 
requirements for using micrographic media \5\ as a method of record 
storage. Specifically, Rule 17Ad-7(f), as amended, requires transfer 
agents that use electronic or micrographic media to store records to:
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    \2\ Securities Exchange Act Release No. 44227 (Apr. 27, 2001), 
66 FR 21648 (May 1, 2001) (``Adopting Release'').
    \3\ 17 CFR 240.17Ad-7(f). All references to Rules 17Ad-6 and 
17Ad-7 or to any paragraph of those rules will be to 17 CFR 
240.17Ad-6 and 240.17Ad-7, respectively.
    \4\ Under Rule 17Ad-7(f)(1)(ii), the term ``electronic storage 
media'' refers to any digital storage medium or system.
    \5\ Under Rule 17Ad-7(f)(1)(i), the term ``micrographic media'' 
refers to microfilm or microfiche or any similar medium.

    [sbull] Use electronic or micrographic storage mechanisms that are 
designed to ensure the accessibility, security, and integrity of the 
records, detect attempts to alter or remove the records, and provide 
means to recover altered, damaged, or lost records;
    [sbull] Create an index of the records that are electronically or 
micrographically stored and store the index with the underlying 
records;
    [sbull] Keep a duplicate of all records and indexes that are stored 
using electronic or micrographic storage media;
    [sbull] Be able to promptly download electronically or 
micrographically stored records to an alternate medium such as paper, 
microfilm, or microfiche; and
    [sbull] Keep in escrow an updated copy of the software or other 
information that is necessary to access and download electronically 
stored records.

    Those amendments to Rule 17Ad-7 did not require transfer agents 
that wish to continue to maintain their records in hard copy format to 
maintain their records any differently from the way they stored them 
prior to the rule change. The amendments apply only to those transfer 
agents that choose to retain their records electronically or 
micrographically. The purpose of those amendments was to increase the 
flexibility and efficiency of transfer agent recordkeeping while 
maintaining necessary controls over accuracy, integrity, and access to 
transfer agent records.
    Notwithstanding the Commission's intent in adopting the amendments 
to Rule 17Ad-7, there appears to be some uncertainty whether (1) Rule 
17Ad-7 allows transfer agents to rely exclusively on electronic or 
micrographic records for purposes of the Commission's transfer agent 
recordkeeping rules and to no longer maintain hard copy records, 
including cancelled certificates and (2) a third party on behalf of the 
transfer agent may deposit with an independent escrow agent a copy of 
all the documentation required under Rule 17Ad-7(f)(5)(ii) for the 
purpose of complying with Rule 17Ad-7(f)(5)(ii).\6\ In order to 
eliminate this uncertainty, we propose to amend Rule 17Ad-7(f).
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    \6\ Under Rule 17Ad-7(f)(5)(ii), transfer agents that choose to 
use electronic storage media must, among other things, ``place in 
escrow with an independent third party and keep current a copy of 
the physical and logical format of the electronic storage or 
micrographic media, the field format of all different information 
types written on the electronic storage media and source code and 
the appropriate documentation and information necessary to access 
records and indexes. * * *''
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II. Proposed Rule Language

    We are proposing to amend paragraph (f) of Rule 17Ad-7 to clarify 
that records, including cancelled securities certificates, stored 
electronically or micrographically in accordance with the provisions of 
Rule 17Ad-7 may serve as a substitute for hard copy records required to 
be maintained pursuant to Rule 17Ad-6. Accordingly, this 
``substitution'' provision would allow, but would not mandate, the 
destruction of hard copy records, including securities certificates, 
after electronic or micrographic records have been created in 
conformity with Rule 17Ad-7(f).\7\
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    \7\ The Commission has proposed new Rule 17Ad-19 that would 
require transfer agents to establish and implement written 
procedures for the cancellation, storage, transportation, and 
destruction of securities certificates. Securities Exchange Act 
Release No. 43401 (Oct. 2, 2000); 65 FR 59766 (Oct. 6, 2000). In 
addition, while Rule 17Ad-7 would permit the destruction of paper 
records for purposes of our recordkeeping requirements, a transfer 
agent may have an obligation to preserve such paper records under 
other applicable law or rules.
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    In addition, we are proposing to amend paragraph (f)(5)(ii) of Rule 
17Ad-7 to clarify that a transfer agent may fulfill its software escrow 
obligation by having a third party deposit with an independent escrow 
agent a copy of all the documentation required under Rule 17Ad-
7(f)(5)(ii) on behalf of the transfer agent.\8\ A transfer agent using 
a third party vendor to maintain its records would be allowed under the 
proposed amendment to have the third party vendor place in escrow a 
copy of the vendor's proprietary source code on behalf of the transfer 
agent using the vendor's services. This proposed amendment would also 
allow a third party vendor maintaining the records of more than one 
transfer agent to place in escrow one copy of the vendor's proprietary 
source code for all the transfer agents for which it acts.\9\
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    \8\ One situation that calls for this clarifying amendment is 
when a software provider licenses its electronic records storage 
system software to a transfer agent but does not grant a license for 
the source code. As a result, the transfer agent does not have 
access to the source code.
    \9\ Rule 17Ad-7(f)(5)(ii) requires the third party to file a 
written undertaking with the Commission stating that it agrees to 
furnish the Commission with the appropriate documentation and 
information necessary to access the records and indexes promptly 
upon request.
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III. Request for Comments

    We request comment from all interested persons on whether the 
proposed rule amendments accomplish our goals of clarifying that (1) 
registered transfer agents may use electronic, microfilm, and 
microfiche media as a substitute for hard copy records for purposes of 
complying with the Commission's transfer agent recordkeeping rules and 
(2) a third party may place into escrow the required software 
information on behalf of a registered transfer agent.
    We also invite commenters to provide views and data relating to the 
costs and benefits associated with the proposed changes discussed 
above. If possible, commenters should provide empirical data to support 
their views. Comments should be submitted by July 21, 2003.

IV. Paperwork Reduction Act

    The proposed amendments to Rule 17Ad-7(f) do not contain new 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 ``(PRA'').\10\ Accordingly, the PRA is 
not applicable to the proposed amendments because they do not impose 
any new collection of information requirements that would require 
approval of the Office of Management and Budget (``OMB''). OMB 
initially approved the paperwork burden analysis for Rule 17Ad-7(f) 
(OMB Control No. 3235-0136) when the Commission proposed amendments for 
Rule 17Ad-7(f) in 1999.\11\
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    \10\ 44 U.S.C. 3501 et seq.
    \11\ Securities Exchange Act Release No. 41442 (May 25, 1999), 
64 FR 29608 (June 2, 1999). Subsequently, OMB approved the extension 
of this paperwork collection.
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V. Costs and Benefits of the Proposed Rule Amendments

    The Commission is considering the costs and the benefits of the 
proposed amendment to Rule 17Ad-7(f) as described below. We encourage 
comments that address any additional costs or benefits that we may have 
not considered. Commenters should provide analysis and empirical data 
to support their views on the costs and benefits associated with the 
proposed amendment.

A. Benefits

    The proposed amendments to Rule 17Ad-7(f) should provide specific 
benefits to U.S. investors, issuers, transfer agents, and other 
financial

[[Page 36953]]

intermediaries. While these benefits are not readily quantifiable in 
terms of dollar value, we believe that transfer agents that choose to 
exclusively adopt electronic or micrographic-based records systems in 
lieu of paper records may realize cost-savings and reduce certain risks 
associated with paper-based recordkeeping. For example, the use of 
electronic and storage media should reduce storage burdens (e.g., the 
need for storage space) that transfer agents currently face in 
maintaining paper records.
    Other benefits include:
    [sbull] increased efficiency of recordkeeping operations by 
reducing the need to maintain records in hard copy format;
    [sbull] reduced likelihood that documents will be lost or misfiled;
    [sbull] ability to retrieve documents more quickly;
    [sbull] audit trails can be automated;
    [sbull] reduction of risk for natural disasters;
    [sbull] file centralization is automatic (file and records need not 
be removed from their storage in order to reference them);
    [sbull] multiple persons can view the same document simultaneously;
    [sbull] access authorization can be automated;
    [sbull] space required for document storage is drastically reduced;
    [sbull] document indexing and cross-referencing can be automatic; 
and
    [sbull] documents can be copied, faxed, printed, and e-mailed 
without the paper originals.

    In addition, the proposed software escrow provision would enable 
transfer agents to more conveniently comply with the current Rule 17Ad-
7(f)(5)(ii) requirement that a copy of the electronic storage system 
the transfer agent utilizes to store its records be placed in escrow 
with an independent third party.
    The Commission requests comments on the potential benefits of 
electronic recordkeeping including quantitative data on the potential 
cost savings from eliminating hard copy records.

B. Costs

    The amendments to Rule 17Ad-7(f) would not impose costs on any 
particular person or entity because compliance with this provision 
would apply only to those transfer agents that choose to store any of 
their records exclusively in electronic form. Nevertheless, transfer 
agents that elect to use micrographic media or electronic storage media 
may incur some costs in destroying or otherwise disposing hard copy 
records that they elect to dispose or destroy. Any costs related to the 
use of micrographic or electronic storage media should be at least 
partly offset by the resulting elimination of the need to maintain and 
store records in hard copy format. This cost is likely to depend upon 
the volume of hard copy records needed to be disposed. We expect these 
costs to be relatively minimal.
    We estimate that approximately 60 transfer agents \12\ will use a 
third party to escrow the required source code.\13\ Each transfer agent 
will evaluate the risk and cost effectiveness of its records management 
solution differently based upon the solution that is best for its 
business model, such as its business practices and volume, and that 
assures its ability to comply with Rule 17Ad-7. Moreover, we cannot 
predict the effect of future market competition and innovation on the 
technologies that transfer agents might employ for their recordkeeping.
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    \12\ In the adopting release to Rule 17Ad-7(f), we estimated 
that approximately 500 transfer agents were likely to use electronic 
or micrographic storage systems. During the year-and-a-half since 
Rule 17Ad-7(f) has been effective, however, only five transfer 
agents have taken advantage of the record storage alternatives 
provided by the rule.
    \13\ Although this estimate represents less than 10% of the 
number of currently-registered transfer agents, we expect that many 
of the largest bank, corporate, and independent transfer agents, 
which represent over 90% of the entire transfer agent industry 
volume, will eventually convert their records-management systems to 
electronic-based solutions.
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    In addition, there will be some cost imposed by the proposed escrow 
requirement amendment. However, the Commission considered these costs 
in the Adopting Release and any new costs associated with the escrow 
amendment (i.e., having a third party escrow the source code on the 
transfer agent's behalf) would likely be included in the software 
contract between the parties.
    The Commission requests commenters to provide cost data for 
switching from hard copy records to electronic recordkeeping. In 
particular, what would be the startup costs and annual maintenance 
costs?

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\14\ a rule is ``major'' if it has resulted or is likely to 
resort in:
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    \14\ 5 U.S.C. 801 et seq.
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    [sbull] an annual effect on the economy of $100 million or more;
    [sbull] a major increase in costs or prices for consumers or 
individual industries; or
    [sbull] significant adverse effects on competition, investment, or 
innovation.
    We request comment regarding the potential impact of the proposed 
rule amendments on the economy on an annual basis. We request that 
commenters provide empirical data and other factual support for their 
views.

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

    Section 3(f) of the Act \15\ as amended by the National Securities 
Markets Improvement Act of 1996\16\ provides that whenever the 
Commission is engaged in rulemaking and is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, the Commission shall consider, in addition to the protection 
of investors, whether the action will promote efficiency, competition, 
and capital formation. In addition, Section 23(a)(2) of the Act \17\ 
requires the Commission, when adopting rules under the Act, to consider 
the anti-competitive effects of any rules it adopts.
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    \15\ 15 U.S.C. 78c.
    \16\ Pub. L. No. 104-290, 110 Stat. 3416 (1996).
    \17\ 15 U.S.C. 78w(a)(2).
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    We are considering the proposed amendments to Rule 17Ad-7(f) in 
light of the standards set forth in Sections 3(f) and 23(a)(2) of the 
Act. For the reasons stated herein, the proposed amendments (1) should 
promote efficiency by allowing registered transfer agents to benefit 
from being allowed to dispose of hard copies, (2) should not adversely 
affect capital formation because they relate solely to post-issuance 
activity, and (3) should not impose any burden on competition because 
they will apply equally to all registered transfer agents.
    We do not anticipate that the proposed amendments would have a 
significant effect on competition or impose any burden on competition 
that is not necessary or appropriate in furtherance of the Act. Under 
the proposed amendments, all registered transfer agents would be 
permitted, though not required, to exclusively use micrographic media 
and electronic storage media to fulfill all of the Commission's 
regulatory obligations. In addition, the proposed amendments would 
apply equally to all registered transfer agents. However, in order to 
fully evaluate the effects on competition of the proposed amendments, 
the Commission requests commenters to provide their views and specific 
empirical data as to any effects on competition that might result from 
the Commission's proposed amendments to Rule 17Ad-7(f).

[[Page 36954]]

VIII. Summary of Regulatory Flexibility Analysis

    The Commission has prepared an initial regulatory flexibility 
analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding the 
proposed amendments to Rule 17Ad-7(f) to determine whether the proposed 
rule amendments will have a significant economic impact on a 
substantial number of small entities.

A. Reasons for Proposed Action

    The IRFA states that despite recent amendments to Rule 17Ad-7, 
there appears to be some uncertainty concerning the scope of the 
current rule with respect to electronic recordkeeping and the ability 
of a third party to deposit certain documentation with an independent 
escrow agent.

B. Objectives and Legal Basis

    In order to eliminate this uncertainty, the Commission is proposing 
to amend Rule 17Ad-7(f). The proposed amendments are designed to make 
clear that transfer agents may use electronically and micrographically 
retained records to comply with the Commission's transfer agent 
recordkeeping requirements. In addition, proposed amendments to 
paragraph (f)(5)(ii) of Rule 17Ad-7 are designed to clarify that a 
transfer agent may fulfill its software escrow obligation by having a 
third party deposit with an independent escrow agent a copy of all the 
documentation required under Rule 17Ad-7(f)(5)(ii) on behalf of the 
transfer agent.
    Amendments to Rule 17Ad-7 are proposed under the Commission's 
authority set forth in Sections 17, 17A, and 23 of the Act.

C. Small Entities Subject to the Rule

    The IRFA states that, for purposes of Commission rulemaking, Rule 
0-10(h) under the Act defines the term ``small business'' or ``small 
organization'' to include any transfer agent that: (1) Received less 
than 500 items for transfer and less than 500 items for processing 
during the preceding six months (or in the time that it has been in 
business, if shorter); (2) transferred items only of issuers that would 
be deemed ``small business'' or ``small organizations'' as defined in 
Rule 0-10 under the Act; (3) maintained master shareholder files that 
in the aggregate contained less than 1,000 shareholder accounts or was 
the named transfer agent for less than 1,000 shareholder accounts at 
all times during the preceding fiscal year (or in the time that it has 
been in business, if shorter); and (4) is not affiliated with any 
person (other than a natural person) that is not a small business or 
small organization under Rule 0-10.\18\ The IRFA states that we 
estimate that 180 registered transfer agents qualify as small entities 
and would be subject to the proposed amendment to Rule 17Ad-7(f).
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    \18\ 17 CFR 240.0-10(h).
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D. Reporting, Recordkeeping, and Other Compliance Requirements

    The IRFA states that the proposed amendments would not impose any 
new reporting, recordkeeping, or other compliance costs or requirements 
on any particular person or entity because compliance with this 
provision would be purely voluntary. Nevertheless, transfer agents that 
elect to exclusively use micrographic media or electronic storage media 
may incur some costs in destroying or otherwise disposing hard copy 
records. However, the Commission believes that this cost is minimal.
    The IRFA notes that the proposed amendment to Rule 17Ad-7(f) would 
apply only to registered transfer agents that choose to exclusively use 
electronic or micrographic storage media. The IRFA notes further that 
some small transfer agents will not be able to afford the costs 
involved with storing records electronically and therefore will not 
choose to use electronic or micrographic storage media. The IRFA states 
that the proposed amendments to Rule 17Ad-7(f) should not have a 
significant economic impact on a substantial number of small entities.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission believes that there are no rules that duplicate, 
overlap, or conflict with the proposed amendments.

F. Significant Alternatives

    The IRFA states that we believe that it is not feasible to further 
clarify, consolidate, or simplify the proposed amendments for small 
entities. The IRFA also states that the Commission believes that the 
use of performance standards rather than design standards is not 
applicable to the proposed amendments.
    The IRFA states that we believe that creating an exemption from the 
requirements of the proposed amendments would not reduce the impact of 
the proposed amendments on small entities. The IRFA notes that Rule 
17Ad-4(b) under the Act \19\ already exempts small transfer agents from 
many of the recordkeeping requirements of Rules 17Ad-6 and 17Ad-7. In 
addition, the IRFA notes that any burden imposed by the proposed 
amendments would apply only to those transfer agents that choose to use 
electronic or micrographic storage media. The IRFA states that we 
believe that there are no rules that duplicate, overlap, or conflict 
with the proposed alternative versions of the rule.
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    \19\ 17 CFR 240.17Ad-4(b).
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G. Solicitation of Comments

    The IRFA contains information concerning the solicitation of 
comments with respect to the IRFA. In particular, the IRFA requests 
comment on whether the proposed amendments to Rule 17Ad-7(f) would have 
a significant economic impact on a substantial number of small entities 
and requests that any such comments be accompanied by specific 
empirical data. A copy of the IRFA may be obtained by contacting David 
Karasik, U.S. Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-1001.

XI. Statutory Authority

    The Commission is proposing amendments to Sec.  240.17Ad-7 of 
Chapter II of Title 17 of the Code of Federal Regulations pursuant to 
sections 17, 17A(a)(2), 17A(d), and 23(a) \20\ of the Act in the manner 
set forth below.
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    \20\ 15 U.S.C. 78q, 78q-1(a)(2), 78q-1(d) and 78w(a)
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List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities, Transfer 
agents.

Text of Amendment

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

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

    1. The authority citation for Part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, and 7202 unless otherwise noted.

    2. Section 240.17Ad-7 is amended by:
    a. Adding introductory text to paragraph (f); and
    b. In the first sentence of paragraph (f)(5)(ii), revise the phrase 
``Place in escrow'' to read ``Place, or have a third party place on 
your behalf, in escrow'.
    The addition reads as follows:

[[Page 36955]]

Sec.  240.17Ad-7  Record retention.

* * * * *
    (f) Subject to the conditions set forth in this section, the 
records required to be maintained pursuant to Sec.  240.17Ad-6 may be 
retained using electronic or micrographic media and may be preserved in 
those formats for the time required by Sec.  240.17Ad-7. Records stored 
electronically or micrographically in accordance with this paragraph 
may serve as a substitute for the hard copy records required to be 
maintained pursuant to Sec.  240.17Ad-6. * * *
* * * * *

    By the Commission.

    Dated: June 16, 2003.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-15648 Filed 6-19-03; 8:45 am]
BILLING CODE 8010-01-P