[Federal Register Volume 68, Number 248 (Monday, December 29, 2003)]
[Rules and Regulations]
[Pages 75050-75054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31640]



[[Page 75049]]

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Part III





Securities and Exchange Commission





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17 CFR Part 240



Recordkeeping Requirements for Registered Transfer Agents; Final Rule

  Federal Register / Vol. 68, No. 248 / Monday, December 29, 2003 / 
Rules and Regulations  

[[Page 75050]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-48949; File No. S7-13-03]
RIN 3235-AI87


Recordkeeping Requirements for Registered Transfer Agents

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Final rule.

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SUMMARY: The Commission is amending its rule concerning recordkeeping 
requirements for registered transfer agents. The amendments will 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.

EFFECTIVE DATE: January 28, 2004.

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, Securities 
and Exchange Commission, 450 5th Street, NW., Washington, DC 20549-
1001.

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

A. Background

    Rule 17Ad-6 \1\ sets forth the records that transfer agents must 
make and preserve and Rule 17Ad-7 describes how and for how long the 
required records must be maintained. On April 27, 2001, the Commission 
adopted amendments\2\ to Rule 17Ad-7, that (1) allows registered 
transfer agents to use electronic storage media\3\ to maintain records 
that they are required by Rule 17Ad-6 to retain and (2) modified the 
requirements for using micrographic media \4\ as a method of record 
storage. Specifically, Rule 17Ad-7(f) requires transfer agents that use 
electronic or micrographic media to store records to:
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    \1\ 17 CFR 240.17Ad-6. 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.
    \2\ Securities Exchange Act Release No. 44227 (Apr. 27, 2001), 
66 FR 21648 (May 1, 2001) (``Adopting Release'').
    \3\ Under Rule 17Ad-7(f)(1)(ii), the term ``electronic storage 
media'' refers to any digital storage medium or system.
    \4\ Under Rule 17Ad-7(f)(1)(i), the term ``micrographic media'' 
refers to microfilm or microfiche or any similar medium.
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    [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.
    Rule 17Ad-7 does 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 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.

B. Discussion of Rule Amendments

    Since the amendments to Rule 17Ad-7(f) were adopted in April 2001, 
we have learned that there is some uncertainty whether (1) Rule 17Ad-
7(f) 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).\5\ In order to 
eliminate this uncertainty, the Commission issued a release requesting 
comment on proposed textual changes to Rule 17Ad-7(f) (``Proposing 
Release'').\6\
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    \5\ 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 * * *''
    \6\ Securities Exchange Act Release No. 48036 (June 16, 2003); 
68 FR 36951 (June 20, 2003).
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    We proposed 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 not mandate, the 
destruction of hard copy records, including securities certificates, if 
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 amended Rule 17Ad-7 will 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 proposed 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 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 amendment also would 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. In this case, 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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II. Discussion of Comment Letters

    We received three comment letters in response to the Proposing 
Release.\10\

[[Page 75051]]

Integrated Fund Services (``IFS'') argued that the general requirement 
that an escrow agent be independent of both the transfer agent and the 
third party software provider is overly burdensome to transfer agents 
and software developers and that sufficient legal and regulatory 
remedies exist that provide the Commission access to the software 
should the transfer agent fail to do so. IFS believes that these 
factors discourage transfer agents from using electronic records 
management systems.
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    \10\ Letters from Jeffrey G. Rutowski, Vice President, 
Integrated Fund Services (June 30, 2003); Cathy Danahy, Assistant 
Director, Nebraska Secretary of State's Office, Records Management 
Division (July 14, 2003); and Charles V. Rossi, Division President, 
EquiServe, Inc. (July 29, 2003).
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    The Records Management Division of the Nebraska Secretary of State 
contended that (1) electronic documents are not as widely accepted as 
evidence in state and federal judicial proceedings compared to paper 
and microfilm records, (2) in addition to the software, the hardware 
(including printers and ink cartridges) necessary to retrieve and 
reproduce hard copy images of the records should also be kept in 
escrow, (3) paper and microfilm are easier to access than electronic 
records, and (4) paper and microfilm records should be subject to the 
same performance requirements as electronic records, specifically that 
they should be indexed, kept in duplicate, and kept safe and secure 
(e.g., from heat and sunlight).
    While we will consider these two commenters' observations and 
suggestions as we continue to assess the effectiveness of the transfer 
agent recordkeeping rules, their comments do not address the issues 
presented in the Proposing Release, which was to clarify that (1) 
electronic records may be maintained in lieu of paper records and (2) a 
third party may escrow the required software on behalf of a transfer 
agent. These comments relate more to the previously adopted amendments 
to Rule 17Ad-7 that allow transfer agents to use electronic storage 
media to maintain their records.\11\
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    \11\ See supra note 2 and accompanying text.
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    EquiServe supported the proposed amendments. EquiServe stated that 
the proposed amendments will resolve an ambiguity, especially with 
respect to cancelled certificates, whether hard copy records need to be 
maintained if they are also stored electronically pursuant to the 
requirements set forth in Rule 17Ad-7. In addition, EquiServe agreed 
with the need to make clear that third parties may escrow the source 
code on behalf of transfer agents.
    After careful consideration of the comment letters, we are adopting 
the proposed amendments to Rule 17Ad-7(f) as proposed.

III. Paperwork Reduction Act

    The 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'') \12\ and therefore 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 for Rule 17Ad-7(f) (OMB Control No. 3235-
0136) when the Commission proposed amendments for Rule 17Ad-7(f) in 
1999.\13\
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    \12\ 44 U.S.C. 3501 et seq.
    \13\ 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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IV. Costs and Benefits of the Proposed Rule Amendments

    The Commission has identified certain costs and the benefits of the 
amendments to Rule 17Ad-7(f) as described below. Commenters did not 
provide any quantitative or other specific data relating to the costs 
or benefits of the proposed rule. We expect that registered transfer 
agents will choose to adopt electronic or micrographic recordkeeping if 
it is cost effective for them to do so.

A. Benefits

    The amendments to Rule 17Ad-7(f) should also provide specific 
benefits to U.S. investors, issuers, transfer agents, and other 
financial intermediaries. The proposed software escrow provision should 
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. 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. While these benefits are not 
readily quantifiable in terms of dollar value, 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. By further clarifying the ramifications of each records format 
system, transfer agents might now choose to use a broader range of 
storage methods. In addition, transfer agents that decide to store 
records electronically or micrographically will no longer have the 
facility or operational costs of a traditional paper based system. 
Transfer agents could then pass the cost savings to issuers who can, in 
turn, see a similar reduction in their transfer agent service fees. 
Also, by eliminating any legal uncertainty whether electronically and 
micrographically-retained records may serve as a substitute for hard 
copy records, registered transfer agents will be free to assess which 
storage method will best suits their business needs. Should they choose 
to benefit from advances in electronic recordkeeping technology, the 
time and labor in maintaining and accessing records should be reduced, 
resulting in operational and financial efficiencies. 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.

B. Costs

    The amendments to Rule 17Ad-7(f) should 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

[[Page 75052]]

needed to be disposed. We expect these costs to be relatively 
minimal.\14\
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    \14\ 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, five transfer agents 
have taken advantage of the record storage alternatives provided by 
the rule.
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    We estimate that approximately 60 transfer agents will use a third 
party to escrow the required source code.\15\ 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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    \15\ 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 associated with the escrow 
requirement amendment. However, the Commission the Commission 
considered these costs in the April 2001 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.

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

    Section 3(f) of the Act \16\ requires the Commission, when engaging 
in rulemaking that requires it to consider or determine whether an 
action is necessary or appropriate in the public interest, to consider 
whether the action will promote efficiency, competition, and capital 
formation.
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    \16\ 15 U.S.C. 78c(f).
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    Section 23(a)(2) of the Act requires us to consider the anti-
competitive effects of any rules that we adopt under the Act. This 
section prohibits us from adopting any rule that would impose a burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Act.
    In the Proposing Release, the Commission solicited comments on 
whether the amendments to Rule 17Ad-7 would have any effects on 
competition, efficiency and capital formation. We received no comments 
in response to this solicitation.
    The Commission believes the amendments should improve efficiency, 
competition, and capital formation. The amendments should promote 
efficiency by allowing registered transfer agents to benefit from 
advances in recordkeeping technology. The amendments should promote 
competition between the vendors who create and manufacture the new 
storage technologies and between the transfer agents who use the new 
methods. Vendors can compete with each other to develop systems that 
can allow transfer agents to manage their records on a more economical 
basis. The improvement in storage technologies would allow transfer 
agents to compete among one another in offering to companies a more 
cost-effective and efficient service. Finally, the amendments should 
not adversely affect capital formation because the amendments relate 
solely to post-issuance activity.
    The Commission does not anticipate that the amendments will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the Act. The amended rule permits, but does not require, 
registered transfer agents to use electronic or micrographic media to 
retain their records in lieu of hard copies and a third party to place 
the required software code into escrow on behalf of a registered 
transfer agent. The amendments are intended to remove legal 
uncertainties facing transfer agents who decide to store records in an 
electronic or micrographic form. The Commission believes that by 
adopting these amendments, transfer agents will have greater certainty 
to assess which storage method will best suits their business needs.

VI. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act 
(``RFA'').\17\ This analysis relates to amendments to Rule 17Ad-7(f) 
under the Securities Exchange Act of 1934(``Act'') \18\ to determine 
whether the rule amendments will have a significant economic impact on 
a substantial number of small entities. The amendments will allow 
registered transfer agents to take advantage of improvements in 
electronic recordkeeping technology by being able to store their 
records exclusively using electronic storage technology and by being 
able to have a third party place in escrow the source code on behalf of 
the transfer agent.
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    \17\ 5 U.S.C. 603.
    \18\ 15 U.S.C. 78a et seq.
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A. Need for the Rule

    Notwithstanding recent amendments to Rule 17Ad-7,\19\ there 
appeared to be some uncertainty whether (1) Rule 17Ad-7(f) 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 may 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 for the purpose of 
complying with Rule 17Ad-7(f)(5)(ii).\20\
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    \19\ Supra note 2.
    \20\ Under Rule 17Ad-7(f)(5)(ii), transfer agents that choose to 
use electronic storage media to store the required records 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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    In order to eliminate this uncertainty, the Commission is amending 
Rule 17Ad-7(f) to clarify that records, including cancelled securities 
certificates, required to be maintained pursuant to Rule 17Ad-6 may be 
retained electronically or micrographically and may serve as a 
substitute for hard copy records required to be maintained pursuant to 
Rule 17Ad-6. Accordingly, this substitution provision allows, 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).\21\
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    \21\ While Rule 17Ad-7 would permit destruction of paper records 
for purposes of our recordkeeping requirements, a transfer agent may 
have an obligation to preserve paper records under other applicable 
laws or rules. The Commission 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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    The amendments make it clear that transfer agents may use 
electronically and micrographically retained records to comply with the 
Commission's transfer agent recordkeeping requirements. We note that 
the Commission did not take a position on whether transfer agents 
should store

[[Page 75053]]

their records using electronically or micrographically instead of in 
paper.
    In addition, we are amending 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.\22\
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    \22\ One situation that necessitates 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.
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    Amendments to Rule 17Ad-7 are adopted under the Commission's 
authority set forth in Sections 17, 17A, and 23 of the Act.

B. Significant Issues Raised by Public Comment

    We received three comment letters in response to the Proposing 
Release.\23\ Integrated Fund Services (``IFS'') argued that the general 
requirement that an escrow agent be independent of both the transfer 
agent and the third party software provider is overly burdensome to 
transfer agents and software developers and that sufficient legal and 
regulatory remedies exist that provide the Commission access to the 
software should the transfer agent fail to do so. IFS believes that 
these factors discourage transfer agents from using electronic records 
management systems.
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    \23\ Letters from Jeffrey G. Rutowski, Vice President, 
Integrated Fund Services (June 30, 2003); Cathy Danahy, Assistant 
Director, Nebraska Secretary of State's Office, Records Management 
Division (July 14, 2003); and Charles V. Rossi, Division President, 
EquiServe, Inc. (July 29, 2003).
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    The Records Management Division of the Nebraska Secretary of State 
contended that (1) electronic documents are not as widely accepted as 
evidence in state and federal judicial proceedings compared to paper 
and microfilm records, (2) in addition to the software, the hardware, 
including printers and ink cartridges, necessary to retrieve and 
reproduce hard copy images of the records should also be kept in 
escrow, (3) paper and microfilm are easier to access than electronic 
records, and (4) paper and microfilm records should be subject to the 
same performance requirements as electronic records, specifically that 
they should be indexed, kept in duplicate, and kept safe and secure 
(e.g. from heat and sunlight).
    While we will consider these two commenters' observations and 
suggestions as we continue to assess the effectiveness of the transfer 
agent recordkeeping rules, such comments do not address the issues 
presented in the Proposing Release, which was to clarify that (1) 
electronic records may be maintained in lieu of paper records and (2) a 
third party may escrow the required software on behalf of a transfer 
agent. Their comments relate more to the issues raised when we adopted 
amendments to Rule 17Ad-7 that allowed transfer agents to use 
electronic storage media to maintain their records.
    EquiServe supported the proposed amendments. EquiServe stated that 
the proposed amendment will resolve an ambiguity, especially with 
respect to cancelled certificates, whether hard copy records need to be 
maintained if they are also stored electronically pursuant to the 
requirements set forth in Rule 17Ad-7. In addition, EquiServe agreed 
with the need to make clear that third parties may escrow the source 
code on behalf of transfer agents.
    Accordingly, we are adopting the proposed amendments to Rule 17Ad-
7(f) entirely as proposed.

C. Small Entities Subject to the Rule

    The rule amendments should not affect registered transfer agents 
that are small entities. 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 Exchange 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.\24\ We estimate that 180 registered transfer agents 
qualify as small entities and would be subject to the amendment to Rule 
17Ad-7(f).
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    \24\ 17 CFR 240.0-10(h).
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D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The amendments do not impose any new reporting, recordkeeping, or 
other compliance costs or requirements on any particular person or 
entity. First, the amendments do not in any way change the manner that 
transfer agents are currently maintaining their records today. Second, 
compliance with this provision is purely voluntary depending on whether 
registered transfer agents choose to exclusively use electronic or 
micrographic media to store the required records. While 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. Finally, while there will be some cost imposed by the proposed 
escrow requirement provision, these costs were contemplated by the 
Commission 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.
    Accordingly, we believe that amendments to Rule 17Ad-7(f) should 
not have a significant economic impact on a substantial number of small 
entities.

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective 
while minimizing any significant adverse impact on small entities. In 
connection with the adopted amendments, the Commission considered the 
following alternatives: (a) The establishment of differing compliance 
or reporting requirements or timetables that take into account the 
resources of small entities; (b) the clarification, consolidation, or 
simplification of compliance and reporting requirements under the rule 
for small entities; (c) the use of performance standards rather than 
design standards; and (d) an exemption from coverage of the proposed 
amendment or any part thereof for small entities.
    The adopted amendments are designed to enable registered transfer 
agents to take advantage of improvements in electronic recordkeeping 
technology by being able to store their records exclusively using 
electronic storage technology and by being able to have a third party 
place in escrow the source code on behalf of the transfer agent. The 
Commission believes that different compliance or reporting requirements 
for small entities are not necessary because the amendments do not 
establish any new reporting, recordkeeping, or compliance requirements 
for small entities. In addition, the Commission has concluded that it 
is not feasible to further clarify, consolidate, or simplify the 
proposed amendments for small

[[Page 75054]]

entities. The Commission also believes that creating an exemption from 
the requirements of the amendments would not reduce the impact of the 
proposed amendments on small entities. We note that Rule 17Ad-4(b) 
under the Exchange Act \25\ already exempts small transfer agents from 
many of the recordkeeping requirements of Rules 17Ad-6 and 17Ad-7. In 
addition, any burdens imposed by the amendments apply only to those 
transfer agents that choose to use electronic or micrographic storage 
media.
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    \25\ 17 CFR 240.17Ad-4(b).
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VII. Statutory Authority

    The Commission is adopting amendments to Sec.  240.17Ad-7 of 
chapter II of title 17 of the Code of Federal Regulations pursuant to 
sections 17, 17A, and 23(a) \26\ of the Act in the manner set forth 
below.
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    \26\ 15 U.S.C. 78q, 78q-1, 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

0
In accordance with the foregoing, title 17, chapter II of the Code of 
Federal Regulations is to be amended as follows:

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

0
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, 7202, 7241, 7262, and 7263; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *

0
2. Section 240.17Ad-7 is amended by:
0
a. Adding introductory text to paragraph (f); and
0
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:


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.
* * * * *

    Dated: December 18, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-31640 Filed 12-24-03; 8:45 am]
BILLING CODE 8010-01-P