April 17, 2001
Via U.S. Mail and Electronic Filing
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W., Mailstop 6-9
Washington, D.C. 20549
Re: Electronic Recordkeeping by Investment Companies and Investment Advisers, Release Nos. IC-24890; IA-1932; File No. S7-06-01
Dear Mr. Katz:
The Investment Counsel Association of America1 appreciates the opportunity to submit comments regarding the Securities and Exchange Commission's proposed electronic recordkeeping rules for investment advisers and investment companies.2 The proposed amendments would expand the ability of advisers and funds to use electronic storage media to maintain and preserve records. The ICAA strongly supports the Commission's proposal with some suggested modifications.
Last year, Congress passed the Electronic Signatures in Global and National Commerce Act ("ESIGN") to facilitate the use of electronic records and signatures in interstate and foreign commerce.3 Section 101(d) of ESIGN provides that regulated entities can comply with regulatory requirements governing record retention by retaining electronic records. The legislation authorizes agencies to issue interpretations of their recordkeeping requirements that are consistent with the provisions of ESIGN.4 Under this authority, the SEC has issued proposed amendments to Rule 204-2 under the Advisers Act and Rule 31a-2 under the Investment Company Act to expand the ability of funds and advisers to maintain records electronically pursuant to certain safeguards. Under these amendments, the SEC will interpret ESIGN as requiring such entities to comply with Rules 31a-2 and 204-2 when they keep electronic records.
The proposed amendments would permit - but not require - investment advisers to create and maintain any required records using any form of electronic or micrographic media, as long as the adviser:
When maintaining records electronically, the adviser would also be required to establish and implement policies and procedures to reasonably safeguard the records from loss, alteration, or destruction, to limit access to the records to properly authorized personnel and the Commission, and to reasonably ensure that any reproduction of an original record is complete, true and legible when retrieved.
Pursuant to current Rule 204-2 under the Investment Advisers Act of 1940, investment advisers may maintain required records electronically only if the records "are created by the adviser on electronic media or are received by the adviser solely on electronic media or by electronic data transmission."5 On its face, Rule 204-2 does not permit an adviser to store documents electronically that it receives on paper. Nevertheless, advisers have been converting paper records to electronic media in reliance on SEC staff no-action positions.6
The SEC's proposed amendments to the recordkeeping rules would explicitly permit advisers to convert records into electronic format and retain them electronically. The proposed rules would simplify many of the conditions to electronic recordkeeping discussed in the no-action letters. We applaud and strongly support the Commission's expansion of advisers' ability to maintain and retain records using electronic storage media.7 This flexibility will enable advisers to store documents more conveniently, efficiently, and effectively, in terms of both organization and expense. Electronic storage may also result in greater security of records from loss or destruction than paper storage, given the nature of the medium and the conditions proposed by the Commission. In addition, electronic or micrographic storage provides a collateral environmental benefit. In short, this proposal would significantly enhance the current record retention regime.
We also offer the following specific comments on the proposed rules.
Electronic Recordkeeping Technology
The Commission's proposal would not require investment advisers and investment companies to preserve records in a non-rewriteable, non-erasable (WORM) format. The Commission has requested comment on its analysis of the costs and benefits of use of the WORM format.8 We concur with the Commission's cost-benefit assessment. Most investment advisers would have to make substantial investments in new technology to preserve documents in a WORM format. Requiring advisers to incur such costs is not warranted. We are unaware of any significant problems involving advisers altering records (whether stored electronically or on paper). We also agree that third parties - many of which are required to use WORM - generally maintain parallel records that can be used to corroborate the accuracy of adviser records.9 We therefore support the Commission's proposal not to require use of WORM where advisers maintain records electronically.
Means To Access, Search, View, Sort and Print the Records
One of the proposed conditions of maintaining electronic records is a requirement to provide the SEC examination staff with "means to access, search, view, sort, and print the records."10 The Commission's release states that this requirement replaces the prior condition of providing facilities for easily readable projection of micrographic storage media and for producing easily readable enlargements.11 The new proposed condition, however, would apply to electronic storage as well as micrographic storage. Given confidentiality and privacy concerns, we are uncomfortable with the notion of providing SEC examination staff with unlimited access to firm computers, just as firms would not desire the examination staff to browse through firm file cabinets searching for paper records.12 We would appreciate clarification regarding the limited nature of this condition. In addition, we request clarification that this proposed condition for electronic storage does not implicitly require investment advisers to program special functionality into existing computer systems.
Time For Providing Records to SEC Examiners
Current Rule 204-2 describes the types of books and records that advisers are required to maintain. It does not address procedures or timing related to providing such records to the SEC's examination staff when maintained and preserved on paper. With respect to electronic records, the rule requires that advisers "promptly" provide a computer printout or copy of the computer storage medium. The SEC now proposes to include a provision that would require advisers who maintain electronic records to provide those records within one business day after the request. Although we understand that the SEC in previous no-action letters interpreted "promptly" to mean within 24 hours,13 we do not support a similar provision in Rule 204-2.
One business day is often too short a time in which to produce documents (paper or electronic). As with paper records, electronic records require time to produce, particularly in the various iterations requested by the examination staff. Electronic records, like paper records, are not always maintained in the order in which the examiners request the documents. It may be necessary to separate what the staff has requested from the material the staff has not requested within the electronic record. Similarly, it may be necessary to separate privileged material from non-privileged material. For small advisers, the services of the firm could be adversely affected - to the detriment of clients - as all employees rush to gather materials in one day. In large firms, the sheer volume of materials requested may make compliance with the one-day rule, applied inflexibly, literally impossible.
As a matter of practice, firms generally work cooperatively with the SEC examiners to discuss which documents will be produced immediately or on the first day and which documents will require additional time. There appears to be no reason to change this reasonable and appropriate practice that has worked for both investment advisers and the examination staff for years. We therefore respectfully request that the Commission amend proposed Rule 204-2(g)(2)(ii) to eliminate the parenthetical "but in no case more than one business day after the request" for the purposes of this rule proposal. Such a rule would provide flexibility for the Commission's examination staff to interpret the term "promptly" in light of specific facts and circumstances.
When the Commission proceeds with its announced intention more broadly to update and modernize the books and records rules,14 it should consider the inspection process separately in a manner that is consistent for both paper and electronic documents. There is no persuasive rationale to require different production deadlines for records based on type of storage medium.
Similarly, the Commission could consider whether it makes sense to differentiate between paper and electronic storage media for the purposes of other proposed conditions, such as whether to require procedures to reasonably safeguard records from loss, destruction or alteration or limiting access to authorized personnel.15 Special conditions for electronic storage may not be warranted in many cases.
Thank you for considering our comments on this important issue. Please do not hesitate to contact the undersigned if we may provide any additional information.
KAREN L. BARR
|1||The ICAA is a not-for-profit association that exclusively represents the interests of SEC-registered investment advisers. Founded in 1937, the Association's membership today consists of more than 275 investment advisory firms that collectively manage in excess of $3 trillion for a wide variety of institutional and individual clients. For additional information, please consult our web site at www.icaa.org.|
|2||Electronic Recordkeeping by Investment Companies and Investment Advisers, Release No. IC-24890, IA-1932 (March 13, 2001) (ESIGN Release).|
|3||Electronic Signatures in Global and National Commerce Act, Pub. L. No. 106-229, 114 Stat. 464 (2000).|
|4||Id., Section 104.|
|5||Rule 204-2(g) under the Investment Advisers Act of 1940.|
|6||E.g. Oppenheimer Management Corporation no-action letter (pub. avail. Aug. 28, 1995).|
|7||Indeed, we previously suggested that Commission staff consider such amendments. See Letter from Karen L. Barr, ICAA General Counsel, to Robert E. Plaze, Associate Director, SEC Division of Investment Management (July 6, 1998) (publicly available at www.icaa.org, under Comments and Statements).|
|8||ESIGN Release at p.3.|
|9||See, e.g., Jennison Associates LLC no-action letter (pub. avail. July 6, 2000) (discussing the inspection staff's ability and desire to use third party records to verify the accuracy of adviser records stored on paper or otherwise).|
|10||Proposed Rule 204-2(g)(2)(ii)(C).|
|11||ESIGN Release at n. 11.|
|12||Similarly, we would appreciate clarification regarding the means of stamping or otherwise designating electronic records as confidential or FOIA treatment requested, in the context both of permitting SEC staff access to firm computers, as well as producing a legible, true, and complete electronic copy of the records for the staff.|
|13||E.g., Oppenheimer Management Corporation no-action letter (pub. avail. Aug. 28, 1995).|
|14||E.g., Managing the Revolution, Keynote Address of Paul F. Roye, Director, Division of Investment Management, at the Third Annual IA Compliance Summit, Washington, D.C. (March 26, 2001).|
|15||For example, under Regulation S-P, advisers and funds already must establish by July 1, 2001 procedures to protect the security of documents containing client information, whether retained on paper or electronically.|