April 21, 2001
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609
Re: Electronic Recordkeeping by Investment Companies and Investment Advisers; Release No. IC-24890; IA-1932; File No. S7-0601
Dear Secretary Katz:
Please accept this comment letter on behalf of the Investment Adviser Section of the North American Securities Administrators Association ("NASAA") regarding the above-referenced release (the "Release"). NASAA would like to commend the staff of the Division of Investment Management for proposing for investment companies and federal investment advisers electronic options for recordkeeping. In today's fast-moving and technology-driven economy, it is important to offer investment companies and federal investment advisers expanded options for electronic records, while at the same time ensuring that the records are accurate and readily available for regulatory and investor protection purposes.
Until recently, there was little widespread demand for an electronic recordkeeping option for investment companies and investment advisers. However, as the Commission points out in the Release, with the passage of the Electronic Signatures in Global and National Commerce Act (ESIGN) and the increasing number of no-action letters issued by the Commission permitting conversion to and retention of electronic records, the need is clear for uniform requirements for electronic records.
NASAA generally supports the Commission's proposal since it clarifies when and how electronically stored records must be provided to the Commission staff upon request. These specifications include items such as (1) that all printouts or copies of electronic records must by legible, true and complete; (2) that the adviser or fund must provide a means of access including searching and printing; and (3) that funds and federal investment advisers maintain separate duplicate copies of records.
Conversely, we believe that the rule is too lenient in defining "promptly provide" to uniformly allow one business day to provide documents requested by the Commission. This amount of time could allow federal investment advisers during a SEC examination to delay unnecessarily the production of readily available documents. We reference Footnote nine of the Release that states "there would be many circumstances in which funds and advisers would be able to, and therefore would be required to, provide records immediately or within a few hours of a request." We encourage the SEC to require advisers, in response to a document request made in the course of an examination, to produce immediately any readily accessible documents as well as documents that are on premises. Requiring otherwise could afford unscrupulous advisers the opportunity to alter documents or delay producing incriminating records. Further, the production delay would interfere substantially with the efficiency of the examination process, particularly considering that federal investment advisers are given advance notice of most examinations along with a list of documents to be produced as part of the examination.
The Release requested comment on the benefits of requiring records to be stored using a so-called "WORM" format. We agree with the SEC that designating only one technology may not be the optimal approach. At the same time, we believe strongly that the final rule should require specifically that federal investment advisers transition to the firm's choice of a technology that is designed to prevent the alteration of stored records. Such a requirement is particularly important for "smaller" advisers that do not have the same volume as large advisers of records that are duplicative of those held by other parties. The majority in number of federal advisers are smaller in size. A technological safeguard would alleviate the concern that for these smaller federal investment advisers there are limited "alternative means to verify the accuracy of the adviser...records."
In conclusion, NASAA generally supports the Commission's efforts to afford flexibility to investment companies and federal investment advisers for maintaining electronic records. We believe that the technology safeguards that NASAA suggests would ensure that regulators and investors would be able to rely on the integrity of those electronic records. Further, we urge the Commission to narrow the definition of "promptly provide" and, thereby help ensure that SEC examiners will be able to conduct effective examinations that are based upon reliable records.
Should you have any questions, please contact me at 515-281-4441 or Royce Griffin, NASAA General Counsel at 202-737-0900.
Very truly yours,
CRAIG A. GOETTSCH
NASAA Investment Adviser