Mr. Jonathan Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Subject: File No. S7-26-98, Books and Records Requirements for Brokers and Dealers under the Securities Exchange Act of 1934
Dear Mr. Katz:
As a long time expert and independent consultant in the field of printed and electronic documents, I would like to hereby submit comments on the proposed amendments to 17 CFR part 240.
Prior to these comments, I would like to congratulate the Commission on its overall strategy and foresight with respect to electronic communications and electronic storage of records. I believe the Commission has put forward rules that not only protect the public but also allow broker-dealers to leverage the significant benefits of electronic document systems. The use of such technologies should result in lower costs and increased efficiency for both the consumer and the broker-dealers.
The following suggestions are therefore meant to further improve the current rules with respect to electronic communications and electronic storage of records. As mentioned previously, electronic documents, electronic communications and electronic storage of records drastically improve the efficiency of all those involved in the related processes. I believe that the public, the Commission and the broker-dealers will each benefit from rules and regulations that facilitate the use of such systems, while absolutely assuring that information will remain accessible in a manner acceptable to both the consumer and the regulatory authorities.
Furthermore, and as you are well aware, technology has been a significant contributor to lowering barriers to entry in the broker-dealer arena. An organization can now set itself up as an Internet-based trader at a minimal cost and gain instant access to millions of consumers without ever opening a single physical "branch". While we all applaud the benefits that stem from these new ways of conducting business, we must also recognize the potential threat that they pose, particularly in the areas of improperly staffed organizations, systems and procedures that lack redundancy and robustness and poor business ethics1. I therefore believe the Commission's rules and regulations with respect to electronic communications and electronic storage of records should take these factors into consideration.
As an Electronic Document and Printing Professional2 , I acknowledged that I have an obligation to society and that I will promote the understanding of the key role of electronic document systems in information processing technology and its power to help people communicate. The following comments are based on my 18 years experience in the industry and my designing solutions that have converted over 30 million pages from traditional "print" to electronic media. My comments will address:
Benoit Chenette, EDPP
Independent Document Technology Consultant
f (3) (iii) Store, in a different location and separately from the original, at least one duplicate copy of the record stored on any medium acceptable under § 240.17a-4 for the time required.
f (3) (iv) (B) Each index must be duplicated at least once and the duplicate copy(ies) must be stored separately and in a different location from the original copy of each index.
The storage of a duplicate copy at a different location from the original is a common practice in the Information Technology industry, especially for information that has to be retained for extended periods of time (commonly referred to as an "off site copy"). This provides recoverability in case of disaster at the main data processing site. By specifying that the duplicate copies of both the records and the indexes have to be stored in a different location, the public, the Commission and the SRO's would benefit from the same recoverability in case of disaster at the broker-dealer's main data processing site.
Since this is a common practice in the Information Technology industry,
we can safely assume that most broker-dealers have already implemented
such an "off site copy" mechanism3.
Therefore, the financial and operational impact on the broker-dealers should
I suggest solidifying this rule by adding that the broker-dealer must store a duplicate of the records and the indexes with the Third Party Download Provider. Such an approach would provide absolute assurance that the public, the Commission and SRO's always have access to the electronically stored information, irrespective of a broker-dealer ceasing to operate or refusing to collaborate.
The following paragraphs will present a few scenarios comparing paper based and electronic storage archive systems, highlighting the need for the Third Party Download Provider to have a physical copy of the records and indexes (i.e. copies of the medium).
The financial and operational impact of this measure for the broker-dealers should be minimal. In a most simplistic implementation, the broker-dealer could simply provide its second copy of the records and indexes to the third party download provider. The broker-dealer would then conform to the "different location" storage requirement and to this proposed requirement. I understand that most broker-dealers will furnish the third party download provider with an additional copy of the medium (at a small cost) and that they will incur charges from the third party download provider for this additional storage and retention of physical media. I believe these additional costs to be amply offset by the savings broker-dealers realize from electronic archival and are also to be justified by the public's, the Commission's and the SRO's having absolute assurance in the capability to access to the records.
I further suggest that the Commission state that both the broker-dealer and the third party download provider must be able to re-create reasonably well7, at any time, both the "on-line" and "printed output" customer experiences.
Electronic communications and electronic documents have numerous features that are simply not available with paper. In addition to the static display of text and images, they provide the ability to "hyperlink", to play sounds or videos, to open and close different windows, etc. The summation of all these components form the "customer experience", the basis upon which he gathers an understanding, forms an opinion or decides on a course of action. I believe that the capability to replicate reasonably well this complete "customer experience" is an absolute requirement for a "true to original" feeling when an electronic communication is examined by authorities.
In addition to the above mentioned "on-line" experience, I also believe that a large number of customers will actually print the electronic communication be it for personal retention or for futher or delayed (off-line) analysis of the communication. I therefore believe that the capability to replicate reasonably well this complete "customer experience" - including a printed version - is a requirement for a "true to original" feeling when an electronic communication is examined by the authorities.
Again, the financial and operational impact on the broker-dealer should be minimal. It is my experience that organizations migrating to electronic communications prefer by far to archive the electronic version - an alternative that is considerably less costly than archiving paper or microfilm renditions.
With regards to the ability to re-create the "customer experience" (both "on-line" and "hard copy"), it is also my experience that this is normally a requirement for the broker-dealer's own customer service department and hence does not present an additional burden to the broker-dealer.
This document is educational in intent and does not adhere to commercial copyright laws. Thus, all or any portion may be reproduced without written permission of the author. I would appreciate, however, that attribution to the author be given or maintained.
This document has been submitted in HTML at the request of the Commission. A more legible Portable Document Format (PDF) version can be found at www.nci-web.com/sec. The PDF version can be authenticated.
1. See SEC' s bulletin 98-117, "SEC Charges 44 Stock Promoters in First Internet Securities Fraud Sweep". Back
2. The Electronic Document and Printing Professional (EDPP) designation is awarded to qualified individuals involved in the use and management of electronic document and printing systems. Xplor International (www.xplor.org) is the sponsoring organization for this Certification Program. In the last nine years, the designation "EDPP" has become a world wide industry symbol for professional proficiency, experience, and commitment. Back
3. With the understanding that this ruling would force broker-dealers that have not implemented this common practice to do so. Back
4 Acknowledging that, in such a case, the broker-dealer would be completely out of compliance. However, when faced with litigation, a firm with poor business ethics could choose such a course of action to "stall" the authorities and/or to avoid further discovery. Back
5 A single 12" optical disk can contain up to 12 Gigabytes of information. At an average of 4,000 bytes per "page", that disk could contain up to 3 million "pages". Quick methods of making an optical disk unusable include scratching the surface with a sharp object, breaking or burning the disk. In contrast, destroying 3 million physical sheets of paper would require significantly more time and effort. Back
6 This potential situation could be avoided by enforcing my previously mentioned requirement for storage of the duplicates in a different location. Back
7 Many technological factors can influence the rendering of an electronic communication: the recipient' s computer operating system, the monitor size and resolution, the processor speed, the immediate or delayed Internet access, the web browser and electronic mail software' s' capabilities, the printer resolution and unprintable area, etc. The concept of "properly" rendering an electronic communication is therefore a very complex subject which, as long as the electronic communication meets the Commission' s requirements, I suggest should be left to the discretion of the broker-dealer. I believe this proposal would satisfy the Commission' s ability, in case of need, to re-create the complete "customer experience" (both "on-line" and "hard copy") and decide on its appropriateness and compliance. Back