Secretary of State
Division of Securities and Business Regulation
2 Martin Luther King, Jr. Drive, S.E.
Suite 802, West Tower
Atlanta, Georgia 30334
Telephone: (404) 656-3920
Telefax: (404) 657-8410
December 9, 1998
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 6-9
Washington, D.C. 20549
Re: File No. S7-26-98
Release No. 34-40518 (Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934)
Dear Mr. Katz:
The Georgia Division of Securities and Business Regulation would like to provide the following comments on the re-proposed amendments to Exchange Act Rules 17a-3 and 17a-4, regarding books and records requirements for brokers and dealers. Since the National Securities Markets Improvement Act of 1996 ("NSMIA") preempts states from requiring the maintenance of books and records which are different from or in addition to those required under federal law, the Division welcomes this opportunity to provide input regarding the amendments. These amendments will have a significant effect on the Divisions ability to perform its enforcement and investigative duties and fulfill its obligations to Georgia citizens.
The Division strongly supports the re-proposed amendments. The need for accurate, informative and readily-available books and records is essential to investors, state regulators and the brokerage industry alike. The amendments will provide for better examinations of brokers and dealers, thus protecting investors not only after malfeasance and fraud have occurred, but also in prevention of such occurrences. The amendments will also allow regulators to provide for quicker, easier and less intrusive office examinations and investigations, while no less thorough than previously (and potentially more so). Finally, the amendments, through better record-keeping and quicker and less-intrusive regulatory examinations and investigations, will obviously benefit the broker and dealer industry as well.
The Division supports the re-proposed amendments to Rules 17a-3(a)(6) and (7). The amendments would require information that is easy to provide and can prove invaluable to state regulators in performing more efficient and productive investigations. These Rules would be amended to require order tickets to be timed stamped when they are received and to include the identity of the individual who accepts or enters the order, in addition to the associated person responsible for the account. Clearly, identification of persons who accept or enter securities orders will greatly enhance state regulators' ability to detect unregistered activity, and will expedite investigations into disputed individual transactions by identifying all persons involved with the transaction (customer, individual accepting/entering order and associated person responsible for account).
In addition, the time stamping of order tickets will assist regulators in their ability to uncover certain statutory violations, including the increasingly common practice of some broker-dealers of trading ahead of their customers and giving transactional priority to certain persons, including insiders.
Rules 17a-3(a)(12), (17) and (18): Associated Persons Records
The records required by these amended rules will assist the Division by enabling regulators ability to more efficiently identify securities violations. The agreements between associate persons and brokers and dealers (Rule 17a-3(12)) will aid in the detection of unregistered activity and supervisory deficiencies. Maintaining information regarding customer complaints (Rule 17a-3(17)) will assist regulators in their ability to direct their efforts on specific areas, patterns of activity or personnel that are the subject of the complaints. Associated person compensation records (Rule 17a-3(18)) are crucial to regulators in establishing churning, manipulation and unauthorized activity.
The Division would further suggest that the compensation records be required to include, in addition to the amount of compensation and security involved, the following items: (1) the date of the transaction; (2) the dollar and/or unit amount of the security transacted; and (3) the account number (or other identification) of the account from which the compensation was paid. Such additional information is vital to the benefits gained by requiring compensation records.
Rule 17a-3(a)(6): Customer Account Records
The Division supports the customer account records requirements as detailed in Rule 17a-3(a)(6). This information is important not only to regulators, but also possibly even more so to the industry. Requiring broker-dealers to provide customers with a copy of their account form within thirty (30) days of opening the account, and thereafter every 36 months, or upon any change in personal information will actual assist broker-dealers in providing better and more informed service to their clients.
Rules 17a-3(g) and 17a-4(k)(1) and (2): Local Office Definition and Record Retention
The re-proposed amendments would require all broker-dealer offices consisting of two or more associated persons to maintain certain books and records on site, or, alternatively, to be able to promptly produce such books and records electronically. While the Division supports this requirement, it should be noted that all offices of broker-dealers based in Georgia who are not registered with the SEC or members of the NASD are required to maintain certain books and records on site, regardless of the number of associated persons within the office. This requirement facilitates examinations and investigations, particularly unannounced ones, both for the Division and the broker-dealers. Additionally, many of the required books and records would be maintained by such offices without any regulation in order to better operate and maintain their businesses. Indeed, many offices of two persons or less still maintain such books and records.
Consequently, while the Division supports re-proposed definition of a local office, we strongly believe that the required number of associated persons located within an office in order to constitute a "local office" should not be any higher than two. A large percentage of brokerage offices in Georgia are single person offices that would not be required to maintain certain basic books and records on site. Furthermore, the amendment as re-proposed is flexible in that it would only require books and records which are stored electronically (as many already are) to be promptly retrievable at the local office site, thus minimizing any burden on smaller offices.
Thank you for this opportunity to comment on the re-proposed amendments to the Books and Records Requirements.
Very truly yours,
Director of Securities Registration and Licensing