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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 231, 241, 271, and 276
Release No. 33-7288; 34-37182; IC-21945; IA-1562 File No. S7-13-
96
USE OF ELECTRONIC MEDIA BY BROKER-DEALERS, TRANSFER AGENTS, AND
INVESTMENT ADVISERS FOR DELIVERY OF INFORMATION; ADDITIONAL
EXAMPLES UNDER THE SECURITIES ACT OF 1933, SECURITIES EXCHANGE
ACT OF 1934, AND INVESTMENT COMPANY ACT OF 1940
AGENCY: Securities and Exchange Commission.
ACTION: Interpretation; Solicitation of Comments.
SUMMARY: The Securities and Exchange Commission ("Commission")
is publishing its views with respect to the use of electronic
media by broker-dealers, transfer agents, and investment advisers
to deliver information as required under the Securities Exchange
Act of 1934 and the Investment Advisers Act of 1940. This
interpretation is intended to provide guidance in using
electronic media to fulfill broker-dealers' obligations to
deliver information to customers, transfer agents' obligations to
deliver information upon written request, and investment
advisers' disclosure delivery obligations. The Commission also is
supplementing its interpretive release published on October 6,
1995, with seven additional examples illustrating the application
of that earlier release to information delivery under the
Securities Act of 1933, the Securities Exchange Act of 1934, and
the Investment Company Act of 1940. Finally, the Commission is
seeking comment on the issues discussed in this release.
DATES: This interpretation is effective on [insert date of
publication in the Federal Register].
Comments must be received on or before [insert date 45 days after
date of publication in the Federal Register].
ADDRESSES: Comments should be submitted in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission,
450 Fifth Street, N.W., Mail Stop 6-9, Washington, D.C. 20549.
Comments also may be submitted electronically at the following
electronic mail address: rule-comments@sec.gov. All comment
letters should refer to File Number S7-13-96. This file number
should be included on the subject line if comments are submitted
using electronic mail. Comment letters will be available for
public inspection and copying at the Commission's Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.
Electronically submitted comment letters will be posted on the
Commission's Internet web site (http://www.sec.gov).
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FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief
Counsel, or Elizabeth King, Special Counsel, or Jack Drogin,
Special Counsel (concerning Rules 10b-10, 10b-16, 15c1-5, 15c1-6,
15c2-12, and 15g-2 through 15g-9 under the Securities Exchange
Act of 1934, and the release generally), 202/942-0073, Office of
Chief Counsel, Mail Stop 5-10; Sheila Slevin, Assistant Director
(concerning information about technology generally), 202/942-
0796, Mail Stop 5-1; Michael Walinskas, Special Counsel
(concerning Rule 9b-1 under the Securities Exchange Act of 1934),
202/942-0188, Mail Stop 5-1; Elizabeth MacGregor, Special
Counsel (concerning Rule 11Ac1-3 under the Securities Exchange
Act of 1934), 202/942-0158, Mail Stop 5-1; Alan Reed, Attorney
(concerning Rules 15c2-8 and 15c2-11 under the Securities
Exchange Act of 1934), 202/942-0772, Mail Stop 5-1; Michael A.
Macchiaroli, Associate Director (concerning Exchange Act Rules
8c-1, 15c2-5, 15c3-2, 15c3-3, and 17a-5), 202/942-0132, Mail Stop
5-1; Jerry Carpenter, Assistant Director (concerning Exchange Act
Rule 17Ad-5), 202/942-4187, Mail Stop 5-1, Division of Market
Regulation; Jack W. Murphy, Chief Counsel or Amy Doberman,
Assistant Chief Counsel (concerning the Investment Advisers Act
of 1940 and the examples illustrating application of electronic
delivery to mutual funds), 202/942-0660, Mail Stop 10-6, Division
of Investment Management; Joseph Babits, Special Counsel
(concerning the examples regarding application of electronic
delivery to issuers other than mutual funds), 202/942-2910, Mail
Stop 3-7, Division of Corporation Finance, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.
SUPPLEMENTARY INFORMATION:
I. Introduction
On October 6, 1995, the Commission published an interpretive
release expressing its views on the electronic delivery of
documents, such as prospectuses, annual reports to shareholders,
and proxy solicitation materials under the Securities Act of 1933
("Securities Act"), the Securities Exchange Act of 1934
("Exchange Act"), and the Investment Company Act of 1940
("October Interpretive Release").-[1]- In the October
---------FOOTNOTES----------
-[1]- Securities Act Release No. 7233 (Oct. 6, 1995), 60
FR 53458 (Oct. 13, 1995) (hereinafter "October
Interpretive Release"). In a companion release,
the Commission proposed technical amendments to
certain of its rules that currently are premised
on the distribution of paper documents.
Securities Act Release No. 7234 (Oct. 6, 1995), 60
FR 53467 (Oct. 13, 1995). Today the Commission is
adopting these technical amendments substantially
(continued...)
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Interpretive Release, the Commission directed the Division of
Market Regulation ("Division") to review Rule 10b-10 and other
rules it administers under the Exchange Act to determine if and
under what conditions electronic delivery of information required
by those rules is feasible.-[2]- Accordingly, the Division
conducted a review of the rules it administers under the Exchange
Act. Based on that review, the Commission is issuing this
release, which expresses its views with respect to the delivery
of information through electronic media in satisfaction of
broker-dealer and transfer agent requirements to deliver
information under the Exchange Act and the rules thereunder. In
conjunction with the results of that review, the Commission is
publishing its views on the use of electronic media with respect
to the disclosure delivery obligations of investment advisers and
persons acting on their behalf-[3]- under the Investment
Advisers Act of 1940 ("Advisers Act").
This release addresses only the procedural aspects under the
federal securities laws of the delivery of information by broker-
dealers, transfer agents, and investment advisers. It does not
affect the rights and responsibilities of any party under the
federal securities laws.-[4]- This release also does not
---------FOOTNOTES----------
-[1]-(...continued)
as proposed. Securities Act Release No. 7289 (May
9, 1996).
-[2]- October Interpretive Release, supra note 1, at
53459, n.12.
-[3]- The term investment adviser is used in the rest of
this release to refer to both investment advisers
and persons acting on their behalf (including any
solicitor receiving cash compensation from an
adviser in accordance with Advisers Act Rule
206(4)-3, 17 CFR 275.206(4)-3).
-[4]- The substantive requirements and liability
provisions of the federal securities laws apply
equally to electronic and paper-based media. For
example, the antifraud provisions of the Exchange
Act and Rule 10b-5 thereunder, as well as section
206 of the Advisers Act and the rules thereunder,
apply to information delivered and communications
transmitted electronically, to the same extent as
they apply to information delivered in paper form.
See October Interpretive Release, supra note 1, at
53459, n.11. In addition, broker-dealers,
transfer agents, and investment advisers continue
to be subject to their respective recordkeeping
(continued...)
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---------FOOTNOTES----------
-[4]-(...continued)
requirements under Exchange Act Rules 17a-3 and
17a-4, 17 CFR 240.17a-3 and 240.17a-4, Exchange
Act Rules 17Ad-6 and 16Ad-7, 17 CFR 240.17Ad-6 and
240.17Ad-7, and Advisers Act Rule 204-2, 17 CFR
275.204-2.
The Commission proposed for comment amendments to the
broker-dealer record preservation rule, which would
permit broker-dealers to employ, under certain
conditions, optical storage technology to maintain
required records. See Exchange Act Release No. 32609
(July 9, 1993), 58 FR 38092 (July 15, 1993) ("Proposing
Release"). At the time these amendments were proposed,
concerns were expressed that optical disk images would
make it difficult, from an examination and discovery
perspective, to detect alterations made to handwritten
records and to records containing handwritten text. To
address these concerns, the Proposing Release solicited
comments on the adequacy of optical disk technology to
preserve handwritten records or records that contain
handwritten text.
Simultaneous with the issuance of the Proposing
Release, the Division of Market Regulation, with the
Commission's concurrence, issued a no-action letter
permitting broker-dealers to use optical disk
technology immediately. See Letter from Michael A.
Macchiaroli, Associate Director, Division of Market
Regulation, SEC to Mr. Michael D. Udoff, Chairman, Ad
Hoc Record Retention Committee, Securities Industry
Association, Inc., (June 18, 1993). The no-action
letter permits the optical storage of all paper
records, including handwritten records, except those
records required to be made under paragraphs (a)(6) and
(a)(7) of Rule 17a-3 (proprietary and customer order
tickets).
The Commission's request for comment in the Proposing
Release regarding handwritten records was in no way
intended to limit reliance on the no-action letter. In
addition, the Commission notes that paperless order
tickets (i.e., those generated by computers) may, under
the no-action letter, be stored on optical disks. The
Commission understands that most of the large firms
generate paperless order tickets rather than
handwritten order tickets.
Finally, the Commission is aware that questions have
(continued...)
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address or affect the applicability of any self-regulatory
organization ("SRO") rules,-[5]- or of any state laws.
---------FOOTNOTES----------
-[4]-(...continued)
been raised regarding the application of the optical
storage no-action letter. The staff of the Division of
Market Regulation is prepared to discuss with
interested persons any issues in connection with this
letter, as well as with the Proposing Release.
-[5]- See, e.g., National Association of Securities
Dealers, Inc. ("NASD") Notice to Members 95-80
(Sept. 26, 1995), NASD Rules of Fair Practice
35, and New York Stock Exchange, Inc. ("NYSE")
Rule 472, which govern member firm
responsibilities relating to communications with
the public, including electronic communications.
In order to determine whether new guidelines are needed for
the use of electronic communications, on January 12, 1996,
the NYSE sent a survey to its members and member
organizations regarding the use of electronic systems to
communicate with customers. The NYSE asked its members to
return the survey by February 15, 1996. NYSE Information
Memorandum (Jan. 12, 1996). The Commission understands that
the NASD intends to send a similar survey to its members.
The Commission strongly encourages the SROs to continue to
work with broker-dealers to adapt SRO supervisory review
requirements governing communications with customers to
accommodate the use of electronic communications by broker-
dealers. Because electronic delivery systems allow broker-
dealers and their associated persons to freely contact the
general public, as well as their clients, firms should
maintain effective supervision and records of associated
persons' communications to avoid potential sales practice
problems. The Commission believes, however, that the SROs'
rules concerning the supervisory requirements for electronic
communications should be based on the content and audience
of the message, and not merely the electronic form of the
communication. For example, the SROs should consider
whether electronic mail communications, that, as a practical
matter, replace or substitute for telephone conversations,
in many cases would not require advance authorization or
prior supervisory review.
The Commission also recognizes that broker-dealers are
concerned about the costs of maintaining electronic
communications as records on a long term basis, and it
intends to discuss these concerns further with the
securities industry.
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Broker-dealers, transfer agents, and investment advisers,
therefore, are reminded to consider the applicability of SRO
rules and state laws in connection with delivering information
electronically.-[6]- The release further does not affect
any rules promulgated under the Exchange Act by agencies other
than the Commission.-[7]-
Finally, this interpretation does not address the existing
paper filing requirements with the Commission,-[8]- other
---------FOOTNOTES----------
-[6]- Article 8 of the UCC was revised substantially in
1994, and the revisions were endorsed by both the
American Law Institute and the National Conference
of Commissioners on Uniform State Laws. This
revised version has been adopted by 13 states.
Under Revised Article 8 Section 8-102(6), parties
to a transaction may "transmit information by any
mechanism agreed upon by the persons transmitting
and receiving the information." Revised Article 8
eliminates the current Section 8-319 requirement
for a signed writing evidencing the terms of a
securities transaction.
In states that have not yet codified the 1994 amendments, a
confirmation bearing the broker-dealer's letterhead or some
other identifying marking, generally, fulfills that
requirement. See e.g., Kohlmeyer and Co. v. Bowen, 192
S.E.2d 400, 126 Ga. App. 700 (Ga. Ct. App. 1972); See also
Bains v. Piper, Jaffray & Hopwood, 497 N.W.2d 263 (Minn. Ct.
App. 1993) (computer generated confirmation held to satisfy
the UCC requirement for a writing).
-[7]- See, e.g., Treas. Reg. 404.4(e) and 403.5(d)
(rules regarding hold in custody repurchase
agreements applicable to government securities
brokers and dealers that are financial
institutions).
-[8]- For example, this interpretation does not apply to
any requirements to file information with the
Commission in connection with registering under
sections 15, 15A, 15B, or 15C of the Exchange Act
as a broker-dealer, national securities
association, municipal securities dealer, or
government securities broker-dealer. Broker-
dealers currently register with the Commission,
the SROs, and the states through the Central
Registration Depository ("CRD") system operated by
the NASD. A redesign of the CRD system will allow
broker-dealers to file uniform registration forms
(continued...)
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regulatory authorities,-[9]- and other third
parties.-[10]-
II. Use of Electronic Media
In the October Interpretive Release, the Commission noted
that the electronic distribution of information provides numerous
benefits and that the use of this type of medium is growing among
all participants in the securities industry. The Commission
concluded that issuers, third parties (such as persons making
tender offers or soliciting proxies), and persons acting on
behalf of such third parties may use electronic media, in
---------FOOTNOTES----------
-[8]-(...continued)
electronically. In connection with the CRD
redesign the Commission intends to adopt
amendments to Form BD, the uniform application for
broker-dealer registration under the Exchange Act.
See Exchange Act Release No. 35224 (Jan. 12,
1995), 60 FR 4040 (Jan. 19, 1995) (proposing
amendments to Form BD).
Because, at the present time, the Commission does not have
the technological capacity to receive electronic
transmissions of information from broker-dealers, transfer
agents, or investment advisers, this interpretation also
does not apply to other requirements to file information
with the Commission under the Exchange and Advisers Acts.
See, e.g., Exchange Act Rule 9b-1, 17 CFR 240.9b-1 (options
markets' obligation to file with the Commission any
revisions to an options disclosure document); Advisers Act
Form ADV, 17 CFR 279.1 (application for registration of
investment advisers). The Commission, nevertheless,
recognizes the desirability of electronic filing and is
examining the feasibility of establishing systems capable of
receiving information electronically.
-[9]- For example, the notice requirements to the
National Association of Securities Dealers, Inc.
under Exchange Act Rule 10b-17, also are not
within the scope of this interpretation. 17 CFR
240.10b-17.
-[10]- For example, Rule 15a-6 requires U.S. registered
broker-dealers, under certain circumstances, to
obtain certain foreign persons' consent to service
of process. 17 CFR 240.15a-6(a)(3)(iii)(D). The
Commission has never taken a position as to the
specific means by which the U.S. broker-dealer may
meet this obligation, but believes that a consent
to service of process may be obtained through the
use of a facsimile.
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accordance with the guidance provided in the October Interpretive
Release, to deliver information. In addition, the Commission
believes that broker-dealers, transfer agents, and investment
advisers may satisfy their delivery obligations under the
Exchange Act and the Advisers Act by using electronic media as an
alternative to paper-based media.-[11]-
This interpretation is intended to provide broker-dealers,
transfer agents, and investment advisers with guidance in using
electronic media to satisfy delivery requirements under the
federal securities laws. This release generally covers those
requirements that obligate broker-dealers to deliver information
to customers, obligate transfer agents to deliver information
upon written request, and obligate investment advisers to deliver
information to their clients or prospective clients. Broker-
dealers and investment advisers also may rely on this
interpretation in obtaining customers' and clients' consents as
required under certain provisions of the Exchange and Advisers
Acts and the rules thereunder.-[12]- A discussion of the
information delivery requirements covered by this interpretation
is provided in section III of this release ("Covered Delivery
Requirements"). Unless the Commission indicates otherwise, this
interpretive release also is intended to apply to all rules
promulgated under the Exchange and Advisers Acts, including rules
promulgated subsequent to the issuance of this release, requiring
broker-dealers or investment advisers to deliver information to
customers or clients, and to rules requiring transfer agents to
deliver information in response to written requests.
---------FOOTNOTES----------
-[11]- The exact nature of the broker-dealer's, transfer
agent's, and investment adviser's delivery
obligations is defined broadly and includes such
terms as "give," "furnish," "send," and "deliver."
The Commission believes that, in general, these
terms are sufficiently broad to accommodate the
contemplated electronic transmission of documents
by or on behalf of the broker-dealer, transfer
agent, or investment adviser and, when called for,
from a customer to a broker-dealer, transfer
agent, or investment adviser. But see infra notes
12 and 50.
-[12]- In connection with transactions in penny stocks,
however, the Commission believes that in order to
fulfill the purposes of the Securities Enforcement
Remedies and Penny Stock Reform Act of 1990,
broker-dealers should continue to have customers
manually sign and return in paper form any
documents that require a customer's signature or
written agreement. See infra note 50.
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A. General
This discussion is intended to complement the discussion in
the October Interpretive Release and to provide general guidance
concerning issues under the Exchange and Advisers Acts. The
Commission believes that broker-dealers, transfer agents, and
investment advisers should be able to satisfy their obligations
under the federal securities laws to deliver information required
under the Covered Delivery Requirements by electronic
distribution. The framework set forth in the October
Interpretive Release is applicable to such electronic
distribution.
In the October Interpretive Release, the Commission stated
that it would view information distributed through electronic
means as satisfying the delivery or transmission requirements of
the federal securities laws if such distribution results in the
delivery to the intended recipients of substantially equivalent
information as such recipients would have if the required
information were delivered to them in paper form.-[13]-
The Commission is not specifying the electronic medium or source
that broker-dealers, transfer agents, and investment advisers may
use.
Like paper documents, electronically delivered documents
must be prepared and delivered in a manner consistent with the
federal securities laws. Regardless of whether information is
delivered in paper form or by electronic means, it should convey
all material and required information. If a paper document is
required to present information in a certain order, for instance,
then the information delivered electronically should be in
substantially the same order.-[14]-
Moreover, regardless of whether information is delivered in
paper or electronic form, broker-dealers and investment advisers
must reasonably supervise firm personnel with a view to
preventing violations.-[15]- Thus, broker-dealers and
investment advisers should consider the need for systems and
procedures to deter or detect misconduct by firm personnel in
connection with the delivery of information, whether by
---------FOOTNOTES----------
-[13]- October Interpretive Release, supra note 1, at
53460. See also supra example 7.
-[14]- For a discussion of how requirements to present
information in a certain order may be applied to
documents containing hyperlinks, see example 51 in
the October Interpretive Release. Id. at 53466.
-[15]- See Exchange Act 15(b)(4)(E); Advisers Act
203(e)(5). See also NASD Rules of Fair Practice
27; NYSE Rule 342.
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electronic or paper means.-[16]-
The Commission believes that, as a matter of policy, a
person who has a right to receive a document under the federal
securities laws and chooses to receive it electronically, should
be provided with the information in paper form whenever
specifically requesting paper.-[17]-
In the October Interpretive Release, the Commission
discussed issues of notice and access that should be considered
in determining whether the legal requirements pertaining to
---------FOOTNOTES----------
-[16]- See, e.g., In re: Bryant, Securities Exchange Act
Release No. 32357 (May 24, 1993), (Commission
upheld a finding of the National Association of
Securities Dealers, Inc. that, among other things,
the failure to develop procedures to supervise a
registered representative, who sent a false
confirmation statement on behalf of the broker-
dealer, and to enforce existing procedures
constituted a failure to supervise on the part of
the president of the firm).
-[17]- For example if a person revokes consent to
receiving information electronically, even
following delivery of the information, a paper
copy should be delivered upon request.
Revocation, however, is not a prerequisite to
requesting a paper copy.
The Commission understands that it can be very costly for
broker-dealers to maintain records for long periods of time.
This is particularly true with respect to information that
is specific to a customer's account or to a transaction,
such as the type of information defined below as Personal
Financial Information. See infra section II.B. For this
reason, the Commission has limited the time period that
broker-dealers must preserve records required to be made
under Exchange Act Rules 17a-3. 17 CFR 240.17a-3.
Specifically, Exchange Act Rule 17a-4 requires broker-
dealers to preserve records for a period of six years (3
years in the case of certain types of information), the
first two years in an easily accessible place. 17 CFR
240.17a-4. For these same reasons, the Commission believes
it is reasonable to expect that broker-dealers would provide
customers with information in paper form upon request for a
period of two years. Transfer agents and investment
advisers are subject to similar recordkeeping requirements.
17 CFR 250.17Ad-6 and 240.17Ad-7; 17 CFR 275.204-2.
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delivery or transmission of documents have been
satisfied,-[18]- and stated that persons using electronic
delivery of information should have reason to believe that any
electronic means so selected will result in the satisfaction of
the delivery requirements.-[19]- The Commission believes
that broker-dealers, transfer agents, and investment advisers
should apply the same considerations in using electronic media to
satisfy their delivery obligations under the Covered Delivery
Requirements.
1. Notice
Broker-dealers, transfer agents, and investment advisers
providing information electronically should consider the extent
to which electronic communication provides timely and adequate
notice that such information is available
electronically.-[20]- When information is delivered on
paper through the postal mail, recipients most likely will be
made aware that they have received information that they may wish
to review and, therefore, separate notice is not necessary.
Information transmitted through electronic media, however, may
not always provide a similar likelihood of notice that
information has been sent that the recipient may wish to
review.-[21]- Broker-dealers, transfer agents, and
investment advisers, therefore, should consider whether it is
necessary to supplement the electronic communication with another
communication that would provide notice similar to that provided
---------FOOTNOTES----------
-[18]- October Interpretive Release, supra note 1, at
53460-61.
-[19]- Id. at 53461.
-[20]- See id. at 53460. See also infra section II.B.2.
regarding additional requirements when broker-
dealers, transfer agents, and investment advisers
send certain types of information (defined as
Personal Financial Information) to customers.
-[21]- For example, if information is provided by
physically delivered material (such as a computer
diskette or CD-ROM) or by electronic mail, that
communication itself generally should be
sufficient notice. If information is made
available electronically through a passive
delivery system, such as an Internet Web Site,
however, separate notice would be necessary to
satisfy the delivery requirements unless the
broker-dealer, transfer agent, or investment
adviser can otherwise evidence that delivery to
the customer or client has been satisfied.
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by delivery in paper through the postal mail.
2. Access
The Commission believes that customers, securities holders,
and clients who are provided information through electronic
delivery from broker-dealers, transfer agents, and investment
advisers should have access to that information comparable to
that which would be provided if the information were delivered in
paper form. Thus, the use of a particular medium should not be
so burdensome that intended recipients cannot effectively access
the information provided. Also, persons to whom information is
sent electronically should have an opportunity to retain the
information through the selected medium or have ongoing access
equivalent to personal retention.-[22]-
3. Evidence to Show Delivery
Providing information through postal mail provides
reasonable assurance that the delivery requirements of the
federal securities laws have been satisfied. The Commission
believes that broker-dealers, transfer agents, and investment
advisers similarly should have reason to believe that
electronically delivered information will result in the
satisfaction of the delivery requirements under the federal
securities laws. Thus, whether using paper or electronic media,
broker-dealers, transfer agents, and investment advisers should
consider the need to establish procedures to ensure that
applicable delivery obligations are met.
Broker-dealers, transfer agents, and investment advisers may
be able to evidence satisfaction of delivery obligations, for
example, by: (1) obtaining the intended recipient's informed
consent-[23]- to delivery through a specified electronic
---------FOOTNOTES----------
-[22]- For example, the intended recipient's ability to
download or print information delivered
electronically would enable a recipient to retain
a permanent record. See October Interpretive
Release, supra note 1, at 53460.
-[23]- See id. at 53460. If a consent is used, the
consent should be an informed consent. An
informed consent should specify the electronic
medium or source through which the information
will be delivered and the period during which the
consent will be effective, and should describe the
information that will be delivered using such
means. The broker-dealer, transfer agent, or
investment adviser also should inform the customer
(continued...)
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medium, and ensuring that the recipient has appropriate notice
and access, as discussed above; (2) obtaining evidence that the
intended recipient actually received the information, such as by
an electronic mail return-receipt or by confirmation that the
information was accessed, downloaded, or printed;-[24]- or
(3) disseminating information through certain facsimile methods.
In order to ensure that information is delivered as intended,
broker-dealers, transfer agents, and investment advisers
delivering information using either electronic or paper-media
should take reasonable precautions to ensure the integrity and
security of that information.-[25]-
B. Personal Financial Information
Certain information that broker-dealers, transfer agents,
and investment advisers deliver is specific to a particular
person's personal financial matters ("Personal Financial
Information"). For example, the information reported to
customers under Exchange Act Rule 10b-10 relates to specific
securities transactions and includes the identity and number of
shares bought or sold and the net dollar price for the shares.
Under Exchange Act Rule 10b-16, a broker-dealer that imposes
finance charges on a customer's account during a quarterly period
must deliver a quarterly statement disclosing, among other
---------FOOTNOTES----------
-[23]-(...continued)
that there may be potential costs associated with
electronic delivery, such as on-line charges.
Except where a manual signature is required under
the penny stock rules, see infra note 50, broker-
dealers may obtain consents either manually or
electronically. In most cases in which a request
for information is made through an electronic
medium, consent to receive the requested
information by means of electronic delivery may be
presumed.
In addition, if the broker-dealer, transfer agent, or
investment adviser is relying on the consent to ensure
effective delivery and the intended recipient revokes the
consent, future documents should be delivered in paper.
-[24]- For example, depending on the circumstances and
the procedures used, customers' and clients'
written consent or acknowledgement, as required
under certain Exchange and Advisers Acts rules and
discussed infra notes 28-29 and accompanying text,
may serve as sufficient evidence to show delivery.
-[25]- October Interpretive Release, supra note 1, at
53460, n.22.
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things, the account's beginning and closing balances, debits and
credits entered during the period, the interest charged, and the
rate or rates of interest. Similarly, under Advisers Act Rule
206(3)-2, investment advisers engaging in agency cross
transactions involving clients are required to send the clients
disclosure about those transactions.-[26]-
1. Confidentiality and Security
Broker-dealers, transfer agents, and investment advisers
sending Personal Financial Information should take reasonable
precautions to ensure the integrity, confidentiality, and
security of that information, regardless of whether it is
delivered through electronic means or in paper form. The
Commission believes that broker-dealers, transfer agents, and
investment advisers transmitting Personal Financial Information
electronically must tailor those precautions to the medium used
in order to ensure that the information is reasonably secure from
tampering or alteration.
2. Consent
Because of the need to maintain the confidentiality and
security of Personal Financial Information, it is important that
the intended recipient is willing to accept the delivery of such
information through electronic media and has actual notice that
the Personal Financial Information will be delivered
electronically. Therefore, in order to ensure that Personal
Financial Information can be delivered in a manner that maintains
the information's confidentiality, unless a broker-dealer,
transfer agent, or investment adviser is responding to a request
for information that is made through electronic media or the
person making the request specifies delivery through a particular
electronic medium, the broker-dealer, transfer agent, or
investment adviser should obtain the intended recipient's
informed consent prior to delivering Personal Financial
Information electronically.-[27]- This consent will ensure
that the intended recipient is willing to accept the delivery of
---------FOOTNOTES----------
-[26]- 17 CFR 275.206(3)-2(a)(2) (written confirmation of
each transaction "at or before the completion of
each such transaction"); 17 CFR 275.206(3)-2(a)(3)
(annual written disclosure statement identifying
transactions). In addition, investment advisers
having custody of client assets are required to
send an itemized statement to each client at least
quarterly showing assets in custody of the
adviser. 17 CFR 275.206(4)-2(a)(4).
-[27]- See discussion supra note 23 regarding informed
consent.
==========================================START OF PAGE 15======
Personal Financial Information through electronic media and has
actual notice that the Personal Financial Information will be
delivered electronically. The Commission believes that such
consent by the customer or client to the delivery of Personal
Financial Information may be made either by a manual signature or
by electronic means.
C. Communications From Broker-Dealers' Customers and
Investment Advisers' Clients
In addition to requirements to deliver information, the
Exchange Act and the Advisers Act provide for broker-dealers and
investment advisers to "receive" or "obtain" responses from their
customers or clients. For example, Exchange Act Rules 8c-1 and
15c2-1 require, under certain circumstances, broker-dealers to
obtain a customer's written consent in order to hypothecate
securities. Similarly, under the Advisers Act, certain
provisions call for clients to consent to a transaction or
acknowledge receipt of certain disclosures.-[28]- The
Commission generally views an electronic communication from a
customer to a broker-dealer or from a client to an investment
adviser as satisfying the requirements for such written consent
or acknowledgement.-[29]-
D. Electronic Transmission of Non-Required Disclosure
The guidance provided above is intended to permit broker-
dealers, transfer agents, and investment advisers to comply with
their delivery obligations under the federal securities laws when
using electronic media. This interpretation does not apply to
the electronic delivery of non-required information that in some
cases is being provided voluntarily to customers, securities
---------FOOTNOTES----------
-[28]- See, e.g. Advisers Act 205(a)(2) and 206(3); 17
CFR 275.206(3)-2(a)(1); 17 CFR
275.206(4)-3(a)(2)(iii).
-[29]- Of course, broker-dealers and investment advisers
should be cognizant of their responsibilities to
prevent, and the potential liability associated
with, unauthorized transactions. See, e.g., supra
note 16. In this regard, the Commission believes
that broker-dealers and investment advisers should
have reasonable assurance that the response
received from a customer or client is authentic.
In addition, for policy reason discussed infra note 50, the
Commission will continue to require broker-dealers to obtain
the manual signature of customers on certain disclosure
documents required under Exchange Act Rules 15g-2 and 15g-9.
==========================================START OF PAGE 16======
holders, and clients-[30]- in that it is not necessary
(although it is, of course, permitted) to conform the electronic
delivery of such information to the guidance in this release.
Nevertheless, the Commission urges broker-dealers, transfer
agents, and investment advisers to take into consideration the
need to implement security measures when using electronic media
to provide personal financial information.
The staff also has received inquiries about the
permissibility of using various electronic media to disseminate
advertisements for an investment adviser's services or other
information that is not subject to a delivery requirement. Such
communications are permissible, subject to the same requirements
and restrictions that apply to such communications in paper. For
example, electronically disseminated advertisements are subject
to the same prohibitions against misleading disclosure as
advertisements in paper.-[31]- Materials concerning an
adviser that are potentially available to ten or more persons
through an electronic system would be considered subject to the
recordkeeping requirements applicable to such
communications.-[32]- Similarly, if an adviser uses a
publicly available electronic medium such as a World Wide Web
site to provide information about its services, the adviser would
not qualify for the exemption from registration in section
203(b)(3) of the Advisers Act. That exemption is available only
if, among other things, an adviser does not hold itself out
generally to the public as an investment adviser.
III. Covered Delivery Requirements
For clarity, below is a list of current rules under the
---------FOOTNOTES----------
-[30]- See, e.g., Kimberly Weisul, Calvert Becomes First
Fund to Offer Info On-Line; Mutual Fund Company
Dodges the Security Issue, Investment Dealers'
Digest, Jan. 22, 1996, at 9; Jon Birger,
Prudential Web Site to Let Clients Track Their
Accounts Daily, Bond Buyer, Oct. 18, 1995, at 10.
-[31]- See 17 CFR 275.206(4)-1. Broker-dealers'
advertisements and sales literature are subject to
NASD rules, which have been recently been amended
specifically to include electronic communications.
NASD, Notice to Members 95-74 (Sept. 1995); NASD,
Notice to Members 95-80 (Sept. 26, 1995).
-[32]- 17 CFR 275.204-2(a)(11). Broker-dealers also are
subject to recordkeeping requirements that would
be applicable to all electronic communications
received and sent by the firm relating to its
business. 17 CFR 17a-4(a)(4).
==========================================START OF PAGE 17======
Exchange Act and requirements under the Advisers Act to which
broker-dealers, transfer agents, and investment advisers may
apply the guidance provided in this interpretation. The
Commission believes that the list sets forth all of the rules
that require or permit communications between broker-dealers,
transfer agents, investment advisers and customers, securities
holders, and clients under the Exchange and Advisers
Acts.-[33]- The interpretation in this release is intended
to cover all optional and required communications under the
Exchange and Advisers Acts between broker-dealers, transfer
agents, and investment advisers, and customers, securities
holders, and clients.-[34]-
A. Exchange Act
Subject to the guidelines in this release, broker-dealers
and transfer agents may fulfill their requirements to deliver
information to customers and securities holders under the
following Exchange Act rules:-[35]-
ù Rule 8c-1, which requires broker-dealers to obtain
customers' written consent in order to hypothecate
securities under circumstances that would permit the
commingling of customers' securities and to give
---------FOOTNOTES----------
-[33]- The summary provided of the delivery obligations
under the Covered Delivery Requirements is
intended for ease of reference only. It is not
intended to be a statement of all the requirements
under the rules and provisions listed, and has no
legal force or effect. Reference should be made
to the full text of the rules, which is published
in the Code of Federal Regulations, as well as to
relevant releases, interpretations, and no-action
letters, and to the full text of the Exchange and
Advisers Acts, 15 U.S.C. 77 and 78, et seq.
-[34]- But see supra notes 4-10 and accompanying text.
See also infra notes 35 and 50.
-[35]- This release does not address the prospectus
delivery requirements under Exchange Act Rule
15c2-8. 17 CFR 240.15c2-8. Broker-dealer
requirements to deliver a preliminary prospectus
in connection with the issuance of securities by
an issuer that has not previously been required to
file reports pursuant to Exchange Act Section
13(a), 15 U.S.C. 78m(a), or 15(d), 15 U.S.C.
78o(d), were addressed in the October Interpretive
Release. See October Interpretive Release, supra
note 1, at 53462, n. 31.
==========================================START OF PAGE 18======
written notice to a pledgee that, among other things, a
security pledged is carried for the account of a
customer.-[36]-
ù Rule 9b-1, which, among other things, requires a
broker-dealer to furnish to each customer, and keep
current, an options disclosure document, prior to
accepting an order to purchase or sell an option on
behalf of that customer.-[37]-
ù Rule 10b-10, which requires a broker-dealer to give or
send confirmation information to customers.-[38]-
In addition, broker-dealers must furnish to customers
upon written request information such as the factors
that affect the yield calculation related to asset-
based securities.-[39]-
ù Rule 10b-16, which requires both initial and periodic
written disclosure of the credit terms of margin
---------FOOTNOTES----------
-[36]- 17 CFR 240.8c-1(a)(1) and (f).
-[37]- 17 CFR 240.9b-1(d).
-[38]- 17 CFR 240.10b-10. This release, therefore,
resolves the issues in the October Interpretive
Release with respect to Exchange Act Rule 10b-10,
which requires broker-dealers to send
confirmations at or before completion of the
transaction by permitting electronic delivery of
the confirmation. 17 CFR 240.10b-10. See October
Interpretive Release, supra note 1, at 53459,
n.12.
In a release adopting certain amendments to Rule 10b-10, the
Commission recognized the use of a facsimile machine to send
customer confirmation statements. At that time, however,
the Commission believed that the use of other electronic
means to send confirmations should be viewed on a case-by-
case basis. See Exchange Act Release No. 34962 (Nov. 10,
1994); 59 FR 59612 (Nov. 17, 1994). This interpretation
supersedes the view expressed in the 1994 release.
Broker-dealers are reminded that, when a prospectus is
required to be delivered, it should be delivered prior to,
or concurrent with, delivery of the confirmation. Thus, if
a confirmation is sent by facsimile, the prospectus also
should be sent by facsimile or equally prompt means.
-[39]- 17 CFR 240.10b-10(a)(7).
==========================================START OF PAGE 19======
loans.-[40]-
ù Rule 11Ac1-3, which requires a broker-dealer to deliver
to each customer, upon opening a new account and on an
annual basis thereafter, an account statement
disclosing the broker-dealer's policies relating to
payment for order flow and its order routing
policies.-[41]-
ù Rule 15c1-5, which requires, under specified
circumstances, written disclosure of control if a
broker-dealer or municipal securities dealer is
controlled by, controlling, or under common control
with the issuer of a security.-[42]-
ù Rule 15c1-6, which requires a broker-dealer or
municipal securities dealer receiving advisory fees to
disclose any participation or financial interest in the
distribution of a security at or before the completion
of a transaction in such security for the account of a
customer.-[43]-
ù Rule 15c2-1, which requires broker-dealers to obtain
customers' written consent in order to hypothecate
securities under circumstances that would permit the
commingling of customers' securities.-[44]-
ù Rule 15c2-5, which requires a written statement making
disclosures prior to effecting transactions in special
insurance premium funding accounts that would involve
an extension or arrangement of credit, as well as
retaining for its files, a written statement setting
forth the basis for making a determination that the
arrangement is suitable for the customer.-[45]-
ù Rule 15c2-11, with regard to the requirement that
broker-dealers make certain information enumerated in
---------FOOTNOTES----------
-[40]- 17 CFR 240.10b-16.
-[41]- 17 CFR 240.11Ac1-3.
-[42]- 17 CFR 240.15c1-5.
-[43]- 17 CFR 240.15c1-6.
-[44]- 17 CFR 240.15c2-1(a)(1).
-[45]- 17 CFR 240.15c2-5.
==========================================START OF PAGE 20======
the rule reasonably available upon request.-[46]-
ù Rule 15c2-12, with regard to the requirements that
municipal securities underwriters provide, upon
request, a preliminary official statement (if one
exists) and a final official statement.-[47]-
ù Rule 15c3-2, which requires a broker-dealer to give or
send to its customers a written notification of a free
credit balance, that the broker-dealer may use that
free credit balance in its business operations, and
that the funds are payable upon demand of the
customer.-[48]-
ù Rule 15c3-3, which requires that broker-dealers obtain
repurchase agreements in writing and confirm in writing
the specific securities that are the subject of hold in
custody repurchase agreements.-[49]-
ù Rules 15g-3 through 15g-8, which require a broker-
dealer, among other things, to disclose to its
customers, both prior to effecting a transaction in a
penny stock and on the written confirmation, bid and
ask quotations and broker-dealer and associated person
compensation.-[50]-
---------FOOTNOTES----------
-[46]- 17 CFR 240.15c2-11(a)(4) and (a)(5).
-[47]- 17 CFR 240.15c2-12.
-[48]- 17 CFR 240.15c3-2.
-[49]- 17 CFR 240.15c3-3(b)(4).
-[50]- 17 CFR 240.15g-3 through 15g-8.
The Commission believes that the requirements under Exchange
Act Rules 15g-2 and 15g-9, which require broker-dealers to
obtain from a customer prior to effecting transactions in
penny stocks (1) a manually signed acknowledgement of the
receipt of a risk disclosure document, (2) a written
agreement to transactions involving penny stocks, and (3) a
manually signed and dated copy of a written suitability
statement, should not be met by means of electronic media.
In adopting these provisions pursuant to the Securities
Enforcement Remedies and Penny Stock Reform Act of 1990, the
Commission intended to provide customers with an opportunity
to make an informed, deliberate decision without the high
pressure sales practices that sometimes are characteristic
of transactions in these securities. For similar reasons, a
facsimile copy of a customer's signature has not been
sufficient to satisfy the requirements under Rules 15g-2 and
(continued...)
==========================================START OF PAGE 21======
ù Rule 17a-5, which requires a broker-dealer to send to
its customers audited and unaudited financial
statements.-[51]-
ù Rule 17Ad-5, which requires a transfer agent to respond
within certain time frames to written requests for the
status of items presented for transfer, for
acknowledgement of transfer instructions, for
confirmation of a transfer agent's possession of a
certificate, for a transcript of a person's account, or
for dividend and interest payments.-[52]-
B. Advisers Act
ù Section 205(a)(2) of the Advisers Act, which requires
an investment adviser to obtain its client's consent to
the assignment of an advisory contract.-[53]-
---------FOOTNOTES----------
-[50]-(...continued)
15g-9 that certain documents be manually signed and dated.
See Exchange Act Release No. 32576 (July 2, 1993); NASD
Notice to Members 90-65 (Oct. 1990); NASD Notice to Members
90-18 (Mar. 1990).
While broker-dealers may not meet the signature requirement
under Rule 15g-9 by electronic means, the Commission
believes that, consistent with the guidance set forth in
this interpretation, they may meet their delivery
obligations to their customers under this rule by electronic
means. The "risk disclosure document" that broker-dealers
are required to furnish to their customers under Rule 15g-2
is subject to strict formatting and typefacing restrictions.
In order to comply with the requirements set forth in the
instructions to Schedule 15G, a risk disclosure document
delivered electronically, when printed, would have to result
in a document that meets the requirements and contains the
exact text of Schedule 15G.
When the Commission next reviews the penny stock rules, it
may be willing to consider a "cooling-off" period as an
alternative to the requirement of a manual signature under
Rules 15g-2 and 15g-9. The Commission requests comment on
this approach.
-[51]- 17 CFR 240.17a-5(c).
-[52]- 17 CFR 17Ad-5. Under certain circumstances,
transfer agents currently are permitted to respond
to requests by telephone.
-[53]- 15 U.S.C. 80b-5(a)(2).
==========================================START OF PAGE 22======
ù Section 205(a)(3) of the Advisers Act, which requires
an investment adviser to notify its clients, if the
adviser is organized as a partnership and there is a
change in members of partnership.-[54]-
ù Section 206(3) of the Advisers Act, which prohibits
certain principal and agency transactions with a client
without prior written disclosure about the transaction
and consent of the client.-[55]-
ù Rule 204-3, which requires investment advisers to
deliver a written disclosure statement, or "brochure,"
to clients at least 48 hours before entering into an
advisory contract, unless the client has the right to
terminate the contract without penalty within five
business days.-[56]- In addition, investment
advisers are required, except in certain cases, to make
available "without charge" updates to its
brochure.-[57]-
---------FOOTNOTES----------
-[54]- 15 U.S.C. 80b-5(a)(3).
-[55]- 15 U.S.C. 80b-6(3).
-[56]- 17 CFR 275.204-3(b). To the extent an adviser
relies on 48-hour advance delivery rather than the
five-day cancellation period, the 48-hour period
would be measured from the time at which notice is
given to the client that the statement is
available through a specified electronic medium or
source. Investment advisers should have reason to
believe that the nature of the system or any
limitations on the client's access to that system
will not result in any material delay in the
client's access to the information following
receipt of the notice.
-[57]- 17 CFR 275.204-3(c). If a client has elected to
receive the disclosure statement electronically,
and neither the adviser nor any system used by the
adviser to disseminate updates electronically
imposes a charge upon the client specifically for
the receipt of this information, the Commission
would consider this requirement satisfied, even
though a system selected by a client to gain
access to the adviser's system may impose charges
for access, printing or downloading.
Alternatively, the Commission would consider the
requirement satisfied so long as a paper version
of the update is available without charge,
(continued...)
==========================================START OF PAGE 23======
ù Rule 205-3(d), which requires disclosure regarding
advisory arrangements involving performance
fees.-[58]-
ù Rule 206(3)-2, which permits agency cross transactions,
provided that the investment adviser provides general
written disclosure about its role in the transactions,
receives from clients consent to agency cross
transactions, and sends both written confirmation of
each transaction and an annual written disclosure
statement.-[59]-
ù Rule 206(4)-2, which requires certain disclosure
relating to adviser custody of client
assets.-[60]-
ù Rule 206(4)-3, which requires certain disclosures to be
made by solicitors who receive cash solicitation fees
from advisers and a signed and dated acknowledgement
from clients of the receipt of the investment advisers
and solicitors written disclosure
statements.-[61]-
IV. Additional Securities Act, Exchange Act, and Investment
Company Act Examples
The October Interpretive Release included a series of
examples illustrating the general concepts set forth earlier in
that release in order to provide guidance in applying those
concepts to specific facts and circumstances. The Commission is
publishing here the following, additional examples to provide
---------FOOTNOTES----------
-[57]-(...continued)
notwithstanding any charges that may be imposed
upon a client for access, printing or downloading
by the system used by an adviser to disseminate
updates electronically.
-[58]- 17 CFR 275.205-3(d).
-[59]- 17 CFR 275.206(3)-2.
-[60]- 17 CFR 275.206(4)-2.
-[61]- 17 CFR 275.206(4)-3. Cf. Investment Company Act
Release No. 21260 at n. 38 (July 27, 1995), 60 FR
39574 (contemplating that notification required
under proposed Investment Company Act Rule 3a-4
could be provided electronically by investment
advisers and other sponsors of investment advisory
programs).
==========================================START OF PAGE 24======
further guidance and illustration. These examples are based on
questions that have been raised with the staff by industry
representatives since the publication of the October Interpretive
Release. Any party (whether or not a registered investment
company) may look to these examples for guidance.
(1) Company XYZ places a prospectus for any securities
offering on its electronic mail system. Company XYZ also uses
its electronic mail system to disseminate documents required
under the Exchange Act. Employees use the company's electronic
mail in the ordinary course of performing their duties as
employees and ordinarily are expected to log-on to electronic
mail routinely to receive mail and communications. Those
employees who do not log-on have alternative means of receiving
electronic mail messages, such as having them sent to secretaries
or co-workers who then deliver them to the employee. The
electronic mail either includes the actual document or announces
the availability of the document and provides information as to
how to access the document through the local area network. The
electronic mail also prominently states that a paper version of
the document is available upon request.
This would satisfy delivery obligations with respect to
employees who use the company's electronic mail system in the
course of performing their duties or who are expected to have
alternative means made available to receive electronic mail
messages.
(2) Company XYZ places a notice announcing its unregistered
Dividend Reinvestment Plan-[62]- on its Internet Web site
under a menu heading "Dividend Reinvestment Plan." The
announcement also contains the phone number of the Company's
agent (which is independent from the Company) from whom
additional information regarding the operation of the Dividend
Reinvestment Plan can be obtained. Additionally, the Company's
Internet Web site contains a hypertext link to the independent
agent's Internet Web site where a brochure describing the
operation of the Dividend Reinvestment Plan and an enrollment
card can be obtained.
---------FOOTNOTES----------
-[62]- A company need not register its dividend
reinvestment plan under the Securities Act where
its involvement in the plan is limited to
administrative or ministerial functions. For
additional information, including a listing of
permitted functions, see Securities Act Release
No. 4790 (July 13, 1965), 30 FR 9059 (July 20,
1965); Securities Act Release No. 5515 (July 22,
1974), 39 FR 28520 (August 8, 1974); Securities
Act Release No. 6188 (February 1, 1980), 45 FR
8960 (February 11, 1980).
==========================================START OF PAGE 25======
This would be permissible, so long as the information on the
Company's Internet Web site is limited to the announcement of the
unregistered Dividend Reinvestment Plan and the name and address
of the independent agent from whom additional information can be
obtained. (This would be analogous to the communications that an
issuer of an unregistered plan could make in paper format.) As
with communications in paper format, the Company may not use its
Internet Web site to advertise the Dividend Reinvestment Plan or
its benefits. Further, the use of a hypertext link to the home
page of the independent agent would be permitted; however, the
Company could not provide a hypertext link directly to the
Dividend Reinvestment Plan materials.
(3) Brokerage firm ABC, a recordholder of Company XYZ's
common stock, received consents from beneficial holders of
Company XYZ's common stock for electronic delivery of Company
XYZ's annual report and proxy materials and for electronic
processing of voting instructions. These customers are provided
with the Internet Web site address where Company XYZ's annual
report and proxy materials are located and the Internet Web site
address where they can provide their voting instructions
electronically to the brokerage firm.
The electronic processing of voting instructions from
beneficial holders and the electronic voting of proxies would be
consistent with the proxy rules. Issuers and others are reminded
to consider any applicable state laws or self-regulatory
organization rules.
(4) A fund makes supplemental sales literature and its
prospectus available through a commercial on-line service. Under
section 5(b) of the Securities Act, sales literature, whether in
paper or electronic form is required to be preceded or
accompanied by a final prospectus meeting the requirements of
section 10(a) of the Securities Act. By contrast, an
advertisement satisfying the requirements of Securities Act Rule
134 or 482 need not be preceded or accompanied by a prospectus.
Users could click on a box in the supplemental sales literature
to have the prospectus downloaded or to request that a prospectus
be mailed. While the system permits the sales literature to be
viewed on-line, it does not allow users to view the prospectus.
Unlike the system in example 36 in the October Interpretive
Release, this system would not require that a user have
downloaded or printed the prospectus before viewing the
supplemental sales literature. Users accessing the supplemental
sales literature would give specific consent to electronic
delivery of the prospectus.
This would not satisfy the prospectus delivery requirement
because there would not be sufficient access to the prospectus.
Because the system does not give users the opportunity to view
the prospectus, it would lack the sort of reasonably comparable
==========================================START OF PAGE 26======
access to the prospectus and the sales literature present in
examples 14, 15, and 35 in the October Interpretive Release. The
opportunity to request that a prospectus be mailed or downloaded
would not, under current technology, be considered to give
investors sufficient access to the prospectus. Instead, it would
be analogous to giving investors sales literature in paper with a
toll-free telephone number for requesting the prospectus: under
those circumstances the prospectus would be received later and
would not be considered to have preceded or accompanied the sales
literature.-[63]-
(5) A fund places its prospectus on its site on the World
Wide Web or some other electronic system. Shareholders provide a
written, revocable consent to receive prospectuses electronically
through the system. The consent informs shareholders that the
current version of each prospectus will be available continuously
on the system and that the fund will use the quarterly account
statement or quarterly newsletter as the means of notification of
prospectus amendments. It also states that another means of
notification may be used, but only after shareholders have been
notified of the change by the then current means of
notification.-[64]- The fund replaces its prospectus with
an annual amendment updating the fund's financial information and
making other changes.-[65]- The fund has provided
notification that the prospectus will be updated by including
notification in the preceding account statement or shareholder
newsletter; the notification provides the approximate date on
which the amendment will be available. A subsequent amendment to
the fund's prospectus reflects the addition of a redemption fee.
---------FOOTNOTES----------
-[63]- As technology develops, some users may have the
capacity to download and view a prospectus in no
more time than it takes to jump via hyperlink from
the sales literature to the prospectus. Under
those circumstances, the capacity to download
would be considered to give those users reasonably
comparable access to the prospectus that would
provide sufficient access.
-[64]- A change in means of notification under such
circumstances would also be effective in the case
of notification of the availability of shareholder
reports discussed in example 46 in the October
Interpretive Release. October Interpretive
Release, supra note 1.
-[65]- Under section 10(a)(3) of the Securities Act, a
fund that continuously offers its shares would
have to amend its prospectus no less frequently
than every 16 months in order to include updated
financial statements.
==========================================START OF PAGE 27======
Notification of the prospectus amendment has been included in the
preceding statement or newsletter.-[66]-
Just as the use of a newsletter or statement in example 46
in the October Interpretive Release constituted sufficient notice
for effective delivery of the semi-annual reports required under
the Investment Company Act of 1940, the use of a newsletter or
statement here would constitute sufficient notice for effective
delivery with respect to the scheduled prospectus update.
(6) A fund's on-line prospectus has the same text as the
paper version, but the text appears in a different format. For
example, text that appears as a block in the margin of a page in
the paper prospectus appears in a box in the flow of the text in
the electronic version. The fund does not make a separate filing
under Securities Act Rule 497 with respect to the electronic
version.
The mere difference in format without any difference in text
would not qualify the electronic version as a different "form of
prospectus" for which filing is required.
(7) An investment company produces both an electronic
version (such as a CD-ROM) and a paper version of its prospectus.
Each version contains all information required by, and otherwise
complies with, the applicable form and all other applicable
provisions of the federal securities laws. The electronic
version contains a movie that does not appear in the paper
version. Each version of the prospectus indicates that there may
be other versions of the prospectus and, if the issuer determines
to make such other versions available, provides information on
how to obtain such other versions.-[67]- The paper version
does not include a summary or transcript of the movie in the
electronic version. Both versions of the prospectus are filed
with the Commission as part of the company's registration
---------FOOTNOTES----------
-[66]- With unscheduled material prospectus amendments
for which such advance notice would not be
feasible, the fund would need to use other forms
of notification such as a postcard or e-mail
message. See October Interpretive Release, supra
note 1, example 43.
-[67]- The facts of this example should not be read as
imposing any obligation on the issuer to make such
other versions of its prospectus available to any
person.
==========================================START OF PAGE 28======
statement, or separately pursuant to Rule 497.-[68]-
The use of either version of the prospectus to satisfy
delivery requirements would be permissible.-[69]- The
issuer (or other party to whom the law assigns the
responsibility) remains responsible for ensuring that each
version satisfies applicable statutory requirements.-[70]-
V. Solicitation of Comments
Any interested person wishing to submit written comments
relating to the views expressed in this release are invited to do
so by submitting them in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Mail Stop 6-9, Washington, D.C. 20549. Comments also may
be submitted electronically at the following electronic mail
address: rule-comments@sec.gov. All comment letters should
refer to File Number S7-13-96. This file number should be
included on the subject line if comments are submitted using
electronic mail. Comment is requested not only on the specific
issues discussed in detail in the release, but on any other
issues that should be considered in connection with facilitating
the use of electronic media by broker-dealers, transfer agents,
and investment advisers. Comment is sought from both the point
of view of the sender and the intended recipient. The Commission
further requests comment on any competitive burdens that may
result from this interpretation. Comments must be received on or
before [insert date 45 days after date of publication in the
Federal Register]. Comments received will be available for
public inspection and copying in the Commission's public reading
room, 450 Fifth Street, N.W., Washington, D.C. 20549.
Electronically submitted comment letters will be posted on the
Commission's Internet web site (http://www.sec.gov).
List of Subjects
17 CFR Parts 231 and 241
---------FOOTNOTES----------
-[68]- Alternatively, the company may file with the
Commission as an appendix to the prospectus the
script of the movie and a fair and accurate
narrative description of the graphic or image
material. See October Interpretive Release, supra
note 1, example 13.
-[69]- Of course, the general principles concerning
electronic delivery, as described in the October
Interpretive Release, supra note 1, would apply.
-[70]- See id. at 53460.
==========================================START OF PAGE 29======
Securities.
17 CFR Parts 271 and 276
Investment companies, Securities.
Amendment to the Code of Federal Regulations
The Commission is amending Title 17, Chapter II of the Code
of Federal Regulations in the manner set forth below:
PART 231 - INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT
OF 1933 AND GENERAL RULES AND REGULATIONS THEREUNDER
Part 231 is amended by adding Release No. 33-7288 and the
release date of May 9, 1996 to the list of interpretive releases.
PART 241 - INTERPRETATIVE RELEASES RELATING TO THE SECURITIES
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
Part 241 is amended by adding Release No. 34-37182 and the
release date of May 9, 1996 to the list of interpretive releases.
PART 271 - INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT
COMPANY ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER
Part 271 is amended by adding Release No. IC-21945 and the
release date of May 9, 1996 to the list of interpretive releases.
PART 276 - INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT
ADVISERS ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER
Part 276 is amended by adding Release No. IA-1562 and the
release date of May 9, 1996 to the list of interpretive releases.
By the Commission.
Jonathan G. Katz
Secretary
Dated: May 9, 1996