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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-38245; File No. S7-21-93]
RIN 3235-AF91
REPORTING REQUIREMENTS FOR BROKERS OR DEALERS UNDER THE
SECURITIES EXCHANGE ACT OF 1934
AGENCY: Securities and Exchange Commission.
ACTION: Final Rule.
SUMMARY: The Securities and Exchange Commission ("Commission")
is amending its broker-dealer record preservation rule to allow
broker-dealers to employ, under certain conditions, electronic
storage media to maintain records required to be retained. The
amendments reflect a recognition of technological developments
that will provide economic as well as time-saving advantages for
broker-dealers by expanding the scope of recordkeeping options
while at the same time continuing to require broker-dealers to
maintain records in a manner that preserves their integrity. The
Commission is also issuing an interpretation of its record
preservation rule relating to the treatment of electronically
generated communications.
EFFECTIVE DATE: The amendments become effective [Insert 60
days after publication in the Federal Register.]
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli,
Associate Director (202/942-0132), Peter R. Geraghty, Assistant
Director (202/942-0177) or Barbara A. Stettner, Staff Attorney
(202/942-0734), Division of Market Regulation, Securities and
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Exchange Commission, 450 Fifth Street, N.W., Mail Stop 5-1,
Washington, D.C. 20549.
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SUPPLEMENTARY INFORMATION
I. Introduction
On July 9, 1993, the Commission issued a release ("Proposing
Release") requesting comment on proposed amendments to its
broker-dealer record preservation rule, Rule 17a-4,-[1]-
that would allow broker-dealers to employ, under certain
conditions, optical storage technology.-[2]- The proposed
amendments also would codify a staff no-action position that
allows broker-dealers to use microfiche as a storage
medium.-[3]- Simultaneous with the issuance of the
Proposing Release, the Division of Market Regulation
("Division"), with the concurrence of the Commission, issued a
no-action letter allowing broker-dealers to utilize optical
storage technology immediately, under certain
conditions.-[4]- Based on the comments received and the
experience gained by the Commission under the no-action letter,
---------FOOTNOTES----------
-[1]- 17 CFR 240.17a-4. Rule 17a-4 sets forth the
records to be preserved by certain exchange
members, brokers, and dealers.
-[2]- Securities Exchange Act Release No. 32609 (July 9,
1993), 58 FR 38092 (July 15, 1993).
-[3]- Letter from Nelson S. Kibler, Assistant Director,
Division of Market Regulation, SEC to Robert F.
Price, Alex.Brown & Sons (November 3, 1979).
-[4]- Letter from Michael A. Macchiaroli, Associate
Director, Division of Market Regulation, SEC to
Michael D. Udoff, Chairman, Ad Hoc Record
Retention Committee, Securities Industry
Association ("SIA") (June 18, 1993).
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the Commission is adopting the proposed amendments with certain
changes discussed herein.
Set forth below is a summary of the proposed amendments, a
summary of the comment letters received in response to the
Proposing Release, a description of the final rule amendments,
and an interpretation relating to the retention of electronically
generated communications. The Commission is also providing
notice of a staff related no-action position regarding other
recordkeeping requirements under the Securities Exchange Act of
1934 ("Exchange Act").
The Commission's Proposal
The Commission proposed to amend its record retention rule,
Rule 17a-4, to expand broker-dealer record retention options by
permitting broker-dealers to use optical storage technology for
information required to be maintained under these rules. The
Proposing Release described optical storage technology as storage
technology which "allows for digital data recording in a non-
rewriteable, non-erasable format, such as write once, read many
("WORM") . . . . Non-rewriteable optical storage records
digital information by employing a laser heat source to burn a
pattern on a metallic film on a disk surface that can hold
billions of bytes of data."
In the Proposing Release, the Commission noted the
importance for recordkeeping of ready access, reliability, and
permanence of records. Therefore, the proposed rule included
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safeguards against data erasure, provisions for immediate
verification of the stored material, and requirements for back-up
facilities. Specifically, the conditions included requirements
that broker-dealers using optical disk storage systems employ
non-rewriteable, non-erasable technology that verifies
automatically the quality and accuracy of the optical storage
recording process, duplicate in a separate optical disk all
information preserved and maintained by means of optical storage
technology, serialize the original and duplicate optical disks,
and time-date the information placed on the optical disks. In
addition, to facilitate full access to records during
examinations by the self-regulatory organizations ("SROs") and
the Commission, broker-dealers would be required to index the
optical disks and place the index on optical disk, and would be
required to have the capability to readily reproduce records kept
on optical disks in any medium acceptable under the final rule
amendment, as required by the SROs and the Commission.
The Proposing Release also solicited comment regarding the
adequacy of optical disk technology to preserve handwritten
records or records that contain handwritten text, given the
difficulties associated with detecting alterations made to
handwritten text preserved through optical disk
technology.-[5]-
---------FOOTNOTES----------
-[5]- In response to these concerns, the Division's no-
action letter permitted optical storage of all
paper records, including handwritten records,
except those records required to be made under
(continued...)
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The Commission received 13 comment letters in response to
the Proposing Release.-[6]- Several commenters explained
that the description of optical storage technology in the
Proposing Release included only one specific type of writing
technology known as ablative writing,-[7]- and requested
clarification that the final rule would apply to other forms of
optical disk technology that met the requirements of the rule.
In addition, a few commenters objected to limiting the acceptable
storage medium to optical disk technology and recommended that
the rule apply to other electronic storage media, including
optical tape.-[8]- More recently, the SIA requested
clarification as to whether the Commission considers CD-ROM to be
---------FOOTNOTES----------
-[5]-(...continued)
paragraphs (a)(6) and (a)(7) of Rule 17a-3
(proprietary and customer order tickets).
-[6]- The comment letters are available for public
inspection and copying in the Commission's public
reference room located at 450 Fifth Street, N.W.,
Washington, D.C. (File No. S7-21-93).
-[7]- Ablative technology means that, by use of a laser,
a pattern is burned onto a metallic film on an
optical disk. Other methods of optical disk
technology utilize a laser to record information
onto the optical disk, but unlike ablative
technology, the laser does not necessarily "burn"
a pattern onto the disk.
-[8]- The SIA commented that optical tape provides the
same safeguards against data erasure and
manipulation as optical disk provides but allows
for storage of greater amounts of data. Letter
from Michael D. Udoff, Chairman, Ad Hoc Record
Retention Committee of the SIA to Jonathan G.
Katz, Secretary, SEC (September 30, 1993).
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a form of optical disk technology.-[9]- Commenters that
addressed the issue of the adequacy of optical disk technology in
preserving handwritten records or records that contain
handwritten text objected to any restrictions on the types of
records broker-dealers can maintain using optical storage
technology.
II. Description of Rule Amendments
A. Scope of Permissible Electronic Storage Media
In the Proposing Release, the Commission did not intend the
definition of optical storage technology to include only an
ablative methodology of storage. The Commission recognizes that
other methods of electronic storage technology exist, including
optical tape and CD-ROM, which are available in a WORM, non-
rewriteable version.-[10]- The Commission is adopting a
rule today which, instead of specifying the type of storage
technology that may be used, sets forth standards that the
electronic storage media must satisfy to be considered an
acceptable method of storage under Rule 17a-4. Specifically,
---------FOOTNOTES----------
-[9]- Letter from Mark A. Egert, Assistant General
Counsel, SIA to Michael A. Macchiaroli, Associate
Director, Division of Market Regulation, SEC
(February 15, 1996) (arguing that CD-ROMs are
simply one of several different optical disk sizes
that are commercially available.)
-[10]- The Commission understands that additional methods
also available in a WORM, non-rewritable version
include, for example, alloying, bubble-forming,
moth-eye (Plasmon), phase-change, dye/polymer, and
magneto-optic.
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because optical tape, CD-ROM, and certain other methods of
electronic storage are available in WORM and can provide the same
safeguards against data manipulation and erasure that optical
disk provides, the final rule clarifies that broker-dealers may
employ any electronic storage media that meets the conditions set
forth in the final rule.-[11]-
B. Handwritten Records
In the Proposing Release, the Commission expressed concern
and requested comment regarding the use of optical disk
technology to preserve handwritten records and records containing
handwritten text. As indicated in the Proposing Release, the
Commission's primary concern was that, from the standpoint of
examinations and enforcement of the securities laws, optical disk
images (as well as microfilm or microfiche images) make it
difficult to detect forgery and alterations made to handwritten
text.
The Commission recognizes that microfilm is a form of record
retention for handwritten records that has been permitted since
1970, and the Commission understands few broker-dealers currently
keep documents in hard copy or paper format. The Commission's
experience since 1970 relating to the retention of handwritten
records on microfilm has generally been positive. The Commission
---------FOOTNOTES----------
-[11]- The amendment the Commission is adopting today
also permits the use of "micrographic media" which
is defined to include microfilm or microfiche, or
any similar media, which codifies an earlier
Commission staff no-action position. See Letter
from Nelson S. Kibler, supra note 3.
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further understands that many of the larger broker-dealers no
longer create traditional order tickets (with or without
handwritten notations) because such broker-dealers enter most
orders directly through electronic systems which automatically
retain an electronic record of the trade entry.
In view of the existing use of microfilm and microfiche
for record retention, the Commission believes that allowing
preservation of handwritten records in electronic storage media
would not significantly increase the difficulty of detecting
forgery or alterations on these records. Accordingly, the
Commission is permitting storage of handwritten records and
records containing handwritten text using electronic storage
media meeting the requirements set forth in the final rule
adopted today.-[12]- Nonetheless, in the future, if
difficulties arise in detecting abuses in handwritten records
stored in electronic format, the Commission may revisit this
issue both with regard to electronic storage media, as well as
---------FOOTNOTES----------
-[12]- But see infra note 16 and accompanying text for
certain limited exceptions.
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microfilm and microfiche.-[13]-
C. Creation of a Duplicate Record
The Proposing Release would have required a broker-dealer to
copy all of the information contained on an original disk onto a
separate, duplicate disk. The SIA commented that broker-dealers
should be permitted to store the duplicate record on any medium
acceptable under Rule 17a-4. The SIA explained that clearing
firms frequently have to provide copies of records to their
correspondent firms that may not have optical disk technology.
Therefore, according to the SIA, clearing firms may be obligated
to maintain certain records in another media for the
correspondents' use.-[14]- The Commission agrees that it
is appropriate to permit storage of the duplicate record on any
---------FOOTNOTES----------
-[13]- Recently, the Commission published 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
Exchange Act and the Investment Advisers Act of
1940. Securities Exchange Act Release No. 37182
(May 9, 1996), 61 FR 24644 (May 15, 1996) ("May
Interpretive Release"). As the Commission noted
in the May Interpretive Release, the staff of the
Division also reminds broker-dealers, transfer
agents, and clearing agencies of their
responsibilities to prevent, and the potential
liability associated with, unauthorized
transactions. In this regard, broker-dealers,
transfer agents, and clearing agencies should have
reasonable assurance that information preserved by
means of electronic storage media, including
customer signatures, is authentic. See id. at
note 29.
-[14]- See Letter from Michael D. Udoff, supra note 8.
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medium acceptable under Rule 17a-4, and accordingly, the final
amendments reflect this change.-[15]-
D. Audit System Requirement
The Proposing Release would have required a broker-dealer to
"have in place an audit system providing for accountability
regarding all access to records maintained and preserved using
optical storage technology and any changes made to every original
and duplicate optical disk." Commenters sought clarification as
to whether this provision requires maintenance of a log of all
persons who have the capability or authority to access optical
disks, or maintenance of a log indicating each instance where
data is added to a disk. The rule adopted by the Commission
today requires an audit system to be utilized only when records
required to be maintained under Rule 17a-4 are being entered or
when any additions to existing records are made. Therefore, an
audit record is not required when a record is accessed but cannot
be altered by the reader.
E. Third Party Down-Load Provider
The Proposing Release would require broker-dealers to have
arrangements with at least one third party that has the ability
to download information from the broker-dealer's electronic
---------FOOTNOTES----------
-[15]- Another issue raised by several commenters
concerns the time at which the duplicate must be
created. Broker-dealers will be permitted to wait
to make the duplicate until the original optical
disk is full, provided that broker-dealers
maintain the duplicate data on another acceptable
medium such as paper or micrographic media until
it creates the duplicate optical disk.
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storage system to another acceptable medium. The third party
must submit undertakings to the SRO for the broker-dealer
indicating that it agrees to promptly furnish information
necessary for the Commission's staff and its designees to
download information from a broker-dealer's electronic storage
system to another acceptable medium, and take reasonable steps to
provide access to information contained on a broker-dealer's
electronic storage system. The Commission is adopting this
requirement substantially as proposed.
F. Escrow Agent
Under the Proposing Release, broker-dealers would be
required to keep current all information necessary to download
records and indices stored on optical disks. Alternatively,
broker-dealers who use outside service bureaus to preserve
records could place in escrow and keep current a copy of the
information necessary to access the format (i.e., the logical
layout) of the optical disks and to download records stored on
optical disks. This condition was intended to ensure access to
information preserved on optical disks when the broker-dealer is
no longer operational, when the broker-dealer refuses to
cooperate with investigative efforts of the Commission or the
SROs, or when the optical disk has not been properly indexed.
The SIA commented that they believed this requirement duplicated
the required third party undertaking in the proposed amendments.
The third party undertaking was intended to act as a back-up to
the escrow requirement, and therefore the Commission does not
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agree that it would be unnecessary and duplicative to require
broker-dealers to keep or escrow the information necessary to
download records from optical disk. Accordingly, the final rule
adopted today includes such proposed requirement.
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III. Staff No-Action Position
The Commission also is providing notice that the staff of
the Division will not recommend enforcement action to the
Commission if broker-dealers, transfer agents, and clearing
agencies fulfill their record retention and preservation
requirements set forth in the following rules under the Exchange
Act by using electronic storage media as permitted by the final
amendments to Rule 17a-4(f) described herein:
Rule 3a51-1 (17 CFR 240.3a51-1)
Rule 15a-6 (17 CFR 240.15a-6)
Rule 15c1-7 (17 CFR 240.15c1-7)
Rule 15c2-5 (17 CFR 240.15c2-5)
Rule 15c2-11 (17 CFR 240.15c2-11)
Rule 15c3-1 (17 CFR 240.15c3-1)
Rule 15c3-3 (17 CFR 240.15c3-3)
Rule 15g-3 (17 CFR 240.15g-3)
Rule 15g-4 (17 CFR 240.15g-4)
Rule 15g-5 (17 CFR 240.15g-5)
Rule 15g-6 (17 CFR 240.15g-6)
Rule 17a-2 (17 CFR 240.17a-2)
Rule 17a-5 (17 CFR 240.17a-5)
Rule 17a-6 (17 CFR 240.17a-6)
Rule 17a-7 (17 CFR 240.17a-7)
Rule 17a-8 (17 CFR 240.17a-8)
Rule 17f-1 (17 CFR 240.17f-1)
Rule 17f-2 (17 CFR 240.17f-2)
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Rule 17Ad-6 (17 CFR 240.17Ad-6)
Rule 17Ad-10 (17 CFR 240.17Ad-10)
Rule 17Ad-11 (17 CFR 240.17Ad-11)
Rule 17Ad-13 (17 CFR 240.17Ad-13)
Rule 17Ad-15 (17 CFR 240.17Ad-15).
The staff of the Division believes that the recordkeeping
requirements under Exchange Act Rules 15g-2 and 15g-9-[16]-
should not be met by means of electronic storage media, and the
records required by such rules should be maintained and preserved
in paper format for the prescribed time period. Rules 15g-2 and
15g-9 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. Because the Commission, in the May Interpretative
Release, did not permit the use of electronic media to satisfy
the requirements of Rules 15g-2 and 15g-9, the staff of the
Division believes it would not be appropriate to permit the
storage of records required by such rules using electronic
storage media.-[17]-
---------FOOTNOTES----------
-[16]- 17 CFR 240.15g-2 and 240.15g-9.
-[17]- See May Interpretive Release at note 50.
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IV. Electronic Communications
Finally, the Commission is aware that many questions have
been raised regarding the applicability of Rule 17a-4(b)(4) to
electronic mail communications ("e-mail") and Internet
communications. In the May Interpretive Release, the Commission
discussed its beliefs regarding the adaptation of SRO supervisory
review requirements governing communications with customers to
accommodate the use of electronic communications by broker-
dealers. The Commission recommended that the SROs work with
broker-dealers with respect to the adaptation of such rules and
recommended that the SRO 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."-[18]-
The Commission understands that broker-dealers use e-mail
and the Internet to communicate important information relating to
the broker-dealer's business internally, to customers, and to the
general public. The Commission is also aware that many broker-
dealers use such electronic systems to communicate about issues
---------FOOTNOTES----------
-[18]- See id. at note 5. The Commission notes that the
New York Stock Exchange, Inc. ("NYSE") has
submitted a proposal to modify its supervisory
rules which will require prior supervisory review
of those communications with the general public
and customers which include advertisements, market
letters, sales literature, and similar types of
communications, as well as research reports. The
proposal also requires members to develop
reasonable procedures for review of registered
representatives' communications with the public
relating to their business. See File No. SR-NYSE-
96-26.
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unrelated to the business of the broker-dealer. Consistent with
the Commission's recommendation to the SROs regarding the
appropriate standard for prior supervisory review for electronic
communications, the Commission believes that for record retention
purposes under Rule 17a-4, the content of the electronic
communication is determinative, and therefore broker-dealers must
retain only those e-mail and Internet communications (including
inter-office communications) which relate to the broker-dealer's
"business as such."
V. Summary of Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act, which became effective on
January 1, 1981, imposes procedural steps applicable to agency
rulemaking that has a "significant economic impact on a
substantial number of small entities."-[19]- The Chairman
---------FOOTNOTES----------
-[19]- Although Section 601(b) of the Regulatory
Flexibility Act defines the term "small entity,"
the statute permits agencies to formulate their
own definitions. The Commission has adopted
definitions of the term "small entity" for
purposes of Commission rulemaking in accordance
with the Regulatory Flexibility Act. Those
definitions are set forth in Rule 0-10, 17 CFR
240.0-10. See Securities Exchange Act Release No.
18452 (January 28, 1982), 47 FR 5215 (February 4,
1982). A broker-dealer is a "small business" or
"small organization" under Rule 0-10 if the
broker-dealer (i) had total capital (net worth
plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as
of which its audited financial statements were
prepared pursuant to 17 CFR 240.17-5(d) or, if not
required to file such statements, a broker-dealer
that had total net capital (net worth plus
subordinated liabilities) of less than $500,000 on
(continued...)
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of the Commission has certified pursuant to the Regulatory
Flexibility Act that the final amendments to Rule 17a-4 will not
have a significant economic impact on a substantial number of
small entities because the amendments do not alter the regulatory
requirements for broker-dealers using currently accepted media
for record retention purposes (i.e., paper, microfilm, or
microfiche). A copy of the certification is attached to this
release as Appendix A.
---------FOOTNOTES----------
-[19]-(...continued)
the last business day of the preceding fiscal year
(or in the time that it has been in business, if
shorter); and (ii) is not affiliated with any
person (other than a natural person) that is not a
small business or small organization as defined in
17 CFR 240.0-10.
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VI. Paperwork Reduction Act
In connection with the Proposing Release, on August 12,
1993, notice was published in the Federal Register-[20]-
that, pursuant to the Paperwork Reduction Act of 1980 ("Old
PRA"),-[21]- the Commission had submitted to the Office of
Management and Budget ("OMB") request for approval of the
proposed amendments to Rule 17a-4. No comments were received
with respect to the notice. The OMB control number, 3235-0279,
was originally issued in 1993 and was reauthorized on June 30,
1996. Comment was sought with respect to the reauthorization and
no comment was received.-[22]- The OMB number was issued
pursuant to the Old PRA, prior to the amendment of such act in
1995.
The Proposing Release included certain requirements that
would be unique to broker-dealers which chose to use optical
storage systems and which qualified as collections of information
under the Old PRA. The final rule amendments do not contain
substantive modifications to the collections of information
originally set forth in the Proposing Release. The collection of
information is in accordance with the clearance requirements of
44 U.S.C. 3507. The final amendments clarify that broker-dealers
may use any electronic storage media that meets the requirements
of the rule. Since the final rule amendment expands the scope of
---------FOOTNOTES----------
-[20]- 58 FR 42992 (August 12, 1993).
-[21]- 44 U.S.C. 3501 et seq.
-[22]- 61 FR 14586 (April 2, 1996).
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recordkeeping options and does not alter the options currently
permitted under the rule, broker-dealers may chose to continue to
store information using paper, microfilm, or microfiche, or may
chose to employ electronic storage media as permitted by the
final rule amendments. If broker-dealers chose the electronic
storage media option, then compliance with the collection of
information requirement is mandatory.
A. Collection of Information Under Rule 17a-4
Under the final rule amendments, users of electronic storage
media must have in place an audit system that provides for
accountability regarding inputting of records required to be
maintained and preserved pursuant to Rules 17a-3 and 17a-4 to
electronic storage media and inputting of any changes made to
every original and duplicate record maintained and preserved
thereby. Although the Commission is not specifying the contents
of each audit system, data automatically or otherwise stored (in
the computer or in hard copy) regarding inputting of records and
changes to existing records will be part of that system. The
Commission envisions that names of individuals actually inputting
records and making particular changes, and the identity of
documents changed and the identity of new documents created, are
the kind of information that automatically would be collected
pursuant to the audit system requirement. The results of the
audit system must be available for examination by the staffs of
the Commission and the appropriate SROs and must be preserved for
the time required for the audited records.
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In addition, the entity employing the electronic storage
media must organize and index all information maintained on both
original and duplicate electronic storage media, and each index
must be duplicated. The entity employing the technology must
also maintain, keep current, and provide promptly upon request by
the Commission or SROs all information necessary to access
records and indexes stored on electronic storage media, or escrow
and keep current a copy of the physical and logical file format,
the field format of all different information types written on
the electronic storage media and the source code, together with
appropriate documentation and information necessary to access
records and indexes.
The recordkeeping requirements described above are unlikely
to prove burdensome to users because the recordkeeping
requirements are specifically tied to the design and use of
electronic storage media. To the extent that the final rule
amendments create any burden on users, however, such burden
should be small, even negligible, relative to the reduced
recordkeeping burden that will result from broker-dealers'
ability to use electronic storage media.
B. Proposed Use of the Information
The information contained in the records required to be
preserved by those subject to Rule 17a-4 will be used by
examiners and other representatives of the Commission and the
SROs to ensure that broker-dealers are in compliance with
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applicable financial responsibility, antifraud, and
antimanipulation rules as well as other rules and regulations of
the Commission and the SROs. The collections of information
generally will not be made publicly available. The ultimate
purpose of the final amendment is the protection of investors.
VII. Statutory Analysis
Pursuant to the Securities Exchange Act of 1934 and
particularly Section 17(a)(1) thereof, 15 U.S.C. 78q(a)(1), the
Commission is adopting amendments to 240.17a-4 of Title 17 of
the Code of Federal Regulations in the manner set forth below.
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List of Subjects in 17 CFR Part 240
Brokers, Reporting and recordkeeping requirements,
Securities.
Text of Final Rule
In accordance with the foregoing, Title 17, chapter II, part
240 of the Code of Federal Regulations is amended as follows:
Part 240 - GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT
OF 1934.
1. The authority citation for Part 240 continues to read in
part as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78k, 78k-1, 78l,
78m, 78n, 78o, 78p, 78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-
20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless
otherwise noted.
* * * * *
2. Section 240.17a-4 is amended by revising paragraph (f)
to read as follows:
240.17a-4. Records to be preserved by certain exchange
members, brokers and dealers.
* * * * *
(f) The records required to be maintained and preserved
pursuant to 240.17a-3 and 240.17a-4 may be immediately
produced or reproduced on "micrographic media" (as defined in
this section) or by means of "electronic storage media" (as
defined in this section) that meet the conditions set forth in
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this section and be maintained and preserved for the required
time in that form.
(1) For purposes of this section:
(i) The term micrographic media means microfilm or
microfiche, or any similar medium; and
(ii) The term electronic storage media means any digital
storage medium or system and, in the case of both paragraphs
(f)(1)(i) and (f)(1)(ii) of this section, that meets the
applicable conditions set forth in this section (f).
(2) If electronic storage media is used by a member,
broker, or dealer, it shall comply with the following
requirements:
(i) The member, broker, or dealer must notify its examining
authority designated pursuant to section 17(d) of the Act (15
U.S.C. 78q(d)) prior to employing electronic storage media. If
employing any electronic storage media other than optical disk
technology (including CD-ROM), the member, broker, or dealer must
notify its designated examining authority at least 90 days prior
to employing such storage media. In either case, the member,
broker, or dealer must provide its own representation or one from
the storage medium vendor or other third party with appropriate
expertise that the selected storage media meets the conditions
set forth in this paragraph (f)(2).
(ii) The electronic storage media must:
(A) Preserve the records exclusively in a non-rewriteable,
non-erasable format;
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(B) Verify automatically the quality and accuracy of the
storage media recording process;
(C) Serialize the original and, if applicable, duplicate
units of storage media, and time-date for the required period of
retention the information placed on such electronic storage
media; and
(D) Have the capacity to readily download indexes and
records preserved on the electronic storage media to any medium
acceptable under this paragraph (f) as required by the Commission
or the self-regulatory organizations of which the member, broker,
or dealer is a member.
(3) If a member, broker, or dealer uses micrographic media
or electronic storage media, it shall:
(i) At all times have available, for examination by the
staffs of the Commission and self-regulatory organizations of
which it is a member, facilities for immediate, easily readable
projection or production of micrographic media or electronic
storage media images and for producing easily readable images.
(ii) Be ready at all times to provide, and immediately
provide, any facsimile enlargement which the Commission or its
representatives may request. (iii) Store separately from the
original, a duplicate copy of the record stored on any medium
acceptable under 240.17a-4 for the time required.
(iv) Organize and index accurately all information
maintained on both original and any duplicate storage media.
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(A) At all times, a member, broker, or dealer must be able
to have such indexes available for examination by the staffs of
the Commission and the self-regulatory organizations of which the
broker or dealer is a member.
(B) Each index must be duplicated and the duplicate copies
must be stored separately from the original copy of each index.
(C) Original and duplicate indexes must be preserved for
the time required for the indexed records.
(v) The member, broker, or dealer must have in place an
audit system providing for accountability regarding inputting of
records required to be maintained and preserved pursuant to
240.17a-3 and 240.17a-4 to electronic storage media and inputting
of any changes made to every original and duplicate record
maintained and preserved thereby.
(A) At all times, a member, broker, or dealer must be able
to have the results of such audit system available for
examination by the staffs of the Commission and the self-
regulatory organizations of which the broker or dealer is a
member.
(B) The audit results must be preserved for the time
required for the audited records.
(vi) The member, broker, or dealer must maintain, keep
current, and provide promptly upon request by the staffs of the
Commission or the self-regulatory organizations of which the
member, broker, or broker-dealer is a member all information
necessary to access records and indexes stored on the electronic
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storage media; or place in escrow and keep current a copy of the
physical and logical file format of the electronic storage media,
the field format of all different information types written on
the electronic storage media and the source code, together with
the appropriate documentation and information necessary to access
records and indexes.
(vii) For every member, broker, or dealer exclusively using
electronic storage media for some or all of its record
preservation under this section, at least one third party ("the
undersigned"), who has access to and the ability to download
information from the member's, broker's, or dealer's electronic
storage media to any acceptable medium under this section, shall
file with the designated examining authority for the member,
broker, or dealer the following undertakings with respect to such
records:
The undersigned hereby undertakes to
furnish promptly to the U.S. Securities and
Exchange Commission ("Commission"), its
designees or representatives, upon reasonable
request, such information as is deemed
necessary by the Commission's or designee's
staff to download information kept on the
broker's or dealer's electronic storage media
to any medium acceptable under Rule 17a-4.
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Furthermore, the undersigned hereby
undertakes to take reasonable steps to
provide access to information contained on
the broker's or dealer's electronic storage
media, including, as appropriate,
arrangements for the downloading of any
record required to be maintained and
preserved by the broker or dealer pursuant to
Rules 17a-3 and 17a-4 under the Securities
Exchange Act of 1934 in a format acceptable
to the Commission's staff or its designee.
Such arrangements will provide specifically
that in the event of a failure on the part of
a broker or dealer to download the record
into a readable format and after reasonable
notice to the broker or dealer, upon being
provided with the appropriate electronic
storage medium, the undersigned will
undertake to do so, as the Commission's staff
or its designee may request.
*****
By the Commission.
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Jonathan G. Katz,
Secretary
Dated: February 5, 1997
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Note: Appendix A to the Preamble will not appear in the Code of
Federal Regulations.
Appendix A
REGULATORY FLEXIBILITY ACT CERTIFICATION
I, Arthur Levitt, Chairman of the Securities and Exchange
Commission, hereby certify pursuant to 5 U.S.C. 605(b) that the
final amendments to Rule 17a-4 set forth in Securities Exchange
Release No. 34-38245 will not have a significant economic impact
on a substantial number of small entities. Specifically, the
amendments do not alter the regulatory requirements for broker-
dealers using currently accepted media for record retention
purposes (i.e., paper, microfilm, or microfiche). Instead, the
amendments expand the record retention media options by allowing
broker-dealers to utilize certain electronic storage media to
store records required under 17 CFR 240.17a-3 and 240.17a-4.
Accordingly, the amendments will not change the impact of current
regulatory record preservation requirements on a substantial
number of small entities.
Arthur Levitt
Chairman
DATE: January 31, 1997