Securities and Exchange Commission
17 CFR Part 240
[Release No. 34-48036; File No. S7-13-03]
Recordkeeping Requirements for Registered Transfer Agents
Agency: Securities and Exchange Commission.
Action: Proposed rule.
Summary: The U.S. Securities and Exchange Commission is proposing for public comment two amendments to its rule concerning recordkeeping requirements for registered transfer agents. The amendments would add language to make clear that registered transfer agents may use electronic, microfilm, and microfiche media as a substitute for hard copy records, including cancelled stock certificates, for purposes of complying with the Commission's transfer agent recordkeeping rules and that a third party on behalf of a registered transfer agent may place into escrow the required software information.
Dates: Comments should be received on or before July 21, 2003.
Addresses: To help us process and review your comments more efficiently, comments should be sent by hard copy or e-mail, but not by both methods. Comments sent by hard copy should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street, NW, Washington, DC 20549-0609. Comments may also be submitted electronically at the following e-mail address: firstname.lastname@example.org. All comment letters should refer to File No. S7-13-03. This file number should be included on the subject line if e-mail is used. Comment letters will be available for public inspection and copying in the Commission's Public Reference Room, 450 5th Street, NW, Washington, DC 20549. Electronically submitted comment letters also will be posted on the Commission's web site (http://www.sec.gov).1
For Further Information Contact: Jerry W. Carpenter, Assistant Director, or David Karasik, Special Counsel, at 202-942-4187, Office of Risk Management and Control, Division of Market Regulation, U.S. Securities and Exchange Commission, 450 5th Street, NW, Washington, DC 20549-1001.
Supplementary Information: The U.S. Securities and Exchange Commission ("Commission") is requesting public comment on a proposed amendment to Rule 17Ad-7(f) under the Securities Exchange Act of 1934 ("Act") (17 CFR 240.17Ad-7(f)).
I. Discussion of Amendments to Rule 17Ad-7(f)
On April 27, 2001, the Commission adopted amendments2 to its transfer agent record retention rule, Rule 17Ad-7,3 that (1) allowed registered transfer agents to use electronic storage media4 to maintain records that they are required by Rule 17Ad-6 to retain and (2) modified the requirements for using micrographic media5 as a method of record storage. Specifically, Rule 17Ad-7(f), as amended, requires transfer agents that use electronic or micrographic media to store records to:
Those amendments to Rule 17Ad-7 did not require transfer agents that wish to continue to maintain their records in hard copy format to maintain their records any differently from the way they stored them prior to the rule change. The amendments apply only to those transfer agents that choose to retain their records electronically or micrographically. The purpose of those amendments was to increase the flexibility and efficiency of transfer agent recordkeeping while maintaining necessary controls over accuracy, integrity, and access to transfer agent records.
Notwithstanding the Commission's intent in adopting the amendments to Rule 17Ad-7, there appears to be some uncertainty whether (1) Rule 17Ad-7 allows transfer agents to rely exclusively on electronic or micrographic records for purposes of the Commission's transfer agent recordkeeping rules and to no longer maintain hard copy records, including cancelled certificates and (2) a third party on behalf of the transfer agent may deposit with an independent escrow agent a copy of all the documentation required under Rule 17Ad-7(f)(5)(ii) for the purpose of complying with Rule 17Ad-7(f)(5)(ii).6 In order to eliminate this uncertainty, we propose to amend Rule 17Ad-7(f).
II. Proposed Rule Language
We are proposing to amend paragraph (f) of Rule 17Ad-7 to clarify that records, including cancelled securities certificates, stored electronically or micrographically in accordance with the provisions of Rule 17Ad-7 may serve as a substitute for hard copy records required to be maintained pursuant to Rule 17Ad-6. Accordingly, this "substitution" provision would allow, but would not mandate, the destruction of hard copy records, including securities certificates, after electronic or micrographic records have been created in conformity with Rule 17Ad-7(f).7
In addition, we are proposing to amend paragraph (f)(5)(ii) of Rule 17Ad-7 to clarify that a transfer agent may fulfill its software escrow obligation by having a third party deposit with an independent escrow agent a copy of all the documentation required under Rule 17Ad-7(f)(5)(ii) on behalf of the transfer agent.8 A transfer agent using a third party vendor to maintain its records would be allowed under the proposed amendment to have the third party vendor place in escrow a copy of the vendor's proprietary source code on behalf of the transfer agent using the vendor's services. This proposed amendment would also allow a third party vendor maintaining the records of more than one transfer agent to place in escrow one copy of the vendor's proprietary source code for all the transfer agents for which it acts.9
III. Request for Comments
We request comment from all interested persons on whether the proposed rule amendments accomplish our goals of clarifying that (1) registered transfer agents may use electronic, microfilm, and microfiche media as a substitute for hard copy records for purposes of complying with the Commission's transfer agent recordkeeping rules and (2) a third party may place into escrow the required software information on behalf of a registered transfer agent.
We also invite commenters to provide views and data relating to the costs and benefits associated with the proposed changes discussed above. If possible, commenters should provide empirical data to support their views. Comments should be submitted within 30 days of publication in the Federal Register.
IV. Paperwork Reduction Act
The proposed amendments to Rule 17Ad-7(f) do not contain new "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995 "(PRA").10 Accordingly, the PRA is not applicable to the proposed amendments because they do not impose any new collection of information requirements that would require approval of the Office of Management and Budget ("OMB"). OMB initially approved the paperwork burden analysis for Rule 17Ad-7(f) (OMB Control No. 3235-0136) when the Commission proposed amendments for Rule 17Ad-7(f) in 1999.11
V. Costs and Benefits of the Proposed Rule Amendments
The Commission is considering the costs and the benefits of the proposed amendment to Rule 17Ad-7(f) as described below. We encourage comments that address any additional costs or benefits that we may have not considered. Commenters should provide analysis and empirical data to support their views on the costs and benefits associated with the proposed amendment.
The proposed amendments to Rule 17Ad-7(f) should provide specific benefits to U.S. investors, issuers, transfer agents, and other financial intermediaries. While these benefits are not readily quantifiable in terms of dollar value, we believe that transfer agents that choose to exclusively adopt electronic or micrographic-based records systems in lieu of paper records may realize cost-savings and reduce certain risks associated with paper-based recordkeeping. For example, the use of electronic and storage media should reduce storage burdens (e.g., the need for storage space) that transfer agents currently face in maintaining paper records.
Other benefits include:
In addition, the proposed software escrow provision would enable transfer agents to more conveniently comply with the current Rule 17Ad-7(f)(5)(ii) requirement that a copy of the electronic storage system the transfer agent utilizes to store its records be placed in escrow with an independent third party.
The Commission requests comments on the potential benefits of electronic recordkeeping including quantitative data on the potential cost savings from eliminating hard copy records.
The amendments to Rule 17Ad-7(f) would not impose costs on any particular person or entity because compliance with this provision would apply only to those transfer agents that choose to store any of their records exclusively in electronic form. Nevertheless, transfer agents that elect to use micrographic media or electronic storage media may incur some costs in destroying or otherwise disposing hard copy records that they elect to dispose or destroy. Any costs related to the use of micrographic or electronic storage media should be at least partly offset by the resulting elimination of the need to maintain and store records in hard copy format. This cost is likely to depend upon the volume of hard copy records needed to be disposed. We expect these costs to be relatively minimal.
We estimate that approximately 60 transfer agents12 will use a third party to escrow the required source code.13 Each transfer agent will evaluate the risk and cost effectiveness of its records management solution differently based upon the solution that is best for its business model, such as its business practices and volume, and that assures its ability to comply with Rule 17Ad-7. Moreover, we cannot predict the effect of future market competition and innovation on the technologies that transfer agents might employ for their recordkeeping.
In addition, there will be some cost imposed by the proposed escrow requirement amendment. However, the Commission considered these costs in the Adopting Release and any new costs associated with the escrow amendment (i.e., having a third party escrow the source code on the transfer agent's behalf) would likely be included in the software contract between the parties.
The Commission requests commenters to provide cost data for switching from hard copy records to electronic recordkeeping. In particular, what would be the startup costs and annual maintenance costs?
VI. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996,14 a rule is "major" if it has resulted or is likely to resort in:
We request comment regarding the potential impact of the proposed rule amendments on the economy on an annual basis. We request that commenters provide empirical data and other factual support for their views.
VII. Consideration of Burden on Competition, and Promotion of Efficiency, Competition, and Capital Formation
Section 3(f) of the Act15 as amended by the National Securities Markets Improvement Act of 199616 provides that whenever the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. In addition, Section 23(a)(2) of the Act17 requires the Commission, when adopting rules under the Act, to consider the anti-competitive effects of any rules it adopts.
We are considering the proposed amendments to Rule 17Ad-7(f) in light of the standards set forth in Sections 3(f) and 23(a)(2) of the Act. For the reasons stated herein, the proposed amendments (1) should promote efficiency by allowing registered transfer agents to benefit from being allowed to dispose of hard copies, (2) should not adversely affect capital formation because they relate solely to post-issuance activity, and (3) should not impose any burden on competition because they will apply equally to all registered transfer agents.
We do not anticipate that the proposed amendments would have a significant effect on competition or impose any burden on competition that is not necessary or appropriate in furtherance of the Act. Under the proposed amendments, all registered transfer agents would be permitted, though not required, to exclusively use micrographic media and electronic storage media to fulfill all of the Commission's regulatory obligations. In addition, the proposed amendments would apply equally to all registered transfer agents. However, in order to fully evaluate the effects on competition of the proposed amendments, the Commission requests commenters to provide their views and specific empirical data as to any effects on competition that might result from the Commission's proposed amendments to Rule 17Ad-7(f).
VIII. Summary of Regulatory Flexibility Analysis
The Commission has prepared an initial regulatory flexibility analysis ("IRFA") in accordance with 5 U.S.C. § 603 regarding the proposed amendments to Rule 17Ad-7(f) to determine whether the proposed rule amendments will have a significant economic impact on a substantial number of small entities.
A. Reasons for Proposed Action
The IRFA states that despite recent amendments to Rule 17Ad-7, there appears to be some uncertainty concerning the scope of the current rule with respect to electronic recordkeeping and the ability of a third party to deposit certain documentation with an independent escrow agent.
B. Objectives and Legal Basis
In order to eliminate this uncertainty, the Commission is proposing to amend Rule 17Ad-7(f). The proposed amendments are designed to make clear that transfer agents may use electronically and micrographically retained records to comply with the Commission's transfer agent recordkeeping requirements. In addition, proposed amendments to paragraph (f)(5)(ii) of Rule 17Ad-7 are designed to clarify that a transfer agent may fulfill its software escrow obligation by having a third party deposit with an independent escrow agent a copy of all the documentation required under Rule 17Ad-7(f)(5)(ii) on behalf of the transfer agent.
Amendments to Rule 17Ad-7 are proposed under the Commission's authority set forth in Sections 17, 17A, and 23 of the Act.
C. Small Entities Subject to the Rule
The IRFA states that, for purposes of Commission rulemaking, Rule 0-10(h) under the Act defines the term "small business" or "small organization" to include any transfer agent that: (1) received less than 500 items for transfer and less than 500 items for processing during the preceding six months (or in the time that it has been in business, if shorter); (2) transferred items only of issuers that would be deemed "small business" or "small organizations" as defined in Rule 0-10 under the Act; (3) maintained master shareholder files that in the aggregate contained less than 1,000 shareholder accounts or was the named transfer agent for less than 1,000 shareholder accounts at all times during the preceding fiscal year (or in the time that it has been in business, if shorter); and (4) is not affiliated with any person (other than a natural person) that is not a small business or small organization under Rule 0-10.18 The IRFA states that we estimate that 180 registered transfer agents qualify as small entities and would be subject to the proposed amendment to Rule 17Ad-7(f).
D. Reporting, Recordkeeping, and other Compliance Requirements
The IRFA states that the proposed amendments would not impose any new reporting, recordkeeping, or other compliance costs or requirements on any particular person or entity because compliance with this provision would be purely voluntary. Nevertheless, transfer agents that elect to exclusively use micrographic media or electronic storage media may incur some costs in destroying or otherwise disposing hard copy records. However, the Commission believes that this cost is minimal.
The IRFA notes that the proposed amendment to Rule 17Ad-7(f) would apply only to registered transfer agents that choose to exclusively use electronic or micrographic storage media. The IRFA notes further that some small transfer agents will not be able to afford the costs involved with storing records electronically and therefore will not choose to use electronic or micrographic storage media. The IRFA states that the proposed amendments to Rule 17Ad-7(f) should not have a significant economic impact on a substantial number of small entities.
E. Duplicative, Overlapping, or Conflicting Federal Rules
The Commission believes that there are no rules that duplicate, overlap, or conflict with the proposed amendments.
F. Significant Alternatives
The IRFA states that we believe that it is not feasible to further clarify, consolidate, or simplify the proposed amendments for small entities. The IRFA also states that the Commission believes that the use of performance standards rather than design standards is not applicable to the proposed amendments.
The IRFA states that we believe that creating an exemption from the requirements of the proposed amendments would not reduce the impact of the proposed amendments on small entities. The IRFA notes that Rule 17Ad-4(b) under the Act19 already exempts small transfer agents from many of the recordkeeping requirements of Rules 17Ad-6 and 17Ad-7. In addition, the IRFA notes that any burden imposed by the proposed amendments would apply only to those transfer agents that choose to use electronic or micrographic storage media. The IRFA states that we believe that there are no rules that duplicate, overlap, or conflict with the proposed alternative versions of the rule.
G. Solicitation of Comments
The IRFA contains information concerning the solicitation of comments with respect to the IRFA. In particular, the IRFA requests comment on whether the proposed amendments to Rule 17Ad-7(f) would have a significant economic impact on a substantial number of small entities and requests that any such comments be accompanied by specific empirical data. A copy of the IRFA may be obtained by contacting David Karasik, U.S. Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-1001.
XI. Statutory Authority
The Commission is proposing amendments to § 240.17Ad-7 of Chapter II of Title 17 of the Code of Federal Regulations pursuant to Sections 17, 17A(a)(2), 17A(d), and 23(a)20 of the Act in the manner set forth below.
List of Subjects
17 CFR Part 240
Reporting and recordkeeping requirements, Securities, Transfer agents.
Text of Amendment
In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is proposed to be 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, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7202 unless otherwise noted.
* * * * *
2. Section 240.17Ad-7 is amended by:
a. Adding introductory text to paragraph (f); and
b. In the first sentence of paragraph (f)(5)(ii), revise the phrase "Place in escrow" to read "Place, or have a third party place on your behalf, in escrow".
The addition reads as follows:
§ 240.17Ad-7 Record retention.
* * * * *
(f) Subject to the conditions set forth in this section, the records required to be maintained
pursuant to § 240.17Ad-6 may be retained using electronic or micrographic media and may be
preserved in those formats for the time required by § 240.17Ad-7. Records stored electronically or micrographically in accordance with this paragraph may serve as a substitute for the hard copy records required to be maintained pursuant to §240.17Ad-6.
* * * * *
By the Commission.
Jill M. Peterson
June 16, 2003
1 We do not edit personal, identifying information such as names or e-mail addresses from electronic submissions. Submit only information you wish to make publicly available.
2 Securities Exchange Act Release No. 44227 (Apr. 27, 2001), 66 FR 21648 (May 1, 2001) ("Adopting Release").
3 17 CFR 240.17Ad-7(f). All references to Rules 17Ad-6 and 17Ad-7 or to any paragraph of those rules will be to 17 CFR 240.17Ad-6 and 240.17Ad-7, respectively.
4 Under Rule 17Ad-7(f)(1)(ii), the term "electronic storage media" refers to any digital storage medium or system.
5 Under Rule 17Ad-7(f)(1)(i), the term "micrographic media" refers to microfilm or microfiche or any similar medium.
6 Under Rule 17Ad-7(f)(5)(ii), transfer agents that choose to use electronic storage media must, among other things, "place in escrow with an independent third party and keep current a copy of the physical and logical format of the electronic storage or micrographic media, the field format of all different information types written on the electronic storage media and source code and the appropriate documentation and information necessary to access records and indexes. . . ."
7 The Commission has proposed new Rule 17Ad-19 that would require transfer agents to establish and implement written procedures for the cancellation, storage, transportation, and destruction of securities certificates. Securities Exchange Act Release No. 43401 (Oct. 2, 2000); 65 FR 59766 (Oct. 6, 2000). In addition, while Rule 17Ad-7 would permit the destruction of paper records for purposes of our recordkeeping requirements, a transfer agent may have an obligation to preserve such paper records under other applicable law or rules.
8 One situation that calls for this clarifying amendment is when a software provider licenses its electronic records storage system software to a transfer agent but does not grant a license for the source code. As a result, the transfer agent does not have access to the source code.
9 Rule 17Ad-7(f)(5)(ii) requires the third party to file a written undertaking with the Commission stating that it agrees to furnish the Commission with the appropriate documentation and information necessary to access the records and indexes promptly upon request.
10 44 U.S.C. 3501 et seq.
11 Securities Exchange Act Release No. 41442 (May 25, 1999), 64 FR 29608 (June 2, 1999). Subsequently, OMB approved the extension of this paperwork collection.
12 In the adopting release to Rule 17Ad-7(f), we estimated that approximately 500 transfer agents were likely to use electronic or micrographic storage systems. During the year-and-a-half since Rule 17Ad-7(f) has been effective, however, only five transfer agents have taken advantage of the record storage alternatives provided by the rule.
13 Although this estimate represents less than 10% of the number of currently-registered transfer agents, we expect that many of the largest bank, corporate, and independent transfer agents, which represent over 90% of the entire transfer agent industry volume, will eventually convert their records-management systems to electronic-based solutions.
14 5 U.S.C. 801 et seq.
15 15 U.S.C. 78c.
16 Pub. L. No. 104-290, 110 Stat. 3416 (1996).
17 15 U.S.C. 78w(a)(2).
18 17 CFR 240.0-10(h).
19 17 CFR 240.17Ad-4(b).
20 15 U.S.C. 78q, 78q-1(a)(2), 78q-1(d) and 78w(a).