Rule Comments: S7-17-99

July 13, 1999

Mr. Jonathan G. Katz, Secretary
Mail Stop 0609
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: File No. S7-17-99

Recordkeeping Requirements for Transfer Agents

Dear Mr. Katz:

Fidelity Investments¹appreciates this opportunity to comment on the Commission's proposed amendment of Rule 17Ad-7 to allow registered transfer agents to use electronic storage media to produce and preserve the records they are required to retain. See Release No. 34-41442 (May 25, 1999) (the "Proposing Release").

While supportive of the Commission's objective, Fidelity has the following concerns, each of which is discussed in more detail in the balance of this letter:

A. The proposal could create record-keeping inconsistencies between broker-dealers and transfer agents.

B. The proposal could create inconsistencies even between the various transfer agent record-keeping requirements.

A. The proposal could create record-keeping inconsistencies between broker-dealers and transfer agents.

The Commission took a major step forward in Release No. 34-38245 (February 5, 1997) (the "'97 Release"), when it announced that the standards for electronic storage media would apply not only to broker-dealers, but to transfer agents and clearing agencies as well. This approach was far more efficient than the previous method of issuing separate "no action" letters. There are few apparent material inconsistencies between the '97 Rule change to 17a-4(f) - to which broker-dealers (and others) are subject - and the proposed rule that would apply to transfer agents. Possible confusion may arise, however, when the respective Releases are analyzed. For example,

The Proposing Release would require sequential serialization of records; there is no similar reference in the '97 Release. This could have an impact as data is migrated to new media when obsolete technology is replaced. We would urge that references to sequential serialization be deleted, thereby giving firms the flexibility to serialize in some other manner, such as unique media index and identifier numbers.
The new rule should also be conformed to the broker-dealer rule in requiring easily readable images; as proposed, the rule defines specific resolution requirements for stored documents, which may or may not limit the types of technology that could be applied.
The Proposing Release suggests that the name of a person who adds or changes a record in the audit system be retained. There are other ways of identifying users, however (e.g., identification number), which should be able to satisfy the regulatory need. Indeed, the '97 Release provides greater flexibility in recording the identity of those who modify records. There does not seem to be any basis for distinguishing broker-dealer records from transfer agent records in terms of this requirement. Fidelity therefore urges that the approach in the current proposal yield to the greater flexibility afforded by the '97 Release.
While the Proposing Release suggests that mandatory back-up facilities are an important component of any system, they are a usual part of good data processing practices. The '97 Release requires only that duplicate records and indices, not facilities, be maintained. This should be sufficient to meet the intent of the regulations.
Finally, broker-dealer Rule 17a-4(f) requires the ability to download information from the storage media. The Proposing Release appears to go further by requiring that a third party have access to the transfer agent's electronic storage media system. This extension, which raises a host of security and confidentiality concerns, is unwarranted when access to records should suffice for regulatory purposes.

While the above are not exclusive, we have identified them as examples of inconsistencies that could create confusion when analyzed and applied to the proposed requirements.

B. The proposal could create inconsistencies even between the various transfer agent record-keeping requirements.

In the '97 Release, the staff of the Division of Market Regulation stated that it would not recommend that the Commission take enforcement action if transfer agents (as well as broker-dealers and clearing firms) used media satisfying the same standards to store records required by, among others, Rules 17Ad-6, 17Ad- 10, 17Ad-11, 17Ad-13 and 17Ad-15. The Proposing Release addresses record-keeping requirements for 17Ad-7 only. That Rule was omitted from "no action" position in the '97 Release; in that sense, the proposed change fills a gap. By being limited to 17Ad-7, however, the proposed rule change leaves transfer agents to rely on the '97 Release - and no explicit rule - for standards applicable to electronic storage of records required to be maintained by other transfer agent rules.

As noted in section A above, there are inconsistencies between (i) Rule 17a-4(f) and the '97 Release, and (ii) the proposed rule relating to 17Ad-7. For the reasons mentioned, we do not believe that these differences are insignificant. Even if they are deemed immaterial, however, it would seem unnecessarily cumbersome for the record-keeping requirements applicable to transfer agents to be in two different places - with one source being a "no action" position rather than an affirmative rule.

Fidelity encourages the Commission to apply the standards set forth in the '97 Release to all the records required to be maintained by transfer agents.

Conclusion

Fidelity supports extending the option to store electronically documents required by Rule 17Ad-7, using any permissible technology. We urge, though, that the extension be done in a way that makes explicit a uniform set of standards for electronic storage of all Commission-required records.

We thank you for the opportunity to make the foregoing comments. Should you wish to discuss any of these matters, do not hesitate to contact me at (617) 563-3651.

Sincerely yours,

Michael L. Michael

Chief Compliance Officer

cc: The Honorable Arthur Levitt, Jr. Chairman
     The Honorable Norman S. Johnson, Commissioner
     The Honorable Isaac C. Hunt, Jr., Commissioner
     The Honorable Paul R. Carey, Commissioner
     The Honorable Laura S. Unger, Commissioner
     Annette Nazareth, Director, Division of Market Regulation
     Jerry W. Carpenter, Assistant Director
     Theodore R. Lazo, Attorney, Office of Risk Management and Control, Division of Market Regulation

footnotes

-[1]- FMR Corp. is the ultimate parent of the group of companies commonly known as Fidelity Investments ("Fidelity"). There are four registered transfer agents affiliated with Fidelity: (i) Fidelity Service Company, Inc., primary transfer and servicing agent for Fidelity retail funds, (ii) Fidelity Investments Institutional Operations Company, Inc., primary transfer agent for Fidelity institutional funds, (iii) Fidelity Investments Southwest Company, Inc., sub-transfer and servicing agent to Fidelity Service Company, Inc. and (iv) National Financial Services Corporation, transfer agent for Fidelity retail funds held as positions in correspondent brokerage accounts. There are four registered broker-dealers affiliated with Fidelity: (i) Fidelity Brokerage Services, Inc., which is primarily engaged with respect to unsolicited, secondary market transactions, (ii) Fidelity Distributors Corporation, which serves as the principal underwriter for the Fidelity mutual funds, (iii) Fidelity Investments Institutional Services Company, which distributes Fidelity funds to institutional intermediaries and (iv) National Financial Services Corporation, which clears transactions and carries accounts on a fully-disclosed basis for customers of approximately 200 correspondent firms, and engages in sales to certain institutional customers through its capital markets division.