March 5, 1999
Re: File No. S7-26-98 - Release No. 34-40518 Proposed Books and Records
Requirements for Brokers and Dealers
Comments from Donald R. Brown, Registered Securities Principal and Partner in
Brown & Overton and Rosilyn H. Overton, CFP, Registered Securities,
Principal and Partner in Brown & Overton
The following are comments with respect to the proposed rules regarding the
physical location of records for Broker-Dealer branch offices. As we understand
it, there are three possibilities for the new rules:
- Records will be required to be physically located at the branch office,
available at any time for inspection by examiners.
- The location requirements will be satisfied if the records are physically
located at a site within the state where the branch office is located, provided
that they can be provided promptly, as above.
- The location requirements will be satisfied if the records are physically
located at the Broker-Dealer's home office, independent of the location of the
branch office, provided that the records can be provided on request promptly
(where promptly will be defined to be a matter of hours).
In our opinion, it is in everyone's best
interest to have local records in each branch, electronic or otherwise, provided
that this requirement does not impose any serious burden of labor or other
expense on the Broker-Dealers and/or their branch offices. The benefits are as
- Examiners are able to do their work more efficiently. Allowing a matter of
hours for a requested document to be produced can greatly impede and protract
the work of the examiners, particularly in cases where the contents of one
document raise questions that can only be answered by the production of
additional documents. Given the current cost-conscious environment in federal
and state governments, the result is sure to be a decline in the number of
examinations conducted. With all required records stored locally, the work of
the examiners will be efficient and swift, the more-so if most records are
stored electronically, allowing more examinations without increasing costs.
- Many Registered Representatives place orders for mutual funds and variable
annuities directly with the issuers. At many Broker-Dealers, this information is
not recorded electronically at the home office. Consequently, the records
available on-line from the Broker-Dealer are necessarily incomplete. Manual
retrieval of these records at the home office will protract the examination
process, as well as increasing Broker-Dealer labor costs.
- Most Broker-Dealer's computer systems do not provide on-line historical
transaction data indefinitely. It is common to have historical trade data
available on-line only for one or two years. A complete local historical record,
particularly if it is electronic, guarantees an instant answer to an examiner
request that might otherwise require manual record retrieval at the home office.
It also reduces the cost of replying to a common customer information request -
cost basis information for old positions - and thus
allows Representatives to be more responsive to clients.
- It is now common for independent Broker-Dealers and their Registered
Representatives to use more than one clearing firm. Auditing such offices will
be a nightmare for examiners if local independent records are not
- We feel strongly that it is in the best interest of clients that Registered
Representatives continue to keep local independent records with the
responsibility to verify these records against those of their Broker-Dealer.
Both branch-office and home-office systems are inherently imperfect, and the
only way quickly to detect and correct errors is to maintain and reconcile
independent local records.
- The maintenance of local electronic records that are quickly searchable can
significantly reduce the load on remote Broker-Dealer computer systems, and thus
reduce the equipment and operating costs for such systems. Any question that be
answered locally eliminates traffic on the Broker-Dealer's telecommunications
network and on their home-office computers.
- When a branch maintains a consolidated local electronic record of all
transactions, interim reviews can be performed remotely, by the OSJ, by the firm
or by any regulator. For example, an examiner can
request an overnight shipment of computer diskettes or an immediate
E-mail transfer of branch data through the Internet.
- The computer hardware required to store data locally is already available in
almost every existing branch office. A Personal Computer with a modest amount of
disk storage is adequate to record every transaction that the largest branch
office could generate in a decade.
- With an electronic record keeping system, it is as easy and inexpensive for
a one-person office to maintain local records as for a larger branch.
Our own experience with a software system that stores required records
locally began in 1991. We developed a database system to record all our
transactions, including stocks, bonds, mutual funds, and variable annuities.
This system provides on-demand examination of any trade ticket including time
stamps and manager approvals, buy and sell blotters, securities cross-reference
pages and customer posting pages. It also produces cash blotters for the branch.
We obtained approval for this system from the compliance department of the
Broker-Dealer with whom we were then affiliated.
Subsequently, with the agreement and approval of that Broker-Dealer, we made
the program available as a commercial software product to hundreds of branch
offices nationwide, including
those of other Broker-Dealers. Since 1992, these branches have passed audits
by all the regulatory examining agencies. In the few cases where the system did
not meet every requirement of a particular state securities agency, we made
changes and added features to eliminate objections. This system is stand-alone,
and independent of any home-office computer system, and hence can be used by any
branch office of any Broker-Dealer. The cost of licensing our system is a very
small part of office operating expenses.
An advantage of a third-party local record-keeping system such as ours is
that new regulatory requirements can be implemented quickly and easily and made
available to the branch offices of all Broker-Dealers simultanously, without
requiring any modifications to their separate home-office computer systems. For
example, we will promptly modify our software to meet any requirements that new
regulations may stipulate, and make the new software available to our users on
the Internet for immediated download and installation.
Broker-Dealers and branch offices appropriately wish to avoid duplicate data
entry. For example, entering trade information into the back-office order-entry
system and also separately into a local database is time consuming.
Consequently, in response to a request by one Broker-Dealer, we built a
companion program that interfaces with their home-office systems to allow
automated reconciliation and updating of the local data with appropriate review
by branch personnel. A similar facility could be easily provided to any other
In summary, our own experience shows that with the use of existing
technology, it is efficient, cost-effective, and in the best interests of the
client, the Broker-Dealer, the branch office and the regulators to maintain
independent compliance records, preferably electronic, physically located in the
Donald R. Brown, Partner, Registered Securities Principal
Rosilyn H. Overton, CFP, Partner, Registered Securities Principal
Mr. Brown was formerly a Vice President at Automatic Data Processing, Inc.,
and President of Database Design, Inc. Ms. Overton was formerly a Vice President
at Manhattan Life Insurance Company, and is President of the New York Chapter of
the IAFP. The views expressed herein are our own, and not those of the IAFP nor
of our current Broker-Dealer, Mid-Atlantic Securities, Inc.