December 9, 1998
Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W. Mail Stop 6-9
Washington, D.C. 20549
Re: Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934 - SEC File No. S7-26-98.
Dear Mr. Katz:
Wilmer, Cutler and Pickering is pleased to submit comments to the Securities and Exchange Commission regarding the reproposed rules concerning the books and records requirements for brokers and dealers under the Securities Exchange Act of 1934. We are submitting these comments on behalf of a client that is a broker-dealer with many smaller offices serving the public throughout the United States. Our client has invested substantial sums in technology to assure appropriate and prudent oversight of these offices, and is very strongly committed to sound and vigorous compliance.
We commend the Commission and the staff for their careful and constructive review of earlier comments and the responsiveness to some of the concerns previously voiced about the proposed rules. For example, we appreciate very much the elimination of the proposed requirement that Forms U-4 and U-5, amendments to those forms, or state or SRO licenses be kept at local offices of the broker-dealer, or that a broker-dealer maintain records concerning an associated person's change in licensing status. We also appreciate elimination of the requirement that each local office maintain a customer complaint file of all correspondence, memoranda, and other documents received in connection with the complaint. We understand that the broker-dealer would have to maintain for each local office a record of written complaints against each associated person that conducts business at that local office, but that the records may be maintained in the broker-dealer’s home office.
We remain very concerned, however, about certain of the remaining aspects of the Commission’s reproposed rules. We discuss these below, in the order in which they are found in the Commission’s release:
1. Definition of the Term "Local Office."
We appreciate that regulatory oversight of the activities of broker-dealers includes the involvement of state regulators and self-regulatory organizations in addition to the Commission. We understand also that, in defining the term "Local Office," the Commission is seeking to enhance the efficiency of on-site examinations by all regulators, by assuring ready access to relevant records about the activity of the office. We respectfully suggest, however, that in defining the term "Local Office," the relevant criteria should relate to the activities performed in the office, rather than to the number of people who work in the office.
Our client, like all registered broker-dealers, is organized around the well established concepts of "office of supervisory jurisdiction," and "branch office" as contained in the rules of the National Association of Securities Dealers. This organizational structure is designed to assure and enhance supervisory oversight of the activities of all of our client’s offices. The OSJ, is lead by a registered principal. Many of our client’s OSJs are two-person offices, and some are operated out of personal residences. The firm also has non-OSJ NASD registered branch offices and a certain number of satellite offices. 1 These latter offices are defined as such because the core activities of these offices do not require the on-site presence of a registered principal. In other words, the determination that an office is a branch or satellite office, not an OSJ, is made on the basis of the activity in those offices, not because of the number of people working in those offices. All branch and satellite offices are supervised by an OSJ. Our client’s internal rules require that a branch or satellite office must be within approximately 30 miles of the OSJ that supervises it. Our client’s ongoing investment in new technology assures that the records of activity of any branch or satellite offices supervised by an OSJ are readily available at the OSJ.
We respectfully suggest, that for clients structured like ours -- which require close proximity between the OSJ and the other offices it supervises -- the definition of Local Office should be "OSJ." The OSJ does and should have the responsibility to keep and maintain all required records for the branch and satellite offices it supervises. The certainty and quality of supervision is enhanced by that obligation. In addition, because OSJs are established to keep and maintain all relevant records, the facilities for permitting efficient examination and inspection of those records will likely be present at the OSJ. The minor inconvenience suffered by examiners from having to travel to the OSJ is therefore offset by the better facilities for conducting the examination. And the travel inconvenience is minimized where, as in the case of our client, there are 30 miles or less separating the OSJ from the branches and satellites it supervises.
If the Commission adopted "OSJ" as the definition of the term "Local Office," so long as the offices supervised by the OSJ were no more than approximately 30 (or 40 or 50) miles from that OSJ, the ability of state regulators to have access to the relevant records would be virtually assured. Very few instances would arise in which a state regulator would not have easy, ready access to the records of any office in the state. The only circumstance in which a state regulator might have difficulty gaining such access would be where the OSJ to a particular branch or satellite office happened to be located across state lines. In those very limited circumstances, the solution is to require production of the relevant records in downloaded form in the branch or satellite office, within 24 hours of the state regulator’s making the request. 2 In the alternative, the broker-dealer could be asked to waive jurisdictional objections to the state regulator examining the records in the OSJ, even though the OSJ was in another state.
An additional benefit of defining the Local Office to be the OSJ is that for most broker-dealers, the need to have a state repository is eliminated. Proposed rule 17a-3(a)(23) would require "a record listing each office of a member, broker or dealer indicating whether the office is a local office or has been designated as a state record depository, and listing each associated person working out of or storing records at that office." The very limited circumstances in which the records of a branch or satellite office are not in ready intrastate proximity can be addressed by requiring timely download of computer information from the OSJ or home office. We strongly urge the Commission to recognize that firms, such as our client, that have made the substantial investment in technology, should be permitted to enjoy and benefit from the convenience and cost savings that stem from that investment, and should not be required to open a costly, peculiar "state repository," that has nothing to do with the firm’s own record keeping or supervisory systems.
2. Record Creation - Rule 17a-3
The reproposed amendments to rule 17a-3 do not alter in any significant way, the requirements of the original proposal relating to record creation. Many of these requirements are so specific and rigid that they may have the undesirable effect of constraining broker-dealers seeking to improve their own management, without helping regulatory oversight. We are particularly opposed to the proposed requirements concerning account opening documentation (proposed rule 17a-3(a)(16)). These proposed requirements include complex, intricate details about account opening documentation and procedure. Broker-dealers already are required to maintain such records of their clients as are necessary to provide reasonable assurance that the advice they give as to the purchase and sale of securities is suitable. The details in the proposed rule really do not add anything important to the broker-dealer’s fulfillment of that obligation, but instead would divert the time of compliance officers from the more important task of developing and enforcing their own systems and procedures for assuring that customer account information is up-to-date and accurate. We urge that the Commission eliminate proposed rule 17a-3(a)(16).
We also question the purpose and need for the requirement in proposed rule 17a-3(a)(6), that seeks to determine the identity of persons entering orders for accounts. The proposal would require that where "a person other than the associated person responsible for the account entered the order into an electronic system . . . and the system is not capable of receiving an entry of the identity of any person other than the responsible associated person, the member, broker or dealer shall create a separate record which identifies each other person upon request. The memorandum shall show ... the identity of each associated person responsible for the account and any other person who entered or accepted the order on behalf of the customer." (Emphasis added.) This requirement does not seem to serve any obvious useful purpose. The associated person is responsible for the entry of orders, not a clerk or other person. What additional supervisory benefit is achieved by this record keeping requirement seems far outweighed by the costs and burdens of making and keeping this record.
We also object to certain of the proposed requirements that seem to defeat the purposes of the National Securities Market Improvement Act of 1996. 3 As the Commission’s release notes, " NSMIA prohibited states from establishing books and records rules that differ from, or are in addition to the Commission's rules." 4 As the release further notes, Chairman Levitt has been quite appropriately concerned that a multiplicity of state record keeping requirements "would impose a substantial burden on broker-dealers because of the possibility that each state's requirements would be inconsistent with those adopted by other states." Yet, in two specific instances, the Commission has proposed to require broker-dealers to keep records to demonstrate compliance with requirements imposed by any securities regulatory authority. These are in proposed rules 17a-3(a)(19) 5 and 17a-3(a)(22). 6 We respectfully suggest that the Commission avoid doing indirectly what NSMIA was designed to prohibit: a multiplicity of state record keeping requirements inconsistent with each other and not related to the Commission’s own concerns. At a minimum, we urge the Commission to modify the proposed rules to require that the relevant records be kept only when NASA certifies that at least three-quarters of the states have imposed identical substantive requirements relevant to those records. That degree of commitment by the states would ensure that state substantive requirements do not become a back door for eviscerating NSMIA’s purpose of lessening record keeping requirements on broker-dealers that do an interstate business.
3. Record Retention - Rule 17a-4
The Commission has sought to address concerns voiced in the earlier proposal about burdens to local offices of keeping voluminous records, by permitting certain records to be kept in a central office so long as they can be furnished to the Local Office on the same business day. The Commission has voiced its belief that the concerns earlier expressed about the requirement that records be produced "promptly" at the local office are alleviated by this modification.
We agree with the Commission’s approach, that companies such as our client, that have made substantial investments in electronic communications and record keeping, should be permitted to retain records in a system that takes advantage of the new technology. We respectfully disagree with the Commission’s specific proposal, however, that for many records, printed copies be available in the local office in the same day that the request for the records is made. 7 In the absence of an emergency, it is hard to understand why same-day production of the multiplicity of records is necessary. Surely, with reasonable planning, more notice can be given. We respectfully request that the Commission consider modifying its proposal to allow more time -- at least one business day -- for a broker-dealer to furnish the required documents.
We appreciate the opportunity to comment on this rule proposal. We know that the Commission must always consider many factors in fulfilling its obligations. Nonetheless, we believe there are ways in which the Commission’s proposal should be modified to lessen the burdens on broker-dealers, particularly those with smaller offices seeking to serve smaller communities. As noted earlier, our client has invested substantially in technology to permit it to perform reasonable supervision on the activities of associated persons in many locations. Nonetheless, even with this investment, our client would be hard pressed to meet the expectations of the new rules. As noted also, some of the proposed requirements seem unduly detailed and will constrain the ability of supervisors to meet substantive requirements in innovative ways.
Sincerely,
Marianne K. Smythe
-[1]- / The differences between a branch office and a satellite office are that branch offices do a greater volume of activity and that branch offices hold themselves out as stand-alone offices. Satellite offices may not list the address of the office without also listing the address of the OSJ that supervises them.
-[2]- / Please see comments below on the question of timeliness of production of computer records.
-[3]- / Pub. L. No. 104-290, 110 Stat. 3416 (1996).
-[4]- / Books & Records Requirements for Brokers & Dealers Under Exchange Act Release No. 34-40518, 63 Fed. Reg. 54404-01, 54405 (Oct. 9, 1998) (citing 15 U.S.C. 78o(h)).
-[5]- / The rule would require: "A record . . . indicating compliance with any applicable regulations of a securities regulatory authority that require certain information about a customer be obtained when opening or updating a customer account. This record shall include the date the member, broker or dealer fulfilled its obligations regarding the opening or updating of the customer account under any applicable regulations of a securities regulatory authority. " Books & Records Requirements for Brokers & Dealers Under the Securities Exchange Act of 1934, 63 Fed. Reg. 54404-01, 54416 (1998) (To be codified at 17 C.F.R. pt. 240) (proposed Oct. 9, 1998).
-[6]- / The rule would require: "A record listing each principal of a member, broker or dealer responsible for establishing policies and procedures that are reasonably designed to ensure compliance with any applicable regulations of a securities regulatory authority that require acceptance or approval of a record by a principal." Id. at 54416.
-[7]- / Proposed rule 17a-4(K): same day production would be required for all records required to be maintained by proposed paragraphs (a)(1), (a)(6), (a)(7), (a)(12), (a)(16), (a)(17), (a)(18), (a)(19), (a)(20), (a)(21), and (a)(22) of rule 17a-3 and paragraphs (b)(4) and (e)(6) of rule 17a-4). 63 Fed. Reg. 54404-01, 54417.