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p SEP 6 1995 

Our Ref. No. 95-252-CC
 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL First Call Corporation
 

DIVISION OF INVESTMENT MAAGEMENT File No. 132 - 3
 

Your l~tter of April 27, 1995 requests our assurance that we
 

would not recommend enforcement action to the Commission under
 

rule 204-2 under the Investment Advisers Act of 1940 ("Advisers
 

Act") or rules 31a-1 and 31a-2 under the Investment Company Act
 

of 1940 ("1940 Act") against a registered investment adviser that
 

subscribes to the FIRST CALL Research Direct service ("Research
 

Direct ") provided by First Call Corporation (" First Call") if
 

First Call and the investment adviser- maintain in the manner
 

described in your letter reports available electronically to
 

Research Direct subscribers.
 

Research Direct provides subscribers with on- line research reports and analyses contributed by broker-dealers. The reports 

carried on Research Direct are identical to reports that the 

contributing broker-dealers provide to their clients in hard 

copy. Research Direct subscribers may view the reports on screen 

or print hard copies of part or all of any report carried on 

Research Direct, but cannot download the reports to their own 

computer systems. i/ The reports carried on Research Direct 

cannot be altered either by First cari or by subscribers. 

The reports will be maintained for approximately thirty days
 

on the computer facilities furnished by First Call to its
 

subscribers. Thereafter, First Call will store the reports on
 

its host computer for six years from the end of the calendar year
 

during which the report was first made available on the system.
 

During this period, subscribers will be able to retrieve reports
 

from storage by means of a two-way digital phone line. ~/
 

First Call creates backups of new and amended documents nightly,
 

and, on a weekly basis, backs up the entire system onto tape.
 

The tapes are stored off site for a minimum of six years in a
 

fireproof, secure vault.
 

First Call monitors and records subscribers' use of reports
 

carried on Research Direct. First Call will provide each
 

Research Direct subscriber with a monthly statement identifying
 

every report that was accessed by the subscriber.
 

Rule 204-2 (a) (7) under the Advisers Act requires that 

investment advisers maintain "originals" of all written
 

i/ Telephone conversation with Mari-Anne Pisarri on July 7,
 1995. 

~/ As further described below, First Call will provide
 

subscribers that have terminated their Research Direct
 

subscriptions with hard copies of reports under certain


circumstances. 
. lI:.:~- . 

., 

- 2 ­

communications received by the adviser relating to any
 

recommendation made or proposed to be made and any advice given
 or proposed ,to be given. ~/ Paragraph (e) (1) of rule 204-2 

requires that most books and records specified under the rule be
 

maintained in an easily accessible place for a period of not less
 

than five years from the end of the fiscal year during which the
 

last entry on the book or record was made, the first two years in
 an appropriate office of the investment adviser. Rule 31a- 1 (f) 

under the 1940 Act generally requires investment advisers to
 

registered investment companies to maintain the same books and


documents required to be maintained under rule 204 - 2 under the 

Advisers Act to the extent these records are necessary or
 

appropriate to record the adviser's transactions with the


investment company. Under rule 31a-2 (e), the investment adviser 

must preserve such books and documents for six years.
 

We first address whether First Call's proposed electronic
 

storage arrangement will satisfy the requirement of rule
 204-2 (e) (1) to maintain records "at an appropriate office of the 

investment adviser." We believe that if an adviser has
 

essentially immediate access to a record (on the adviser's
 

proprietary system or otherwise) through a computer located at an
 

appropriate office of the adviser, then that record is being
 

maintained "at an appropriate office of the adviser" as required


by rule 204-2 (e) (1). ~/ 

The arrangement proposed by First Call also implicates other
 

requirements of rule 204-2, including the conditions set forth in
 

paragraph (g) of the rule pursuant to which records can be
 

maintained and preserved on magnetic disk, tape or other computer
 

storage medium. á/ Paragraph (f) of rule 31a-2 specifies
 

~/ See Depository Trust Co. (pub. avail Sept. 4, 1992) (an
 

electronic confirmation may be treated as an "original


communication") . 

4/ Immediate access to records includes the ability to promptly
 

provide to Commission examination staff hard copies of the
 

records or access to the storage medium.
 

á/ Specifically, paragraph (g) (2) permits computer storage of
 

records created by the adviser on electronic media or
 

received by the adviser solely on electronic media or by
 electronic data transmission. Paragraph (g) (1) of the rule 

requires that an adviser (1) arrange the records and index
 

the storage medium to permit the immediate location of any
 

record, (2) be ready to provide Commission examiners with
 

copies or printouts of the records, (3) store one copy of
 

each record separately from the original, and (4) maintain
 

(continued. . .) 
- 3 ­

corresponding conditions for computer storage of certain records
 

by investment companies. Q/ In addition, the proposed
 

arrangement gives rise to issues under rule 204 - 2 because an
 

adviser would no longer have immediate access through its
 

computers to records carried on Research Direct if it ceased to
 

subscribe to the service or if the service was no longer offered.
 

In adopting paragraph (g) of rule 204-2, the Commission
 

intended to provide investment advisers with the flexibility to
 

determine the computerized medium on which to store their
 

records. 2/ You state that, although subscribers may print
 

out the reports accessed through Research Direct, requiring
 

advisers to preserve printouts of all such reports would defeat
 

one of the primary benefits of Research Direct, the elimination
 

of the need to store large quantities of paper. You assert that
 

the proposed storage of the reports on First Call's host computer
 

for six years, the backup storage on tape, and the subscriber's
 

ability to retrieve reports electronically ensure that the
 

reports will be maintained and adequately safeguarded from loss
 

or destruction for the requisite periods under the Advisers Act
 

and the 1940 Act and will be accessible to Commission
 

staff. ~/
 

á/ ( . . . continued) procedures to reasonably safeguard records stored on
 

computer from loss, alteration, or destruction.
 

Q/ Under the proposed arrangement, First Call, rather than the investment adviser or the investment company, would maintain
 

and preserve the reports carried on Research Direct. An
 

investment adviser may delegate certain record creation and
 

retention responsibilities to a third party, but the adviser
 

cannot, by doing so, avoid liability for violating the
 

Advisers Act, the 1940 Act, or the rules under those Acts if
 

the third party fails to carry out those responsibilities.
 

See National Regulatory Services (pub. avail. Dec. 2, 1992).
 

7/ Investment Advisers Release No. 952 (Jan. 16, 1985).
 

~/ We note that, because an adviser may retrieve reports stored


on First Call's host computer at any time during the six-


year storage period, removing such reports from the system
 

after this period may not comply with the literal terms of
 

rules 204-2, 31a-1, and 31a-2 with respect to an adviser
 

that has used a report after the commencement of the
 

required preservation period. Nonetheless, in light of the
 

overall recordkeeping procedures you propose and the
 

impracticability of restricting use of reports by advisers


while they are available on the system, we will not obj ect 

to the proposed procedures.
 
- 4 ­

We would not recommend enforcement action to the Commission
 

under rule 204-2 under the Advisers Act or rules 31a-1 and 31a-2
 

under the 1940 Act against an investment adviser that subscribes
 

to Research Direct if records of the electronic reports available
 

on Research Direct are maintained in the manner described in your
 

letter. We also would not recommend enforcement action to the
 

Commission under rule 31a-3 under the 1940 Act even though the
 

reports may not be the property of the investment adviser. ~/
 

These positions are based on the facts and representations made
 

in your letter and the telephone conversations, particularly your
 representations that: 

(1) First Call will provide each Research Direct subscriber
 

with a monthly statement identifying every research
 

report retrieved by that subscriber during the


month; 10/ 

(2) investment adviser subscribers will maintain hard
 

copies of the monthly statements in accordance with the


requirements of rule 204-2 (e) (1); 11/ 

(3) First Call will store the reports on its host computer
 

for six years from the end of the calendar year during
 

which the report was first made available on the system
 

and will store backup tapes of the reports for six


years; 

(4) in the event an investment adviser cancels its
 

subscription to Research Direct, First Call will
 

provide the former subscriber, within 48 hours of the
 

2/ Rule 31a-3 provides that if a third party maintains records


on behalf of a person required to maintain records under
 

rules 31a-1 and 31a-2, such person must obtain an agreement
 

from the third party to the effect that the records are the
 

property of the person required to maintain the records and
 

will be surrendered promptly upon request. Our position
 

with respect to rule 31a-3 is based on the proprietary
 

nature of the research reports carried on Research Direct.
 

The staff would not otherwise be inclined to grant relief
 

from the requirements of that rule.
 

10/ Paragraph (g) (1) of rule 204-2 requires an investment 

adviser that maintains electronic records to arrange and
 

index records to permit the immediate location of any
 

particular record.
 

i1/ Investment advisers subj ect to the requirements of rule


31a-2 (e) will maintain the monthly statements for six years 

from the date the statements are received.
 
- 5 ­

former subscriber's request, with a hard copy of any
 

report that the subscriber accessed that the Commission
 

staff may request in connection with an examination,
 

inspection, or investigation of the Investment
 

adviser; 12/ and
 

(5) in the event First Call ceases operations or ceases to
 

offer Research Direct, it will make arrangements
 

reasonably acceptable to the Commission or its staff to
 

ensure the availability of the reports carried on
 

Research Direct for the remainder of the requisite
 

period. 13/
 

You should note that any different facts or circumstances might
 

require a different conclusion. This response (other than the
 

interpretive position under rule 204-2 (e) (1)) only represents the
 

Division's position on enforcement action and does not purport to
 

express any legal conclusion on the questions presented.
 

~ßL O&A/ Av-cf 

Barbara Chretien-Dar 

Senior Counsel
 

12/ Telephone conversation with Mari-Anne Pisarri on July 24,


1995. 

13/ Telephone conversation with Mari-Anne Pisarri on July 24,
 

1995. As noted above (see supra n. 6), this letter would
 

not relieve investment advisers from liability for
 

violations of the recordkeeping rules under the Advisers Act
 

or 1940 Act that would occur in the event First Call failed
 

to comply with the representations set forth above.
 
ACf :rAA

SECTION 

Q 04 -.Q L €- ) (I) PICKARD AND DJINIS RULE 

ATTORNEYS AT LAW PUBLIC q-Ç;- 'ts­ 1990 M STREET, N. W. AVAILABILITY 

WASHINGTON, D. C. 20036 

TELEPHONE TELECOPIER 

(202) 223-4416 (202) 331-3613 

April 27, 1995
 

By Hand
 

Jack W. Murphy, Esq.
 

Chief Counsel , Division of Investment Management
 

Securities and Exchange Commission
 

450 Fifth street, N.W.
 

Washington, D.C. 20549
 

Dear Mr. Murphy:
 

This letter is submitted on behalf of First Call Corporation
 

("First Call"), to request confirmation that electronic storage in


the manner described below of reports transmitted through the FIRST
 

CALL Research Direct service satisfies the recordkeeping
 

requirements of both the Investment Advisers Act of 1940 (the
 

"Advisers Act") and the Investment Company Act of 1940 (the


"Company Act") . 

Description Of FIRST CALL Research Direct
 

Jointly owned by the Thomson Corporation, a $6 billion
 

publisher of specialized professional and business information, and
 

ten major U. S. broker-dealers, First Call Corporation has provided
 

the investment management community with electronic access to
 

commingled financial research since 1984.
 

The new FIRST CALL Research Direct service (hereinafter
 

"Research Direct" or the "Service") delivers in-depth research and
 

analytics, on line, twenty-four hours per day from broker-dealer
 

contributors through First Call's host computer to investment
 

manager subscribers. i The reports transmitted through the Service
 

in read-only format are exact replicas of those which the broker-


dealers otherwise would send to their clients by mail, including
 

full text and all associated graphs, tables, spread-sheets, color
 2 and artwork. 


i At the present time, more than twenty broker-dealers contribute an
 

aggregate of approximately 70 to 100 reports per day to Research Direct. This
 

number is expected to increase substantially in the future.
 

2 Neither the subscriber nor First Call has the ability to alter the


contents of the contributors' reports. 
Jack W. Murphy, Esq.
 

April 27, 1995
 

Page 2
 

Research Direct subscribers can search the Service's database
 

of reports. by analyst, broker, company name, company symbol,
 

country, industry, portfolio, region or subject. The Service's
 

"free-text" feature permits database searches by specific words,
 

phrases, concepts or multiple subjects; and the "relevancy grade"
 

feature tells subscribers which documents best fit their search
 

cri teria. Subscribers can print hard copies of all or part of the
 

Service's reports if they so desire. They are not, howeveri
 

allowed to download these reports to their own computer systems. 3
 

Research Direct also allows subscribers to create customized
 

portfolios containing up to 1000 companies each, in order to track
 

information on issuers of particular interest. And, by either
 

emitting an audible signal, automatically printing relevant
 

documents, or displaying a written message on the user's computer
 

screen, the Service's "Alert" feature enables subscribers to
 

moni tor the receipt of all new reports on particular companies,
 

industries or subjects, or by any word or sentence.
 

Research Direct is available on a dedicated terminal or
 

through a desktop personal computer via a Windowsm-based Local Area
 Network. Hardware provided with the Service includes a data 

service unit, router, hub, 486 network server running SCO Open
 

Systems UNIX, and workstation (486 PC with 600 dpi printer). The
 

enabling technology for Research Direct includes Adobem Acrobatm
 

software, which provides cross-platform viewing, navigation and
 

printing of electronic documents, and Fulcrum's full -text retrieval
 

technology combined with proprietary software.
 

The Service's host computer, located in Boston, Massachusetts
 

is an Ethernet network of Sun 1000 workstations. The host
 

currently consists of two workstations, and can be expanded as
 

demand grows by adding additional workstations. The host stores
 

reports on a mirrored disk subsystem which allows "mirror" storage
 

of reports to ensure data integrity. The mirrored disk subsystem
 

currently consists of 18 Gigabytes of disk storage, and is


expandable. Al I changes to the reports database (new or modi f ied 

documents) are backed up every night. Every weekend, a ful I backup
 

of the entire system is done to tape. These tapes are stored off
 

site every Monday in a fireproof, secure vault for a minimum of six
 

years. 

Reports contained in Research Direct's database are stored
 

electronically on the facilities furnished to subscriber by First
 

Call for a period of approximately thirty days, and are stored
 

3 The prohibition against downloading Research Direct reports stems from
 

the contributing brokers' desire to prevent the electronic redistribution of
 

their proprietary analysis.
 
Jack W. Murphy, Esq.
 

April 27, 1995
 

Page 3
 

thereafter in First Call's host computer for an additional eleven
 months. As explained below, if the staff grants the no-action 

relief requested herein, each report will be stored in the First
 

Call host computer for a period of six years from the end of the
 calendar year in which the report was produced. Subscribers will 

be able to retrieve reports from storage in two minutes or less, at
 

any time during this period by means of a two-way digital phone
 line.4 

First Call monitors usage of the Service and produces a record
 

indicating which subscribers have obtained access to which specific
 

reports. A broker-dealer disseminating research through the
 

Service has the authority to block particular subscribers' access
 

to that contributor's reports, if it so desires.
 

Advantages Of The Service 

Among the most notable benefits of Research Direct are speed
 

and efficiency. By delivering complete copies of broker-dealers'
 

reports electronically in real-time, the Service eliminates delays
 mail . And the
 encountered in delivering research through the 


Service's various search, monitoring and retrieval features enable
 

portfolio mangers to hone in on and keep track of the precise
 

information they need without reviewing thousands of pages of
 

irrelevant material. In this way, managers are able to take
 

maximum advantage of the enormous volume of investment research
 being produced today. Electronic delivery of brokers' reports 

also eliminates clutter in the manager's office and saves paper.
 

The question arises, however, of how to allow money managers
 

to reap the full benefits of the Service and still comply with
 

their recordkeeping obligations under the Advisers and Company


Acts. 

Recordkeeping Requirements
 

Rule 204-2 (a) (7) under the Advisers Act requires investment 

advisers to maintain originals of all written communications they
 

recei ve relating to any recommendations made or proposed to be made
 

and any advice given or proposed to be given. This requirement
 

presumably encompasses broker-dealer research reports which relate
 

4 To retrieve a report from storage, the subscriber "clicks" on the
 

document headline with a mouse and the document is automatically downloaded from


the host computer to the subscr iber 's server, and then to the subscr iber ' s 

desktop computer.
 
Jack W. Murphy, Esq.
 

April 27, 1995
 

Page 4
 

to advice given or recommendations made by the adviser, including
 

reports transmi tted through FIRST CALL Research Direct.
 

Books and records covered by Rule 204-2 must be maintained in
 

an easily accessible place for a period of not less than five years
 

from the end of the fiscal year during which the last entry was
 

made thereon.5 For the first two years, the records must be kept
 

in "an appropriate office of the investment adviser." Rule 204­

2(e). 

Al though the recordkeeping rule originally contemplated the
 

preservation of paper documents, the rule was subsequently amended
 

to permit advisers to store required records on computers under
 

certain conditions.6 In this regard, Rule 204-2(g) was revised in
 

1985 to provide that records which the adviser receives solely on
 

electronic media or by electronic data transmission may be stored
 

on a computer storage medium so long as the following conditions
 are satisfied: 

( 1) the records are arranged and indexed so as to permit the

immediate location of any particular record;
 

(2) printouts of the records or copies of the computer tape or
 disk are made available to Commission examiners promptly upon


request; 

(3) a duplicate of the computer storage medium is stored
 separately from the original; and
 

( 4) procedures are implemented for the maintenance,
 preservation of and access to records so as to reasonably
 

safeguard records from loss, alteration or destruction.
 

In adopting this amendment, the Commission explained that the
 

modified rule would "provide flexibility to advisers to determine
 

the medium on which required records would be stored." 50 Fed.
 

Reg. 2542 (January 17,1985). The Commission also expressed its
 

belief that allowing each adviser to design its own procedures for
 

safeguarding computer records was preferable to dictating specific
 

5 Rule 31a-2 (e) under the Company Act requires every investment adviser
 

(other than a majority-owned subsidiary of a registered investment company) to


preserve for six years those documents required under Section 204 of the Advisers


Act which are-necessary or appropriate" to record the adviser's transactions 

with registered investment company clients. See also, Rule 31a-1(f). An adviser
 

which is a majority-owned subsidiary of a registered investment company is
 

subject only to the five year requirement of Rule 204-2(e). Rules 31a-1(e) and


31a-2(d). 

6 Provisions also were made for document retention on microfilm.
 
Jack W. Murphy, Esq.
 

April 27, 1995
 

Page 5
 

protective measures that all advisers must adopt, because the
 

former approach would avoid imposing requirements "which, in some
 

cases, might be unnecessarily restrictive or which might become
 

outdated as newer technologies become available." Id.
 

The Commission's flexible approach to electronic record
 

retention clearly conforms to congressional intent in this area.
 

As far back as 1975, Congress endorsed the notion that
 

recordkeeping under the federal securities laws is a dynamic
 

concept which must keep pace with advances in technology. For
 

example, the Securities Acts Amendments of 1975 added the following
 

definition of "records" to the Securities Exchange Act:
 

The term "records" means accounts, correspondence,
 

memorandums, tapes, discs, papers, books and other
 

documents or transcribed information of any type, whether
 

expressed in ordinary or machine language.
 

Exchange Act, Section 3(a) (37). The Senate Report which
 

accompanied this legislation explained the rationale for this
 addition as follows: 

the Committee believes a modern and expansive
 defini tion of this important term "records" is desirable. 

Thus, the definition would explicitly recognize the
 

impact of advanced technology on traditional business
 

methods by including within the definition tapes, discs,
 

and other documents or transcribed information of any
 

type whether expressed in ordinary or machine language.
 

s. Rep. No. 75, 94th Cong., 1st Sess., reprinted in (1975) u.S.
 

Code Cong. & Ad. News 179.
 

To ensure that the Commission's recordkeeping rules continue
 

to keep pace with the dramatic technological advances which have
 

occurred since Rule 204-2 (g) was revised in 1985, it appears that
 

a slight modification of the rule's application is now in order.
 

Record Retention And Research Direct
 

We begin this discussion with the observation that requiring
 

Research Direct's subscribers to print and save hard copies of all
 

reports relating to their advice and recommendations would
 

obliterate one of the primary benefits of the Service and would
 

force the retention of a vast amount of paper at very great
 expense. However, because subscribers are prohibited from 

downloading Research Direct reports onto their internal computer
 
Jack W. Murphy, Esq.
 

April 27, 1995
 

Page 6
 

systems, the Service may not lend itself to electronic storage
 

within the .confines of Rule 204-2 as it is presently configured.7
 

Nevertheless, as explained herein, more than adequate
 

safeguards can be designed to ensure that the Service's reports are
 

not altered, lost or destroyed during the periods prescribed by the
 

Advisers and Company Acts' recordkeeping rules, as well as to
 

ensure that the Commission and its staff have prompt and thorough
 access to these reports for regulatory purposes. In this regard, we propose the following reèordkeeping arrangement for reports 

disseminated to investment advisers through Research Direct:
 

1. First Call would provide each Research Direct subscriber
 

with a monthly statement identifying every research report
 

that was disseminated to the subscriber during that month.
 

2. Investment adviser subscribers to Research Direct would
 

maintain hard copies of the foregoing monthly statements in
 

accordance with Advisers Act Rule 204-2 and/or Company Act
 

3la-l and 3la-2.
 

3. First Call would store at its Boston headquarters, each
 

report disseminated through the Service for a period of six
 

years from the end of the calendar year during which the
 B 

report was produced.
 

4. During the six-year period described in Paragraph 3,
 

subscribers would be able to access Research Direct reports
 

from subscribers' on-site terminals. In the event that a
 

subscriber terminates its subscription to First Call, the
 

subscriber will be able to obtain within 48 hours, for a fee,
 

a hard copy of any report covered by Rule 204-2(a) (7) which
 

the Staff of the Division of Investment Management may request
 

in connection with any examination, inspection or
 investigation. 

7 In particular, because Research Direct reports are stored at the
 

subscriber's premises for only thirty days, relevant documents may not be deemed
 

to be maintained for two years "in an appropriate office of the investment
 

adviser" as required by Rule 204-2 (e) . Nor may advisers be in a position to
 

comply with all of the conditions enumerated in subsection (g) of the rule.
 

B Because Research Direct disseminates reports in real time, the date of

production and date of availability through the Service would be the same. A 

calendar year rather than fiscal year basis has been chosen since it would be
 

impossible to calibrate the Service's document retention with every adviser's
 

fiscal year. For many advisers, the fiscal year ends on December 3l anyway.
 
Jack W. Murphy, Esq.
 

April 27, 1995
 

Page 7
 

5. In the event that First Call ceases operations, it will
 

make arrangements reasonably acceptable to the Commission or
 

its staff to ensure the continued availability of Research
 

Direct reports for regulatory purposes during the remainder of
 

the period described in paragraph 3.
 

We believe that the foregoing arrangement would comport with
 

congressional directives to incorporate technological advances into
 

securities regulation; would facilitate advisers' compliance with
 

their recordkeeping obligations; would reduce costs and regulatory
 

burdens on investment advisers; and would simplify the staff's
 

inspections of advisers' operations.
 

Therefore, please advise us that you would not recommend that
 

the Commission take enforcement action against a registered
 

investment adviser under Advisers Act Rule 204-2 or Company Act
 

Rule 3la-l or 3la-2 if the adviser maintains and makes available to
 

the SEC relevant Research Direct reports, through the facilities of
 

First Call in accordance with the arrangement outlined herein.
 

Conclusion 

In view of the many salutary characteristics of FIRST CALL
 

Research Direct, and in further view of the fact that the
 

electronic storage proposed in this letter meets the fundamental
 

goals of the recordkeeping requirements under the Advisers and
 

Company Acts, we respectfully request that you grant the no-action
 

relief described herein.
 

If you need any further information on this matter, please do
 

not hesitate to contact the undersigned.
 

Very truly yours,
 

he-' -qL w-~aVr ~
 

Mari-Anne Pisarri
 

cc: Alex Bentley
 

Barbara Chretien Dar, Esq.