22916 Federal Register / Vol. 66, No. 88 / Monday, May 7, 2001 / Rules and Regulations

1Pub. L. 106–229, 114 Stat. 464 (2000).

2Electronic Signatures Act Section 101(a).

3Electronic Signatures Act Section 101(d)(1).

4 Id.

5Electronic Signatures Act Section 104(b).

6Electronic Signatures Act Section 107(b)(1).

7Electronic Signatures Act Section 107(b)(1)(B).

8Exchange Act Release No. 44014 (Feb. 28, 2001),

66 FR 13273 (March 5, 2001), <http://www.sec.gov/

news/digest.shtml>. 9Exchange Act Release No. 2304 (Nov. 13, 1939),

4 FR 4578 (Jan. 2, 1940).

10Exchange Act Release No. 38245 (Feb. 5, 1997),

62 FR 6469 (Feb. 12, 1997) (‘‘Adopting Release’’).

Note 2: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the International Branch,

ANM–116.

Special Flight Permits

(c) Special flight permits may be issued in

accordance with §§ 21.197 and 21.199 of the

Federal Aviation Regulations (14 CFR 21.197

and 21.199) to operate the airplane to a

location where the requirements of this AD

can be accomplished.

Incorporation by Reference

(d) The actions shall be done in accordance

with CASA Service Bulletin SB–235–24–14,

dated June 27, 2000. This incorporation by

reference was approved by the Director of the

Federal Register in accordance with 5 U.S.C.

552(a) and 1 CFR part 51. Copies may be

obtained from Construcciones Aeronauticas,

S.A., Getafe, Madrid, Spain. Copies may be

inspected at the FAA, Transport Airplane

Directorate, 1601 Lind Avenue, SW., Renton,

Washington; or at the Office of the Federal

Register, 800 North Capitol Street, NW., suite

700, Washington, DC.

Note 3: The subject of this AD is addressed

in Spanish airworthiness directive 06/00,

dated June 27, 2000.

Effective Date

(e) This amendment becomes effective on

June 11, 2001.

Issued in Renton, Washington, on April 24,

2001.

Donald L. Riggin,

Acting Manager, Transport Airplane

Directorate, Aircraft Certification Service.

[FR Doc. 01–10727 Filed 5–4–01; 8:45 am]

BILLING CODE 4910–13–U

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 241

[Release No. 34–44238]

Commission Guidance to BrokerDealers on the Use of Electronic

Storage Media Under the Electronic

Signatures in Global and National

Commerce Act of 2000 With Respect to

Rule 17a–4(f)

AGENCY: Securities and Exchange

Commission.

ACTION: Interpretation.

SUMMARY: The Commission is

publishing guidance on the operation of

its rule permitting electronic storage of

broker-dealer records in light of the

recently enacted Electronic Signatures

in Global and National Commerce Act of

2000. In particular, we are publishing

guidance on how the electronic storage

requirements of Rule 17a–4(f) under the

Securities Exchange Act of 1934 meet,

and are consistent with, the

requirements of the Electronic

Signatures in Global and National

Commerce Act.

EFFECTIVE DATE: The guidance is

effective on May 7, 2001.

FOR FURTHER INFORMATION CONTACT:

Michael A. Macchiaroli, Associate

Director, 202/942–0131; Thomas K.

McGowan, Assistant Director, 202/942–

4886; Randall W. Roy, Special Counsel,

202/942–0798, or Mathew Comstock,

Attorney, 202/942–0156, Division of

Market Regulation, Securities and

Exchange Commission, 450 Fifth Street,

N.W., Washington, D.C. 20549–1001.

SUPPLEMENTARY INFORMATION: The

Securities and Exchange Commission

(‘‘Commission’’) is publishing guidance

on how Rule 17a–4(f) (17 CFR 240.17a–

4(f)) under the Securities Exchange Act

of 1934 (‘‘Exchange Act’’) is consistent

with the Electronic Signatures in Global

and National Commerce Act of 2000.

I. Introduction

The Electronic Signatures in Global

and National Commerce Act of 2000

(the ‘‘Electronic Signatures Act’’) 1 seeks

to promote electronic commerce by

providing greater legal certainty to

transactions effected by electronic

means. To this end, the Electronic

Signatures Act provides that the legal

validity of a signature or contract cannot

be denied solely because it is in

electronic form.2 It also encourages

electronic record storage by providing

that any statute, regulation, or other rule

of law that requires the retention of

contracts or other records relating to

transactions in or affecting interstate or

foreign commerce may, with certain

exceptions, be complied with by storing

the documents electronically.3

However, the Electronic Signatures Act

requires that the electronically stored

documents must accurately reflect the

information in the contracts or

transactional records and be accessible

to all persons entitled to review them

under statute, regulation, or rule of law

in a form that is capable of being

accurately reproduced for later

reference.4 The Electronic Signatures

Act does not define how these

requirements are to be met. Instead, it

preserves the ability of regulatory

agencies to interpret them with respect

to statutes under which such agencies

have rulemaking authority.5

On March 1, 2001, the Electronic

Signatures Act became effective with

respect to any existing state or federal

regulatory requirement that a contract or

transactional record be retained.6 This

effective date is delayed, however, if an

agency has announced, proposed or

initiated, but not completed, a

rulemaking proceeding under the

authority preserved in the Electronic

Signatures Act.7 On February 28, 2001,

the Commission announced that it

would act shortly to provide

interpretive guidance and, where

appropriate, propose or adopt rules

consistent with the Electronic

Signatures Act, thereby delaying the

effective date with respect to

Commission recordkeeping rules to June

1, 2001.8

Since 1939, the Commission has

required broker-dealers, through rules

authorized under the Exchange Act, to

make and maintain certain records

deemed necessary to ensure compliance

with federal securities laws and

regulations.9 In 1997, after requests by

industry representatives, the

Commission amended its record

retention rule to allow broker-dealers to

store these records using any electronic

storage medium, subject to certain

requirements set forth in the rule.10

These requirements are safeguards

designed to ensure the accuracy,

accessibility, and accurate reproduction

of the electronically stored records. The

rule’s evolution from a strictly paper

requirement to its present electronic

storage provisions reflects the

Commission’s approach of promoting

the use of available technologies to the

benefit of broker-dealers and investors.

In anticipation of the June 1, 2001

effective date for the electronic storage

provisions of the Electronic Signatures

Act, we are publishing this release to

explain how the electronic storage

requirements of the broker-dealer record

retention rule meet, and are consistent

with, the requirements of the Electronic

Signatures Act.

II. Background

A. Broker-Dealer Books and Records

Rules

Section 17(a)(1) of the Exchange Act

authorizes the Commission to issue

rules requiring broker-dealers to make

and keep for prescribed periods, and

furnish copies thereof, such records as

necessary or appropriate in the public

Federal Register / Vol. 66, No. 88 / Monday, May 7, 2001 / Rules and Regulations 22917

11 15 U.S.C. 78q(a)(1).

12Exchange Act Release No. 2304 (Nov. 13, 1939),

4 FR 4578 (Jan. 2, 1940).

13 17 CFR 240.17a–3.

14 17 CFR 240.17a–4.

15The Commission continues to be interested in

exploring ways in which technology can be used to

create efficiencies without sacrificing the

Commission’s regulatory objectives.

16Exchange Act Release No. 2304 (Nov. 13, 1939),

4 FR 4578 (Jan. 2, 1940).

17Exchange Act Release No. 8875 (Apr. 30, 1970),

35 FR 7644 (May 16, 1970).

18 Id.

19 Id.

20Letter from Edward I. O’Brien, President, SIA,

to William Heyman, Deputy Director, Division,

(May 1, 1991).

21Letter from Michael D. Udoff, Chairman, Ad

Hoc Record Retention Committee, SIA, to Michael

Macchiaroli, Assistant Director, Division, (May 19,

1992).

22Letter from Michael A. Macchiaroli, Associate

Director, Division, to Michael D. Udoff, Chairman,

Ad Hoc Record Retention Committee, SIA (June 18,

1993).

23Adopting Release 34–38245, 62 FR 6469 (Feb.

12, 1997).

24The requirements for using electronic storage

media for broker-dealer records are set forth in

subsections (2)(i), (2)(ii)(A)–(D), and (3)(i)–(vii) of

paragraph (f) of Rule 17a–4. These subsections are

the requirements that are generally referred to

throughout this release as, among other terms, ‘‘the

electronic storage requirements of Rule 17a–4(f).’’

interest, for the protection of investors

or otherwise in furtherance of the

purposes of the Exchange Act.11 In

1939, the Commission adopted Rules

17a–3 (17 CFR 240.17a–3) and 17a–4 (17

CFR 240.17a–4), pursuant to this

authority.12 Rule 17a–3 requires brokerdealers to make certain records,

including trade blotters, asset and

liability ledgers, income ledgers,

customer account ledgers, securities

records, order tickets, trade

confirmations, trial balances, and

various employment related

documents.13 Rule 17a–4 specifies the

manner and length of time that the

records created in accordance with Rule

17a–3, and certain other records

produced by broker-dealers, must be

maintained.14 In combination, Rules

17a–3 and 17a–4 require broker-dealers

to create, and preserve in an accessible

manner, a comprehensive record of each

securities transaction they effect and of

their securities business in general.

These rules impose minimum

recordkeeping requirements that are

based on standards a prudent brokerdealer should follow in the normal

course of business. The requirements

are an integral part of the investor

protection function of the Commission,

and other securities regulators, in that

the preserved records are the primary

means of monitoring compliance with

applicable securities laws, including

antifraud provisions and financial

responsibility standards.

Originally, Rule 17a–4 had a paperonly requirement for the initial

retention of records; now, the rule

allows broker-dealers to choose between

storing records in paper form, on

microfilm or microfiche (‘‘micrographic

media’’) or using electronic storage

media. This progression from paper to

electronic media is indicative of how

the Commission encourages the use of

technological innovation when both

broker-dealers and investors will

benefit.15

As mentioned, Rule 17a–4, when

adopted in 1939, required brokerdealers to maintain records in paper

form for the first two years of the

specified retention period, and on

microfilm thereafter.16 In 1970, the

Commission amended the rule to allow

the records to be stored immediately on

microfilm.17 This amendment

recognized that broker-dealers were

increasingly using automated systems in

their back office operations, and that the

records generated on such systems

could be transferred to microfilm more

quickly than to paper, and at

substantially less expense. As the

Commission noted at the time, ‘‘the

retention of reels of microfilm as against

bulky hard copy records should enable

an organization to effect substantial

savings in storage space and man

hours.’’ 18 The rule specifies certain

requirements on the use of microfilm

intended to ‘‘preserve the basic

safeguards designed by [Rules 17a–3

and 17a–4] for the protection of public

investors.’’ 19 Broker-dealers who use

micrographic media must: (1) Maintain

facilities to protect the records and

reproduce them in an easily readable

format; (2) arrange the records and their

indexes in a manner that permits the

immediate location of a particular

record; and (3) store a second copy of

the records in a separate location.

In 1991, the Securities Industry

Association (‘‘SIA’’), on behalf of its

broker-dealer members, requested that

the Division of Market Regulation

(‘‘Division’’) amend Rule 17a–4 to

permit broker-dealers to store records

electronically.20 The following year, the

SIA requested that the Division not

recommend enforcement action if

broker-dealers stored records using an

electronic storage technology known as

optical disk.21 In its no-action request,

the SIA set forth a list of safeguards that

it believed were appropriate. These

safeguards included that the storage

system: be non-rewriteable and nonerasable (or write once, read many

‘‘WORM’’); automatically verify the

accuracy of stored information; serialize

and time-date the records; and create

indexes of the records. The SIA

estimated that the savings realized by

switching from microfilm to optical disk

would range from $250,000 a year for a

medium-sized firm to $1.6 million a

year for a large firm.

In 1993, the Division issued a noaction letter in response to the SIA’s

1992 request. The no-action letter

permitted broker-dealers to meet the

record retention requirements of Rule

17a–4 using optical disk storage

technology.22 This allowed brokerdealers to take advantage of the savings

and of the increased productivity and

quicker access to archived records

provided by optical disk. At the same

time, the Division recognized that the

use of an electronic storage system

raised audit and examination concerns.

Consequently, the Division established

certain conditions for using optical disk

to help ensure that records stored in this

manner would be accurate and

accessible for examination purposes.

These conditions were consistent with

the safeguards proposed by the SIA in

its 1992 no-action request. For example,

the optical disk technology stores digital

information by employing a laser heat

source to burn a pattern on the disk,

which makes the records nonrewriteable and non-erasable. The letter

also required: (1) Broker-dealers to file

an undertaking signed by a third-party

in which the third-party represents that

it will access the records at the request

of the Commission; (2) the optical disk

system to automatically verify the

quality and accuracy of the recording

process; (3) the optical disk system to

serialize the original and any duplicate

units of the storage medium and timedate information stored on the medium;

and (4) the optical disk system to have

the capacity to download indices and

records.

In 1997, the Commission, in many

respects, codified the Division’s noaction letter by amending paragraph (f)

of Rule 17a–4 to allow broker-dealers to

store records electronically.23 However,

one significant difference was that the

final rule did not limit broker-dealers to

using optical disk. Instead, it allowed

them to employ any electronic storage

medium, subject to certain

requirements. For the most part, these

requirements are the same safeguards

proposed by the SIA in its 1992 noaction request and later required by the

Division in its 1993 no-action letter. It

is these requirements of Rule 17a–4 that

we now find meet, and are consistent

with, the Electronic Signatures Act.24

22918 Federal Register / Vol. 66, No. 88 / Monday, May 7, 2001 / Rules and Regulations

25Electronic Signatures Act § 101(d)(1).

26Electronic Signatures Act § 104(b).

27Electronic Signatures Act § 104(b)(2)(A).

28Electronic Signatures Act § 104(b)(2)(B).

29Electronic Signatures Act § 104(b)(2)(C).

30See 66 FR 13273 (March 5, 2001).

31We also note that, during the debate on the

Electronic Signatures Act, a concern was raised as

to whether the validity of a contract could be

challenged because it was not retained in an

accurate or accessible manner. 146 Cong. Rec.

H4349 (daily ed. June 14, 2000) (statement of Rep.

Dreier). The electronic storage requirements of Rule

17a–4(f) are designed to ensure that electronic

records are kept in an accurate and accessible

manner.

32 146 Cong. Rec. H4347 (daily ed. June 14, 2000)

(statement of Rep. Sessions).

33Adopting Release, 62 FR at 6469.

34 146 Cong. Rec. H4358 (daily ed. June 14, 2000)

(statement of Rep. Dingell) (emphasis added).

B. The Electronic Storage Requirements

of the Electronic Signatures Act

Section 101(d)(1) of the Electronic

Signatures Act permits persons who are

legally required to retain contracts or

records relating to transactions in or

affecting interstate or foreign commerce

to do so using electronic means.

However, Section 101(d)(1) also requires

persons who opt to store such records

in electronic form to proceed in a

manner that ensures the records are

accurate, accessible, and capable of

accurate reproduction for later

reference. As Section 101(d)(1) reads in

full,

If a statute, regulation, or other rule of law

requires that a contract or other record

relating to a transaction in or affecting

interstate or foreign commerce be retained,

that requirement is met by retaining an

electronic record of the information in the

contract or other record that—

(A) accurately reflects the information set

forth in the contract or other record; and

(B) remains accessible to all persons who

are entitled to access by statute, regulation,

or rule of law, for the period required by such

statute, regulation, or rule of law, in a form

that is capable of being accurately

reproduced for later reference, whether by

transmission, printing, or otherwise.25

The Electronic Signatures Act does

not specify the conditions under which

an electronic record would be deemed

to have met these requirements.

However, it does preserve the ability of

regulatory agencies to interpret them

with respect to statutes under which

they have rulemaking authority.26 The

exercise of this interpretive authority is

subject to certain guidelines. First, the

interpretation must be ‘‘consistent’’ with

Section 101 of the Act.27 Second, the

interpretation may not ‘‘add to the

requirements’’ of Section 101.28 Third,

the agency, in issuing the interpretation,

must find that: (1) There is substantial

justification for the interpretation; (2)

the methods selected to carry out that

purpose are substantially equivalent to

the requirements imposed on records

that are not electronic; (3) the methods

selected to carry out that purpose will

not impose unreasonable costs on the

acceptance and use of electronic

records; and (4) the methods selected to

carry out that purpose do not require, or

accord greater legal status or effect to,

the implementation or application of a

specific technology or technical

specification.29 We believe the

electronic storage requirements of Rule

17a–4(f) meet these guidelines.

III. Analysis

The Electronic Signatures Act

becomes effective on June 1, 2001 with

respect to Rule 17a–4.30 To the extent

Rule 17a–4 requires the retention of the

types of contracts and transactional

records identified in the Electronic

Signatures Act, broker-dealers will be

able to retain them electronically under

Section 101(d)(1), provided the

electronic records are accurate,

accessible, and capable of being

accurately reproduced for later

reference. Under paragraph (f) of Rule

17a–4, broker-dealers are already

permitted to retain all required

records—not just these contracts and

transactional records—using electronic

means, subject to the requirements set

forth in that paragraph. Pursuant to the

Commission’s interpretive authority

preserved by the Electronic Signatures

Act, we find that the electronic storage

requirements of Rule 17a–4(f) meet, and

are consistent with, the accuracy,

accessibility, and accurate reproduction

requirements of Section 101(d)(1) of the

Electronic Signatures Act. Therefore,

broker-dealers must continue to comply

with the electronic storage requirements

of Rule 17a–4(f) after June 1, 2001.31

A. The Electronic Storage Requirements

of Rule 17a–4(f) Are Consistent With

Section 101(d) of the Electronic

Signatures Act

The electronic storage requirements of

Rule 17a–4(f) are consistent with

Section 101(d) of the Electronic

Signatures Act. First, the Electronic

Signatures Act provides that statutes or

regulations requiring the retention of

certain contractual or transactional

records may be complied with by

storing them electronically. Rule 17a–

4(f) allows for the retention of

documents in electronic form. In fact,

the rule is broader than the Electronic

Signatures Act because it does not limit

its applicability to contracts or other

records that relate to transactions in or

affecting interstate or foreign commerce.

Rather, it permits broker-dealers to

electronically store all records they are

required to retain under Rule 17a–4.

Moreover, Rule 17a–4(f) makes specific

provision for the use of new

technologies as they become available,

which is consistent with the technologyneutral requirements in the Electronic

Signatures Act.

Second, the Electronic Signatures Act

and the electronic storage requirements

of Rule 17a–4(f) were each designed to

allow affected parties to take advantage

of the increased productivity and cost

savings arising from the use of

electronic storage systems. To quote

Representative Sessions, ‘‘the

underlying legislation will allow all

Americans to benefit from the

efficiencies resulting from advances in

technology.’’ 32 Similarly, the

Commission, when adopting its

electronic storage rule, stated that the

amendments were ‘‘a recognition of

technological developments that will

provide economic as well as time-saving

advantages for broker-dealers by

expanding the scope of recordkeeping

options.* * *’’ 33

Third, there is explicit support in the

legislative history for our finding that

Rule 17a–4(f) is consistent with the

Electronic Signatures Act. As noted by

Representative Dingell, ‘‘[t]he standards

set forth in the SEC’s existing electronic

recordkeeping rule, Rule 17a–4(f), such

as the requirement that an electronic

recordkeeping system preserve records

in a non-rewriteable and non-erasable

manner, are essential to the SEC’s

investor protection mission and are

consistent with the provisions of the

conference report [on the Electronic

Signatures Act].’’ 34

B. The Electronic Storage Requirements

of Rule 17a–4(f) Do Not Add

Requirements to Section 101(d) of the

Electronic Signatures Act

The electronic storage requirements of

Rule 17a–4(f) do not add to the

requirements of Section 101(d) of the

Electronic Signatures Act. The

Electronic Signatures Act requires

electronic records to be stored in a

manner that ensures they are accurate,

accessible, and capable of being

accurately reproduced for later

reference. Rule 17a–4(f) permits brokerdealers to store electronic records in a

manner consistent with the Electronic

Signatures Act. For example, the WORM

requirement is designed to ensure that

electronic records are capable of being

accurately reproduced for later reference

by maintaining the records in an

unalterable form. The automatic

Federal Register / Vol. 66, No. 88 / Monday, May 7, 2001 / Rules and Regulations 22919

35Electronic Signatures Act § 104(b)(2)(C).

36See e.g., In the Matter of Del Mar Financial

Services, Inc., et al., Exchange Act Release No.

42421 (Feb. 14, 2000); In the Matter of A.S.

Goldmen & Co., Inc., et al., Exchange Act Release

No. 41601 (July 7, 1999). 37 17 CFR 240.17a–4(j).

verification requirement is designed to

ensure the records are accurate by

providing verification that a record has

been accurately stored in the electronic

system. Indexing is designed to ensure

that the records are accessible by

providing a means to search for specific

records among the many that have been

stored. The third-party download

requirement is designed to ensure that

records remain accessible by providing

that a person with the appropriate

knowledge and expertise will access the

system at the Commission’s request. The

serialization provision is intended to

ensure both the accuracy and

accessibility of the records by indicating

the order in which records are stored,

thereby making specific records easier

to locate and authenticating the storage

process.

C. The Commission Makes the Findings

Required by Section 104(b)(2)(C) of the

Electronic Signatures Act

In exercising its authority to interpret

its statutes, as preserved in the

Electronic Signatures Act, the

Commission must make four findings:

(1) That there is substantial justification

for the interpretation; (2) that the

methods selected to carry out that

purpose are substantially equivalent to

the requirements imposed on records

that are not electronic; (3) that the

methods selected to carry out that

purpose will not impose unreasonable

costs on the acceptance and use of

electronic records; and (4) that the

methods selected to carry out that

purpose do not require, or accord

greater legal status or effect to, the

implementation or application of a

specific technology or technical

specification.35

1. There Is Substantial Justification for

the Commission’s Interpretation of Rule

17a–4(f)

The electronic storage requirements of

Rule 17a–4(f) are substantially justified

by the need to protect investors and

ensure the soundness of the securities

markets. Over the last several years,

there has been significant growth in the

number of investors entering these

markets. For example, we estimate that

the number of securities accounts at

U.S. broker-dealers has grown from

approximately 35 million in 1990 to 82

million in 1999. In part, this growth has

been driven by advances in information

and trade processing technology, which

make it easier for investors to purchase

and hold securities. The increase in the

number of investors has emphasized the

need for a safe and sound market place.

The Commission is responsible for

interpreting and enforcing federal

securities laws and regulations—such as

anti-fraud, sales practice and financial

responsibility requirements—aimed at

ensuring safe and sound securities

markets. Because broker-dealers play a

critical role in these markets, the

Commission has established rules

requiring them to act in a manner that

foremost is protective of the interests of

their customers and other market

participants. These rules, along with

rules promulgated by the self-regulatory

organizations (‘‘SROs’’), seek to ensure

that broker-dealers operate in a

financially sound manner, maintain

adequate custody of customer assets,

and refrain from deceptive and

manipulative practices. To monitor

compliance with these rules, the

Commission requires broker-dealers to

make and maintain records that

document their transactions with

customers and overall securities

operations. Commission and SRO

examiners review these records to

determine whether broker-dealers are

acting within the requirements of the

securities laws, regulations and SRO

rules. Accordingly, if investors are to be

adequately protected, regulators must be

able to rely on these records as

providing a true account of a brokerdealer’s operations.

Commission enforcement actions

against unscrupulous broker-dealers

that improperly altered or destroyed

records demonstrate the need for

measures aimed at maintaining the

integrity of broker-dealer records. These

cases have included situations in which

broker-dealer employees have changed

or destroyed order tickets and other

transactional records in an effort to shift

firm losses to their customers or to

conceal fraudulent activities.36

Moreover, the complexity of the

securities business makes accurate and

comprehensive recordkeeping vital to

the financial well being of brokerdealers and, as a result, investors and

the securities markets. Many securities

firms process large volumes of

transactions on a daily basis across

diverse markets, business groups and

geographic areas. Each trade generates

several separate records that must be

retained. In addition, broker-dealers

hold cash and a wide range of domestic

and foreign securities on behalf of their

customers. The amount of securities

under a firm’s control constantly

changes as it effects transactions.

Moreover, the securities for which a

broker-dealer has custodial

responsibility are frequently maintained

in different locations throughout the

world. This complexity of operations

makes the accurate and comprehensive

keeping of broker-dealer books and

records crucial to the securities

industry. A failure to maintain accurate,

accessible, and true records may lead to

situations where a firm cannot account

for customer property or its own assets.

For these reasons, the Commission’s

broker-dealer recordkeeping

requirements are an important part of

managing systemic risk in the industry.

2. The Electronic Storage Requirements

of Rule 17a–4(f) Are Substantially

Equivalent to the Requirements for

Records That Are Not Electronic

The electronic storage requirements of

Rule 17a–4(f) are intended to ensure the

prompt production of legible, true, and

complete records, a requirement

applicable to the storage of all brokerdealer records regardless of their form.

Accordingly, the requirements for

electronic storage are substantially

equivalent to the requirements for the

other methods of record storage.

The examination process, which is

fundamental to the regulation of brokerdealers, depends on the ability of

examiners to quickly obtain records that

are relevant to a particular examination

and that reflect the information as

originally entered into the record. This

need is complicated by the recordintensive nature of the securities

industry. Rule 17a–4 seeks to address

the tension between the need for quick

production of specific records and the

volume of records generated on a daily

basis, by requiring that more current

records be retained in an easily

accessible place. It also requires that

every broker-dealer ‘‘shall furnish

promptly * * * legible, true and

complete copies of those records’’

requested by representatives of the

Commission.37

These requirements apply regardless

of whether the records are stored in

paper form, on micrographic media, or

using electronic media. However, given

the differences in the methods of

storage, the rule sets forth, with respect

to micrographic and electronic media,

certain requirements designed to ensure

the prompt production of legible, true,

and complete records. These

requirements do not impose greater

burdens on broker-dealers for using

micrographic or electronic storage

methods; rather, they address the

unique characteristics of each storage

22920 Federal Register / Vol. 66, No. 88 / Monday, May 7, 2001 / Rules and Regulations

38 17 CFR 240.17a-4(f)(3)(i) and (ii).

39Exchange Act Release No. 32609 (July 9, 1993),

58 FR 38092 (July 15, 1993).

40Adopting Release, 62 FR 6469.

41Adopting Release, 62 FR at 6470.

42Adopting Release, 62 FR at 6470 n.10 (The

other methodologies identified in the release were

alloying, bubble-forming, moth-eye (Plasmon),

phase-change, dye/polymer, and magneto-optic).

43Electronic Signatures Act Section 104(b)(3)(A).

method and seek to put them all on an

equal footing. For example, the ability to

promptly produce legible, true, and

complete paper records requires keeping

them in an accessible location and filed

in a way that particular documents can

be identified and retrieved. Conversely,

it is not enough to simply keep

microfilm tapes or optical disks easily

accessible. There must also be facilities

to locate the appropriate records, to read

them, and to print them. Therefore,

paragraph (f) of Rule 17a–4 specifies

that broker-dealers using micrographic

or electronic media must have such

retrieval facilities available.38 Requiring

such facilities for electronically stored

records is similar to requiring that paper

records be in an accessible place.

Moreover, the indexing requirement for

records stored using micrographic or

electronic media allows for the retrieval

of specific records in a manner

equivalent to the way that particular

paper records can be pulled from

designated files.

Furthermore, paper and micrographic

media both store exact images of the

information as it was originally entered

into the record. Electronic media, on the

other hand, store the original

information in digital or computerized

form. The WORM provision is designed

to ensure that the original information is

preserved in an unalterable manner so

that it can be accurately reproduced for

later reference.

Paper records are accessible if

examiners can obtain and use them. In

contrast, accessing electronic storage

media systems requires varying degrees

of technical expertise (depending on the

medium used) and, very likely,

knowledge of the proprietary

characteristics (e.g., passwords and

source codes) of a given system.

Therefore, Rule 17a–4(f) requires an

undertaking that a third party can

provide access to these records. In the

absence of such an undertaking,

examiners could find it difficult, if not

impossible, to obtain electronic records

from a broker-dealer that had gone out

of business or was refusing to cooperate.

Consequently, attempting to retrieve

records from an electronic storage

medium without the requisite

technological knowledge would be no

different than attempting to obtain

records from a broker-dealer that stored

paper records in an inaccessible place.

3. The Electronic Storage Requirements

of Rule 17a–4(f) Do Not Impose

Unreasonable Costs on the Acceptance

and Use of Electronic Records

The costs associated with the

electronic storage requirements of Rule

17a–4(f) are reasonable, given their

investor protection objective and goal of

reducing storage expenses. Brokerdealers have had the option since 1993

of storing records electronically on

optical disk, and since 1997 on any type

of electronic media. The requirements

for using electronic storage media (e.g.,

WORM, automatic verification,

indexing, third-party undertaking) have

been in place since the Division’s 1993

no-action letter. Our interpretation

today does not add to these

requirements, and therefore, will not

increase the costs of electronic storage,

which have likely decreased since 1993

and should continue to drop as

technological advances occur.

Moreover, the costs of storing large

volumes of records electronically are

likely to be substantially lower than

storing them on paper or on

micrographic media.

We believe the electronic storage

requirements in Rule 17a–4(f) are

necessary to ensure the accuracy,

accessibility, and accurate reproduction

of broker-dealer records stored

electronically. Accordingly, we believe

they are reasonable, particularly when

measured against the problems that

could arise if the ability of securities

regulators to enforce compliance with

securities laws and regulations was

compromised due to inadequate and

unreliable electronic recordkeeping.

Moreover, as discussed in the next

section, the requirements are

technology-neutral and, therefore, allow

for the use of new technologies as they

become available. This flexibility is

incorporated in the rule to keep record

retention costs as low as possible.

4. The Electronic Storage Requirements

of Rule 17a–4(f) Do Not Require, or

Accord Greater Legal Status or Effect to,

the Implementation or Application of a

Specific Technology or Technical

Specification

The Commission first proposed

amending Rule 17a–4 to allow

electronic storage in 1993.39 The

proposed amendments would have

limited broker-dealers to using optical

disk. However, the Commission

ultimately adopted a rule that allows the

use of any electronic storage medium

that meets the general requirements of

the rule.40 Moreover, in discussing the

WORM provision of the rule, the

Commission made clear that this did not

mean only one type of storage

methodology. As the Commission stated

in the release,

In the Proposing Release, the Commission

did not intend the definition of optical

storage technology to include only ablative

methodology of storage. The Commission

recognizes that other methods of electronic

storage technology exist, including optical

tape and CD–ROM, which is available in a

WORM, non-rewriteable version. The

Commission is adopting a rule today, which,

instead of specifying the type of storage

technology that may be used, sets forth

standards that the electronic storage media

must satisfy to be considered an acceptable

method of storage under Rule 17a–4.

Specifically, because optical tape, CD–ROM,

and certain other methods of electronic

storage are available in WORM and can

provide the same safeguards against data

manipulation and erasure that optical disk

provides, the final rule clarifies that brokerdealers may employ any electronic storage

media that meets the conditions set forth in

the final rule.41

The Commission also acknowledged

that, with respect to the WORM

provision, several storage

methodologies, in addition to the

ablative method mentioned above, were

available.42 For these reasons, the

electronic storage requirements of Rule

17a–4 do not require, or accord greater

legal status to, the implementation or

application of a specific technology or

technical specification.

D. The Electronic Storage Requirements

of Rule 17a–4(f) Would Be Permissible

Performance Standards Under Section

104(b)(3) of the Electronic Signatures

Act

Even if the electronic storage

requirements of Rule 17a–4(f) accorded

greater legal status to the

implementation or application of a

specific technology or technical

specification, the requirements would

still be permissible under the Electronic

Signatures Act. The Electronic

Signatures Act contains an exception to

the limitation against the

implementation or application of a

specific technology or technical

specification.43 The exception permits

an agency to specify performance

standards to ensure the accuracy,

accessibility, and integrity of records

that are required to be retained, even if

Federal Register / Vol. 66, No. 88 / Monday, May 7, 2001 / Rules and Regulations 22921

44 Id.

45 15 U.S.C. 78q(a)(1).

46 146 Cong. Rec. S5230 (daily ed. June 14, 2000)

(statement of Sens. Hollings, Wyden, and Sarbanes).

47See e.g., In the Matter of Del Mar Financial

Services, Inc., et al., Exchange Act Release No.

42421 (Feb. 14, 2000); In the Matter of A.S.

Goldmen & Co., Inc., et al., Exchange Act Release

No. 41601 (July 7, 1999).

48Adopting Release, 62 FR at 6470.

49 Id.

50 146 Cong. Rec. S5221 (daily ed. June 15, 2000)

(statement of Sen. Leahy).

51See 146 Cong. Rec. S5230 (daily ed. June 15,

2000) (statement of Sens. Hollings, Wyden and

Sarbanes); 146 Cong. Rec. H4358 (daily ed. June 14,

2000) (statement of Rep. Dingell).

those standards require implementation

or application of a specific technology

or technical specification. Under the

Electronic Signatures Act, such

performance standards must: (1) Serve

an important governmental objective;

and (2) be substantially related to the

achievement of that objective.44 Even if

the electronic storage requirements of

Rule 17a–4(f) must be evaluated under

Section 104(b)(3)(A) of the Electronic

Signatures Act, they serve an important

governmental objective and are

substantially related to achieving that

objective.

1. The Electronic Storage Requirements

of Rule 17a–4(f) Serve an Important

Governmental Interest

Section 17(a)(1) of the Exchange Act

authorizes the Commission to issue

rules requiring broker-dealers to make

and keep for prescribed periods, and

furnish copies thereof, such records as

necessary or appropriate in the public

interest, for the protection of investors

or otherwise in furtherance of the

purposes of the Exchange Act.45 This

grant of authority recognizes the

importance of broker-dealer

recordkeeping to the Commission’s

regulatory function and investor

protection objective. Rule 17a–4,

adopted by the Commission pursuant to

this authority, sets forth the

requirements for keeping and furnishing

broker-dealer records. In so doing, the

rule serves the important governmental

interest of assisting adequate

supervision of broker-dealers by the

Commission and the SROs. During the

debate on the Electronic Signatures Act,

the importance of accurate

recordkeeping in regulated industries

was noted. To quote a statement by

Senators Hollings, Wyden and Sarbanes,

‘‘bank and other financial regulators

need to require that records be retained

in order that their examiners can insure

the safety and soundness of the

institutions and compliance with all

relevant regulatory requirements.’’ 46

Investor protection depends on the

examination process, which, in turn,

relies on the records that broker-dealers

are required to make and maintain. The

electronic storage requirements of Rule

17a–4(f) are designed to ensure that

broker-dealers will meet their obligation

under Section 17(a)(1) and Rule 17a–4

to promptly furnish legible, true and

complete copies of such records as are

requested by the Commission or its

representatives. This is crucial to the

Commission’s mandate to protect

investors. Accordingly, the

Commission’s regulatory function is

undermined to the extent that these

records are inaccurate, retained in a

non-accessible manner, or capable of

alteration. The Commission’s

enforcement record against

unscrupulous broker-dealers that have

changed or destroyed records

demonstrates how such conduct can

harm investors and the public interest.47

2. The Electronic Storage Requirements

of Rule 17a–4(f) Are Substantially

Related to the Important Governmental

Interest

The electronic storage requirements

are designed to ensure that the

Commission can promptly obtain

legible, true, and complete records.

Because the Commission relies on this

ability to fulfill its responsibilities, the

requirements are substantially related to

the Commission’s regulatory function.

The Commission, in the release

adopting the electronic storage

requirements of Rule 17a–4, noted the

‘‘importance for recordkeeping of ready

access, reliability, and permanence of

records.’’ 48 Therefore, the release made

clear that the electronic storage

requirements were intended as

‘‘safeguards against data erasure’’ and to

‘‘facilitate full access to the records

during examinations.’’ 49 As noted by

Senator Leahy, the Electronic Signatures

Act specifically authorizes agencies ‘‘to

set performance standards to assure the

accuracy, integrity, and accessibility of

records that are required to be

retained.’’ 50 Statements of Senators

Hollings, Wyden and Sarbanes, and of

Representative Dingell indicate that the

intent behind this section of the

Electronic Signatures Act was to allow

agencies to have standards designed to,

among other things, prevent companies

from retaining materials in an easily

alterable form.51 The electronic storage

requirements of Rule 17a–4(f), such as

WORM, are designed for this purpose.

IV. Conclusion

For the foregoing reasons, we find that

the electronic storage requirements of

Rule 17a–4(f) meet, and are consistent

with, the requirements of the Electronic

Signatures Act.

List of Subjects in 17 CFR Part 241

Securities.

Amendments to the Code of Federal

Regulations

For the reasons set forth in the

preamble, the Commission is amending

title 17, chapter II of the Code of Federal

Regulations as set forth below:

PART 241—INTERPRETATIVE

RELEASES RELATING TO THE

SECURITIES EXCHANGE ACT OF 1934

AND GENERAL RULES AND

REGULATIONS THEREUNDER

1. Part 241 is amended by adding

Release No. 34–44238 and the release

date of May 1, 2001 to the list of

interpretive releases.

Dated: May 1, 2001.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–11333 Filed 5–4–01; 8:45 am]

BILLING CODE 8010–01–U

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Part 173

[Docket No. 00F–1487]

Secondary Direct Food Additives

Permitted in Food for Human

Consumption

AGENCY: Food and Drug Administration,

HHS.

ACTION: Final rule.

SUMMARY: The Food and Drug

Administration (FDA) is amending the

food additive regulations to provide for

the safe use of acidified sodium chlorite

solutions as a component of a post-chill

carcass spray or dip when applied to

poultry meat, organs, or related parts or

trim. This action is in response to a

petition filed by Alcide Corp.

DATES: This rule is effective May 7,

2001. Submit written objections and

requests for a hearing by June 6, 2001.

ADDRESSES: Submit written objections to

the Dockets Management Branch (HFA–

305), Food and Drug Administration,

5630 Fishers Lane, rm. 1061, Rockville,

MD 20852.

FOR FURTHER INFORMATION CONTACT:

Robert L. Martin, Center for Food Safety

and Applied Nutrition (HFS–215), Food

and Drug Administration, Washington,

DC 20204–0001, 202–418–3074.