21648 Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations

1 17 CFR 240.17Ad–7. Unless otherwise noted, all

references to Rule 17Ad–7 or Rule 17Ad–6 or to any

paragraph of those rules will be to 17 CFR

240.17Ad–7 and 17 CFR 17Ad–6, respectively.

2Securities Exchange Act Release No. 41442 (May

25, 1999), 64 FR 29608 (June 2, 1999).

3On February 2, 1993, the Commission’s

Divisions of Market Regulation and Investment

Management issued a no-action letter that permitted

registered transfer agents, investment advisors, and

investment companies to retain their records using

optical disk storage technology. Letter regarding

DST Systems, Inc. (Feb. 2, 1993). On February 12,

1997, the Commission announced in the release

adopting amendments to Rule 17a–4 that the staff

would take no action if transfer agents fulfilled their

recordkeeping requirements by complying with the

provisions of Rule 17a–4. Securities Exchange Act

Release No. 38245 (Feb. 5, 1997), 62 FR 6469 (Feb.

12, 1997). The optical disk recordkeeping

requirements of the 1997 no-action position were

similar to those set forth in the 1993 no-action

position but contained additional safeguards, such

as a third party access requirement and eliminated

certain requirements, such as the requirement that

the storage system be reviewed and evaluated by

two independent public accounting firms. The

requirements of the Proposing Release were nearly

identical to those of the 1997 no-action position.

4 15 U.S.C. 78q-1(a)(2)(A)(i).

following points in the order stated,

except as specified in paragraphs (a)(2)

and (d) of this section:

* * * * *

(b) * * *

(1) No fishing vessel or person on a

fishing vessel may enter, fish, or be in

the area known as Closed Area II (copies

of a chart depicting this area are

available from the Regional

Administrator upon request), as defined

by straight lines connecting the

following points in the order stated,

except as specified in paragraph (b)(2) of

this section:

* * * * *

(2) * * *

(ii) The vessel’s fishing gear is stowed

in accordance with the provisions of

§ 648.23(b).

(c) * * *

(1) No fishing vessel or person on a

fishing vessel may enter, fish, or be in

the area known as the Nantucket

Lightship Closed Area (copies of a chart

depicting this area are available from

the Regional Administrator upon

request), as defined by straight lines

connecting the following points in the

order stated, except as specified in

paragraphs (c)(2) and (d) of this section:

* * * * *

10. In § 648.86, paragraph (a)(2)(iii) is

revised to read as follows:

§ 648.86 Multispecies possession

restrictions.

* * * * *

(a) * * *

(2) * * *

(iii) Unless otherwise authorized by

the Regional Administrator as specified

in paragraph (f) of this section, scallop

dredge vessels or persons owning or

operating a scallop dredge vessel that is

fishing under a scallop DAS allocated

under § 648.53 may land or possess on

board up to 300 lb (136.1 kg), of

haddock, except as specified in

§ 648.88(c), provided that the vessel has

at least one standard tote on board. This

restriction does not apply to vessels

issued NE multispecies Combination

Vessel permits that are fishing under a

multispecies DAS. Haddock on board a

vessel subject to this possession limit

must be separated from other species of

fish and stored so as to be readily

available for inspection.

* * * * *

11. In § 648.88, paragraph (c) is

revised to read as follows:

§ 648.88 Multispecies open access permit

restrictions.

* * * * *

(c) Scallop multispecies possession

limit permit. A vessel that has been

issued a valid open access scallop

multispecies possession limit permit

may possess and land up to 300 lb

(136.1 kg) of regulated species when

fishing under a scallop DAS allocated

under § 648.53, provided the vessel

does not fish for, possess, or land

haddock from January 1 through June

30, as specified under § 648.86(a)(2)(i),

and provided the vessel has at least one

standard tote on board.

* * * * *

[FR Doc. 01–10783 Filed 4–26–01; 4:30 pm]

BILLING CODE 3510–22–S

SECURITIES AND EXCHANGE

COMMISSION

17 CFR PART 240

[Release No. 34–44227; File No. 57–17–99]

RIN 3235–AH74

Recordkeeping Requirements for

Transfer Agents

AGENCY: Securities and Exchange

Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange

Commission (‘‘Commission’’) is

amending its transfer agent record

retention rule, Rule 17Ad–7, under the

Securities Exchange Act of 1934

(‘‘Act’’). The amendments will allow

registered transfer agents to use

electronic, microfilm, and microfiche

records maintenance systems to

preserve records that they are required

to retain under Rule 17Ad–6. The new

requirements apply only to those

registered transfer agents that elect to

store their records using these methods.

The amendments are designed to

increase the flexibility and efficiency of

transfer agent recordkeeping. The

amendments adopted today are

consistent with the requirements of the

Electronic Signatures and Global and

National Commerce Act of 2000

(‘‘ESIGN’’).

EFFECTIVE DATE: May 31, 2001.

FOR FURTHER INFORMATION CONTACT: Jerry

W. Carpenter, Assistant Director, or

David Karasik, Special Counsel, at 202–

942–4187, Office of Risk Management

and Control, Division of Market

Regulation, Securities and Exchange

Commission, 450 5th Street, NW.,

Washington, DC 20549–1001.

SUPPLEMENTARY INFORMATION: The

Commission today is adopting

amendments to rule 17Ad–7 [17 CFR

240.17Ad–7(f)] under the Act.

I. Discussion of Amendments to Rule

17Ad–7

A. Background

On May 25, 1999, the Commission

issued a release requesting comment on

proposed amendments to its transfer

agent record retention rule, Rule 17Ad–

7,1 that would allow registered transfer

agents to use electronic and

micrographic records storage systems

subject to certain conditions

(‘‘Proposing Release’’).2 The purpose of

the proposal was to increase the

flexibility and efficiency of transfer

agent recordkeeping while maintaining

necessary controls over accuracy,

integrity, and access to those records.

The proposed amendments would have

codified, in most part, two staff noaction positions that permitted transfer

agents to use optical storage

technology.3 However, based on the

comments received and the experience

gained by the staff in considering

appropriate records management

solutions, the Commission is adopting

the proposed amendments with certain

changes discussed herein.

B. The Transfer Agent Regulatory

System

Section 17A(a)(2)(A)(i) of the Act

directs the Commission to use its

authority under the Act ‘‘to facilitate the

establishment of a national system for

the prompt and accurate clearance and

settlement of transactions in securities.

***’’4 Transfer agents play a vital role

in the operation of that system. Transfer

agents cancel stock certificates

presented for transfer, issue new stock

certificates, and maintain the records

Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations 21649

5 15 U.S.C. 78q-1(a)(2)(A).

6 15 U.S.C. 78q-1(d).

7 15 U.S.C. 78q-(a)(3).

8 15 U.S.C. 78w(a).

9 Depending on the type of record, the records

covered by these rules generally must be

maintained for two years, six years, or until one

year after the termination of a transfer agency

relationship. Rule 17Ad–7.

10Rule 17Ad–7(f)(1).

11 In certain situations, the Commission is not a

transfer agent’s primary regulatory authority. The

most common example of this is for transfer agents

that are banks or subsidiaries of banks. In such a

case, the transfer agent’s ARA could be the Board

of Governors of the Federal Reserve System, the

Office of the Comptroller of the Currency, or the

Federal Deposit Insurance Corporation.

12Rule 17Ad–7(f)(2).

13Rule 17Ad–7(f)(3).

14Rule 17Ad–7(f)(4).

reflecting the ownership of securities as

agent for the issuer. They also may

disburse dividends and interest

payments and send securityowner

communications, such as proxy

materials and annual reports. Some

transfer agents maintain custody of

securities on behalf of individual

investors and securities depositories.

In order to facilitate the prompt,

accurate, and efficient clearance and

settlement of securities transactions, the

Commission, having due regard for the

public interest, the protection of

investors, the safeguarding of securities

and funds, and the maintenance of fair

competition among transfer agencies, is

authorized to promulgate rules and

regulations that are necessary or

appropriate to implement the provisions

of section 17A of the Act.5 Section 17A

of the Act prohibits registered transfer

agents from engaging in any activity in

contravention of the rules and

regulations that the Commission may

prescribe as necessary or appropriate in

the public interest, for the protection of

investors, or otherwise in furtherance of

the Act.6 Section 17 of the Act requires

every registered transfer agent to make,

keep, and furnish copies of such records

that the transfer agent’s appropriate

regulatory agency prescribes by rule.7

Finally, Section 23(a) of the Act grants

the Commission the power to make such

rules and regulations as may be

necessary or appropriate to implement

the provisions of the Act.8

Because the Commission’s oversight

of transfer agents is substantially

dependent on its own transfer agent

examination process, which in turn

relies on the records that transfer agents

make and retain, the Commission

promulgated Rules 17Ad–6 and 17Ad–

7 under the Act to specify the types of

records that transfer agents must make

and keep and the amount of time and

manner in which these records must be

preserved.91 The Commission’s

oversight of transfer agents would be

seriously hindered if a transfer agent’s

records were inaccurate, inauthentic, or

inaccessible. Accordingly, Rule 17Ad–7

seeks to protect investors and promote

the integrity of the markets by

protecting the accuracy, integrity, and

accessibility of transfer agent records.

II. The Rule Amendments as Adopted

Rule 17Ad–7, as amended, allows

transfer agents to use electronic or

micrographic storage media to maintain

their records. Specifically, the rule

requires transfer agents to:

• Use storage mechanisms that are

designed to ensure the accessibility,

security, and integrity of the records,

detect attempts to alter or remove the

records, and provide means to recover

altered, damaged, or lost records;

• Create an index of the records that

are electronically or micrographically

stored and store the index with the

underlying records;

• Keep a duplicate of all records and

indexes that are stored using electronic

or micrographic storage media;

• Be able to promptly download

electronically or micrographically

stored records to an alternate medium

such as paper, microfilm, or microfiche;

and,

• Keep in escrow an updated copy of

the software or other information that is

necessary to access and download

electronically stored records.

The amended rule does not require

transfer agents that wish to continue to

maintain their records in hard copy

format to maintain their records any

differently than they are doing so today.

The requirements adopted today apply

only to those transfer agents that choose

to retain their records electronically or

micrographically.

III. Overview of Amendments to Rule

17Ad–7

The new provisions of Rule 17Ad–7

define the term ‘‘micrographic media’’

to mean microfilm or microfiche or any

similar medium and the term

‘‘electronic storage media’’ to mean any

digital storage medium or system. 10

Registered transfer agents that choose

to use electronic or micrographic

records storage media must: have

available at all times for examination by

the Commission and the transfer agent’s

appropriate regulatory agency

(‘‘ARA’’)11 facilities to project or

produce easily readable images of the

records that it stores on electronic or

micrographic storage media; be ready to

provide the stored records to the

Commission and its ARA; create an

index of the records that it stores on

electronic storage media or

micrographic media and store the index

with those records; have the index

available at all times for examination by

the Commission and its ARA; have

quality assurance procedures to verify

the quality and accuracy of the

electronic or micrographic recording

process; and maintain separately from

the originals a duplicate of the records

and the index that the transfer agent

stores on electronic storage media or

micrographic media. 12 The transfer

agents may store the duplicates of the

indexed records on any medium

permitted by this rule. The electronic

media that a transfer agent uses to store

its records must: ensure the security and

integrity of the records by means of

manual and automated controls that

assure the authenticity and quality of

the electronic facsimile; detect attempts

to alter or remove the records; provide

means to recover altered, damaged, or

lost records resulting from any cause;

externally label all removable units of

storage media using a unique identifier;

internally label each file with its unique

name, the date and time of file creation,

the date and time of last modification or

extension, and a file sequence number

when the file spans more than one

volume. 13

Transfer agents that use electronic or

micrographic records storage media to

store their records must establish an

audit system that accounts for the

inputting of and any changes to every

record that is stored on electronic or

micrographic storage media. The results

of such audit system must be available

at all times for examination by the

Commission and the transfer agent’s

ARA and be preserved for the same time

that is required by this rule for the

underlying records. 14

Also, transfer agents that use

electronic storage media or

micrographic media to store their

records must: Maintain, keep current,

and provide promptly upon request by

the Commission and their ARA all

information necessary to access the

records and indexes stored on electronic

storage media or micrographic media

and place in escrow and keep current a

copy of the physical and logical format

of the electronic or micrographic storage

media, the field format of all different

information types written on the

electronic storage media and source

code, and the appropriate

documentation and information

necessary to access records and indexes.

The escrow agent must file a statement

with the Commission that it will make

21650 Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations

15Rule 17Ad–7(f)(5).

16A transfer agent may use the services of a third

party to maintain the records required to be

retained under Rule 17Ad-6. An agreement with a

third party can include instructions for the third

party to fulfill some or all of the requirements of

Rule 17Ad–7 including, for example, the

maintenance of duplicate records. However, an

agreement with a third party to maintain a transfer

agent’s records shall not relieve the transfer agent

from the responsibility to prepare and maintain

records as specified in this rule or in Rule 17Ad6. Rule 17Ad-7(f)(6).

17Letters from Charles Rossi, President, and

Thomas L. Montrone, Vice President and Chairman,

STA Optical Scanning Committee, The Securities

Transfer Association, Inc. (‘‘STA’’) (July 2, 1999);

Kathleen C. Joaquin, Director—Transfer Agency &

International Operations, Investment Company

Institute (‘‘ICI’’) (July 1, 1999); Jay S. Neuman,

Corporate Counsel, Federated Investors, Inc.

(‘‘Federated’’) (July 1, 1999); Gerald L. Popovsky,

Associate Counsel, ChaseMellon Shareholder

Services, LLC (‘‘ChaseMellon’’) (July 2, 1999);

Christine A. Owens, Corporate Government

Relations Manager, StorageTek (‘‘StorageTek’’) (July

2, 1999); Robert P. DeGregorie, Assistant General

Counsel, The Chase Manhattan Bank (‘‘Chase’’)

(July 2, 1999); Michael L. Michael, Vice President

and Chief Compliance Officer, FMR Corp.

(‘‘Fidelity’’) (July 13, 1999); W. Hardy Callcott, Sr.

Vice President and General Counsel, Charles

Schwab & Co., Inc. (‘‘Schwab’’) (July 14, 1999);

Robert L. Hamilton (August 8, 1999); Thomas

Ferguson, Senior Vice President, Plasmon/IDE

(‘‘Plasmon’’) (April 27, 2000); and Michael Kilian,

Senior Technologist, EMC Corporation (‘‘EMC’’)

(October 31, 2000). The comment letters and a

Commission staff summary of the comment letters

are contained in File No. S7–17–99 and are

available for inspection in the Commission’s Public

Reference Section, 450 5th Street, NW, Washington,

DC.

18Also known as ‘‘WORM’’ or write once, read

many.

19Proposed Rule 17Ad–7(f)(2)(ii).

20Proposed Rule 17Ad–7(f)(2)(iii).

21Proposed Rule 17Ad–7(f)(2)(iv).

this information available promptly

upon request to the Commission’s

representatives or the ARA. 15

Finally, if a transfer agent uses

another party to maintain or preserve

the required records using electronic

storage media or micrographic media,

such third party shall file with the

Commission an undertaking stating that

such records are being maintained or

preserved by the third party on behalf

of the transfer agent and that such

records will be surrendered promptly

upon request of the transfer agent, the

Commission’s representatives, or the

ARA to examine such records. The rule

makes clear that the transfer agent

retains ultimate responsibility for

complying with the requirements of the

rule. 16

IV. Discussion of Proposal and

Comment Letters

The Commission received eleven

comment letters in response to the

Proposing Release. 17 While most of the

comments were generally favorable, all

of the commenters offered specific

observations and suggestions about the

proposed conditions on transfer agents’

use of electronic storage media. As

discussed below, the Commission is

adopting the proposed amendments to

Rule 17Ad-7 with certain modifications

suggested by the comment letters.

A. Scope and Definitions

In the Proposing Release, the

Commission proposed to add

subparagraph (f) to Rule 17Ad-7 to

allow registered transfer agents to use

micrographic media or electronic

storage media to store the records that

they are required to keep under Rule

17Ad-6. The term ‘‘micrographic

media’’ was defined as microfilm or

microfiche or any similar medium. The

term ‘‘electronic storage media’’ was

defined as any digital storage medium

or system that meets the standard of this

rule. The commenters did not raise any

issues with regard to the proposed scope

or definitions.

We are adopting these definitions

substantially as proposed. For clarity,

we have added another definition: the

term ‘‘ARA’’ as used throughout the rule

refers to a transfer agent’s appropriate

regulatory agency as that term is defined

in 15 U.S.C. 78c(a)(34).

B. Record Integrity Standards

The Proposing Release would have

required that transfer agents use an

electronic or micrographic storage

media system that met certain standards

intended to deter the alteration of

records. Specifically, the Commission

proposed that transfer agents preserving

their records electronically must do so

in a non-rewriteable, non-erasable

format 18 and that the storage system be

able to automatically verify the quality

and accuracy of the electronic recording

process.19 The Commission also

proposed that the electronic storage

media system label the storage units in

sequential order and record the date and

time that information is electronically

stored.20 Finally, as proposed, the

storage system would have the capacity

to download records stored on

electronic storage media so that the

records could be promptly transferred to

an alternate medium such as paper,

microfilm or microfiche.21

The commenters had varying

responses to these proposed standards.

Schwab stated that the rule should not

limit electronic storage media to

WORM-based systems. StorageTek

stated that the Commission should not

favor a particular type of storage system

because there are types of electronic

storage systems other than optical disk

systems that use WORM technology.

Chase stated that, with respect to

downloading records stored on

electronic storage media, the rule

should only require that the electronic

storage media system have the

capability to print images or provide

images in a format suitable for transfer

to another acceptable medium, thereby

allowing transfer agents the flexibility to

determine the most suitable way to

provide imaged data to an examining

authority. Chase further stated that it

would be comfortable with the proposed

requirement as long as paper is an

acceptable alternate medium. In

addition, with respect to the

requirement that an electronic storage

media system automatically verify the

accuracy of the quality and accuracy of

its recording process, Chase stated it is

unaware of any system that can

automatically insure image quality and

accuracy. Chase also suggested that the

rule should require only that the

transfer agent have quality assurance

procedures in place.

Plasmon agreed with the

Commission’s interest in

accommodating a wider range of storage

media and suggested that there are at

least four major varieties of optical disk

media that should be considered for

document storage applications.

However, Plasmon contended that

magnetic-optical disks offer the highest

degree of data protection over the

longest periods of time. Plasmon

believes that linear (tape) media simply

does not attain the same degree of data

safety.

EMC wrote that specifying that

records be retained on non-erasable,

non-rewritable media is overly

prescriptive because it would effectively

dictate the storage technology (i.e.,

WORM). It further argued that this

technology has become obsolete and

expensive to manage. Instead, EMC

suggested that the focus of the

Commission’s rule should not be to

create an immutable copy but rather on

the ability of the storage system to create

a copy that can be verified as authentic.

Fidelity argued that the rule should

not require sequential serialization of

storage units but instead should allow

more flexibility (e.g., serialization by

unique media index and identifier

numbers).

The final rule incorporates many of

the commenters’ suggestions. For

example, we have eliminated the

proposed ‘‘non-erasable, nonrewriteable’’ requirement and instead

are adopting a goals-oriented set of

requirements that electronic storage

systems be designed to: ensure the

security and integrity of the records by

means of manual and automated

Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations 21651

22Rule 17Ad–7(f)(3)(i).

23Rule 17Ad–7(f)(3)(ii).

24Proposed Rule 17Ad–7(f)(3).

25Proposed Rule 17Ad–7(f)(1).

26Rule 17Ad–7(f)(2).

27Proposed Rule 17Ad–7(f)(5).

28Proposed Rule 17Ad–7(f)(5).

controls; detect attempts to alter or

remove the records; and provide means

to recover altered, damaged or lost

records.22 The Commission believes that

using a set of requirements to ensure

security and integrity of records is

appropriate in the transfer agent

context, unlike the broker-dealer

context, because of the lower risks from

record alteration for transfer agents.

There appear to be a lower incidence of

altered transfer agent records and the

Commission staff has brought few

enforcement actions against transfer

agents based on alteration of their

records. In addition, transfer agents do

not hold customer funds, open

accounts, or recommend investments.

Therefore, the Commission generally

does not inspect transfer agents for

financial and sales practice problems.

Accordingly, requiring transfer agents to

use WORM does not at this time seem

necessary.

We have also removed the

requirement that the storage system be

able to ‘‘automatically verify the quality

and accuracy’’ of the recording process

and instead substituted language

requiring the storage system to ‘‘have

quality assurance procedures to verify

the quality and accuracy of the

electronic or micrographic recording

process.’’ 23 In making the change, the

Commission emphasizes the importance

of the electronic recordkeeping system’s

ability to electronically store documents

in a reliable and consistent manner.

Finally, in response to the comments

discussed above, we have modified the

requirement that the storage system

label ‘‘all units of storage media in

sequential order’’ in favor of a standard

that requires the system to ‘‘label all

removable units of storage media using

a unique identifier * * *’’ and

‘‘uniquely identify files and internally

label each file with its unique name, the

date and time of file creation, the date

and time of last modification or

extension, and a file sequence number

when the file spans more than one

volume.’’ We believe that these changes

will provide transfer agents greater

flexibility to select appropriate and cost

effective records organizing

methodologies while still maintaining

the ability of the transfer agent and the

Commission to locate individual records

and reconstruct the sequence of the

records.

The Commission notes that the

amendments to the Rule are technologyneutral as they establish standards and

set forth features that the electronic

storage media must satisfy to be

considered an acceptable storage

medium rather than specifying the use

of a particular technology.

C. Audit System

In the Proposing Release, the

Commission proposed to require

transfer agents using electronic or

micrographic storage media to establish

an audit system that accounts for the

entry of and changes to every record

that is electronically or

micrographically stored.24 As proposed,

the results of the audit system would

have to be available at all times for

inspection by the transfer agent’s ARA

and the Commission and would have to

be preserved for the same period of time

as the underlying records.

Fidelity contended that the audit

system should not be required to record

the names of the people who add or

change records stored on electronic

storage media because it is possible for

audit systems to identify people through

the use of identifier numbers.

In response to these comments, we

have modified the audit provisions to

offer transfer agents flexibility over how

to record and trace the identity of those

who modify records. The rule does not

specify the manner in which transfer

agents should account for those who

input or change the records. Rather,

paragraph (f)(3) of the rule requires that

transfer agents establish an audit system

that can, at the least, readily identify

when and by whom changes to records

were made to the stored records.

D. Production of Stored Records

The Proposing Release would have

required transfer agents storing

electronic or micrographic records to:

(1) Have facilities for immediate

projection or production of easily

readable images of the records that are

being stored electronically or

micrographically; (2) be ready at all

times to provide a facsimile enlargement

of the records that are being stored

electronically or micrographically; (3)

create an index of the records that are

being stored electronically or

micrographically; and (4) maintain a

duplicate of the index of the records.25

Chase stated that the rule should not

require that the index be stored on an

optical disk or otherwise specify the

location of the index. Chase further

commented that being able to identify a

needed image, locate the image, and

retrieve it whenever necessary should

be sufficient requirements for the index

component of the rule. Fidelity stated

that the requirement to maintain

duplicates of records stored on

micrographic media or electronic

storage media should not be interpreted

as a requirement to maintain backup

storage systems.

In order to help ensure efficient and

complete access to a transfer agent’s

records during examinations by the

Commission or the transfer agent’s ARA,

we are adopting these requirements

substantially as proposed.26 The

Commission notes that the rule does not

specify the type of medium on which

the index should be stored. The

Commission, however, believes that it is

important to keep the requirement that

the index be stored with the indexed

records so that Commission

representatives will be able to locate

records in cases where a transfer agent

refuses to cooperate or is no longer

operating. In addition, Commission

agrees that the requirement to maintain

duplicates of records stored on

micrographic or electronic storage

media is not a requirement to maintain

backup storage systems.

E. Proposed Third Party Access

Requirement

In the Proposing Release, the

Commission proposed that there be a

mechanism to enable the Commission to

access and download the electronically

stored records in cases where a transfer

agent is no longer operating, refuses to

cooperate with the Commission or the

transfer agent’s ARA, or has not

properly or fully indexed electronically

stored records.27 Accordingly, the

proposed amendments would have

required transfer agents to preserve,

keep current, and surrender upon

request the information necessary to

download records stored on electronic

or micrographic storage media.

Moreover, under the proposed

amendments, before a transfer agent

would have been able to use electronic

storage media, it would have had to

have at least one party other than itself

(e.g., the transfer agent’s electronic

storage media vendor) file a statement

with the Commission that it, the third

party, had the ability to download

information from the transfer agent’s

electronic storage system and that it

would do so at the request of either the

Commission or the transfer agent’s

ARA.28

ICI, Federated Investors, Chase,

ChaseMellon, Schwab, and Fidelity

commented on the proposed

requirement that a third party file

undertakings with the Commission and

21652 Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations

29Rule 17a–4(f)(3)(vii) requires broker-dealers

that use electronic or micrographic storage media to

‘‘organize and index accurately all information

maintained on both original and any duplicate

storage media.’’ The Commission notes that the

third party ‘‘access’’ provisions as proposed in Rule

17Ad–7 were modeled after those contained in Rule

17a–4(vii).

30Rule 17Ad–7(f)(5)(ii).

31An ‘‘independent’’ third party is a third party

that does not control, is not controlled by, and is

not under common control with, the transfer agent.

32See supra footnote 3.

33Securities Exchange Act Release No. 38245

(Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997).

34ESIGN is discussed in section V of this release.

35The Commission also is providing notice that

the staff of the Division of Market Regulation will

not recommend enforcement action to the

Commission if until June 30, 2001, a transfer agent

continues to use records storage technology

permissible under either of two staff no-action

positions. Securities Exchange Act Release No.

38245 (Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997)

or Letter to Jules Moskowitz, DST Systems, Inc.,

from Judith C. Poppalardo, Division of Market

Regulation and Thomas S. Harman, Division of

Investment Management (February 2, 1993).

36Securities Exchange Act Release No. 43401

(Oct. 2, 2000), 65 FR 59766 (Oct. 6, 2000). In that

release, we proposed rules to, among other things,

require transfer agents to establish written

procedures for the cancellation, storage,

transportation, and destruction of securities

certificates. Should the Commission adopt these

rules, maintaining such written procedures in either

hard copy or on electronic or micrographic media

would be permissible.

37The Electronic Signatures in Global and

National Commerce, Pub. L. 106–229, 114 Stat. 464

(2000), 15 U.S.C. 7001 et seq.

38Section 106(9) of ESIGN, 15 U.S.C. 7006(9),

defines the term ‘‘record’’ to mean ‘‘information

that is inscribed on a tangible medium or that is

the transfer agent’s ARA before a

transfer agent uses electronic storage

media. ICI and Federated asked for the

Commission to clarify whether the third

party access undertakings pursuant to

the 1997 no action position would be

sufficient to comply with the proposed

amendments to Rule 17Ad–7. ICI and

Federated both opined that the

provisions of the 1997 no-action

position are substantially similar to the

proposed amendments and therefore

should be sufficient for a transfer agent

to comply with.

Chase, ChaseMellon, and Fidelity

expressed concern that the proposed

requirement raises security and

confidentiality risks because it would

require that the undertakings be filed by

a third party that has direct access to the

transfer agent’s records. Schwab stated

that it is unnecessary for a transfer agent

that maintains its own records to

contract with another party solely to

comply with the requirement. Schwab

also asserted that the requirement

should be amended so that it is

consistent with Rule 17a–4(f)(3)(vii) 29

and should only apply to transfer agents

that use electronic storage media

exclusively for some or all of their

record retention.

The Commission has revised the

proposed rule to reflect its intention that

the third party access requirement be no

more burdensome than necessary to

allow the Commission to access a

transfer agent’s records. The proposed

requirement was intended to assist the

Commission or the transfer agent’s ARA

to access the transfer agent’s records

during, for example, some type of

emergency (such as a transfer agent’s

insolvency or refusal to cooperate), yet

recognize the potential security

concerns if transfer agents provide

‘‘access’’ to their records system to third

parties. In consideration of the

comments received, the final rule

clarifies that the third party is not

required to have a continuous or

unlimited right to use or have access to

the records.30 Instead, the transfer agent

will be required to place in escrow with

an independent third party 31 its records

management software that will enable

the Commission or the transfer agent’s

ARA to access records and indexes. The

escrow agent will only have in its

possession the records management

software but will not have access to the

underlying records. The amended rule

also requires the escrow agent to file an

undertaking with the Commission and

the transfer agent’s ARA that it will

make such records management

software available to the Commission or

the transfer agent’s ARA promptly upon

the request of the Commission or the

ARA.

F. Effect on Previously Issued No Action

Positions

ICI and Federated requested that the

Commission elucidate the effect that

amendments to Rule 17Ad–7 will have

on transfer agents that are currently

using electronic storage media under the

terms of previously issued no-action

letters.32 ICI and Federated Investors

believe that the terms of the no-action

letters are sufficient to comply with the

proposed amendments to the rule and

that transfer agents using electronic

storage media under the terms of noaction letters should not have to

additionally comply with the third party

undertaking requirement. ICI stated that

if the Commission determines that new

undertakings are necessary transfer

agents should have a transition period

of at least ninety days to obtain the

required undertakings.

Fidelity requested that the

Commission explain the effect of the

proposed amendments on the no-action

position relating to transfer agents that

was issued when the Commission

amended Rule 17a–4 to permit brokerdealers to use electronic storage

media.33 Specifically, Fidelity stated

that the no-action position allowed

transfer agents to use electronic storage

media under the terms of the amended

Rule 17a–4 to comply with their

recordkeeping requirements under

Rules 17Ad–6, 17Ad–10, 17Ad–11,

17Ad–13, and 17Ad–15 under the Act

but that the proposed amendments in

the Proposing Release only applied to

Rule 17Ad–7.

The Commission notes that the

amendments to Rule 17Ad–7 provide

for the electronic or micrographic

storage of all records that transfer agents

are required to retain. The Commission

also notes that the amendments to Rule

17Ad–7 will supersede all previously

issued no-action letters and will be

effective May 31, 2001, as opposed to

ninety days from the date of publication

in the Federal Register as suggested by

ICI.

There are two reasons why the

amendments to Rule 17Ad–7 will

become effective on May 31, 2001. First,

after May 31, 2001, and until the

Commission’s transfer agent record

retention rule is effective, the differing

provisions of ESIGN 34 would be

applicable, which could potentially lead

to confusion. Second, the Commission

believes that the minor changes required

to be made to transfer agents’

recordkeeping systems currently

operating under the no-action positions

will not be burdensome to implement.35

G. Destruction of Canceled Certificates

and Other Records

StorageTek and Chase stated that

transfer agents should be able to destroy

canceled certificates where an electronic

record has been made. StorageTek

included an analysis with its comment

letter that concluded that organizations

should be able to copy original records

and store them on electronic storage

media without significant legal

consequences if the original records are

destroyed.

The Commission has solicited

comment on the issue of the destruction

of canceled certificates in another

proposing release and, thus, is not

addressing that issue in the context of

this rulemaking.36

V. The Electronic Signatures in Global

and National Commerce Act of 2000

A. Introduction

On June 30, 2000, Congress enacted

ESIGN.37 ESIGN, among other things,

specifies that where a statute,

regulation, or other rule of law requires

records 38 to be retained, such

Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations 21653

stored in an electronic or other medium and is

retrievable in perceivable form.’’

39ESIGN § 101(d)(1).

40ESIGN § 104(b).

41ESIGN § 104(b)(1). See section 23(a) of the Act.

42See Securities Exchange Act Release No. 44014

(February 28, 2001), 66 FR 13273 (March 5, 2001);

<http://www.sec.gov/news/digest.shtml>.

43 15 U.S.C. 78q(a)(3).

44 15 U.S.C. 78q–1(d).

45 15 U.S.C. 78w(a).

46Rule 17Ad–7(a) and (b).

47Rule 17Ad–7(d).

48Rule 17Ad–7(c).

49 15 U.S.C. 78q(a)(1).

50ESIGN § 104(b)(2)(A). See also ESIGN § 101(d).

51ESIGN § 104(b)(2)(B).

52, 53ESIGN § 104(b)(2)(C); 15 U.S.C. 78q, 78q–1

and 78w.

requirement is met by retaining an

electronic record that accurately reflects

the information set forth in the record;

remains accessible to all parties legally

entitled to access such record; and is

kept in a form capable of being

accurately reproduced for later

reference.39

While ESIGN does not define how

these requirements are to be met, it

preserves the Commission’s ability to

interpret and apply ESIGN consistent

with the statutes it administers pursuant

to its existing legal authority.40 To

interpret ESIGN, the Commission may

issue rules, orders, or guidance of

general applicability under its organic

statute.41 On February 28, 2001, the

Commission announced several

upcoming rulemaking activities

regarding recordkeeping requirements

under the federal securities laws that are

consistent with ESIGN.42 Accordingly,

under ESIGN section 107(b)(1)(B), the

record retention provisions of Title I of

ESIGN will become effective on June 1,

2001.

B. The Commission’s Statutory

Responsibilities

In order to facilitate the prompt,

accurate, and efficient clearance and

settlement of securities transactions,

Congress authorized the Commission,

having due regard for the public

interest, the protection of investors, the

safeguarding of securities and funds,

and the maintenance of fair competition

among transfer agencies, to promulgate

rules and regulations that are necessary

or appropriate to implement the

provisions of the Act. For example,

section 17(a)(3) requires every registered

transfer agent to make, keep, and

furnish copies of such records that the

transfer agent’s ARA prescribes by

rule.43 Section 17A prohibits registered

transfer agents from engaging in any

activity in contravention of the rules

and regulations that the Commission

may prescribe as necessary or

appropriate in the public interest, for

the protection of investors, or otherwise

in furtherance of the Act.44 Finally,

Section 23(a) grants the Commission the

power to make such rules and

regulations as may be necessary or

appropriate to implement the provisions

of the Act.45 Thus, the Act authorizes

the Commission to issue rules that

require registered transfer agents to keep

such records as the Commission may

prescribe in the public interest or for the

protection of investors, and to make

such records available for inspection.

This grant of authority recognizes the

importance of transfer agent

recordkeeping to the Commission’s

regulatory function and investor

protection objective.

Rules 17Ad–6 and 17Ad–7 under the

Act specify the type of records that

registered transfer agents must make

and keep and the length of time and

manner in which these records must be

preserved. Depending on the type of

record, the records covered by these

rules generally must be maintained for

two years,46 six years,47 or until one

year after the termination of a transfer

agency relationship.48 Section 17(a)(1)

of the Act 49 requires registered transfer

agents to make and keep certain records

that the Commission prescribes to be

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act. Rules 17Ad–6 and

17Ad–7 under the Act specify the type

of records that registered transfer agents

must make and keep and the length of

time and manner in which these records

must be preserved. Rule 17Ad–7(f)

currently permits registered transfer

agents to preserve the records listed in

Rule 17Ad–6 either in hardcopy or on

microfilm, subject to certain conditions.

However, Rule 17Ad–7 provides no

other alternatives to maintaining

records. The amendments will allow

registered transfer agents to

electronically and micrographically

preserve records that they are required

to retain.

As discussed above, Rule 17Ad–7, as

amended today, allows transfer agents

to use electronic or micrographic storage

media to store their records in a manner

that will ensure the security and

integrity of the records by means of

manual and automated controls; will

assure the authenticity and quality of

the electronic facsimile; detect attempts

to alter or remove the indexed records;

and will provide means to recover

altered, damaged, or lost indexed

records.

Transfer agents that use electronic or

micrographic storage media are also

required to create an index of the

records that are electronically or

micrographically stored and store the

index with those records. In addition,

the rule requires that the electronic

storage system label the storage units

with unique identifiers and record the

date and time that information was

electronically stored. Transfer agents are

also required to keep a duplicate of any

records that are stored using electronic

or micrographic storage media on any

type of medium that is acceptable under

Rule 17Ad–7. Finally, transfer agents

are required to maintain a duplicate

index that is stored with the duplicate

set of records separately from the

original records.

C. ESIGN’s Requirements

When adopting regulations, orders, or

guidance to interpret ESIGN’s impact on

the statutes it administers, the

Commission is subject to certain

requirements. First, the interpretation

must be ‘‘consistent’’ with Section 101

of ESIGN.50 Second, the interpretation

may not ‘‘add to the requirements’’ of

Section 101.51 Third, in issuing the

interpretation, the Commission 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 nonelectronic records; (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.52, 53

As discussed in the next section, the

Commission finds that the electronic

recordkeeping provisions of Rule 17Ad–

7, as amended today, are consistent with

the requirements established by ESIGN.

Thus, registered transfer agents are

required to comply with Rule 17Ad–7 as

amended.

D. Analysis and Commission Findings

The amendments to Rule 17Ad–7

require transfer agents to preserve, keep

current, and surrender upon request the

information necessary to download

records stored on electronic or

micrographic storage media. Transfer

agents must also be able to promptly

download electronically or

micrographically stored records to an

alternate medium, such as paper,

microfilm or microfiche. Moreover, if a

21654 Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations

54Rule 17Ad–6(a).

55Unlike broker-dealers, transfer agents are not

subject to the rules and oversight of any selfregulatory organization. Since the Commission is

the only entity that reviews transfer agent records,

the rule’s record integrity requirements are

essential.

transfer agent uses a third party to

maintain its records, the amendments

require the third party to file an

undertaking with the Commission that

the third party will permit the

Commission or the transfer agent’s ARA

to examine such records upon request.

The Commission’s investor protection

objective is substantially dependent on

the Commission’s oversight of transfer

agents through its transfer agent

examination process, which relies on

the records that transfer agents make

and retain. This objective would be

seriously undermined if transfer agents

records were inaccurate, inauthentic, or

inaccessible. Through Rule 17Ad–7, the

Commission seeks to protect investors

by promoting the accuracy, integrity,

and accessibility of transfer agent

records.

The Commission makes the following

findings with respect to Rule 17Ad–7:

1. Rule 17Ad–7 Is Consistent With

Section 101 of ESIGN

ESIGN provides that statutes or

regulations that require the retention of

certain contractual or transactional

records may be complied with by

storing such records electronically.

Similarly, Rule 17Ad–7 allows transfer

agents to maintain various records that

they are required to retain in an

electronic or micrographic format. In

addition, Rule 17Ad–7 permits

electronic or micrographic storage of a

broader category of records than ESIGN

requires because it permits the

electronic and micrographic storage of

all records registered transfer agents are

required to create and maintain, not just

contractual or transactional records.

Moreover, consistent with ESIGN, the

rule’s electronic and micrographic

storage provisions do not specify the use

of a particular technology or technical

specification. The Commission believes

that the amended rule will help to

ensure that records necessary for the

supervision and regulation of registered

transfer agents are maintained in a

manner that is accurate, accessible, and

that is consistent with ESIGN.

2. Rule 17Ad–7 Does Not Add to the

Requirements of Section 101 of ESIGN

ESIGN requires electronic records to

be stored in a manner that ensures that

they are accurate, accessible, and

capable of being accurately reproduced

for later reference. The electronic and

micrographic storage provisions of Rule

17Ad–7 are designed to ensure that

registered transfer agents store

electronic and micrographic records in

a manner consistent with the statutory

goals of ESIGN—accurate, accessible

and accurately reproduced records. For

example, the quality assurance

procedures requirement is designed to

ensure that the records are accurate by

providing verification that a record has

been accurately stored in the electronic

system. The indexing requirement is

designed to ensure that the records are

accessible by providing a means to

search for specific records. The labeling

provisions are 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.

Finally, the rule does not specify or

require any type of records storage

technology but instead permits a

transfer agent to choose the method of

electronic and micrographic storage

subject to certain conditions. Thus, Rule

17Ad–7 provides flexibility and choice

for registered transfer agents as new

electronic and micrographic storage

technologies are developed.

3. Rule 17Ad–7’s Requirements Are

Substantially Justified

The amendments to Rule 17Ad–7 are

substantially justified by the need to

protect investors, ensure the soundness

of the securities markets, and ensure the

prompt and accurate clearance and

settlement of securities transactions,

which includes the transfer of record

ownership. In order to ensure investor

protection and compliance with its

rules, the Commission requires, among

other things, that registered transfer

agents maintain records that document

their transactions with customers and

other entities with which they

transact.54 Examiners review these

records to determine whether registered

transfer agents are complying with the

requirements of the securities laws and

regulations. A failure to maintain

accurate, accessible, and correct records

could lead to situations where a transfer

agent does not know whether an

investor actually owns a security and

could also provide an opportunity for

deliberate alteration of records.

Accordingly, if investors are to be

adequately protected and systemic risk

in the securities industry mitigated, a

transfer agent’s records must provide an

accurate account of its operations.

To achieve its vital regulatory

interests, the Commission believes that

a rule that permits the use of electronic

and micrographic storage media must

contain certain requirements.55 These

requirements include prudent but

reasonable safeguards to prevent the

stored information from being modified

or removed (accidentally or maliciously)

without detection. To further this

objective, the rule requires that transfer

agents use electronic or micrographic

records storage systems that are

designed to insure the security and

integrity of the records by means of

manual and automated controls and can

detect attempts to alter or remove the

records. The rule also requires transfer

agents to create duplicates of the

original records. The duplicates must be

accessible and verifiable as authentic. In

addition, Rule 17Ad–7 requires

registered transfer agents to maintain,

keep current, and provide promptly

upon request by the Commission or the

transfer agent’s ARA all information

necessary to access the records and

indexes stored on electronic or

micrographic storage media. Finally,

transfer agents must place in escrow a

current copy of the electronic or

micrographic storage media’s software

and all the other information necessary

for the Commission or the transfer

agent’s ARA to access records and

indexes.

These conditions also are necessary

because electronic storage technology is

relatively new and there currently does

not appear to be an industry standard

for its development and for

compatibility among different electronic

storage systems. In addition, the ability

of the Commission to review a transfer

agent’s records would be severely

compromised should a transfer agent

refuse or not be available to cooperate

with the Commission.

4. Rule 17Ad–7’s Requirements Are

Substantially Equivalent to NonElectronic Record Requirements

Amended Rule 17Ad–7 is designed to

ensure the retention of legible,

authentic, and complete records. These

same goals are applicable to all

registered transfer agent records

regardless of their form: registered

transfer agents have in place similar

record retention requirements whether

they store their records electronically,

micrographically, or in hard copy.

While Rule 17Ad–7 contains specific

provisions that are only applicable to

electronic or micrographic formats,

these provisions are designed to take

into account the different characteristics

among paper, electronic, and

micrographic formats, while not

imposing disproportionate burdens on

any format.

Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations 21655

56Rule 17Ad–7(f)(5)(ii). 58 44 U.S.C. 3501 et seq.

Another reason for requirements that

apply to electronic storage derives from

the differences in the way that paper,

micrographic, and electronic media

store images of records. Paper and

micrographic systems store exact images

while electronic systems often store the

original information in digital form,

which can potentially be tampered with.

In addition, the use of electronic storage

media requires technical expertise and

knowledge of the media’s proprietary

hardware and software characteristics in

order to access the records. Therefore,

Rule 17Ad–7 requires transfer agents

that use electronic and micrographic

storage media place in escrow a copy of

the physical and logical format of the

storage media, the field format of all

different information types written on

the storage media and source code, and

the appropriate documentation and

information necessary to access records

and indexes.56 In the absence of such

requirement, a transfer agent could store

records that only it had the technology

and knowledge to access. If the transfer

agent went out of business or refused to

cooperate, it would be similar to a

situation where a transfer agent has

stored hard copy records in an

inaccessible place, which has always

been prohibited by the rule.

5. Rule 17Ad–7 Does Not Impose

Unreasonable Costs on the Acceptance

and Use of Electronic Records

Amended Rule 17Ad–7 will not result

in unreasonable costs to any particular

person or entity. The amendments will

broaden the options that transfer agents

have for the storage and retention of the

records they are required to maintain.

Specifically, because the amendments

do not require the use of any particular

technology, transfer agents are not

obligated to change their present

recordkeeping and retention systems.

Those transfer agents that choose to

take advantage of the amendments to

Rule 17Ad–7 will face certain fixed and

variable costs to employ electronic or

micrographic records management

systems that would comply with the

rule. However, it is practically

impossible to estimate the costs for

implementing a records management

system for any given transfer agent, or

the industry as a whole, that would be

in compliance with Rule 17Ad–7. When

a transfer agent selects the type of

records management storage, such as

micrographic (microfilm or microfiche)

or electronic recording techniques

(computers), it will likely consider

solutions that will optimize its cost,

based on factors such as risk and

complexity, while enabling it to meet its

regulatory obligations. Moreover, while

the costs and types of these systems

vary, numerous document storage

vendors appear to make the market for

these systems competitive. Further, Rule

17Ad–7 requires that any recordkeeping

system, whether electronic or paperbased, selected by a registered transfer

agent be designed to ensure the

accuracy, integrity, and accessibility of

the transfer agent’s records.

The Commission believes that the

costs are justified by the benefits that

electronic or micrographic storage

media offer. For example, with

electronic records maintenance systems:

Documents are less likely to be lost or

misfiled; documents are likely to be

retrieved more quickly; audit trails can

be automated; risk reduction is

improved for natural disasters; file

centralization is automatic (electronic

records need not be removed from their

storage in order to reference them);

multiple persons can view the same

document simultaneously; access

authorization can be automated; the

space required for document storage is

drastically reduced; document indexing

and cross-referencing can be automatic;

and documents can be copied, faxed,

printed, and emailed without the paper

originals.

Each transfer agent will ultimately

evaluate the risk and cost effectiveness

of its records management solution

differently based upon the solution that

is best for its business model, such as its

business practices and volume, and will

select a method that assures its ability

to comply with Rule 17Ad–7. Moreover,

the rule cannot envision the effect of

future market competition, innovation,

and the other solutions that transfer

agents might employ. Because each

transfer agent is able to select the

method, whether electronic,

micrographic, or paper-based, that

works best for it based on its individual

circumstances, Rule 17Ad–7 does not

impose any unreasonable costs on the

acceptance and use of electronic

records.

6. Rule 17Ad–7 Does Not Require, or

Accord Greater Legal Status or Effect to,

the Implementation or Application of a

Specific Technology or Technical

Specification

Rather than prescribe a single

technological solution to records

management, the rule incorporates a

goal-oriented approach based on the

statutory scheme for transfer agent

regulation. The goals of the rule include:

Long-term retention and access to

records; detection of fraud, including

forged or illegally modified records;

making information more useful; and

allowing transfer agents to use modern

information technology to handle their

ever-expanding number of records.

While the rule contains certain

standards to achieve the Commission’s

statutory functions, the rule enables

transfer agents to select from numerous

types of records storage systems to

maintain the records that they are

required to retain. The Commission is

aware of many types of electronic and

micrographic storage media technology

available for recordkeeping purposes

that would comply with the rule’s

requirements and anticipates that

additional methods will continue to be

developed.

E. Conclusion

Rule 17Ad–7, as amended today,

provides standards so that the transfer

agents’ use of record maintenance

systems, including those using

electronic and micrographic

technologies, will accurately reflect the

information contained in the original

records and will be readily accessible to

the Commission and other appropriate

regulatory agencies. The rule does not

specify a particular technology to carry

out these standards. Therefore, the

Commission finds that Rule 17Ad–7 is

consistent with ESIGN’s requirements.

VI. Paperwork Reduction Act

Certain provisions of the amendments

to Rule 17Ad–7 contain ‘‘collection of

information’’ requirements within the

meaning of the Paperwork Reduction

Act of 1995,58 and the Commission has

submitted them to the Office of

Management and Budget (‘‘OMB’’) for

review in accordance with 44 U.S.C.

3507(d) and 5 CFR 1320.11. The title for

the collection of information is: ‘‘Record

Retention Requirements for Registered

Transfer Agents.’’ The OMB control

number for the collection of information

is 3235–0136. The collection of

information requirements are necessary

to ensure the integrity of transfer agents’

records that are maintained on

electronic storage media and to ensure

the Commission’s ability to access such

records.

In the Proposing Release, the

Commission requested comment on the

proposed collections of information. No

comments were received that addressed

the PRA submission.

Rules 17Ad–7(f)(2)(iii) and 17Ad–

7(f)(2)(iv) contain a collection of

information requirements that are

intended to ensure that the Commission

has complete access to transfer agents’

records during examinations. Rule

21656 Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations

59The Commission is unable to predict the

number of transfer agents that will use third parties

to store their records and, thus, is unable to predict

the number of third party undertakings that will be

filed with the Commission.

60Based on an estimated average administrative

labor cost of $50 per hour (based on the Securities

Industry Association’s wage survey for the year

2000 for programmers and senior programmers. An

additional 35% for overhead was added to the

hourly rates.), the Commission’s staff estimate that

the total labor cost to the entire transfer agent

industry for complying with the collection of

information requirements contained in the

proposed amendments is $3,125,000 annually ($50

x 62,500). The Commission’s staff developed these

estimates in consultation with representatives of the

transfer agent industry and the staff of the

Commission’s Office of Economic Analysis.

17Ad–7(f)(2)(iii) and 17Ad–7(f)(2)(v)

will require transfer agents that use

electronic or micrographic storage

media to create an index of all

electronically or micrographically

stored records and to maintain a

duplicate of each index. The

Commission has not specified the

format of the index that is required to

be maintained. The original and

duplicate indexes are required to be

kept in separate locations in order to

protect against loss, damage, or

alteration. The indexes are required to

be maintained for as long as the transfer

agent uses electronic or micrographic

storage media.

Rule 17Ad–7(f)(4) contains a

collection of information requirement

that is intended to ensure the integrity

of transfer agents’ records that are stored

on electronic or micrographic storage

media. Rule 17Ad–7(f)(4) requires each

registered transfer agent that uses

electronic or micrographic storage

media to establish an audit system to

account for the inputting of or changes

made to the records (e.g., by unique

identifier numbers) that are

electronically or micrographically

stored. While the rule does not specify

the precise contents of each audit

system, any data stored regarding

inputting of records and changes made

to existing records would be part of that

audit system. The rule further requires

that the results of the audit system be

preserved for the period of time the

underlying audited records are required

to be preserved and that the results of

the audit system be available to the

Commission or ARA at all times.

Rule 17Ad–7(f)(5) contains collection

of information requirements that

ensures the Commission’s access to

records of a transfer agent that is no

longer operating, refuses to cooperate

with the investigative efforts of the

Commission or another appropriate

regulatory agency, or has not properly or

fully indexed electronically or

micrographically stored records. Rule

17Ad–7(f)(5) requires each transfer

agent that uses electronic or

micrographic storage media to place in

escrow and keep current a copy of the

physical and logical format of the

electronic storage or micrographic

media, the field format of all different

information types written on the

electronic storage media and source

code, and the appropriate

documentation and information

necessary to access records and indexes.

The information required by Rule

17Ad–7(f)(5) will be required to be

maintained for as long as the transfer

agent is using electronic or

micrographic storage media.

Rule 17Ad–7(f)(6) requires that for

each transfer agent that uses a third

party to maintain or preserve the

transfer agent’s records with electronic

or micrographic systems, the third party

must file with the Commission a written

statement to the effect that (1) such

records are maintained or preserved by

the third party on behalf of the transfer

agent; (2) such records will be

surrendered promptly on request of the

transfer agent; and (3) the third party

will permit Commission representatives

or designees to examine such records.

This requirement is intended to ensure

that the appropriate examining

authorities are able to access a transfer

agent’s electronically or

micrographically stored records if the

transfer agent does not maintain those

records. This requirement can be

fulfilled in the form of a letter to the

Commission.

The collection of information required

by the amendments to Rule 17Ad–7

should not result in any new significant

burden to transfer agents. All

information required as a condition of

transfer agents’ use of electronic or

micrographic storage media is

specifically tied to a transfer agent’s

decision to use electronic or

micrographic storage media to satisfy its

recordkeeping obligations.

The likely respondents to the

collection of information are large

registered transfer agents. At this time,

the Commission estimates that there

will be 500 respondents to the

collection of information requirements

contained in the amendments to Rule

17Ad–7. The frequency of response to

the collection of information

requirements varies depending on the

specific requirement and whether the

transfer agent stores its own records or

uses the services of a third party. Thus,

the collection of information

requirements contained in Rules 17Ad–

7(f)(5)(ii) and 17Ad–7(f)(6) might

require more than one response.

The primary time burdens that are

required by the amendments to Rule

17Ad–7 are the duplicate, labeling,

index, audit trail, and statement-filing

provisions. The Commission

contemplates that the electronic and

micrographic document storage systems

that transfer agents are likely to utilize

can automatically produce duplicate

records, sequential labels, indexes, and

audit trails. In the Proposing Release,

the Commission estimated that each

transfer agent would, on average,

expend 125 hours per year to comply

with the collection of information

requirements of Rule 17Ad–7. The

Commission solicited comments

regarding this annual hourly burden but

did not receive any comments. This

time burden will apply only to

registered transfer agents that choose to

use electronic or micrographic storage

media.

In the Proposing Release, the

Commission estimated that

approximately 40 transfer agents were

likely to use electronic or micrographic

storage systems. However, based on

further consultations with transfer agent

industry officials, vendors of electronic

records storage systems, and

Commission staff members, the

Commission now believes that the

number of likely respondents will be

500.59 Accordingly, we estimate that the

collection of information requirements

will result in 62,500 additional burden

hours (500 transfer agents x 125 annual

hours) to the transfer agent industry.60

If a transfer agent chooses to use

electronic or micrographic storage

media, then providing the information

will be mandatory. Responses to the

collection of information requirements

will not be kept confidential. An agency

may not conduct or sponsor, and a

person is not required to respond to, a

collection of information unless it

displays a currently valid OMB control

number.

VII. Costs and Benefits of the

Amendments to Rule 17Ad-7

The Commission has identified

certain costs and benefits relating to the

rule amendments. No comments were

received about the costs and benefits of

the proposed rule and the commenters

did not cite cost concerns as the basis

for their suggestions. We expect that

registered transfer agents will chose to

adopt electronic or micrographic

recordkeeping if it is cost effective for

them to do so.

A. Benefits

The Commission envisions that

transfer agents choosing to automate

their paper-based records systems in

favor of electronic or micrographic

Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations 21657

61 17 CFR 240.17Ad-6 and 240.17Ad-7.

62 15 U.S.C. 78w(a)(2).

63 15 U.S.C. 78w(a)(2).

64 15 U.S.C. 78c.

65Pub. L. No. 104–290, 110 Stat. 3416 (1996).

systems are likely to reduce their costs

and risks associated with recordkeeping.

While these benefits are not readily

quantifiable in terms of a particular

dollar value, many factors underlie the

potential reduction of costs and gains in

efficiency to transfer agents that elect to

use micrographic or electronic storage

systems:

• Documents are less likely to be lost

or misfiled,

• Documents are likely to be retrieved

more quickly,

• Audit trails can be automated,

• Risk reduction is improved for

natural disasters,

• File centralization is automatic (file

and records need not be removed from

their storage in order to reference them),

• Multiple persons can view the same

document simultaneously,

• Access authorization can be

automated,

• Space required for document

storage is drastically reduced,

• Document indexing and crossreferencing can be automatic, and

• Documents can be copied, faxed,

printed, and e-mailed without the paper

originals.

B. Costs

The amendments to Rule 17Ad-7 will

not impose costs on any particular

person or entity. Although the

amendments will broaden the options

for transfer agents to use for the storage

and retention of the records that they

are required to maintain, the

amendments require no technology

changes or even the use of any

technology, provided the transfer agent

is capable of producing copies of

documents that the Commission, or the

transfer agent’s ARA, requests.61

Therefore, transfer agents are not

obligated to change their present

recordkeeping and retention systems.

We expect, as noted above, that

numerous transfer agents will determine

that it is cost-effective for them to

choose to maintain their records

electronically or micrographically.

However, it is practically impossible to

estimate the costs for implementing a

records management system for any

given transfer agent, or the industry as

a whole, that would be in compliance

with Rule 17Ad-7(f). When a transfer

agent selects the type of records

management technology, such as

photographic (microfilm or microfiche)

or digital recording techniques

(computer technology), it will likely

consider solutions that will optimize its

cost, based on individualized factors

such as risk and complexity. Each

transfer agent will evaluate the risk and

cost effectiveness of their records

management solution differently based

upon the solution that is best for their

business model, such as their business

practices and volume, and that assures

their ability to comply with Rule 17Ad7. Moreover, we cannot predict the

effect of future market competition and

innovation on the technologies that

transfer agents might employ for their

recordkeeping.

Nevertheless, transfer agents that

choose to change their recordkeeping

system to electronic or micrographic

storage systems may face the following

costs. First, transfer agents that choose

to store records electronically or

micrographically will have to select the

type of technology system they will use

to store and maintain the required

records. While the costs and types of

these systems vary widely, numerous

document storage vendors appear to

make the market for these systems

competitive. In addition, the expected

life span of each system varies (e.g.,

some systems and their associated

software might become obsolete sooner

than others and some systems

physically last longer than others). All

systems, however, require physical and

technological maintenance.

Second, transfer agents that choose to

use micrographic media or electronic

storage media will incur some costs

associated with transferring hard copy

records to micrographic or electronic

storage media. These costs are likely to

depend upon the volume of hard copy

records needed to be transferred to

electronic or micrographic format, the

amount of labor needed to convert the

records, and the type of storage media

involved.

Third, transfer agents will incur costs

in complying with the rule. Specifically,

the rule requires that transfer agents

using electronic or micrographic storage

media create a duplicate of the records

electronically or micrographically

stored, that they create an index of the

electronically or micrographically

stored records, and that they establish

an audit system to account for inputting

of and changes to electronically or

micrographically stored records. All of

these requirements will result in costs to

those transfer agents. Again, these costs

are difficult to quantify in terms of labor

and technology.

VIII. Consideration of Burden on

Competition and Promotion of

Efficiency, Competition and Capital

Formation

A. Consideration of Burden on

Competition

Section 23(a)(2) of the Act 62 requires

the Commission to consider the impact

that any rule promulgated under the Act

would have on competition. The

Commission is further required to state

‘‘the reasons for [its] determination that

any burden on competition imposed by

such rule or regulation is necessary or

appropriate in furtherance of the

purposes of [the Act].63

In the Proposing Release, the

Commission solicited comments on

whether the amendments to Rule 17Ad–

7 would have any effects on

competition. The Commission received

no comments in response to this

solicitation.

The Commission does not anticipate

that the amendments will impose any

burden on competition that is not

necessary or appropriate in furtherance

of the Act. The amended rule permits,

but does not require, all registered

transfer agents to use electronic and

micrographic storage media to fulfill

their recordkeeping obligations. In

addition, the requirements that transfer

agents must meet with respect to using

electronic and micrographic storage

media will apply to all registered

transfer agents that choose to store their

records electronically or

micrographically. The amendments are

intended to remove any remaining

regulatory impediments facing transfer

agents who decide to store records in an

electronic or micrographic form. The

Commission believes that by changing

the regulatory scheme, transfer agents

can have the certainty to adopt storage

methods that best suits their business

needs and can then be able to offer to

the market a service they believe is more

cost-effective and efficient.

B. Promotion of Efficiency, Competition,

and Capital Formation

Section 3 of the Act 64 as amended by

the National Securities Markets

Improvement Act of 1996 65 provides

that whenever the Commission is

engaged in rulemaking and is required

to consider or determine whether an

action is necessary or appropriate in the

public interest, the Commission shall

consider, in addition to the protection of

investors, whether the action will

21658 Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations

66 5 U.S.C. 604.

67An Initial Regulatory Flexibility Analysis

(‘‘IRFA’’) summary regarding the amendments to

Rule 17Ad–7 appeared in the Proposing Release.

68 15 U.S.C. 78q(a)(1).

69Rule 17Ad–7(a) and (b).

70Rule 17Ad–7(d).

71Rule 17Ad–7(c).

72Rule 17Ad–7(f).

73 17 CFR 240.0–10(h).

74 17 CFR 240.17Ad–4(b).

75For example, Rule 17Ad–7(f) will be essentially

inapplicable to transfer agents that solely maintain

paper records.

promote efficiency, competition, and

capital formation.

In the Proposing Release, the

Commission solicited comments on

whether the amendments to Rule 17Ad–

7 would have any effects on

competition, efficiency and capital

formation. The Commission received no

comments in response to this

solicitation.

The amendments should promote

efficiency. By allowing registered

transfer agents to benefit from advances

in recordkeeping technology, the time

and labor in maintaining and accessing

records should be reduced, resulting in

operational and financial efficiencies.

Although the amendments address how

companies and its transfer agents keep

records which are activities that occur

after the issuance of securities, the

amendments should also encourage

capital formation. By allowing transfer

agents to use a broader range of storage

methods, transfer agents who decide to

store records electronically or

micrographically, will no longer have

the facility or operational costs of a

traditional paper based system. Transfer

agents could then pass the cost savings

to companies who can, in turn, see a

similar reduction in their recordkeeping

expenses. Lower recordkeeping

expenses should assist companies in

bringing their overall costs down and

should benefit companies in their efforts

in raising capital. The amendments,

which apply equally to transfer agents,

should also promote competition

between the vendors who create and

manufacture the new storage

technologies and between the transfer

agents who use the new methods.

Vendors can compete with each other to

develop systems that can allow transfer

agents to mange the records on a more

resourceful, economical basis. The

improvement in storage technologies

can then allow transfer agents to

compete among one another in offering

to companies a more cost-effective,

efficient service.

The amendments should: (1) Promote

efficiency by allowing registered

transfer agents to benefit from advances

in recordkeeping technology, (2) not

adversely affect capital formation

because the amendments relate solely to

post-issuance activity, and (3) not

impose any burden on competition

among transfer agents because the

amendments will apply equally to all

registered transfer agents.

IX. Final Regulatory Flexibility

Analysis

This Final Regulatory Flexibility

Analysis (‘‘FRFA’’) has been prepared in

accordance with the provisions of the

Regulatory Flexibility Act (‘‘RFA’’).66

This FRFA relates to the adoption of

amendments to Rule 17Ad–7(f), which

conditions registered transfer agents’

use of micrographic and electronic

storage systems in fulfilling their record

retention requirements.67 The FRFA

notes that the new rule does not require

transfer agents to maintain their records

micrographically or electronically;

however, those transfer agents choosing

to do so must comply with the

requirements of the rule.

A. Need for the Rules and Rule

Amendments

The amendments are designed to

increase the flexibility and efficiency of

transfer agent recordkeeping. Section

17(a)(1) of the Act 68 requires registered

transfer agents to make and keep certain

records that the Commission prescribes

to be necessary or appropriate in the

public interest, for the protection of

investors, or otherwise in furtherance of

the purposes of the Act. Rules 17Ad–6

and 17Ad–7 under the Act specify the

type of records that registered transfer

agents must make and keep and the

amount of time and manner in which

these records must be preserved.

Depending on the type of record, the

records covered by these rules generally

must be maintained for two years,69 six

years,70 or until one year after the

termination of a transfer agency

relationship.71 Rule 17Ad–7(f) 72

currently permits registered transfer

agents to preserve the records listed in

Rule 17Ad–6 on microfilm, subject to

certain conditions. However, Rule

17Ad–7 currently provides no other

alternative to maintaining records in

hard copy.

B. Significant Issues Raised by Public

Comment

The Commission received eleven

comment letters in response to the

Proposing Release. The commenters

generally supported the goals of the

Commission’s proposals, although some

expressed concerns with specific

provisions and some suggested

alternative approaches for addressing

particular issues. The Commission has

modified its proposal to incorporate

many of these comments and suggested

alternatives.

The Commission also requested

comment with respect to the IRFA in

the Proposing Release. The Commission

did not receive any comments

concerning the IRFA.

C. Small Entities Subject to the Rule

For purposes of Commission

rulemaking, paragraph (h) of Rule 0–10

under the Act 73 defines the term ‘‘small

business’’ or ‘‘small organization,’’ with

reference to a transfer agent, to include

any transfer agent that: (1) Received

fewer than 500 items for transfer and

fewer than 500 items for processing

during the preceding six months (or in

the time that it has been in business, if

shorter); (2) transferred items only of

issuers that would be deemed ‘‘small

business’’ or ‘‘small organizations’’ as

defined in Rule 0–10 under the Act; (3)

maintained master shareholder files that

in the aggregate contained less than

1,000 shareholder accounts or was the

named transfer agent for less than 1,000

shareholder accounts at all times during

the preceding fiscal year (or in the time

that it has been in business, if shorter);

and (4) is not affiliated with any person

(other than a natural person) that is not

a small business or small organization

under Rule 0–10. The Commission

estimates that 180 registered transfer

agents qualify as small entities and

would be subject to the amendments to

Rule 17Ad–7.

The Commission estimates that

approximately 150 transfer agents will

receive fewer than 500 items for transfer

during the preceding six months.

However, the Commission believes that

the amendments to Rule 17Ad–7 will

not significantly affect small entities.

The Commission notes that Rule 17Ad–

4(b) under the Act 74 already exempts

approximately 150 small transfer agents

from several of the recordkeeping

requirements of Rules 17Ad–6 (and as a

result from 17Ad–7). In addition, any

burden imposed by the amendments

applies only to those transfer agents that

choose to use electronic or micrographic

storage media; many transfer agents

might not have to maintain their records

any differently than they are doing so

prior to today.75 The Commission also

believes that it is not feasible to further

clarify, consolidate, or simplify the

amendments for small entities because a

small entity choosing to store its records

electronically or micrographically will

not be disproportionately or

unreasonably burdened by the new

Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations 21659

76 15 U.S.C. 78q, 78q–1(a)(2), 78q–1(d) and

78w(a).

requirements of Rule 17Ad–7. Finally,

the Commission believes that creating

any new exemptions for small business

entities in Rule 17Ad–7 would

undermine the purpose of the

Commission’s transfer agent regulatory

oversight responsibilities. Thus, small

business entities are still required to

maintain the same types of records as

before; Rule 17Ad–7 merely provides

alternate methods for doing so.

D. Projected Reporting, Recordkeeping,

and Other Compliance Requirements

In the IRFA, the Commission

requested comment on the costs of

complying with each of the

recordkeeping, reporting, and other

requirements under the proposed rule

amendments. It also requested comment

as to whether there would be any

ongoing costs associated with

complying with the rule amendments

and asked commenters to provide

detailed estimates of these costs. The

Commission did not receive any

comments concerning this aspect of the

IRFA.

The amendments to Rule 17Ad–7

impose certain reporting, recordkeeping,

and compliance requirements. For

example, the amendments require each

registered transfer agent that chooses to

use electronic or micrographic storage

media to set up a system to record the

inputting of records to electronic storage

media and the inputting of any changes

to records that are electronically or

micrographically stored. However, the

reporting, recordkeeping, and

compliance requirements contained in

the amendments to Rule 17Ad–7 apply

only to registered transfer agents that

choose to use electronic storage media.

Some small transfer agents might not be

able to afford the costs currently

involved with storing records

electronically or micrographically and

therefore will not choose to use these

storage medias. However, it is likely that

as additional technologies are

developed, these costs will be reduced

and it may become cost-effective for

more small transfer agents to use

electronic or micrographic storage

media. Therefore, the amendments to

Rule 17Ad–7 should not have a

significant economic impact on a

substantial number of small entities.

E. Agency Action to Minimize Effect on

Small Entities

As required by section 603 of the

RFA, the Commission has considered

adopting different compliance, reporting

requirements, and effective dates with

respect to transfer agents’ use of

electronic and micrographic storage

media with the view that these

measures would minimize the economic

impact of the proposed rule

amendments on small entities.

However, the Commission believes that

the compliance, reporting requirements,

and effective dates as adopted today are

necessary to ensure the accuracy and

integrity of the records of those transfer

agents that choose to store them

electronically or micrographically and

to ensure the access to such records by

the Commission or another appropriate

regulatory agency.

X. Statutory Basis

The Commission is adopting

amendments to § 240.17Ad–7 of Chapter

II of Title 17 of the Code of Federal

Regulations pursuant to Sections 17,

17A, and 23 76 in the manner set forth

below.

List of Subjects in 17 CFR Part 240

Reporting and recordkeeping

requirements, Securities, Transfer

agents.

Text of Amendment

In accordance with the foregoing,

Title 17, Chapter II of the Code of

Federal Regulations is amended as

follows:

PART 240—GENERAL RULES AND

REGULATIONS, SECURITIES

EXCHANGE ACT OF 1934

1. The authority citation for Part 240

is amended by adding the following

specific citation:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j,

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,

77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j–1,

78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 78q, 78s,

78u–5, 78w, 78x, 78ll, 78mm, 79q, 79t, 80a–

20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4

and 80b–11, unless otherwise noted.

* * * * *

Section 240.17Ad–7 also issued under

15 U.S.C. 78b, 78q, and 78q–1.

* * * * *

2. The authority citation following

§ 240.17Ad–7 is removed.

3. Section 240.17Ad–7 is amended by

revising paragraph (f) to read as follows:

§ 240.17Ad–7 Record retention.

* * * * *

(f) (1) For purposes of this section:

(i) The term micrographic media

means microfilm or microfiche or any

similar medium.

(ii) The term electronic storage media

means any digital storage medium or

system.

(iii) The term ARA means your

appropriate regulatory agency as that

term is defined in 15 U.S.C. 78c(a)(34).

(2) If you as a registered transfer agent

use electronic storage media or

micrographic media to store your

records, you must:

(i) Have available at all times for

examination by the staffs of the

Commission and of your ARA facilities

to project or produce immediately easily

readable images of such records;

(ii) Be ready at all times to provide

such records that the staffs of the

Commission and your ARA or their

representatives may request;

(iii) Create an accurate index of such

records, store the index with those

records, and have the index available at

all times for examination by the staffs of

the Commission and your ARA;

(iv) Have quality assurance

procedures to verify the quality and

accuracy of the electronic or

micrographic recording process; and

(v) Maintain separately from the

originals duplicates of the records and

the index that you store on electronic

storage media or micrographic media.

You may store the duplicates of the

indexed records on any medium

permitted by this section. You must

preserve the duplicate records and

index for the same time that is required

by this section for the indexed records,

and you must have them available at all

times for examination by the staffs of

the Commission and your ARA.

(3) Any electronic storage media that

you use to store your records must:

(i) Ensure the security and integrity of

the records by means of manual and

automated controls that assure the

authenticity and quality of the

electronic facsimile, detect attempts to

alter or remove the records, and provide

means to recover altered, damaged, or

lost records resulting from any cause;

(ii) Externally label all removable

units of storage media using a unique

identifier that allows the manual

association of that removable storage

unit with its place and order in the

recordkeeping system; and

(iii) Uniquely identify files and

internally label each file with its unique

name, the date and time of file creation,

the date and time of last modification or

extension, and a file sequence number

when the file spans more than one

volume.

(4) If you use electronic storage media

or micrographic media to store your

records, you must establish an audit

system that accounts for the inputting of

and any changes to every record that is

stored on electronic storage media or

micrographic media. The results of such

audit system must:

21660 Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Rules and Regulations

(i) Be available at all times for

examination by the staffs of the

Commission and your ARA; and

(ii) Be preserved for the same time

that is required by this section for the

underlying records.

(5) If you use electronic storage media

or micrographic media to store your

records, you must:

(i) Maintain, keep current, and

provide promptly upon request by the

staffs of the Commission and your ARA

all information necessary to access the

records and indexes stored on electronic

storage media or micrographic media;

and

(ii) Place in escrow with an

independent third party and keep

current a copy of the physical and

logical format of the electronic storage

or micrographic media, the field format

of all different information types written

on the electronic storage media and

source code, and the appropriate

documentation and information

necessary to access records and indexes.

The independent escrow agent must file

an undertaking signed by a duly

authorized person with the Commission

and your ARA stating that:

‘‘[Name of Third Party] hereby undertakes

to furnish promptly upon request to the U.S.

Securities and Exchange Commission, its

designees, or representatives, upon

reasonable request, a current copy of the

physical and logical format of the electronic

storage or micrographic media, the field

format of all different information types

written on the electronic storage media and

source code, and the appropriate

documentation and information necessary to

access the records and indexes of [Name of

Transfer Agent]’s electronic records

management system.

(6) (i) If you use a third party to

maintain or preserve some or all of the

required records using electronic storage

media or micrographic media, such

third party shall file a written

undertaking signed by a duly authorized

person with the Commission and your

ARA stating that:

‘‘With respect to any books and records

maintained or preserved on behalf of [Name

of Transfer Agent], [Name of Third Party]

hereby undertakes to permit examination of

such books and records at any time or from

time to time during business hours by

representatives or designees of the U.S.

Securities and Exchange Commission, and to

promptly furnish to said Commission or its

designee true, correct, complete, and current

hard copies of any or all or any part of such

books and records.’’

(ii) Agreement with a third party to

maintain your records shall not relieve

you from the responsibility to prepare

and maintain records as specified in this

section or in § 240.17Ad–6.

* * * * *

Dated: April 27, 2001.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–11005 Filed 4–27–01; 2:33 pm]

BILLING CODE 8010–01–U

DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Part 102

T.D. [01–36]

RIN 1515–AC80

Rules of Origin for Textile and Apparel

Products

AGENCY: Customs Service, Department

of the Treasury.

ACTION: Interim rule; solicitation of

comments.

SUMMARY: This document amends the

Customs Regulations on an interim basis

to align the existing country of origin

rules for textile and apparel products

with the statutory amendments to

section 334 of the Uruguay Round

Agreements Act, as set forth in section

405 within Title IV of the Trade and

Development Act of 2000. Section 405

clarifies the text of section 334 by

redesignating certain provisions and

amends the processing operations

required to confer country of origin

status to certain textile fabrics and

made-up articles. This document

implements the statutory changes.

DATES: This interim rule is effective May

1, 2001. Comments must be received on

or before July 2, 2001.

ADDRESSES: Written comments

(preferably in triplicate) may be

submitted to and inspected at the

Regulations Branch, Office of

Regulations and Rulings, U.S. Customs

Service, 1300 Pennsylvania Avenue,

NW., 3rd Floor, Washington, DC 20229.

FOR FURTHER INFORMATION CONTACT:

Cynthia Reese, Textile Branch, Office of

Regulations and Rulings, U.S. Customs

Service, 1300 Pennsylvania Avenue,

NW., Washington, DC 20229, Tel. (202)

927–1361.

SUPPLEMENTARY INFORMATION:

Background

Section 334 of the Uruguay Round

Agreements Act (URAA), Public Law

103–465, 108 Stat. 4809 (19 U.S.C.

3592), directs the Secretary of the

Treasury to prescribe rules

implementing certain principles for

determining the origin of textiles and

apparel products. Section 102.21 of the

Customs Regulations (19 CFR 102.21)

implements section 334 of the URAA.

On May 18, 2000, President Clinton

signed into law the Trade and

Development Act of 2000 (the Act),

Public Law 106–200, 114 Stat. 251.

Section 405 of Title IV of the Act

amends section 334 of the URAA.

Specifically, section 405(a) amends

section 334(b)(2) of the URAA by

redesignating paragraphs (b)(2)(A) and

(B) as paragraphs (b)(2)(A)(i) and (ii),

and by adding two special rules at new

paragraphs (b)(2)(B) and (C) that change

the rules of origin for certain fabrics and

made-up textile products.

Under section 334, certain fabrics, silk

handkerchiefs and scarves were

considered to originate where the base

fabric was knit or woven,

notwithstanding any further processing.

As a result of the statutory amendment

to section 334 effected by section 405 of

the Act, the processing operations

which may confer origin on certain

textile fabrics and made-up articles are

changed to include dyeing, printing,

and two or more finishing operations. In

particular, the amendment to section

334 affects the processing operations

which may confer origin on fabrics

classified under the Harmonized Tariff

Schedule of the United States (HTSUS)

as of silk, cotton, man-made fibers or

vegetable fibers.

Section 405(b) provides that the

amendments to section 334 apply to

goods entered, or withdrawn from

warehouse for consumption, on or after

May 18, 2000.

Amendment to the Customs Regulations

As the statutory amendments to

section 334 of the URAA necessitate

corresponding changes to the Customs

Regulations, this document amends

§ 102.21 on an interim basis to

implement the rules of origin for the

textile products specified in section

405(a) of the Act.

Comments

Before adopting this interim

regulation as a final rule, consideration

will be given to any written comments

timely submitted to Customs, including

comments on the clarity of this interim

rule and how it may be made easier to

understand. Comments submitted will

be available for public inspection in

accordance with the Freedom of

Information Act (5 U.S.C. 552), § 1.4 of

the Treasury Department Regulations

(31 CFR 1.4), and § 103.11(b) of the

Customs Regulations (19 CFR

103.11(b)), on regular business days

between the hours of 9 a.m. and 4:30

p.m. at the Regulations Branch, Office of

Regulations and Rulings, U.S. Customs