[Federal Register Volume 66, Number 104 (Wednesday, May 30, 2001)]
[Rules and Regulations]
[Pages 29224-29229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13526]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 270 and 275

[Release Nos. IC-24991 and IA-2945; File No. S7-06-01]
RIN 3235-AI05


Electronic Recordkeeping by Investment Companies and Investment 
Advisers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting amendments 
to rules under the Investment Company Act of 1940 and the Investment 
Advisers Act of 1940 that permit registered investment companies and 
registered investment advisers to preserve required records using 
electronic storage media such as magnetic disks, tape, and other 
digital storage media. The amendments expand the ability of advisers 
and funds to use electronic storage media to maintain and preserve 
records. This release and these rule amendments respond to the 
enactment of the Electronic Signatures in Global and National Commerce 
Act, which encourages federal agencies to accommodate electronic 
recordkeeping.

EFFECTIVE DATE: May 31, 2001.

FOR FURTHER INFORMATION CONTACT: William C. Middlebrooks, Jr., 
Attorney, or Martha B. Peterson, Special Counsel, (202) 942-0690, 
Office of Regulatory Policy, Division of Investment Management, 
Securities and Exchange Commission, 450 5th Street, NW., Washington, DC 
20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is adopting amendments to rule 31a-2 (17 CFR 270.31a-
2) under the Investment Company Act of 1940 (15 U.S.C. 80a) (the 
``Investment Company Act''), and rule 204-2 (17 CFR 275.204-2) under 
the Investment Advisers Act of 1940 (15 U.S.C. 80b) (the ``Advisers 
Act'').\1\
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    \1\ Unless otherwise noted, all references to rule 31a-2 or rule 
204-2, or to any paragraph of those rules, will be to 17 CFR 
270.31a-2 and 17 CFR 275.204-2, as amended by this release.
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Executive Summary

    The Commission is adopting amendments to rules regarding electronic 
recordkeeping by registered investment companies (``funds'') and 
registered investment advisers (``advisers''). The federal securities 
laws require funds, advisers, and others to make and keep books and 
records. The recordkeeping requirements are a key part of the 
Commission's regulatory program for funds and advisers, as they allow 
us to monitor fund and adviser operations, and to evaluate their 
compliance with federal securities laws. Last year, Congress passed the 
Electronic Signatures in Global and National Commerce Act (the 
``Electronic Signatures Act,'' ``Act,'' or ``ESIGN'') to facilitate the 
use of electronic records and signatures in interstate and foreign 
commerce.\2\ Consistent with the purposes and goals of the Electronic 
Signatures Act, we are adopting rule amendments that expand the 
circumstances under which funds and advisers may keep records on 
electronic storage media, and clarify and update our recordkeeping 
rules. We are also interpreting rules 31a-2 and 204-2 to be the 
exclusive means by which funds and advisers can comply with the 
recordkeeping provisions of the Electronic Signatures Act.
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    \2\ Electronic Signatures in Global and National Commerce Act, 
Pub. L. No. 106-229, 114 Stat. 464 (2000) (15 U.S.C. 7001), 
Preamble.
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I. Discussion

A. Amendments to Rules 31a-2 and 204-2

    The Commission is amending rules 31a-2 and 204-2 to permit funds 
and advisers to keep all of their records in an electronic format. 
Prior to today's amendments, rules 31a-2 and 204-2 provided that funds 
and advisers could keep records on electronic storage media only if the 
records were originally created or received in an electronic format.\3\ 
The Commission's staff had issued no-action letters to conditionally 
permit funds and advisers to convert records into an electronic format 
and retain them electronically.\4\ In March of this year we proposed 
rule amendments to incorporate these no-action letters into rules 31a-2 
and 204-2, while eliminating many of the conditions that apply only to 
electronic records created from non-electronic originals. We also 
proposed to clarify the obligation of funds and advisers to provide 
copies of their records to Commission examiners, and to incorporate 
terminology used in electronic recordkeeping rules under the Securities 
Exchange Act of 1934 into rules 31a-2 and 204-2.\5\ We received seven 
comment letters addressing the proposal.\6\ Commenters supported most 
of the proposed amendments, and we are adopting them substantially as 
proposed, with a few changes in response to concerns expressed by 
commenters.
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    \3\ See Electronic Recordkeeping by Investment Companies and 
Investment Advisers, Investment Company Act Release No. 24890 (Mar. 
13, 2001) [66 FR 15369 (Mar. 19, 2001)] (``Proposing Release'') at 
n.4 and accompanying text.
    \4\ See Oppenheimer Management Corporation, SEC No-Action Letter 
(Aug. 28, 1995); DST Systems, Inc., SEC No-Action Letter (Feb. 2, 
1993).
    \5\ Proposing Release, supra note 3, at nn. 7-12 and 
accompanying text.
    \6\ The comment letters are available for public inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
NW., Washington, DC (File No. S7-06-01).
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    Under revised rules 31a-2 and 204-2, funds and advisers are 
permitted to maintain records electronically if they establish and 
maintain procedures: (i) To safeguard the records from loss, 
alteration, or destruction, (ii) to limit access to the records to 
authorized personnel, the Commission, and (in the case of funds) fund 
directors, and (iii) to ensure that electronic copies of non-electronic 
originals are complete, true, and legible.\7\ In response to a 
suggestion of one commenter, we are expanding rules 31a-2 and 204-2 to 
include all records that are required to be

[[Page 29225]]

maintained and preserved by any rule under the Investment Company or 
Advisers Acts (``other recordkeeping requirements'') so that it is 
clear that if funds and advisers keep records electronically they must 
comply with the conditions of these rules.\8\
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    \7\ Rules 31a-2(f)(3) and 204-2(g)(3). We requested commenters 
to address whether rules 31a-2 and 204-2 should require funds and 
advisers to preserve records in a non-rewriteable, non-erasable 
(also known as ``write once, read many,'' or ``WORM'') format. 
Commenters concurred in our preliminary assessment, at the proposing 
stage, that the costs of such a requirement would be likely to 
outweigh the benefits (with respect to advisers and funds). Based on 
our consideration of costs, benefits, and other factors described in 
the proposing release we are not adopting such a requirement at this 
time. We recognize that the standards for electronic recordkeeping 
we are adopting for funds and advisers are different from the rules 
that we have adopted for broker-dealers, which require brokerage 
records to be preserved in a WORM format. We have not experienced 
any significant problems with funds or advisers altering stored 
records. Moreover, most advisory and mutual fund arrangements 
involve multiple parties (e.g., brokers, custodians, transfer 
agents), each with its own, often parallel, recordkeeping 
requirement. As a result, our compliance examiners typically have an 
alternative means to verify the accuracy of adviser and fund 
records. In light of these factors, the costs of requiring funds and 
advisers to invest in new electronic recordkeeping technologies may 
not be justified.
    \8\ Prior to the adoption of these amendments, rule 31a-2(f)(1) 
was limited to records required to be maintained and preserved under 
rules 31a-1(a) through (d) and 31a-2 (a) through (c), and rule 204-
2(g)(1) was limited to records required to be maintained under rule 
204-2. Other rules under both Acts contain additional recordkeeping 
requirements. See, e.g., rule 2a-7(c)(10) [17 CFR 270.2a-7(c)(10)] 
(money market funds must keep a written copy of certain procedures 
for not less than six years); rule 8b-16(c) (17 CFR 270.8b-16(c)) 
(funds must maintain certain documents concerning dividend 
reinvestment plans in accordance with section 31 of the Investment 
Company Act); rule 10f-3(b)(12)(ii) (17 CFR 270.10f-3(b)(12)(ii)) 
(funds must maintain and preserve for not less than six years a 
written record of certain security transactions during the existence 
of an underwriting or selling syndicate); rule 11a-3(a)(2)(i) (17 
CFR 270.11a-3(a)(2)(i)) (funds must maintain and preserve records of 
any determination of the costs incurred in connection with exchange 
offers for not less than six years in accordance with section 31(b) 
of the Investment Company Act); rule 12b-1(f) (17 CFR 270.12b-1(f)) 
(funds must preserve copies of any plan, agreement or report under 
this rule for not less than six years); rule 17e-1(d)(2) (17 CFR 
270.17e-1(d)(2)) (funds must maintain and preserve for at least six 
years a written record of certain brokerage transactions); rule 17j-
1(f)(1) (17 CFR 270.17j-1(f)(1)) (each fund that is required to 
adopt a code of ethics must make the corresponding records available 
to the Commission or its representatives for inspection); rule 203A-
2(e)(4) (17 CFR 275.203A-2(e)(4)) (advisers must maintain a record 
of the States in which the adviser has determined it would be 
required to register for not less than five years); and rule 204-
1(c) (17 CFR 275.204-1(c)) (advisers must maintain copies of Part II 
of Form ADV and any brochure delivered to client).
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    We are also amending the rules to clarify the obligation of funds 
and advisers to provide copies of their records to Commission 
examiners. The amendments make clear that funds and advisers may be 
requested to promptly provide (i) legible, true, and complete copies of 
records in the medium and format in which they are stored, and 
printouts of such records; and (ii) means to access, view, and print 
the records.\9\
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    \9\ Rules 31a-2(f)(2) and 204-2(g)(2). We have eliminated a 
proposed requirement that funds and advisers provide means to search 
and sort, as well as access, view, and print records. When their 
recordkeeping systems have the capacity to automatically ``search'' 
and ``sort'' records, funds and advisers typically voluntarily make 
those functions available to our examination staff. We did not 
intend to require funds and advisers to add ``search'' and ``sort'' 
functions to systems that do not have that capability.
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    We are not adopting a proposed amendment that would have stated 
that records are to be provided in no case more than one business day 
after a request.\10\ Some commenters were concerned that such an 
amendment could preclude funds and advisers from reaching an 
accommodation with the examination staff to produce certain documents 
immediately and other documents, that are not immediately accessible, 
on a delayed basis.\11\ We agree that such arrangements when entered 
into and performed in good faith by funds or advisers can facilitate 
the examination process. While the ``promptly'' standard imposes no 
specific time limit, we expect that a fund or adviser would be 
permitted to delay furnishing electronically stored records for more 
than 24 hours only in unusual circumstances. At the same time, we 
believe that in many cases funds and advisers could, and therefore will 
be required to, furnish records immediately or within a few hours of 
request.\12\
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    \10\ See proposed rules 31a-2(f)(2)(ii) and 204-2(g)(2)(ii).
    \11\ Rule 31a-2(a) generally requires records to be preserved in 
an ``easily accessible'' place for only the first two years of the 
retention period.
    \12\ See Investment Company Act; Use of Magnetic Tape, Disk, or 
Other Computer Storage Medium, Investment Company Act Release No. 
15410 (Nov. 13, 1986) [51 FR 42207 (Nov. 24, 1986)].
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B. Electronic Signatures Act

    Under the Electronic Signatures Act, an agency's recordkeeping 
requirements may be met by retaining electronic records that accurately 
reflect the information set forth in the record, and remain accessible 
to all persons who are entitled to access, in a format that can be 
accurately reproduced.\13\ The Act allows us to interpret this 
provision pursuant to our authority under the Investment Company and 
Advisers Acts.\14\ Our interpretation of the Electronic Signatures Act 
must be consistent with the Act and not add to its requirements.\15\ 
The interpretation must be based on findings that (i) our interpreting 
regulations are substantially justified; (ii) the methods selected to 
carry out our purposes are substantially equivalent to the requirements 
imposed on records that are not electronic records and will not impose 
unreasonable costs on the acceptance and use of electronic records; and 
(iii) the methods selected to carry out our purposes do not require, or 
accord greater legal status or effect to, the implementation or 
application of a specific technology or technical specification for 
performing the functions of creating, storing, generating, receiving, 
communicating, or authenticating electronic records or electronic 
signatures.\16\ The Electronic Signatures Act also explicitly 
authorizes agencies to interpret the Act's electronic recordkeeping 
provisions to specify performance standards to assure accuracy, record 
integrity, and accessibility of electronically retained records.\17\
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    \13\ ESIGN section 101(d)(1).
    \14\ Under the Electronic Signatures Act, a federal regulatory 
agency (like the Commission) that is responsible for rulemaking 
under any other statute (such as the Investment Company Act or the 
Advisers Act) ``may interpret section 101 [of the Electronic 
Signatures Act] with respect to such statute through the issuance of 
regulations pursuant to a statute; or to the extent such agency is 
authorized by statute to issue orders or guidance, the issuance of 
orders or guidance of general applicability that are publicly 
available and published (in the Federal Register in the case of an 
order or guidance issued by a Federal regulatory agency).'' ESIGN 
section 104(b).
    \15\ ESIGN section 104(b)(2)(A) and (B).
    \16\ ESIGN section 104(b)(2)(C).
    \17\ ESIGN section 104(b)(3). Such performance standards may be 
specified in a manner that imposes a requirement in violation of the 
general prohibition against selecting methods that require or accord 
greater legal status or effect to the implementation or application 
of a specific technology or technical specification for performing 
the functions of creating, storing, generating, receiving, 
communicating, or authenticating electronic records or electronic 
signatures if the requirement (i) serves an important governmental 
objective and (ii) is substantially related to the achievement of 
that objective.
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    We interpret the Electronic Signatures Act with respect to the 
Investment Company Act and Advisers Act to require funds and advisers 
to comply with the requirements of rules 31a-2 and 204-2 when they keep 
required records on electronic storage media. Funds and advisers, 
therefore, can comply with the requirements of the Electronic 
Signatures Act only by complying with the requirements of amended rules 
31a-2 and 204-2. This interpretation includes any records, maintained 
in an electronic format, that are required by any rule under the 
Investment Company or Advisers Acts.\18\ In the proposing release, we 
asked for comment on whether these interpretations were consistent with 
the Electronic Signatures Act's requirements.\19\ Commenters generally 
agreed that our interpretation of the Electronic Signatures Act was 
reasonable. As discussed below, our rules and interpretation satisfy 
all requirements of the Electronic Signatures Act.
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    \18\ See supra note 8 and accompanying text.:
    \19\ Proposing Release, supra note 3, at nn.13-15 and 
accompanying text.:
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1. Consistency With Electronic Signatures Act
    Rules 31a-2 and 204-2 and the other recordkeeping requirements are 
consistent with the Electronic Signatures Act. The Act permits 
federally required records to be retained in an electronic format, and 
we are amending rules 31a-2 and 204-2 to permit funds and advisers to 
maintain all required records electronically.

[[Page 29226]]

2. No Additional Requirements
    Rules 31a-2 and 204-2 and the other recordkeeping requirements do 
not impose requirements in addition to those imposed by the Act. The 
Electronic Signatures Act 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.\20\ The rules require 
funds and advisers that maintain their records electronically to comply 
with certain conditions that are consistent with the requirements of 
the Act and that are designed to bring about fund and adviser 
compliance with the Act's requirements.\21\
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    \20\ ESIGN section 101(d)(1).:
    \21\ The rules' general requirements that funds and advisers 
have procedures to protect electronic records from alteration, loss, 
or destruction, to limit unauthorized access, and verify the 
integrity of electronic copies of hard copy originals ensure that an 
electronic record is accurate from the outset, and limit the 
possibility that an electronic record will be corrupted during its 
retention period. The rules' requirements regarding indexing, and 
the obligation of funds and advisers to provide records to examiners 
and fund directors foster the accessibility of electronic records.
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3. Substantial Justification
    Our rules require funds and advisers to maintain a wide variety of 
documents that we use to verify compliance with federal securities 
law.\22\ The value of these records is entirely dependent on their 
integrity and accessibility. If funds and advisers are not required to 
protect their records from inadvertent or intentional alteration or 
destruction\23\ and provide examiners with meaningful access to all 
required records,\24\ then the records become unreliable, and the 
examination process moot. Therefore, we find that our interpretation of 
the Electronic Signatures Act, that funds and advisers must comply with 
rules 31a-2 and 204-2, is substantially justified.
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    \22\ For example, funds must keep accounts, books and other 
documents that form the basis for the fund's financial statements, 
and itemized records detailing purchases and sales of securities, 
receipts and deliveries of securities, receipts and disbursements of 
cash, and all other debits and credits. See rule 31a-1. Advisers 
must maintain records such as ledgers reflecting asset, liability, 
reserve, capital, income, and expense accounts, memoranda of 
instructions from clients, and written communications received and 
sent relating to recommendations and advice, and receipt, 
disbursement or delivery of funds or securities. See rule 204-2.
    \23\ See rules 31a-2(f)(3)(iii) and 204-2(g)(3)(iii) (requiring 
procedures to ensure the quality of electronic copies of non-
electronic records); rules 31a-2(f)(2)(iii) and 204-2(g)(2)(iii) 
(requiring that funds and advisers separately store duplicates of 
electronic records); rules 31a-2(f)(3)(ii) and 204-2(g)(3)(ii) 
(requiring funds and advisers to limit access to electronic 
records); rules 31a-2(f)(3)(i) and 204-2(g)(3)(i) (requiring funds 
and advisers to adopt procedures to maintain and preserve electronic 
records, so as to reasonably safeguard them from loss, alteration, 
or destruction).
    \24\ See rules 31a-2(f)(2)(ii)(A) and 204-2(g)(2)(ii)(A) 
(requiring funds and advisers to provide promptly a legible, true, 
and complete copy of an electronically stored record upon request 
from the Commission or other parties entitled to access the 
records); rules 31a-2(f)(2)(i) and 204-2(g)(2)(i) (requiring funds 
and advisers to arrange and index their electronic and micrographic 
records in a way that permits easy location and retrieval); and 
rules 31a-2(f)(2)(ii)(C) and 204-2(g)(2)(ii)(C) (requiring funds and 
advisers to provide means to access, view, and print electronic 
records).
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4. Requirements Equivalent to Requirements for Other Record Formats
    Rules 31a-2 and 204-2 and the other recordkeeping requirements 
subject electronic records to conditions that are substantially 
equivalent to conditions under which funds and advisers keep paper and 
micrographic records. These conditions are designed to ensure that the 
records exist in a form that is legible, authentic, complete, and 
accessible. While all records, regardless of format, must comply with 
certain conditions,\25\ other requirements, which would be superfluous 
for paper records, apply only to electronic and micrographic 
records.\26\
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    \25\ See, e.g., rule 31a-2(a)(1) (funds to preserve required 
records permanently, the first two years in an easily accessible 
place); and rule 204-2(a) (all registered advisers must keep their 
required records true, accurate, and current).
    \26\ For example, the requirement that funds and advisers that 
keep micrographic or electronic records provide promptly (i) a 
legible, true, and complete copy of the record in the medium and 
format in which it is stored, (ii) a legible, true, and complete 
printout of the record, and (iii) means to access, view, and print 
the records is unnecessary for paper records, which require no 
special treatment to make them readable and reproducible.
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    Funds and advisers that maintain records in an electronic format 
must comply with several requirements that have no micrographic or 
paper equivalent. For example, funds and advisers must have procedures 
to reasonably protect electronic records from loss, alteration, or 
destruction,\27\ to limit access to electronic records,\28\ and to 
assure that electronic records that are created from hard copy are 
complete, true, and legible.\29\ We believe that these additional 
requirements are necessary because of the unique vulnerability of 
unprotected electronic records to undetectable alteration and 
falsification.
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    \27\ Rules 31a-2(f)(3)(i) and 204-2(g)(3)(i).
    \28\ Rules 31a-2(f)(3)(ii) and 204-2(g)(3)(ii).
    \29\ Rules 31a-2(f)(3)(iii) and 204-2(g)(3)(iii).
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5. No Unreasonable Costs on Acceptance and Use of Electronic Records
    We have permitted funds and advisers to retain records 
electronically for over fifteen years.\30\ During this period 
electronic recordkeeping by funds and advisers has become 
widespread.\31\ We conclude that rules 31a-2 and 204-2 and the other 
recordkeeping requirements have not and will not impose unreasonable 
costs on the acceptance and use of electronic recordkeeping.
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    \30\ The Commission amended rules 204-2 and 31a-2, in 1985 and 
1986 respectively, to permit advisers and funds to store required 
records in computer systems. See Amendment to Investment Advisers 
Act Recordkeeping Rule, Investment Advisers Act Release No. 952 
(Jan. 11, 1985) [50 FR 2542 (Jan. 17, 1985)]; Investment Company 
Act; Use of Magnetic Tape, Disk, or Other Computer Storage Medium, 
Investment Company Act Release No. 15410 (Nov. 13, 1986) [51 FR 
42207 (Nov. 24, 1986)].
    \31\ With today's amendments to rules 31a-2 and 204-2, the 
conditions under which funds and advisers may convert and store hard 
copy records as electronic records will be more flexible than the 
conditions of the staff no-action letters. The conditions under 
which other records may be stored electronically are unchanged. As a 
result, we are confident that rules 31a-2 and 204-2, as amended, 
will impose no greater burden on electronic recordkeeping than has 
been imposed to date.
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6. Specific Technology or Technical Specification
    The Electronic Signatures Act generally prohibits us from requiring 
or according greater legal status or effect to the implementation or 
application of a specific technology or technical specification. 
However, the Act does permit us to specify performance standards to 
assure the accuracy, integrity, and accessibility of required records, 
even if our standards require funds and advisers to implement or apply 
a specific technology or technical specification to their storage 
system.\32\ Rules 31a-2 and 204-2 have been deliberately crafted to be 
technologically neutral, leaving funds and advisers free to adopt any 
combination of technological and manual protocols that meet the 
requirements of the rules. In any event, even if the rules were 
interpreted to favor a specific technology or technical specification, 
they would nonetheless be a valid exercise of our interpretive 
authority, as they serve the important governmental objective of 
assisting us to oversee fund and adviser compliance with the federal 
securities laws, and are substantially related to the achievement of 
that objective.\33\ The continuing accessibility and integrity of fund 
and adviser records are critical to the fulfillment of our oversight 
responsibilities.
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    \32\ ESIGN section 104(b)(3)(A).
    \33\ ESIGN section 104(b)(3)(A).

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[[Page 29227]]

C. Effective Date

    The effective date for these amendments is May 31, 2001. In most 
cases, the Administrative Procedures Act (``APA'') requires that a rule 
amendment be published in the Federal Register at least 30 days prior 
to its effective date unless the promulgating agency can show good 
cause for shortening this interim period.\34\ The Electronic Signatures 
Act becomes effective on June 1, 2001, at which point funds and 
advisers may opt to store required records electronically, so long as 
the records are accessible and accurate.\35\ As described above, the 
Electronic Signatures Act authorizes the Commission to interpret these 
terms. A gap between the effective dates of the Electronic Signatures 
Act and our rule amendments would needlessly create confusion about the 
appropriate standards for electronic recordkeeping. During the period 
between the effective dates, funds and advisers would be forced to 
choose between maintaining their electronic records in accordance with 
the Act's general but operative standards, or relying instead on the 
more specific, but as yet not effective, standards set in rules 31a-2 
and 204-2. We find that there is good cause for these amendments to 
become effective on May 31, 2001.
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    \34\ 5 U.S.C. 553(d)(3).
    \35\ ESIGN section 101(d)(1).
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    The APA also authorizes acceleration of the effective date of a 
rule that ``relieves a restriction.'' \36\ The amendments to rules 31a-
2 and 204-2 allow funds and advisers to store all of their required 
records electronically, regardless of how the documents originated or 
were received, thus removing the prior restrictions placed on storage 
of documents created or received on paper.
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    \36\ 5 U.S.C. 553(d)(1).
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II. Cost-Benefit Analysis

    In proposing the amendments to rules 31a-2 and 204-2, we considered 
the costs and benefits that the amendments would generate. Although we 
encouraged commenters to address the proposal's costs and benefits and 
to submit their own estimates of what they might be, we received no 
comment specifically addressing this issue.
    We believe the amendments will impose few, if any, costs on funds 
or advisers that are not already required. As described above, the 
amended rules allow funds and advisers to maintain required records on 
electronic storage media, regardless of whether the record was created 
or received electronically. Our rules already permit funds and advisers 
to retain records electronically if they were created or received 
electronically, and these amendments do not materially change those 
requirements. The only effect will be on funds and advisers who choose 
to convert records into an electronic format, and they must simply do 
so in the same fashion as they already keep electronically created or 
received records. Electronic storage remains optional with the adoption 
of these amendments. We assume that funds and advisers will not select 
the electronic storage option provided for in the amended rules unless 
doing so is less expensive (or otherwise more efficient and, therefore, 
supported by business considerations). It remains our belief that the 
amended rules will allow funds and advisers greater flexibility to make 
business decisions about recordkeeping and, when appropriate, opt for 
electronic storage with potential cost savings and other benefits.
    In addition, we are adopting minor amendments to clarify the 
obligation of funds and advisers to provide records to our examination 
staff and, in the case of funds, fund directors, and minor technical 
amendments to conform the language of rules 31a-2 and 204-2 to the 
recordkeeping rules under the Securities Exchange Act of 1934. We 
anticipate few, if any, costs to funds or advisers as a result of these 
amendments.

III. Effects on Efficiency, Competition, and Capital Formation

    Section 2(c) of the Investment Company Act requires the Commission, 
when engaging in rulemaking that requires it to consider or determine 
whether an action is consistent with the public interest, to consider, 
in addition to the protection of investors, whether the action will 
promote efficiency, competition, and capital formation. We requested 
comment on this issue in the Proposing Release, and we have considered 
these factors in determining to adopt the amendments as proposed. We 
did not receive any comments directly addressing this issue.
    The amendments to rules 31a-2 and 204-2 promote efficiency by 
giving funds and advisers that establish procedures to assure record 
soundness the option of maintaining their electronic records in the 
format most suited to their business needs. The rules' standards are 
flexible, and permit funds and advisers to modify their electronic 
record retention practices to take advantage of advances in electronic 
storage technology.
    We do not believe that the rule amendments will have an impact on 
competition. The rule amendments apply to all advisers and funds 
equally and should provide no competitive advantage or burden to any 
industry sector. The rule amendments should also have no impact on 
competition within the computer industry. The amendments do not favor 
the use of any particular form of electronic recordkeeping. They simply 
require that whatever technology a fund or adviser chooses, the fund or 
adviser have specific types of procedures to protect the integrity and 
accessibility of the electronic records.
    We believe that the amendments are unrelated to and will have 
little or no effect on capital formation.

IV. Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 605(b)), the Acting Chairman of the Commission has certified 
that the proposed amendments to rules 31a-2 and 204-2 will not have a 
significant economic impact on a substantial number of small entities. 
While the amendments could potentially affect all funds and advisers, 
including small entities, the economic impact of the amendments will be 
insignificant. The Commission prepared an Initial Regulatory 
Flexibility Analysis (``IRFA'') in accordance with 5 U.S.C. 603 
regarding amendments to rule 31a-2 under the Investment Company Act and 
rule 204-2 under the Advisers Act. The Proposing Release summarized the 
IRFA and requested commenters to address matters discussed in the IRFA. 
We received no comment on the IRFA. The Acting Chairman's certification 
is attached to this release as Appendix A.

V. Paperwork Reduction Act

    The amendments do not require a new collection of information. They 
affect only the manner in which registrants can store information that 
must be collected under rules 31a-2 and 204-2. In connection with rules 
31a-2 and 204-2, the Commission previously submitted to the Office of 
Management and Budget, pursuant to the Paperwork Reduction Act, a 
request for approval and received OMB control numbers for the rules, 
OMB Control Nos. 3235-0179 (rule 31a-2), and 3235-0278 (rule 204-2).

VI. Statutory Authority

    The Commission is adopting amendments to rule 31a-2 under the 
Investment Company Act pursuant to authority set forth in sections 31 
and 38(a) of the Investment Company Act (15 U.S.C. 80a-30 and 80a-
37(a)).

[[Page 29228]]

    The Commission is adopting amendments to rule 204-2 under the 
Advisers Act pursuant to authority set forth in sections 204, 206(4), 
and 211 of the Advisers Act (15 U.S.C. 80b-4, 80b-6(4), and 80b-11).

List of Subjects

17 CFR Part 270

    Investment companies; Reporting and recordkeeping requirements; 
Securities.

17 CFR Part 275

    Reporting and recordkeeping requirements; Securities.

Text of Rule Amendments

    For reasons set forth in the preamble, Title 17, Chapter II of the 
Code of Federal Regulations is amended as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

    1. The Authority citation for Part 270 continues to read in part as 
follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
unless otherwise noted;
* * * * *

    2. Section 270.31a-2 is amended by:
    a. Revising paragraphs (f)(1) and (f)(2);
    b. Redesignating paragraph (f)(3) as (f)(4); and
    c. Adding a new paragraph (f)(3) to read as follows:


Sec. 270.31a-2  Records to be preserved by registered investment 
companies, certain majority-owned subsidiaries thereof, and other 
persons having transactions with registered investment companies.

* * * * *
    (f) Micrographic and electronic storage permitted.--(1) General. 
The records required to be maintained and preserved under this part may 
be maintained and preserved for the required time by, or on behalf of, 
an investment company on:
    (i) Micrographic media, including microfilm, microfiche, or any 
similar medium; or
    (ii) Electronic storage media, including any digital storage medium 
or system that meets the terms of this section.
    (2) General requirements. The investment company, or person that 
maintains and preserves records on its behalf, must:
    (i) Arrange and index the records in a way that permits easy 
location, access, and retrieval of any particular record;
    (ii) Provide promptly any of the following that the Commission (by 
its examiners or other representatives) or the directors of the company 
may request:
    (A) A legible, true, and complete copy of the record in the medium 
and format in which it is stored;
    (B) A legible, true, and complete printout of the record; and
    (C) Means to access, view, and print the records; and
    (iii) Separately store, for the time required for preservation of 
the original record, a duplicate copy of the record on any medium 
allowed by this section.
    (3) Special requirements for electronic storage media. In the case 
of records on electronic storage media, the investment company, or 
person that maintains and preserves records on its behalf, must 
establish and maintain procedures:
    (i) To maintain and preserve the records, so as to reasonably 
safeguard them from loss, alteration, or destruction;
    (ii) To limit access to the records to properly authorized 
personnel, the directors of the investment company, and the Commission 
(including its examiners and other representatives); and
    (iii) To reasonably ensure that any reproduction of a non-
electronic original record on electronic storage media is complete, 
true, and legible when retrieved.
* * * * *

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

    3. The authority citation for Part 275 continues to read in part as 
follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(F), 80b-2(a)(17), 80b-3, 80b-
4, 80b-6(4), 80b-6a, 80b-11, unless otherwise noted.
* * * * *

    4. The authority citation following Sec. 275.204-2 is removed.

    5. Section 275.204-2 is amended by revising paragraphs (g)(1) and 
(g)(2), and by adding paragraph (g)(3), to read as follows:


Sec. 275.204-2  Books and records to be maintained by investment 
advisers.

* * * * *
    (g) Micrographic and electronic storage permitted.--(1) General. 
The records required to be maintained and preserved pursuant to this 
part may be maintained and preserved for the required time by an 
investment adviser on:
    (i) Micrographic media, including microfilm, microfiche, or any 
similar medium; or
    (ii) Electronic storage media, including any digital storage medium 
or system that meets the terms of this section.
    (2) General requirements. The investment adviser must:
    (i) Arrange and index the records in a way that permits easy 
location, access, and retrieval of any particular record;
    (ii) Provide promptly any of the following that the Commission (by 
its examiners or other representatives) may request:
    (A) A legible, true, and complete copy of the record in the medium 
and format in which it is stored;
    (B) A legible, true, and complete printout of the record; and
    (C) Means to access, view, and print the records; and
    (iii) Separately store, for the time required for preservation of 
the original record, a duplicate copy of the record on any medium 
allowed by this section.
    (3) Special requirements for electronic storage media. In the case 
of records on electronic storage media, the investment adviser must 
establish and maintain procedures:
    (i) To maintain and preserve the records, so as to reasonably 
safeguard them from loss, alteration, or destruction;
    (ii) To limit access to the records to properly authorized 
personnel and the Commission (including its examiners and other 
representatives); and
    (iii) To reasonably ensure that any reproduction of a non-
electronic original record on electronic storage media is complete, 
true, and legible when retrieved.
* * * * *

    Dated: May 24, 2001.
    By the Commission.
Margaret H. McFarland,
Secretary.
[Note: Appendix A to the Preamble will not appear in the Code of 
Federal Regulations.]

Appendix A; Regulatory Flexibility Act Certification

    I, Laura S. Unger, Acting Chairman of the Securities and 
Exchange Commission, hereby certify pursuant to 5 U.S.C. 605(b) that 
amendments to rule 31a-2 (17 CFR 270.31a-2) under the Investment 
Company Act of 1940 (the ``Investment Company Act'') and rule 204-2 
(17 CFR 275.204-2) under the Investment Advisers Act of 1940 (the 
``Advisers Act''), as amended, would not have a significant economic 
impact on a substantial number of small entities in the United 
States.
    The Commission estimates that there are approximately 3,610 
active registered investment companies, 3,010 of which are open-end 
investment companies with the remaining 600 closed-end investment 
companies. Of the total number of active registered investment 
companies, 203 are small entities. There are also 762 Unit

[[Page 29229]]

Investment Trusts (``UITs''), about 12 of which are small entities, 
as the term is defined by the Investment Company Act.\37\ The 
Commission further estimates that approximately 1,500 out of 8,100 
SEC-registered investment advisers are small entities, as the term 
is defined by the Advisers Act.\38\
---------------------------------------------------------------------------

    \37\ 17 CFR 270.0-10.
    \38\ 17 CFR 275.0-7.
---------------------------------------------------------------------------

    All investment companies registered with the Commission 
(including both management investment companies and UITs) are 
subject to the recordkeeping requirements of rule 31a-2, and all 
registered advisers are subject to the recordkeeping requirements of 
rule 204-2. Electronic storage remains optional with the adoption of 
these amendments. Therefore, the amended rules will impact only 
those small funds and small advisers that choose to store required 
records electronically.
    Despite the universal applicability of the rule changes on all 
funds and advisers that store their records on electronic storage 
media, the resulting economic impact of the amendments on small 
entities will not be significant. As funds and advisers are not 
required to store required records electronically, we anticipate 
that only those entities, small or otherwise, that foresee a 
financial or organizational benefit attaching to electronic storage, 
will exercise the expanded storage options found in the amendments 
to rules 31a-2 and 204-2. Accordingly, the amendments will not have 
a significant economic impact on a substantial number of small 
entities.

    Dated: May 22, 2001.

Laura S. Unger,
Acting Chairman.

[FR Doc. 01-13526 Filed 5-29-01; 8:45 am]
BILLING CODE 8010-01-U