`[Federal Register Volume 61, Number 95 (Wednesday, May 15, 1996)]
[Rules and Regulations]
[Pages 24644-24651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12176]




[[Page 24643]]


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Part VI





Securities and Exchange Commission





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17 CFR Part 231, et al.



Use of Electronic Media by Broker-Dealers, Transfer Agents, and 
Investment Advisers for Delivery of Information; Final Rules

  Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Rules 
and Regulations  

[[Page 24644]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 231, 241, 271, and 276

[Release No. 33-7288; 34-37182; IC-21945; IA-1562; File No. S7-13-96]


Use of Electronic Media by Broker-Dealers, Transfer Agents, and 
Investment Advisers for Delivery of Information; Additional Examples 
Under the Securities Act of 1933, Securities Exchange Act of 1934, and 
Investment Company Act of 1940

AGENCY: Securities and Exchange Commission.

ACTION: Interpretation; solicitation of comments.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
publishing its views with respect to the use of electronic media by 
broker-dealers, transfer agents, and investment advisers to deliver 
information as required under the Securities Exchange Act of 1934 and 
the Investment Advisers Act of 1940. This interpretation is intended to 
provide guidance in using electronic media to fulfill broker-dealers' 
obligations to deliver information to customers, transfer agents' 
obligations to deliver information upon written request, and investment 
advisers' disclosure delivery obligations. The Commission also is 
supplementing its interpretive release published on October 6, 1995, 
with seven additional examples illustrating the application of that 
earlier release to information delivery under the Securities Act of 
1933, the Securities Exchange Act of 1934, and the Investment Company 
Act of 1940. Finally, the Commission is seeking comment on the issues 
discussed in this release.

DATES: This interpretation is effective on May 15, 1996.
    Comments must be received on or before July 1, 1996.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street 
NW., Mail Stop 6-9, Washington, DC 20549. Comments also may be 
submitted electronically at the following electronic mail address: 
[email protected]. All comment letters should refer to File Number 
S7-13-96. This file number should be included on the subject line if 
comments are submitted using electronic mail. Comment letters will be 
available for public inspection and copying at the Commission's Public 
Reference Room, 450 Fifth Street NW., Washington, DC 20549. 
Electronically submitted comment letters will be posted on the 
Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel, or 
Elizabeth King, Special Counsel, or Jack Drogin, Special Counsel 
(concerning Rules 10b-10, 10b-16, 15c1-5, 15c1-6, 15c2-12, and 15g-2 
through 15g-9 under the Securities Exchange Act of 1934, and the 
release generally), 202/942-0073, Office of Chief Counsel, Mail Stop 5-
10; Sheila Slevin, Assistant Director (concerning information about 
technology generally), 202/942-0796, Mail Stop 5-1; Michael Walinskas, 
Special Counsel (concerning Rule 9b-1 under the Securities Exchange Act 
of 1934), 202/942-0188, Mail Stop 5-1; Elizabeth MacGregor, Special 
Counsel (concerning Rule 11Ac1-3 under the Securities Exchange Act of 
1934), 202/942-0158, Mail Stop 5-1; Alan Reed, Attorney (concerning 
Rules 15c2-8 and 15c2-11 under the Securities Exchange Act of 1934), 
202/942-0772, Mail Stop 5-1; Michael A. Macchiaroli, Associate Director 
(concerning Exchange Act Rules 8c-1, 15c2-5, 15c3-2, 15c3-3, and 17a-
5), 202/942-0132, Mail Stop 5-1; Jerry Carpenter, Assistant Director 
(concerning Exchange Act Rule 17Ad-5), 202/942-4187, Mail Stop 5-1, 
Division of Market Regulation; Jack W. Murphy, Chief Counsel or Amy 
Doberman, Assistant Chief Counsel (concerning the Investment Advisers 
Act of 1940 and the examples illustrating application of electronic 
delivery to mutual funds), 202/942-0660, Mail Stop 10-6, Division of 
Investment Management; Joseph Babits, Special Counsel (concerning the 
examples regarding application of electronic delivery to issuers other 
than mutual funds), 202/942-2910, Mail Stop 3-7, Division of 
Corporation Finance, Securities and Exchange Commission, 450 Fifth 
Street NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On October 6, 1995, the Commission published an interpretive 
release expressing its views on the electronic delivery of documents, 
such as prospectuses, annual reports to shareholders, and proxy 
solicitation materials under the Securities Act of 1933 (``Securities 
Act''), the Securities Exchange Act of 1934 (``Exchange Act''), and the 
Investment Company Act of 1940 (``October Interpretive 
Release'').1 In the October Interpretive Release, the Commission 
directed the Division of Market Regulation (``Division'') to review 
Rule 10b-10 and other rules it administers under the Exchange Act to 
determine if and under what conditions electronic delivery of 
information required by those rules is feasible.2 Accordingly, the 
Division conducted a review of the rules it administers under the 
Exchange Act. Based on that review, the Commission is issuing this 
release, which expresses its views with respect to the delivery of 
information through electronic media in satisfaction of broker-dealer 
and transfer agent requirements to deliver information under the 
Exchange Act and the rules thereunder. In conjunction with the results 
of that review, the Commission is publishing its views on the use of 
electronic media with respect to the disclosure delivery obligations of 
investment advisers and persons acting on their behalf 3 under the 
Investment Advisers Act of 1940 (``Advisers Act'').
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    \1\ Securities Act Release No. 7233 (Oct. 6, 1995), 60 FR 53458 
(Oct. 13, 1995) (hereinafter ``October Interpretive Release''). In a 
companion release, the Commission proposed technical amendments to 
certain of its rules that currently are premised on the distribution 
of paper documents. Securities Act Release No. 7234 (Oct. 6, 1995), 
60 FR 53467 (Oct. 13, 1995). Today the Commission is adopting these 
technical amendments substantially as proposed. Securities Act 
Release No. 7289 (May 9, 1996).
    \2\ October Interpretive Release, supra note 1, at 53459, n.12.
    \3\ The term investment adviser is used in the rest of this 
release to refer to both investment advisers and persons acting on 
their behalf (including any solicitor receiving cash compensation 
from an adviser in accordance with Advisers Act Rule 206(4)-3, 17 
CFR 275.206(4)-3).
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    This release addresses only the procedural aspects under the 
federal securities laws of the delivery of information by broker-
dealers, transfer agents, and investment advisers. It does not affect 
the rights and responsibilities of any party under the federal 
securities laws.4 This release also does not address

[[Page 24645]]

or affect the applicability of any self-regulatory organization 
(``SRO'') rules,5 or of any state laws. Broker-dealers, transfer 
agents, and investment advisers, therefore, are reminded to consider 
the applicability of SRO rules and state laws in connection with 
delivering information electronically.6 The release further does 
not affect any rules promulgated under the Exchange Act by agencies 
other than the Commission.\7\
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    \4\ The substantive requirements and liability provisions of the 
federal securities laws apply equally to electronic and paper-based 
media. For example, the antifraud provisions of the Exchange Act and 
Rule 10b-5 thereunder, as well as section 206 of the Advisers Act 
and the rules thereunder, apply to information delivered and 
communications transmitted electronically, to the same extent as 
they apply to information delivered in paper form. See October 
Interpretive Release, supra note 1, at 53459, n.11. In addition, 
broker-dealers, transfer agents, and investment advisers continue to 
be subject to their respective recordkeeping requirements under 
Exchange Act Rules 17a-3 and 17a-4, 17 CFR 240.17a-3 and 240.17a-4, 
Exchange Act Rules 17Ad-6 and 16Ad-7, 17 CFR 240.17Ad-6 and 
240.17Ad-7, and Advisers Act Rule 204-2, 17 CFR 275.204-2.
    The Commission proposed for comment amendments to the broker-
dealer record preservation rule, which would permit broker-dealers 
to employ, under certain conditions, optical storage technology to 
maintain required records. See Exchange Act Release No. 32609 (July 
9, 1993), 58 FR 38092 (July 15, 1993) (``Proposing Release''). At 
the time these amendments were proposed, concerns were expressed 
that optical disk images would make it difficult, from an 
examination and discovery perspective, to detect alterations made to 
handwritten records and to records containing handwritten text. To 
address these concerns, the Proposing Release solicited comments on 
the adequacy of optical disk technology to preserve handwritten 
records or records that contain handwritten text.
    Simultaneous with the issuance of the Proposing Release, the 
Division of Market Regulation, with the Commission's concurrence, 
issued a no-action letter permitting broker-dealers to use optical 
disk technology immediately. See Letter from Michael A. Macchiaroli, 
Associate Director, Division of Market Regulation, SEC to Mr. 
Michael D. Udoff, Chairman, Ad Hoc Record Retention Committee, 
Securities Industry Association, Inc., (June 18, 1993). The no-
action letter permits the optical storage of all paper records, 
including handwritten records, except those records required to be 
made under paragraphs (a)(6) and (a)(7) of Rule 17a-3 (proprietary 
and customer order tickets).
    The Commission's request for comment in the Proposing Release 
regarding handwritten records was in no way intended to limit 
reliance on the no-action letter. In addition, the Commission notes 
that paperless order tickets (i.e., those generated by computers) 
may, under the no-action letter, be stored on optical disks. The 
Commission understands that most of the large firms generate 
paperless order tickets rather than handwritten order tickets.
    Finally, the Commission is aware that questions have been raised 
regarding the application of the optical storage no-action letter. 
The staff of the Division of Market Regulation is prepared to 
discuss with interested persons any issues in connection with this 
letter, as well as with the Proposing Release.
    \5\ See, e.g., National Association of Securities Dealers, Inc. 
(``NASD'') Notice to Members 95-80 (Sept. 26, 1995), NASD Rules of 
Fair Practice Sec. 35, and New York Stock Exchange, Inc. (``NYSE'') 
Rule 472, which govern member firm responsibilities relating to 
communications with the public, including electronic communications.
    In order to determine whether new guidelines are needed for the 
use of electronic communications, on January 12, 1996, the NYSE sent 
a survey to its members and member organizations regarding the use 
of electronic systems to communicate with customers. The NYSE asked 
its members to return the survey by February 15, 1996. NYSE 
Information Memorandum (Jan. 12, 1996). The Commission understands 
that the NASD intends to send a similar survey to its members.
    The Commission strongly encourages the SROs to continue to work 
with broker-dealers to adapt SRO supervisory review requirements 
governing communications with customers to accommodate the use of 
electronic communications by broker-dealers. Because electronic 
delivery systems allow broker-dealers and their associated persons 
to freely contact the general public, as well as their clients, 
firms should maintain effective supervision and records of 
associated persons' communications to avoid potential sales practice 
problems. The Commission believes, however, that the SROs' rules 
concerning the supervisory requirements for electronic 
communications should be based on the content and audience of the 
message, and not merely the electronic form of the communication. 
For example, the SROs should consider whether electronic mail 
communications, that, as a practical matter, replace or substitute 
for telephone conversations, in many cases would not require advance 
authorization or prior supervisory review.
    The Commission also recognizes that broker-dealers are concerned 
about the costs of maintaining electronic communications as records 
on a long term basis, and it intends to discuss these concerns 
further with the securities industry.
    \6\ Article 8 of the UCC was revised substantially in 1994, and 
the revisions were endorsed by both the American Law Institute and 
the National Conference of Commissioners on Uniform State Laws. This 
revised version has been adopted by 13 states. Under Revised Article 
8 Section 8-102(6), parties to a transaction may ``transmit 
information by any mechanism agreed upon by the persons transmitting 
and receiving the information.'' Revised Article 8 eliminates the 
current Section 8-319 requirement for a signed writing evidencing 
the terms of a securities transaction.
    In states that have not yet codified the 1994 amendments, a 
confirmation bearing the broker-dealer's letterhead or some other 
identifying marking, generally, fulfills that requirement. See e.g., 
Kohlmeyer and Co. v. Bowen, 192 S.E.2d 400, 126 Ga. App. 700 (Ga. 
Ct. App. 1972); See also Bains v. Piper, Jaffray & Hopwood, 497 
N.W.2d 263 (Minn. Ct. App. 1993) (computer generated confirmation 
held to satisfy the UCC requirement for a writing).
    \7\ See, e.g., Treas. Reg. Secs. 404.4(e) and 403.5(d) (rules 
regarding hold in custody repurchase agreements applicable to 
government securities brokers and dealers that are financial 
institutions).
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    Finally, this interpretation does not address the existing paper 
filing requirements with the Commission,\8\ other regulatory 
authorities,\9\ and other third parties.\10\
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    \8\ For example, this interpretation does not apply to any 
requirements to file information with the Commission in connection 
with registering under sections 15, 15A, 15B, or 15C of the Exchange 
Act as a broker-dealer, national securities association, municipal 
securities dealer, or government securities broker-dealer. Broker-
dealers currently register with the Commission, the SROs, and the 
states through the Central Registration Depository (``CRD'') system 
operated by the NASD. A redesign of the CRD system will allow 
broker-dealers to file uniform registration forms electronically. In 
connection with the CRD redesign the Commission intends to adopt 
amendments to Form BD, the uniform application for broker-dealer 
registration under the Exchange Act. See Exchange Act Release No. 
35224 (Jan. 12, 1995), 60 FR 4040 (Jan. 19, 1995) (proposing 
amendments to Form BD).
    Because, at the present time, the Commission does not have the 
technological capacity to receive electronic transmissions of 
information from broker-dealers, transfer agents, or investment 
advisers, this interpretation also does not apply to other 
requirements to file information with the Commission under the 
Exchange and Advisers Acts. See, e.g., Exchange Act Rule 9b-1, 17 
CFR 240.9b-1 (options markets' obligation to file with the 
Commission any revisions to an options disclosure document); 
Advisers Act Form ADV, 17 CFR 279.1 (application for registration of 
investment advisers). The Commission, nevertheless, recognizes the 
desirability of electronic filing and is examining the feasibility 
of establishing systems capable of receiving information 
electronically.
    \9\ For example, the notice requirements to the National 
Association of Securities Dealers, Inc. under Exchange Act Rule 10b-
17, also are not within the scope of this interpretation. 17 CFR 
240.10b-17.
    \10\ For example, Rule 15a-6 requires U.S. registered broker-
dealers, under certain circumstances, to obtain certain foreign 
persons' consent to service of process. 17 CFR 240.15a-
6(a)(3)(iii)(D). The Commission has never taken a position as to the 
specific means by which the U.S. broker-dealer may meet this 
obligation, but believes that a consent to service of process may be 
obtained through the use of a facsimile.
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II. Use of Electronic Media

    In the October Interpretive Release, the Commission noted that the 
electronic distribution of information provides numerous benefits and 
that the use of this type of medium is growing among all participants 
in the securities industry. The Commission concluded that issuers, 
third parties (such as persons making tender offers or soliciting 
proxies), and persons acting on behalf of such third parties may use 
electronic media, in accordance with the guidance provided in the 
October Interpretive Release, to deliver information. In addition, the 
Commission believes that broker-dealers, transfer agents, and 
investment advisers may satisfy their delivery obligations under the 
Exchange Act and the Advisers Act by using electronic media as an 
alternative to paper-based media.11
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    \11\ The exact nature of the broker-dealer's, transfer agent's, 
and investment adviser's delivery obligations is defined broadly and 
includes such terms as ``give,'' ``furnish,'' ``send,'' and 
``deliver.'' The Commission believes that, in general, these terms 
are sufficiently broad to accommodate the contemplated electronic 
transmission of documents by or on behalf of the broker-dealer, 
transfer agent, or investment adviser and, when called for, from a 
customer to a broker-dealer, transfer agent, or investment adviser. 
But see infra notes 12 and 50.
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    This interpretation is intended to provide broker-dealers, transfer 
agents, and investment advisers with guidance in using electronic media 
to satisfy delivery requirements under the federal securities laws. 
This release generally covers those requirements that obligate broker-
dealers to deliver information to customers, obligate transfer agents 
to deliver information upon written request, and obligate investment 
advisers to deliver information to their clients or prospective 
clients. Broker-dealers and investment advisers also may rely on this 
interpretation in obtaining customers' and clients' consents as 
required under certain provisions of the Exchange and Advisers Acts and 
the rules

[[Page 24646]]

thereunder.12 A discussion of the information delivery 
requirements covered by this interpretation is provided in section III 
of this release (``Covered Delivery Requirements''). Unless the 
Commission indicates otherwise, this interpretive release also is 
intended to apply to all rules promulgated under the Exchange and 
Advisers Acts, including rules promulgated subsequent to the issuance 
of this release, requiring broker-dealers or investment advisers to 
deliver information to customers or clients, and to rules requiring 
transfer agents to deliver information in response to written requests.
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    \12\ In connection with transactions in penny stocks, however, 
the Commission believes that in order to fulfill the purposes of the 
Securities Enforcement Remedies and Penny Stock Reform Act of 1990, 
broker-dealers should continue to have customers manually sign and 
return in paper form any documents that require a customer's 
signature or written agreement. See infra note 50.
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A. General

    This discussion is intended to complement the discussion in the 
October Interpretive Release and to provide general guidance concerning 
issues under the Exchange and Advisers Acts. The Commission believes 
that broker-dealers, transfer agents, and investment advisers should be 
able to satisfy their obligations under the federal securities laws to 
deliver information required under the Covered Delivery Requirements by 
electronic distribution. The framework set forth in the October 
Interpretive Release is applicable to such electronic distribution.
    In the October Interpretive Release, the Commission stated that it 
would view information distributed through electronic means as 
satisfying the delivery or transmission requirements of the federal 
securities laws if such distribution results in the delivery to the 
intended recipients of substantially equivalent information as such 
recipients would have if the required information were delivered to 
them in paper form.13 The Commission is not specifying the 
electronic medium or source that broker-dealers, transfer agents, and 
investment advisers may use.
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    \13\ October Interpretive Release, supra note 1, at 53460. See 
also supra example 7.
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    Like paper documents, electronically delivered documents must be 
prepared and delivered in a manner consistent with the federal 
securities laws. Regardless of whether information is delivered in 
paper form or by electronic means, it should convey all material and 
required information. If a paper document is required to present 
information in a certain order, for instance, then the information 
delivered electronically should be in substantially the same 
order.14
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    \14\ For a discussion of how requirements to present information 
in a certain order may be applied to documents containing 
hyperlinks, see example 51 in the October Interpretive Release. Id. 
53466.
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    Moreover, regardless of whether information is delivered in paper 
or electronic form, broker-dealers and investment advisers must 
reasonably supervise firm personnel with a view to preventing 
violations.15 Thus, broker-dealers and investment advisers should 
consider the need for systems and procedures to deter or detect 
misconduct by firm personnel in connection with the delivery of 
information, whether by electronic or paper means.16
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    \15\ See Exchange Act Sec. 15(b)(4)(E); Advisers Act 
Sec. 203(e)(5). See also NASD Rules of Fair Practice Sec. 27; NYSE 
Rule 342.
    \16\ See, e.g., In re: Bryant, Securities Exchange Act Release 
No. 32357 (May 24, 1993), (Commission upheld a finding of the 
National Association of Securities Dealers, Inc. that, among other 
things, the failure to develop procedures to supervise a registered 
representative, who sent a false confirmation statement on behalf of 
the broker-dealer, and to enforce existing procedures constituted a 
failure to supervise on the part of the president of the firm).
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    The Commission believes that, as a matter of policy, a person who 
has a right to receive a document under the federal securities laws and 
chooses to receive it electronically, should be provided with the 
information in paper form whenever specifically requesting 
paper.17
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    \17\ For example if a person revokes consent to receiving 
information electronically, even following delivery of the 
information, a paper copy should be delivered upon request. 
Revocation, however, is not a prerequisite to requesting a paper 
copy.
    The Commission understands that it can be very costly for 
broker-dealers to maintain records for long periods of time. This is 
particularly true with respect to information that is specific to a 
customer's account or to a transaction, such as the type of 
information defined below as Personal Financial Information. See 
infra section II.B. For this reason, the Commission has limited the 
time period that broker-dealers must preserve records required to be 
made under Exchange Act Rules 17a-3. 17 CFR 240.17a-3. Specifically, 
Exchange Act Rule 17a-4 requires broker-dealers to preserve records 
for a period of six years (3 years in the case of certain types of 
information), the first two years in an easily accessible place. 17 
CFR 240.17a-4. For these same reasons, the Commission believes it is 
reasonable to expect that broker-dealers would provide customers 
with information in paper form upon request for a period of two 
years. Transfer agents and investment advisers are subject to 
similar recordkeeping requirements. 17 CFR 250.17Ad-6 and 240.17Ad-
7; 17 CFR 275.204-2.
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    In the October Interpretive Release, the Commission discussed 
issues of notice and access that should be considered in determining 
whether the legal requirements pertaining to delivery or transmission 
of documents have been satisfied,18 and stated that persons using 
electronic delivery of information should have reason to believe that 
any electronic means so selected will result in the satisfaction of the 
delivery requirements.19 The Commission believes that broker-
dealers, transfer agents, and investment advisers should apply the same 
considerations in using electronic media to satisfy their delivery 
obligations under the Covered Delivery Requirements.
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    \18\ October Interpretive Release, supra note 1, at 53460-61.
    \19\ Id. at 53461.
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1. Notice
    Broker-dealers, transfer agents, and investment advisers providing 
information electronically should consider the extent to which 
electronic communication provides timely and adequate notice that such 
information is available electronically.20 When information is 
delivered on paper through the postal mail, recipients most likely will 
be made aware that they have received information that they may wish to 
review and, therefore, separate notice is not necessary. Information 
transmitted through electronic media, however, may not always provide a 
similar likelihood of notice that information has been sent that the 
recipient may wish to review.21 Broker-dealers, transfer agents, 
and investment advisers, therefore, should consider whether it is 
necessary to supplement the electronic communication with another 
communication that would provide notice similar to that provided by 
delivery in paper through the postal mail.
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    \20\ See id. at 53460. See also infra section II.B.2. regarding 
additional requirements when broker-dealers, transfer agents, and 
investment advisers send certain types of information (defined as 
Personal Financial Information) to customers.
    \21\ For example, if information is provided by physically 
delivered material (such as a computer diskette or CD-ROM) or by 
electronic mail, that communication itself generally should be 
sufficient notice. If information is made available electronically 
through a passive delivery system, such as an Internet Web Site, 
however, separate notice would be necessary to satisfy the delivery 
requirements unless the broker-dealer, transfer agent, or investment 
adviser can otherwise evidence that delivery to the customer or 
client has been satisfied.
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2. Access
    The Commission believes that customers, securities holders, and 
clients who are provided information through electronic delivery from 
broker-dealers, transfer agents, and investment advisers should have 
access to that information comparable to that which would be provided 
if the information

[[Page 24647]]

were delivered in paper form. Thus, the use of a particular medium 
should not be so burdensome that intended recipients cannot effectively 
access the information provided. Also, persons to whom information is 
sent electronically should have an opportunity to retain the 
information through the selected medium or have ongoing access 
equivalent to personal retention.22
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    \22\ For example, the intended recipient's ability to download 
or print information delivered electronically would enable a 
recipient to retain a permanent record. See October Interpretive 
Release, supra note 1, at 53460.
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3. Evidence to Show Delivery
    Providing information through postal mail provides reasonable 
assurance that the delivery requirements of the federal securities laws 
have been satisfied. The Commission believes that broker-dealers, 
transfer agents, and investment advisers similarly should have reason 
to believe that electronically delivered information will result in the 
satisfaction of the delivery requirements under the federal securities 
laws. Thus, whether using paper or electronic media, broker-dealers, 
transfer agents, and investment advisers should consider the need to 
establish procedures to ensure that applicable delivery obligations are 
met.
    Broker-dealers, transfer agents, and investment advisers may be 
able to evidence satisfaction of delivery obligations, for example, by: 
(1) obtaining the intended recipient's informed consent 23 to 
delivery through a specified electronic medium, and ensuring that the 
recipient has appropriate notice and access, as discussed above; (2) 
obtaining evidence that the intended recipient actually received the 
information, such as by an electronic mail return-receipt or by 
confirmation that the information was accessed, downloaded, or printed; 
24 or (3) disseminating information through certain facsimile 
methods. In order to ensure that information is delivered as intended, 
broker-dealers, transfer agents, and investment advisers delivering 
information using either electronic or paper-media should take 
reasonable precautions to ensure the integrity and security of that 
information.25
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    \23\ See id. at 53460. If a consent is used, the consent should 
be an informed consent. An informed consent should specify the 
electronic medium or source through which the information will be 
delivered and the period during which the consent will be effective, 
and should describe the information that will be delivered using 
such means. The broker-dealer, transfer agent, or investment adviser 
also should inform the customer that there may be potential costs 
associated with electronic delivery, such as on-line charges. Except 
where a manual signature is required under the penny stock rules, 
see infra note 50, broker-dealers may obtain consents either 
manually or electronically. In most cases in which a request for 
information is made through an electronic medium, consent to receive 
the requested information by means of electronic delivery may be 
presumed.
    In addition, if the broker-dealer, transfer agent, or investment 
adviser is relying on the consent to ensure effective delivery and 
the intended recipient revokes the consent, future documents should 
be delivered in paper.
    \24\ For example, depending on the circumstances and the 
procedures used, customers' and clients' written consent or 
acknowledgement, as required under certain Exchange and Advisers 
Acts rules and discussed infra notes 28-29 and accompanying text, 
may serve as sufficient evidence to show delivery.
    \25\ October Interpretive Release, supra note 1, at 53460, n.22.
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B. Personal Financial Information

    Certain information that broker-dealers, transfer agents, and 
investment advisers deliver is specific to a particular person's 
personal financial matters (``Personal Financial Information''). For 
example, the information reported to customers under Exchange Act Rule 
10b-10 relates to specific securities transactions and includes the 
identity and number of shares bought or sold and the net dollar price 
for the shares. Under Exchange Act Rule 10b-16, a broker-dealer that 
imposes finance charges on a customer's account during a quarterly 
period must deliver a quarterly statement disclosing, among other 
things, the account's beginning and closing balances, debits and 
credits entered during the period, the interest charged, and the rate 
or rates of interest. Similarly, under Advisers Act Rule 206(3)-2, 
investment advisers engaging in agency cross transactions involving 
clients are required to send the clients disclosure about those 
transactions.26
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    \26\ 17 CFR 275.206(3)-2(a)(2) (written confirmation of each 
transaction ``at or before the completion of each such 
transaction''); 17 CFR 275.206(3)-2(a)(3) (annual written disclosure 
statement identifying transactions). In addition, investment 
advisers having custody of client assets are required to send an 
itemized statement to each client at least quarterly showing assets 
in custody of the adviser. 17 CFR 275.206(4)-2(a)(4).
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1. Confidentiality and Security
    Broker-dealers, transfer agents, and investment advisers sending 
Personal Financial Information should take reasonable precautions to 
ensure the integrity, confidentiality, and security of that 
information, regardless of whether it is delivered through electronic 
means or in paper form. The Commission believes that broker-dealers, 
transfer agents, and investment advisers transmitting Personal 
Financial Information electronically must tailor those precautions to 
the medium used in order to ensure that the information is reasonably 
secure from tampering or alteration.
2. Consent
    Because of the need to maintain the confidentiality and security of 
Personal Financial Information, it is important that the intended 
recipient is willing to accept the delivery of such information through 
electronic media and has actual notice that the Personal Financial 
Information will be delivered electronically. Therefore, in order to 
ensure that Personal Financial Information can be delivered in a manner 
that maintains the information's confidentiality, unless a broker-
dealer, transfer agent, or investment adviser is responding to a 
request for information that is made through electronic media or the 
person making the request specifies delivery through a particular 
electronic medium, the broker-dealer, transfer agent, or investment 
adviser should obtain the intended recipient's informed consent prior 
to delivering Personal Financial Information electronically.27 
This consent will ensure that the intended recipient is willing to 
accept the delivery of Personal Financial Information through 
electronic media and has actual notice that the Personal Financial 
Information will be delivered electronically. The Commission believes 
that such consent by the customer or client to the delivery of Personal 
Financial Information may be made either by a manual signature or by 
electronic means.
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    \27\ See discussion supra note 23 regarding informed consent.
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C. Communications From Broker-Dealers' Customers and Investment 
Advisers' Clients

    In addition to requirements to deliver information, the Exchange 
Act and the Advisers Act provide for broker-dealers and investment 
advisers to ``receive'' or ``obtain'' responses from their customers or 
clients. For example, Exchange Act Rules 8c-1 and 15c2-1 require, under 
certain circumstances, broker-dealers to obtain a customer's written 
consent in order to hypothecate securities. Similarly, under the 
Advisers Act, certain provisions call for clients to consent to a 
transaction or acknowledge receipt of certain disclosures.28 The 
Commission generally views an electronic communication from a customer 
to a broker-dealer or from a client to an investment adviser as

[[Page 24648]]

satisfying the requirements for such written consent or 
acknowledgement.29
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    \28\ See, e.g. Advisers Act Secs. 205(a)(2) and 206(3); 17 CFR 
275.206(3)-2(a)(1); 17 CFR 275.206(4)-3(a)(2)(iii).
    \29\ Of course, broker-dealers and investment advisers should be 
cognizant of their responsibilities to prevent, and the potential 
liability associated with, unauthorized transactions. See, e.g., 
supra note 16. In this regard, the Commission believes that broker-
dealers and investment advisers should have reasonable assurance 
that the response received from a customer or client is authentic.
    In addition, for policy reason discussed infra note 50, the 
Commission will continue to require broker-dealers to obtain the 
manual signature of customers on certain disclosure documents 
required under Exchange Act Rules 15g-2 and 15g-9.
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D. Electronic Transmission of Non-Required Disclosure

    The guidance provided above is intended to permit broker-dealers, 
transfer agents, and investment advisers to comply with their delivery 
obligations under the federal securities laws when using electronic 
media. This interpretation does not apply to the electronic delivery of 
non-required information that in some cases is being provided 
voluntarily to customers, securities holders, and clients 30 in 
that it is not necessary (although it is, of course, permitted) to 
conform the electronic delivery of such information to the guidance in 
this release. Nevertheless, the Commission urges broker-dealers, 
transfer agents, and investment advisers to take into consideration the 
need to implement security measures when using electronic media to 
provide personal financial information.
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    \30\ See, e.g., Kimberly Weisul, Calvert Becomes First Fund to 
Offer Info On-Line; Mutual Fund Company Dodges the Security Issue, 
Investment Dealers' Digest, Jan. 22, 1996, at 9; Jon Birger, 
Prudential Web Site to Let Clients Track Their Accounts Daily, Bond 
Buyer, Oct. 18, 1995, at 10.
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    The staff also has received inquiries about the permissibility of 
using various electronic media to disseminate advertisements for an 
investment adviser's services or other information that is not subject 
to a delivery requirement. Such communications are permissible, subject 
to the same requirements and restrictions that apply to such 
communications in paper. For example, electronically disseminated 
advertisements are subject to the same prohibitions against misleading 
disclosure as advertisements in paper.31 Materials concerning an 
adviser that are potentially available to ten or more persons through 
an electronic system would be considered subject to the recordkeeping 
requirements applicable to such communications.32 Similarly, if an 
adviser uses a publicly available electronic medium such as a World 
Wide Web site to provide information about its services, the adviser 
would not qualify for the exemption from registration in section 
203(b)(3) of the Advisers Act. That exemption is available only if, 
among other things, an adviser does not hold itself out generally to 
the public as an investment adviser.
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    \31\ See 17 CFR 275.206(4)-1. Broker-dealers' advertisements and 
sales literature are subject to NASD rules, which have recently been 
amended specifically to include electronic communications. NASD, 
Notice to Members 95-74 (Sept. 1995); NASD, Notice to Members 95-80 
(Sept. 26, 1995).
    \32\ 17 CFR 275.204-2(a)(11). Broker-dealers also are subject to 
recordkeeping requirements that would be applicable to all 
electronic communications received and sent by the firm relating to 
its business. 17 CFR 17a-4(a)(4).
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III. Covered Delivery Requirements

    For clarity, below is a list of current rules under the Exchange 
Act and requirements under the Advisers Act to which broker-dealers, 
transfer agents, and investment advisers may apply the guidance 
provided in this interpretation. The Commission believes that the list 
sets forth all of the rules that require or permit communications 
between broker-dealers, transfer agents, investment advisers and 
customers, securities holders, and clients under the Exchange and 
Advisers Acts.33 The interpretation in this release is intended to 
cover all optional and required communications under the Exchange and 
Advisers Acts between broker-dealers, transfer agents, and investment 
advisers, and customers, securities holders, and clients.34
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    \33\ The summary provided of the delivery obligations under the 
Covered Delivery Requirements is intended for ease of reference 
only. It is not intended to be a statement of all the requirements 
under the rules and provisions listed, and has no legal force or 
effect. Reference should be made to the full text of the rules, 
which is published in the Code of Federal Regulations, as well as to 
relevant releases, interpretations, and no-action letters, and to 
the full text of the Exchange and Advisers Acts, 15 U.S.C. Secs. 77 
and 78, et seq.
    \34\ But see supra notes 4-10 and accompanying text. See also 
infra notes 35 and 50.
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A. Exchange Act

    Subject to the guidelines in this release, broker-dealers and 
transfer agents may fulfill their requirements to deliver information 
to customers and securities holders under the following Exchange Act 
rules: 35
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    \35\ This release does not address the prospectus delivery 
requirements under Exchange Act Rule 15c2-8. 17 CFR 240.15c2-8. 
Broker-dealer requirements to deliver a preliminary prospectus in 
connection with the issuance of securities by an issuer that has not 
previously been required to file reports pursuant to Exchange Act 
Section 13(a), 15 U.S.C. 78m(a), or 15(d), 15 U.S.C. 78o(d), were 
addressed in the October Interpretive Release. See October 
Interpretive Release, supra note 1, at 53462, n. 31.
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     Rule 8c-1, which requires broker-dealers to obtain 
customers' written consent in order to hypothecate securities under 
circumstances that would permit the commingling of customers' 
securities and to give written notice to a pledgee that, among other 
things, a security pledged is carried for the account of a 
customer.36
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    \36\ 17 CFR 240.8c-1(a)(1) and (f).
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     Rule 9b-1, which, among other things, requires a broker-
dealer to furnish to each customer, and keep current, an options 
disclosure document, prior to accepting an order to purchase or sell an 
option on behalf of that customer.37
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    \37\ 17 CFR 240.9b-1(d).
---------------------------------------------------------------------------

     Rule 10b-10, which requires a broker-dealer to give or 
send confirmation information to customers.38 In addition, broker-
dealers must furnish to customers upon written request information such 
as the factors that affect the yield calculation related to asset-based 
securities.39
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    \38\ 17 CFR 240.10b-10. This release, therefore, resolves the 
issues in the October Interpretive Release with respect to Exchange 
Act Rule 10b-10, which requires broker-dealers to send confirmations 
at or before completion of the transaction by permitting electronic 
delivery of the confirmation. 17 CFR 240.10b-10. See October 
Interpretive Release, supra note 1, at 53459, n.12.
    In a release adopting certain amendments to Rule 10b-10, the 
Commission recognized the use of a facsimile machine to send 
customer confirmation statements. At that time, however, the 
Commission believed that the use of other electronic means to send 
confirmations should be viewed on a case-by-case basis. See Exchange 
Act Release No. 34962 (Nov. 10, 1994); 59 FR 59612 (Nov. 17, 1994). 
This interpretation supersedes the view expressed in the 1994 
release.
    Broker-dealers are reminded that, when a prospectus is required 
to be delivered, it should be delivered prior to, or concurrent 
with, delivery of the confirmation. Thus, if a confirmation is sent 
by facsimile, the prospectus also should be sent by facsimile or 
equally prompt means.
    \39\ 17 CFR 240.10b-10(a)(7).
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     Rule 10b-16, which requires both initial and periodic 
written disclosure of the credit terms of margin loans.40
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    \40\ 17 CFR 240.10b-16.
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     Rule 11Ac1-3, which requires a broker-dealer to deliver to 
each customer, upon opening a new account and on an annual basis 
thereafter, an account statement disclosing the broker-dealer's 
policies relating to payment for order flow and its order routing 
policies.41
---------------------------------------------------------------------------

    \41\ 17 CFR 240.11Ac1-3.
---------------------------------------------------------------------------

     Rule 15c1-5, which requires, under specified 
circumstances, written disclosure of control if a broker-dealer or 
municipal securities dealer is controlled by, controlling, or under 
common control with the issuer of a security.42
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    \42\ 17 CFR 240.15c1-5.
---------------------------------------------------------------------------

     Rule 15c1-6, which requires a broker-dealer or municipal 
securities dealer receiving advisory fees to

[[Page 24649]]

disclose any participation or financial interest in the distribution of 
a security at or before the completion of a transaction in such 
security for the account of a customer.43
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    \43\ 17 CFR 240.15c1-6.
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     Rule 15c2-1, which requires broker-dealers to obtain 
customers' written consent in order to hypothecate securities under 
circumstances that would permit the commingling of customers' 
securities.44
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    \44\ 17 CFR 240.15c2-1(a)(1).
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     Rule 15c2-5, which requires a written statement making 
disclosures prior to effecting transactions in special insurance 
premium funding accounts that would involve an extension or arrangement 
of credit, as well as retaining for its files, a written statement 
setting forth the basis for making a determination that the arrangement 
is suitable for the customer.45
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    \45\ 17 CFR 240.15c2-5.
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     Rule 15c2-11, with regard to the requirement that broker-
dealers make certain information enumerated in the rule reasonably 
available upon request.46
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    \46\ 17 CFR 240.15c2-11(a)(4) and (a)(5).
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     Rule 15c2-12, with regard to the requirements that 
municipal securities underwriters provide, upon request, a preliminary 
official statement (if one exists) and a final official 
statement.47
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    \47\ 17 CFR 240.15c2-12.
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     Rule 15c3-2, which requires a broker-dealer to give or 
send to its customers a written notification of a free credit balance, 
that the broker-dealer may use that free credit balance in its business 
operations, and that the funds are payable upon demand of the 
customer.48
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    \48\ 17 CFR 240.15c3-2.
---------------------------------------------------------------------------

     Rule 15c3-3, which requires that broker-dealers obtain 
repurchase agreements in writing and confirm in writing the specific 
securities that are the subject of hold in custody repurchase 
agreements.49
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    \49\ 17 CFR 240.15c3-3(b)(4).
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     Rules 15g-3 through 15g-8, which require a broker-dealer, 
among other things, to disclose to its customers, both prior to 
effecting a transaction in a penny stock and on the written 
confirmation, bid and ask quotations and broker-dealer and associated 
person compensation.50
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    \50\ 17 CFR 240.15g-3 through 15g-8.
    The Commission believes that the requirements under Exchange Act 
Rules 15g-2 and 15g-9, which require broker-dealers to obtain from a 
customer prior to effecting transactions in penny stocks (1) a 
manually signed acknowledgement of the receipt of a risk disclosure 
document, (2) a written agreement to transactions involving penny 
stocks, and (3) a manually signed and dated copy of a written 
suitability statement, should not be met by means of electronic 
media. In adopting these provisions pursuant to the Securities 
Enforcement Remedies and Penny Stock Reform Act of 1990, the 
Commission intended to provide customers with an opportunity to make 
an informed, deliberate decision without the high pressure sales 
practices that sometimes are characteristic of transactions in these 
securities. For similar reasons, a facsimile copy of a customer's 
signature has not been sufficient to satisfy the requirements under 
Rules 15g-2 and 15g-9 that certain documents be manually signed and 
dated. See Exchange Act Release No. 32576 (July 2, 1993); NASD 
Notice to Members 90-65 (Oct. 1990); NASD Notice to Members 90-18 
(Mar. 1990).
    While broker-dealers may not meet the signature requirement 
under Rule 15g-9 by electronic means, the Commission believes that, 
consistent with the guidance set forth in this interpretation, they 
may meet their delivery obligations to their customers under this 
rule by electronic means. The ``risk disclosure document'' that 
broker-dealers are required to furnish to their customers under Rule 
15g-2 is subject to strict formatting and typefacing restrictions. 
In order to comply with the requirements set forth in the 
instructions to Schedule 15G, a risk disclosure document delivered 
electronically, when printed, would have to result in a document 
that meets the requirements and contains the exact text of Schedule 
15G.
    When the Commission next reviews the penny stock rules, it may 
be willing to consider a ``cooling-off'' period as an alternative to 
the requirement of a manual signature under Rules 15g-2 and 15g-9. 
The Commission requests comment on this approach.
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     Rule 17a-5, which requires a broker-dealer to send to its 
customers audited and unaudited financial statements.\51\
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    \51\ 17 CFR 240.17a-5(c).
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     Rule 17Ad-5, which requires a transfer agent to respond 
within certain time frames to written requests for the status of items 
presented for transfer, for acknowledgement of transfer instructions, 
for confirmation of a transfer agent's possession of a certificate, for 
a transcript of a person's account, or for dividend and interest 
payments.\52\
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    \52\ 17 CFR 17Ad-5. Under certain circumstances, transfer agents 
currently are permitted to respond to requests by telephone.
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B. Advisers Act

     Section 205(a)(2) of the Advisers Act, which requires an 
investment adviser to obtain its client's consent to the assignment of 
an advisory contract.\53\
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    \53\ 15 U.S.C. 80b-5(a)(2).
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     Section 205(a)(3) of the Advisers Act, which requires an 
investment adviser to notify its clients, if the adviser is organized 
as a partnership and there is a change in members of partnership.\54\
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    \54\ 15 U.S.C. 80b-5(a)(3).
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     Section 206(3) of the Advisers Act, which prohibits 
certain principal and agency transactions with a client without prior 
written disclosure about the transaction and consent of the client.\55\
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    \55\ 15 U.S.C. 80b-6(3).
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     Rule 204-3, which requires investment advisers to deliver 
a written disclosure statement, or ``brochure,'' to clients at least 48 
hours before entering into an advisory contract, unless the client has 
the right to terminate the contract without penalty within five 
business days.\56\ In addition, investment advisers are required, 
except in certain cases, to make available ``without charge'' updates 
to its brochure.\57\
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    \56\ 17 CFR 275.204-3(b). To the extent an adviser relies on 48-
hour advance delivery rather than the five-day cancellation period, 
the 48-hour period would be measured from the time at which notice 
is given to the client that the statement is available through a 
specified electronic medium or source. Investment advisers should 
have reason to believe that the nature of the system or any 
limitations on the client's access to that system will not result in 
any material delay in the client's access to the information 
following receipt of the notice.
    \57\ 17 CFR 275.204-3(c). If a client has elected to receive the 
disclosure statement electronically, and neither the adviser nor any 
system used by the adviser to disseminate updates electronically 
imposes a charge upon the client specifically for the receipt of 
this information, the Commission would consider this requirement 
satisfied, even though a system selected by a client to gain access 
to the adviser's system may impose charges for access, printing or 
downloading. Alternatively, the Commission would consider the 
requirement satisfied so long as a paper version of the update is 
available without charge, notwithstanding any charges that may be 
imposed upon a client for access, printing or downloading by the 
system used by an adviser to disseminate updates electronically.
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     Rule 205-3(d), which requires disclosure regarding 
advisory arrangements involving performance fees.\58\
---------------------------------------------------------------------------

    \58\ 17 CFR 275.205-3(d).
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     Rule 206(3)-2, which permits agency cross transactions, 
provided that the investment adviser provides general written 
disclosure about its role in the transactions, receives from clients 
consent to agency cross transactions, and sends both written 
confirmation of each transaction and an annual written disclosure 
statement.\59\
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    \59\ 17 CFR 275.206(3)-2.
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     Rule 206(4)-2, which requires certain disclosure relating 
to adviser custody of client assets.\60\
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    \60\ 17 CFR 275.206(4)-2.
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     Rule 206(4)-3, which requires certain disclosures to be 
made by solicitors who receive cash solicitation fees from advisers and 
a signed and dated acknowledgement from clients of the receipt of the 
investment advisers and solicitors written disclosure statements.\61\
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    \61\ 17 CFR 275.206(4)-3. Cf. Investment Company Act Release No. 
21260 at n. 38 (July 27, 1995), 60 FR 39574 (contemplating that 
notification required under proposed Investment Company Act Rule 3a-
4 could be provided electronically by investment advisers and other 
sponsors of investment advisory programs).

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[[Page 24650]]

IV. Additional Securities Act, Exchange Act, and Investment Company Act 
Examples

    The October Interpretive Release included a series of examples 
illustrating the general concepts set forth earlier in that release in 
order to provide guidance in applying those concepts to specific facts 
and circumstances. The Commission is publishing here the following, 
additional examples to provide further guidance and illustration. These 
examples are based on questions that have been raised with the staff by 
industry representatives since the publication of the October 
Interpretive Release. Any party (whether or not a registered investment 
company) may look to these examples for guidance.
    (1) Company XYZ places a prospectus for any securities offering on 
its electronic mail system. Company XYZ also uses its electronic mail 
system to disseminate documents required under the Exchange Act. 
Employees use the company's electronic mail in the ordinary course of 
performing their duties as employees and ordinarily are expected to 
log-on to electronic mail routinely to receive mail and communications. 
Those employees who do not log-on have alternative means of receiving 
electronic mail messages, such as having them sent to secretaries or 
co-workers who then deliver them to the employee. The electronic mail 
either includes the actual document or announces the availability of 
the document and provides information as to how to access the document 
through the local area network. The electronic mail also prominently 
states that a paper version of the document is available upon request.
    This would satisfy delivery obligations with respect to employees 
who use the company's electronic mail system in the course of 
performing their duties or who are expected to have alternative means 
made available to receive electronic mail messages.
    (2) Company XYZ places a notice announcing its unregistered 
Dividend Reinvestment Plan \62\ on its Internet Web site under a menu 
heading ``Dividend Reinvestment Plan.'' The announcement also contains 
the phone number of the Company's agent (which is independent from the 
Company) from whom additional information regarding the operation of 
the Dividend Reinvestment Plan can be obtained. Additionally, the 
Company's Internet Web site contains a hypertext link to the 
independent agent's Internet Web site where a brochure describing the 
operation of the Dividend Reinvestment Plan and an enrollment card can 
be obtained.
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    \62\ A company need not register its dividend reinvestment plan 
under the Securities Act where its involvement in the plan is 
limited to administrative or ministerial functions. For additional 
information, including a listing of permitted functions, see 
Securities Act Release No. 4790 (July 13, 1965), 30 FR 9059 (July 
20, 1965); Securities Act Release No. 5515 (July 22, 1974), 39 FR 
28520 (August 8, 1974); Securities Act Release No. 6188 (February 1, 
1980), 45 FR 8960 (February 11, 1980).
---------------------------------------------------------------------------

    This would be permissible, so long as the information on the 
Company's Internet Web site is limited to the announcement of the 
unregistered Dividend Reinvestment Plan and the name and address of the 
independent agent from whom additional information can be obtained. 
(This would be analogous to the communications that an issuer of an 
unregistered plan could make in paper format.) As with communications 
in paper format, the Company may not use its Internet Web site to 
advertise the Dividend Reinvestment Plan or its benefits. Further, the 
use of a hypertext link to the home page of the independent agent would 
be permitted; however, the Company could not provide a hypertext link 
directly to the Dividend Reinvestment Plan materials.
    (3) Brokerage firm ABC, a recordholder of Company XYZ's common 
stock, received consents from beneficial holders of Company XYZ's 
common stock for electronic delivery of Company XYZ's annual report and 
proxy materials and for electronic processing of voting instructions. 
These customers are provided with the Internet Web site address where 
Company XYZ's annual report and proxy materials are located and the 
Internet Web site address where they can provide their voting 
instructions electronically to the brokerage firm.
    The electronic processing of voting instructions from beneficial 
holders and the electronic voting of proxies would be consistent with 
the proxy rules. Issuers and others are reminded to consider any 
applicable state laws or self-regulatory organization rules.
    (4) A fund makes supplemental sales literature and its prospectus 
available through a commercial on-line service. Under section 5(b) of 
the Securities Act, sales literature, whether in paper or electronic 
form is required to be preceded or accompanied by a final prospectus 
meeting the requirements of section 10(a) of the Securities Act. By 
contrast, an advertisement satisfying the requirements of Securities 
Act Rule 134 or 482 need not be preceded or accompanied by a 
prospectus. Users could click on a box in the supplemental sales 
literature to have the prospectus downloaded or to request that a 
prospectus be mailed. While the system permits the sales literature to 
be viewed on-line, it does not allow users to view the prospectus. 
Unlike the system in example 36 in the October Interpretive Release, 
this system would not require that a user have downloaded or printed 
the prospectus before viewing the supplemental sales literature. Users 
accessing the supplemental sales literature would give specific consent 
to electronic delivery of the prospectus.
    This would not satisfy the prospectus delivery requirement because 
there would not be sufficient access to the prospectus. Because the 
system does not give users the opportunity to view the prospectus, it 
would lack the sort of reasonably comparable access to the prospectus 
and the sales literature present in examples 14, 15, and 35 in the 
October Interpretive Release. The opportunity to request that a 
prospectus be mailed or downloaded would not, under current technology, 
be considered to give investors sufficient access to the prospectus. 
Instead, it would be analogous to giving investors sales literature in 
paper with a toll-free telephone number for requesting the prospectus: 
under those circumstances the prospectus would be received later and 
would not be considered to have preceded or accompanied the sales 
literature.\63\
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    \63\ As technology develops, some users may have the capacity to 
download and view a prospectus in no more time than it takes to jump 
via hyperlink from the sales literature to the prospectus. Under 
those circumstances, the capacity to download would be considered to 
give those users reasonably comparable access to the prospectus that 
would provide sufficient access.
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    (5) A fund places its prospectus on its site on the World Wide Web 
or some other electronic system. Shareholders provide a written, 
revocable consent to receive prospectuses electronically through the 
system. The consent informs shareholders that the current version of 
each prospectus will be available continuously on the system and that 
the fund will use the quarterly account statement or quarterly 
newsletter as the means of notification of prospectus amendments. It 
also states that another means of notification may be used, but only 
after shareholders have been notified of the change by the then current 
means of notification.\64\ The fund replaces its prospectus with an 
annual amendment updating the

[[Page 24651]]

fund's financial information and making other changes.\65\ The fund has 
provided notification that the prospectus will be updated by including 
notification in the preceding account statement or shareholder 
newsletter; the notification provides the approximate date on which the 
amendment will be available. A subsequent amendment to the fund's 
prospectus reflects the addition of a redemption fee. Notification of 
the prospectus amendment has been included in the preceding statement 
or newsletter.\66\
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    \64\ A change in means of notification under such circumstances 
would also be effective in the case of notification of the 
availability of shareholder reports discussed in example 46 in the 
October Interpretive Release. October Interpretive Release, supra 
note 1.
    \65\ Under section 10(a)(3) of the Securities Act, a fund that 
continuously offers its shares would have to amend its prospectus no 
less frequently than every 16 months in order to include updated 
financial statements.
    \66\ With unscheduled material prospectus amendments for which 
such advance notice would not be feasible, the fund would need to 
use other forms of notification such as a postcard or e-mail 
message. See October Interpretive Release, supra note 1, example 43.
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    Just as the use of a newsletter or statement in example 46 in the 
October Interpretive Release constituted sufficient notice for 
effective delivery of the semi-annual reports required under the 
Investment Company Act of 1940, the use of a newsletter or statement 
here would constitute sufficient notice for effective delivery with 
respect to the scheduled prospectus update.
    (6) A fund's on-line prospectus has the same text as the paper 
version, but the text appears in a different format. For example, text 
that appears as a block in the margin of a page in the paper prospectus 
appears in a box in the flow of the text in the electronic version. The 
fund does not make a separate filing under Securities Act Rule 497 with 
respect to the electronic version.
    The mere difference in format without any difference in text would 
not qualify the electronic version as a different ``form of 
prospectus'' for which filing is required.
    (7) An investment company produces both an electronic version (such 
as a CD-ROM) and a paper version of its prospectus. Each version 
contains all information required by, and otherwise complies with, the 
applicable form and all other applicable provisions of the federal 
securities laws. The electronic version contains a movie that does not 
appear in the paper version. Each version of the prospectus indicates 
that there may be other versions of the prospectus and, if the issuer 
determines to make such other versions available, provides information 
on how to obtain such other versions.\67\ The paper version does not 
include a summary or transcript of the movie in the electronic version. 
Both versions of the prospectus are filed with the Commission as part 
of the company's registration statement, or separately pursuant to Rule 
497.\68\
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    \67\ The facts of this example should not be read as imposing 
any obligation on the issuer to make such other versions of its 
prospectus available to any person.
    \68\ Alternatively, the company may file with the Commission as 
an appendix to the prospectus the script of the movie and a fair and 
accurate narrative description of the graphic or image material. See 
October Interpretive Release, supra note 1, example 13.
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    The use of either version of the prospectus to satisfy delivery 
requirements would be permissible.\69\ The issuer (or other party to 
whom the law assigns the responsibility) remains responsible for 
ensuring that each version satisfies applicable statutory 
requirements.\70\
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    \69\ Of course, the general principles concerning electronic 
delivery, as described in the October Interpretive Release, supra 
note 1, would apply.
    \70\ See id. at 53460.
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V. Solicitation of Comments

    Any interested person wishing to submit written comments relating 
to the views expressed in this release are invited to do so by 
submitting them in triplicate to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 
6-9, Washington, D.C. 20549. Comments also may be submitted 
electronically at the following electronic mail address: rule-
[email protected]. All comment letters should refer to File Number S7-
13-96. This file number should be included on the subject line if 
comments are submitted using electronic mail. Comment is requested not 
only on the specific issues discussed in detail in the release, but on 
any other issues that should be considered in connection with 
facilitating the use of electronic media by broker-dealers, transfer 
agents, and investment advisers. Comment is sought from both the point 
of view of the sender and the intended recipient. The Commission 
further requests comment on any competitive burdens that may result 
from this interpretation. Comments must be received on or before July 
1, 1996. Comments received will be available for public inspection and 
copying in the Commission's public reading room, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Electronically submitted comment letters 
will be posted on the Commission's Internet web site (http://
www.sec.gov).

List of Subjects

17 CFR Parts 231 and 241

    Securities.

17 CFR Parts 271 and 276

    Investment companies, Securities.

Amendment to the Code of Federal Regulations

    The Commission is amending Title 17, Chapter II of the Code of 
Federal Regulations in the manner set forth below:

PART 231--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF 
1933 AND GENERAL RULES AND REGULATIONS THEREUNDER

    Part 231 is amended by adding Release No. 33-7288 and the release 
date of May 9, 1996 to the list of interpretive releases.

PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES 
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

    Part 241 is amended by adding Release No. 34-37182 and the release 
date of May 9, 1996 to the list of interpretive releases.

PART 271--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
COMPANY ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER

    Part 271 is amended by adding Release No. IC-21945 and the release 
date of May 9, 1996 to the list of interpretive releases.

PART 276--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
ADVISERS ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER

    Part 276 is amended by adding Release No. IA-1562 and the release 
date of May 9, 1996 to the list of interpretive releases.

    By the Commission.

    Dated: May 9, 1996.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12176 Filed 5-14-96; 8:45 am]
BILLING CODE 8010-01-P`