24644 Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Rules and Regulations

1Securities 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).

2October Interpretive Release, supra note 1, at

53459, n.12.

3The 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).

4The 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, brokerdealers, 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 16Ad7, 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 brokerdealers 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’’).

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 BrokerDealers, 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.

SUMMARY: The Securities and Exchange

Commission (‘‘Commission’’) is

publishing its views with respect to the

use of electronic media by brokerdealers, 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: rule-comments@sec.gov.

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’’).

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
Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Rules and Regulations 24645

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 noaction 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 noaction 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.

5See, e.g., National Association of Securities

Dealers, Inc. (‘‘NASD’’) Notice to Members 95–80

(Sept. 26, 1995), NASD Rules of Fair Practice § 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 brokerdealers. 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 brokerdealers 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.

6Article 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 brokerdealer’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).

7See, e.g., Treas. Reg. §§ 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).

8For 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.

9For 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.

10For 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.

11The 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.

or affect the applicability of any selfregulatory organization (‘‘SRO’’) rules,5or 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

Finally, this interpretation does not

address the existing paper filing

requirements with the Commission,8

other regulatory authorities,9 and other

third parties.10

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 brokerdealers, 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

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. Brokerdealers 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
24646 Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Rules and Regulations

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.

13October Interpretive Release, supra note 1, at

53460. See also supra example 7.

14For 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.

15See Exchange Act § 15(b)(4)(E); Advisers Act

§ 203(e)(5). See also NASD Rules of Fair Practice

§ 27; NYSE Rule 342.

16See, 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 brokerdealer, and to enforce existing procedures

constituted a failure to supervise on the part of the

president of the firm).

17For 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.

18October Interpretive Release, supra note 1, at

53460–61.

19 Id. at 53461.

20See id. at 53460. See also infra section II.B.2.

regarding additional requirements when brokerdealers, transfer agents, and investment advisers

send certain types of information (defined as

Personal Financial Information) to customers.

21For 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.

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.

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.

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

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, brokerdealers 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

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

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 brokerdealers, transfer agents, and investment

advisers should apply the same

considerations in using electronic media

to satisfy their delivery obligations

under the Covered Delivery

Requirements.

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 Brokerdealers, 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.

2. Access

The Commission believes that

customers, securities holders, and

clients who are provided information

through electronic delivery from brokerdealers, transfer agents, and investment

advisers should have access to that

information comparable to that which

would be provided if the information
Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Rules and Regulations 24647

22For 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.

23See 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.

24For 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.

25October Interpretive Release, supra note 1, at

53460, n.22.

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).

27See discussion supra note 23 regarding

informed consent.

28See, e.g. Advisers Act §§ 205(a)(2) and 206(3);

17 CFR 275.206(3)–2(a)(1); 17 CFR 275.206(4)–

3(a)(2)(iii).

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

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 brokerdealers, 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

B. Personal Financial Information

Certain information that brokerdealers, 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

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.

C. Communications From BrokerDealers’ 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
24648 Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Rules and Regulations

29Of 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 brokerdealers to obtain the manual signature of customers

on certain disclosure documents required under

Exchange Act Rules 15g–2 and 15g–9.

30See, 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.

31See 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).

33The 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 noaction letters, and to the full text of the Exchange

and Advisers Acts, 15 U.S.C. §§ 77 and 78, et seq.

34But see supra notes 4–10 and accompanying

text. See also infra notes 35 and 50.

35This 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.

36 17 CFR 240.8c–1(a)(1) and (f).

37 17 CFR 240.9b–1(d).

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-bycase 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).

40 17 CFR 240.10b–16.

41 17 CFR 240.11Ac1–3.

42 17 CFR 240.15c1–5.

satisfying the requirements for such

written consent or acknowledgement.29

D. Electronic Transmission of NonRequired 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.

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.

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 brokerdealers, transfer agents, and investment

advisers, and customers, securities

holders, and clients.34

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

• Rule 8c–1, which requires brokerdealers 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

• 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

• 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

• Rule 10b–16, which requires both

initial and periodic written disclosure of

the credit terms of margin loans.40

• 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 brokerdealer’s policies relating to payment for

order flow and its order routing

policies.41

• 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

• Rule 15c1–6, which requires a

broker-dealer or municipal securities

dealer receiving advisory fees to
Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Rules and Regulations 24649

43 17 CFR 240.15c1–6.

44 17 CFR 240.15c2–1(a)(1).

45 17 CFR 240.15c2–5.

46 17 CFR 240.15c2–11(a)(4) and (a)(5).

47 17 CFR 240.15c2–12.

48 17 CFR 240.15c3–2.

49 17 CFR 240.15c3–3(b)(4).

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 ‘‘coolingoff’’ 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.

51 17 CFR 240.17a–5(c).

52 17 CFR 17Ad–5. Under certain circumstances,

transfer agents currently are permitted to respond

to requests by telephone.

53 15 U.S.C. 80b–5(a)(2).

54 15 U.S.C. 80b–5(a)(3).

55 15 U.S.C. 80b–6(3).

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.

58 17 CFR 275.205–3(d).

59 17 CFR 275.206(3)–2.

60 17 CFR 275.206(4)–2.

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).

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

• Rule 15c2–1, which requires brokerdealers to obtain customers’ written

consent in order to hypothecate

securities under circumstances that

would permit the commingling of

customers’ securities.44

• 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

• Rule 15c2–11, with regard to the

requirement that broker-dealers make

certain information enumerated in the

rule reasonably available upon

request.46

• 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

• 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

• 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

• 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

• Rule 17a-5, which requires a brokerdealer to send to its customers audited

and unaudited financial statements.51

• 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

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

• 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

• 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

• 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

• Rule 205–3(d), which requires

disclosure regarding advisory

arrangements involving performance

fees.58

• 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

• Rule 206(4)–2, which requires

certain disclosure relating to adviser

custody of client assets.60

• 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
24650 Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Rules and Regulations

62A 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).

63As 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.

64A 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.

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 coworkers 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.

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

(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
Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Rules and Regulations 24651

65Under 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.

66With 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.

67The 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.

68Alternatively, 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.

69Of course, the general principles concerning

electronic delivery, as described in the October

Interpretive Release, supra note 1, would apply.

70See id. at 53460.

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

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

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

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: rulecomments@sec.gov. 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