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A. Rules and regulations
for general record retention:
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Paragraphs (a) and (b)(1)
of Rule 17a-4 of Securities
& Exchange Commission, list certain records
required under Rule 17a-3 that must be kept for
six and three years, respectively. The amendments
to these two paragraphs have been modified from
the reproposal to remain consistent with the modifications
to Rule 17a-3.
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B. Retention of Communications
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Paragraph (b)(4) of
Rule 17a-4 of Securities &
Exchange Commission, previously required
that each broker-dealer keep originals of all communications
received and copies of all communications sent by
the firm relating to its business as a broker-dealer,
including inter-office memoranda and communications.
With respect to memoranda, including e-mail messages,
the Securities & Exchange
Commission has stated that the content and
audience of the message determine whether a copy
must be preserved, regardless of whether the message
was sent on paper or sent electronically. The amendments
to this paragraph adopted today require by all firms,
record retention for all communications that
are subject to SRO rules regarding "communications
with the public" (such as advertising) as well,
a requirement reproposed separately as paragraph
(b)(10) of Rule 17a-4. This requirement is designed
to provide State Securities Regulators with the
ability to access these public communications records
so they can enforce their laws relating to the form
and use of public communications.
It should be noted that a written advertisement
that is never released to the public would not be
covered by this rule; however, a sales script that
is used by an associated person when communicating
with the public would be covered even if the script
itself is not delivered to the public.
The requirement, as reproposed, that "any written
procedures [a broker-dealer] uses for reviewing
the communications received or sent" has been moved
to new paragraph (e)(7) of Rule 17a-4, which requires
firms to keep all compliance, supervisory, and procedures
manuals, including any written procedures for reviewing
communications.
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C. Rules and regulations
for organizational Documents
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The Securities
& Exchange
Commission has modified paragraph (d) of
Rule 17a-4, require record retention by a
broker-dealer, i.e. to maintain certain organizational
records. Specifically, the Commission has added
language to clarify that organizational records
of legal entities not specifically delineated in
the present rule are still required to be preserved
under this rule. Various State statutes use different
terms to describe the legal entities that may be
created under their rules and the organizational
documents necessary to create those entities; accordingly,
the Commission has included in this paragraph generic
terms to describe the types of records that firms
must keep. The Commission believes that generally
broker-dealers that are not formed as corporations
or partnerships are already keeping these types
of records and that this amendment codifies current
business practices. Similar to the amendment to
paragraph (g)(3) of Rule 17a-3 noted above, the
Commission has replaced the phrase "state securities
jurisdictions and self-regulatory organizations"
in the Reproposing Release with the term "securities
regulatory authorities."
Under this paragraph, every broker-dealer is also
required to maintain copies of its Form BD and all
amendments thereto. To comply with this requirement
with respect to amendments to Form BD, a broker-dealer
is required to retain a copy of only those portions
of the Form that were amended. The Commission believes
that generally broker-dealers are already keeping
these records and that this amendment codifies current
business practices.
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D. Account Record Information
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Electronic
records retention:
New paragraph (e)(5) of Rule 17a-4 requires
broker-dealers to retain account record information
for six years. The six-year period begins either
at the time the account is closed or when the information
is replaced or updated. This provision will allow
regulators to review account record information
for at least the six years immediately prior to
the examination or investigation. Broker-dealers
generally maintain account record information for
at least the life of the account to facilitate a
number of business purposes, including suitability
determinations and supervision of accounts and representatives.
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E. Special Reports
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New paragraph (e)(6) of Rule 17a-4
requires a firm to keep for three years a copy of
all reports that a securities regulatory authority
has requested or required a specific firm to create.
Such special reports would include those reports
that are requested or required under an order or
settlement that requires the firm to produce the
report as part of the terms of the order or settlement.
The purpose of this paragraph is to clarify that
these records must be kept and to provide guidance
as to how long firms are expected to maintain these
records. This requirement is not designed to limit
the ability of securities regulatory authorities
to obtain records that are otherwise required to
be created and maintained, such as records of internal
communications required to be maintained under paragraph
(b)(4) of Rule 17a-4.
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F. Compliance, Supervisory and
Procedure Manuals
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The Commission is also adopting,
as reproposed, new paragraph (e)(7) of Rule 17a-4.
This paragraph requires firms to retain a copy of
all compliance, supervisory, and procedures manuals
describing the firm's policies and practices with
respect to compliance and supervision, as currently
in use and for three years after the termination
of the use of each manual, including any updates,
modifications, and revisions to the manuals. This
will ensure that securities regulators are able
to obtain information as to what policies and procedures
were in place at a given time.
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G. Exception Reports
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New paragraph (e)(8)(ii) of Rule
17a-4 requires firms to maintain copies of reports
produced to review for unusual activity in customer
accounts (commonly referred to as "exception reports").
This paragraph does not obligate broker-dealers
to create exception reports. Exception reports would
include reports that identify exceptional numerical
occurrences, such as frequent trading in customer
accounts, unusually high commissions, or an unusually
high number of trade corrections or cancelled transactions.
These reports will help securities regulators discover
sales practice problems such as churning, unauthorized
trading, or other indications of micro-cap fraud,
and will also provide securities regulators with
information as to what type of data may have been
available to the broker-dealer.
In lieu of retaining copies of the reports, a member,
broker or dealer may choose to promptly re-create
the reports upon request by a securities regulatory
authority. If the broker-dealer elects to re-create
exception reports instead of maintaining a copy
of the report, but the firm has changed its systems
so that it cannot re-create the same report, the
broker-dealer may provide a copy of the report in
the format presently available using historical
data, but must also provide a record explaining
each system change that affected each report. Lastly,
if the firm is unable to re-create the report in
any format for the most recent 18 months, due to
changes, for example, in a database, software, or
physical system, the rule provides that the broker-dealer
may instead provide a record of the parameters that
were used to generate the report for the time period
specified by the representative of the securities
regulatory authority. The Commission provided these
alternatives in order to make this rule less burdensome
on broker-dealers.
Many firms commented that this requirement would
be potentially counter-productive because, if firms
are required to retain copies of all reports that
they create, they would create fewer reports. However,
the Commission believes that broker-dealers will
continue to create those exception reports that
are necessary to adequately supervise their business,
and that retaining these reports will increase the
efficiency of examinations by regulators and may
reduce the examination burden on broker-dealers.
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H. Electronic Storage Media
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On February 5, 1997,
the Commission amended Rule 17a-4 to allow broker-dealers
to employ, under certain conditions, electronic
storage media to maintain its records. The Commission
proposed and is now adopting technical amendments
to that rule. The Electronic Storage Media Release
requires a broker-dealer that employs micrographic
or electronic storage media to be ready at all times
to immediately provide a facsimile enlargement upon
request by the Commission or its representatives.
It also requires a broker-dealer that exclusively
uses electronic storage media to fulfill some or
all of its record preservation requirements to contract
with a third party download provider that will file
undertakings with the broker-dealer's designated
examining authority indicating that the download
provider will furnish promptly to the Commission,
its designees or representatives, the information
necessary to download information kept on the broker-dealer's
electronic storage media. Because SROs and State
Securities Regulators are neither representatives
nor designees of the Commission but, to the extent
that they have jurisdiction over the broker-dealer
serviced by the third party download provider, are
organizations that should have access to facsimile
enlargements and download information, the Commission
is adopting these technical amendments to provide
them with access to these records. The Commission
is also adopting these technical amendments so that
when broker-dealers use the undertaking option under
Regulation ATS, SROs and State Securities Regulators
will have access to those records.
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