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Federal Register / Vol. 62, No. 29 / Wednesday, 12, 1997 / Rules and Regulations 6469

FOR FURTHER INFORMATION CONTACT: Execution Rules.2 Accordingly, the public interest, the protection of Betsy Prout Lefler, Special Counsel, Gail Commission has determined that it is investors and the removal of Marshall-Smith, Special Counsel, or appropriate to modify the schedule to impediments to and perfection of the David Oestreicher, Special Counsel, provide a more gradual phase-in to mechanism of a national market system. (202) 942–0158, Division of Market allow market participants more time to For the Commission, by the Division of 3 Regulation, Securities and Exchange adapt to the Order Execution Rules. Market Regulation, pursuant to delegated Commission, 450 Fifth Street, NW., Mail The new schedule is as follows: On authority, 17 CFR 200.30(a)(28), (61), and Stop 5–1, Washington, DC 20549. , 1997, 50 Nasdaq securities, (62). SUPPLEMENTARY INFORMATION: and on , 1997, an additional Dated: , 1997. 50 Nasdaq securities, shall be phased-in Margaret H. McFarland, Background for compliance under the Order Deputy Secretary. Execution Rules.4 Furthermore, in On 28, 1996, the Securities [FR Doc. 97–3432 Filed 2–11–97; 8:45 am] and Exchange Commission response to the Industry Letters, the BILLING CODE 8010±01±M (‘‘Commission’’) adopted Rule 11Ac1–4, Commission is exempting responsible the ‘‘Limit Order Display Rule,’’ and brokers and dealers, electronic amendments to Rule ‘‘Ac1–1, the ‘‘ECN communications networks, exchanges, 17 CFR Part 240 Amendment,’’ to require OTC market and associations, until 14, 1997, makers and exchange specialists to from the requirements of the ECN [Release No. 34±38245; File No. S7±21±93] display certain customer limit orders, Amendment with respect to all Nasdaq RIN 3235±AF91 and to publicly disseminate the best securities not phased-in as of February prices that the OTC market maker or 24, 1997, and from the requirements of Reporting Requirements for Brokers or exchange specialist has placed in the Limit Order Display Rule with Dealers Under the Securities Exchange certain electronic communications respect to the 2350 Nasdaq securities Act of 1934 networks (‘‘ECNs’’), or to comply that will not be phased-in as of February indirectly with the ECN Amendment by 24, 1997. Under the prior schedule, all AGENCY: Securities and Exchange using an ECN that furnishes the best Nasdaq securities would have been Commission. market maker and specialist prices phased-in by 28, 1997 for ACTION: Final rule. therein to the public quotation system. compliance with the requirements of the On 20, 1997, the Order ECN Amendment. Likewise, 850 of SUMMARY: The Securities and Exchange Execution Rules became effective. As of these securities would have been Commission (‘‘Commission’’) is that date, compliance with the rules phased-in on , and another amending its broker-dealer record became mandatory for all exchange- 1500 on , 1997, for compliance preservation rule to allow broker-dealers traded securities and 50 Nasdaq with the Limit Order Display Rule. to employ, under certain conditions, securities. Compliance with the rules for The Commission believes it is electronic storage media to maintain the remaining Nasdaq securities is to be imperative to continue to phase-in records required to be retained. The completed in accordance with a implementation of the Order Execution amendments reflect a recognition of schedule established by the Rules with respect to additional Nasdaq technological developments that will Commission.1 Under the previously securities. The Commission has granted provide economic as well as time-saving announced schedule, compliance with exemptive relief to monitor operation of advantages for broker-dealers by the Order Handling Rules would have the rules carefully, and will develop a expanding the scope of recordkeeping been required with respect to another further phase-in schedule for the options while at the same time 100 Nasdaq securities on , Nasdaq securities not phased-in as of continuing to require broker-dealers to 1997, and another 850 Nasdaq securities February 24, 1997. maintain records in a manner that on February 28, 1997. In addition, on The Commission finds that the preserves their integrity. The March 28, 1997, compliance would have modifications of the compliance dates Commission is also issuing an been required with respect to all described above, and the exemptive interpretation of its record preservation remaining Nasdaq securities under the relief provided herein to responsible rule relating to the treatment of ECN Rule, and with respect to another brokers and dealers, electronic electronically generated 1500 Nasdaq securities under the Limit communications networks, exchanges, communications. Order Display Rule. Thereafter, and associations are consistent with the EFFECTIVE DATE: The amendments compliance under the Limit Order become effective , 1997. 2 See letter from Bernard L. Madoff, Securities Display Rule was to be phased-in over Industry Association, to Richard R. Lindsey, dated FOR FURTHER INFORMATION CONTACT: several months. , 1997, and letter from John N. Tognino, Michael A. Macchiaroli, Associate The Commission has been closely Securities Traders Association, to Richard R. Director (202/942–0132), Peter R. monitoring the implementation of the Lindsey, dated , 1997. Geraghty, Assistant Director (202/942– Order Execution Rules, and recently 3 The Commission also amended subsection (a)(25)(ii) of the Quote Rule, thereby expanding the 0177) or Barbara A. Stettner, Staff received two letters from representatives coverage of the Quote Rule to all exchange-traded Attorney (202/942–0734), Division of of numerous industry participants securities. Thereafter, the Commission determined Market Regulation, Securities and (‘‘Industry Letters’’) requesting that the that it was appropriate to make this aspect of the Exchange Commission, 450 Fifth Street, Commission adopt a more conservative amendments effective , 1997. See Securities Exchange Act Release No. 38110, supra note 1. The NW., Mail Stop 5–1, Washington, DC schedule for implementing the Order present order does not change that date and, 20549. therefore, the effective date of subsection (a)(25)(ii) 1 See Securities Exchange Act Release Nos. of the Quote Rule remains April 10, 1997. SUPPLEMENTARY INFORMATION 37619A ( 6, 1997) (‘‘Adopting Release’’), 4 Currently, compliance with the Order Handling 37972 ( 22, 1996), 38110 (, Rules is required for 50 of the 1000 Nasdaq I. Introduction 1997), and 38139 (, 1997). The securities with the highest average daily trading On 9, 1993, the Commission Commission notes that a broker-dealer’s duty of volume. These 50 securities have been identified by best execution discussed in the Adopting Release Nasdaq. Similarly, Nasdaq is to identify the next issued a release (‘‘Proposing Release’’) applies whether or not the security has been two groups of 50 stocks to be phased-in under the requesting comment on proposed phased-in under the Order Execution Rules. Order Handling Rules. amendments to its broker-dealer record 6470 Federal Register / Vol. 62, No. 29 / Wednesday, , 1997 / Rules and Regulations preservation rule, Rule 17a–4,1 that Therefore, the proposed rule included including optical tape.8 More recently, would allow broker-dealers to employ, safeguards against data erasure, the SIA requested clarification as to under certain conditions, optical storage provisions for immediate verification of whether the Commission considers CD– technology.2 The proposed amendments the stored material, and requirements ROM to be a form of optical disk also would codify a staff no-action for back-up facilities. Specifically, the technology.9 Commenters that position that allows broker-dealers to conditions included requirements that addressed the issue of the adequacy of use microfiche as a storage medium.3 broker-dealers using optical disk storage optical disk technology in preserving Simultaneous with the issuance of the systems employ non-rewriteable, non- handwritten records or records that Proposing Release, the Division of erasable technology that verifies contain handwritten text objected to any Market Regulation (‘‘Division’’), with automatically the quality and accuracy restrictions on the types of records the concurrence of the Commission, of the optical storage recording process, broker-dealers can maintain using issued a no-action letter allowing duplicate in a separate optical disk all optical storage technology. broker-dealers to utilize optical storage information preserved and maintained II. Description of Rule Amendments technology immediately, under certain by means of optical storage technology, conditions.4 Based on the comments serialize the original and duplicate A. Scope of Permissible Electronic received and the experience gained by optical disks, and time-date the Storage Media the Commission under the no-action information placed on the optical disks. In the Proposing Release, the letter, the Commission is adopting the In addition, to facilitate full access to Commission did not intend the proposed amendments with certain records during examinations by the self- definition of optical storage technology changes discussed herein. regulatory organizations (‘‘SROs’’) and to include only an ablative methodology Set forth below is a summary of the the Commission, broker-dealers would of storage. The Commission recognizes proposed amendments, a summary of be required to index the optical disks that other methods of electronic storage the comment letters received in and place the index on optical disk, and technology exist, including optical tape response to the Proposing Release, a would be required to have the capability and CD–ROM, which are available in a description of the final rule to readily reproduce records kept on WORM, non-rewriteable version.10 The amendments, and an interpretation optical disks in any medium acceptable Commission is adopting a rule today relating to the retention of electronically under the final rule amendment, as which, instead of specifying the type of generated communications. The required by the SROs and the storage technology that be used, Commission is also providing notice of Commission. sets forth standards that the electronic a staff related no-action position The Proposing Release also solicited storage media must satisfy to be regarding other recordkeeping comment regarding the adequacy of considered an acceptable method of requirements under the Securities optical disk technology to preserve storage under Rule 17a–4. Specifically, Exchange Act of 1934 (‘‘Exchange Act’’). handwritten records or records that because optical tape, CD–ROM, and contain handwritten text, given the The Commission’s Proposal certain other methods of electronic difficulties associated with detecting The Commission proposed to amend storage are available in WORM and can alterations made to handwritten text provide the same safeguards against its record retention rule, Rule 17a–4, to preserved through optical disk data manipulation and erasure that expand broker-dealer record retention 5 technology. optical disk provides, the final rule options by permitting broker-dealers to The Commission received 13 clarifies that broker-dealers may employ use optical storage technology for comment letters in response to the any electronic storage media that meets information required to be maintained Proposing Release.6 Several commenters the conditions set forth in the final under these rules. The Proposing explained that the description of optical rule.11 Release described optical storage storage technology in the Proposing technology as storage technology which Release included only one specific type B. Handwritten Records ‘‘allows for digital data recording in a of writing technology known as ablative In the Proposing Release, the non-rewriteable, non-erasable format, writing,7 and requested clarification that Commission expressed concern and such as write once, read many the final rule would apply to other requested comment regarding the use of (‘‘WORM’’) * * *. Non-rewriteable forms of optical disk technology that optical disk technology to preserve optical storage records digital met the requirements of the rule. In information by employing a laser heat addition, a few commenters objected to 8 The SIA commented that optical tape provides source to burn a pattern on a metallic limiting the acceptable storage medium the same safeguards against data erasure and film on a disk surface that can hold to optical disk technology and manipulation as optical disk provides but allows for recommended that the rule apply to storage of greater amounts of data. Letter from billions of bytes of data.’’ Michael D. Udoff, Chairman, Ad Hoc Record In the Proposing Release, the other electronic storage media, Retention Committee of the SIA to Jonathan G. Katz, Commission noted the importance for Secretary, SEC (, 1993). recordkeeping of ready access, 5 In response to these concerns, the Division’s no- 9 Letter from Mark A. Egert, Assistant General reliability, and permanence of records. action letter permitted optical storage of all paper Counsel, SIA to Michael A. Macchiaroli, Associate records, including handwritten records, except Director, Division of Market Regulation, SEC those records required to be made under paragraphs (, 1996) (arguing that CD–ROMs are 1 17 CFR 240.17a–4. Rule 17a–4 sets forth the (a)(6) and (a)(7) of Rule 17a–3 (proprietary and simply one of several different optical disk sizes records to be preserved by certain exchange customer order tickets). that are commercially available.) members, brokers, and dealers. 6 The comment letters are available for public 10 The Commission understands that additional 2 Securities Exchange Act Release No. 32609 (July inspection and copying in the Commission’s public methods also available in a WORM, non-rewritable 9, 1993), 58 FR 38092 (, 1993). reference room located at 450 Fifth Street, NW., version include, for example, alloying, bubble- 3 Letter from Nelson S. Kibler, Assistant Director, Washington, DC. (File No. S7–21–93). forming, moth-eye (Plasmon), phase-change, dye/ Division of Market Regulation, SEC to Robert F. 7 Ablative technology means that, by use of a polymer, and magneto-optic. Price, Alex. Brown & Sons (, 1979). laser, a pattern is burned onto a metallic film on 11 The amendment the Commission is adopting 4 Letter from Michael A. Macchiaroli, Associate an optical disk. Other methods of optical disk today also permits the use of ‘‘micrographic media’’ Director, Division of Market Regulation, SEC to technology utilize a laser to record information onto which is defined to include microfilm or Michael D. Udoff, Chairman, Ad Hoc Record the optical disk, but unlike ablative technology, the microfiche, or any similar media, which codifies an Retention Committee, Securities Industry laser does not necessarily ‘‘burn’’ a pattern onto the earlier Commission staff no-action position. See Association (‘‘SIA’’) ( 18, 1993). disk. Letter from Nelson S. Kibler, supra note 3. Federal Register / Vol. 62, No. 29 / Wednesday, February 12, 1997 / Rules and Regulations 6471 handwritten records and records C. Creation of a Duplicate Record for the Commission’s staff and its containing handwritten text. As The Proposing Release would have designees to download information from indicated in the Proposing Release, the required a broker-dealer to copy all of a broker-dealer’s electronic storage Commission’s primary concern was the information contained on an original system to another acceptable medium, that, from the standpoint of disk onto a separate, duplicate disk. The and take reasonable steps to provide examinations and enforcement of the SIA commented that broker-dealers access to information contained on a securities laws, optical disk images (as should be permitted to store the broker-dealer’s electronic storage well as microfilm or microfiche images) duplicate record on any medium system. The Commission is adopting make it difficult to detect forgery and acceptable under Rule 17a–4. The SIA this requirement substantially as alterations made to handwritten text. explained that clearing firms frequently proposed. The Commission recognizes that have to provide copies of records to F. Escrow Agent their correspondent firms that may not microfilm is a form of record retention Under the Proposing Release, broker- have optical disk technology. Therefore, for handwritten records that has been dealers would be required to keep according to the SIA, clearing firms may permitted since 1970, and the current all information necessary to be obligated to maintain certain records Commission understands few broker- download records and indices stored on in another media for the dealers currently keep documents in optical disks. Alternatively, broker- correspondents’ use.14 The Commission hard copy or paper format. The dealers who use outside service bureaus agrees that it is appropriate to permit Commission’s experience since 1970 to preserve records could place in storage of the duplicate record on any relating to the retention of handwritten escrow and keep current a copy of the medium acceptable under Rule 17a–4, records on microfilm has generally been information necessary to access the and accordingly, the final amendments positive. The Commission further format (i.e., the logical layout) of the reflect this change.15 understands that many of the larger optical disks and to download records broker-dealers no longer create D. Audit System Requirement stored on optical disks. This condition traditional order tickets (with or without was intended to ensure access to handwritten notations) because such The Proposing Release would have required a broker-dealer to ‘‘have in information preserved on optical disks broker-dealers enter most orders directly when the broker-dealer is no longer through electronic systems which place an audit system providing for accountability regarding all access to operational, when the broker-dealer automatically retain an electronic record refuses to cooperate with investigative of the trade entry. records maintained and preserved using optical storage technology and any efforts of the Commission or the SROs, In view of the existing use of changes made to every original and or when the optical disk has not been microfilm and microfiche for record duplicate optical disk.’’ Commenters properly indexed. The SIA commented retention, the Commission believes that sought clarification as to whether this that they believed this requirement allowing preservation of handwritten provision requires maintenance of a log duplicated the required third party records in electronic storage media of all persons who have the capability undertaking in the proposed would not significantly increase the or authority to access optical disks, or amendments. The third party difficulty of detecting forgery or maintenance of a log indicating each undertaking was intended to act as a alterations on these records. instance where data is added to a disk. back-up to the escrow requirement, and Accordingly, the Commission is The rule adopted by the Commission therefore the Commission does not agree permitting storage of handwritten today requires an audit system to be that it would be unnecessary and records and records containing utilized only when records required to duplicative to require broker-dealers to handwritten text using electronic be maintained under Rule 17a–4 are keep or escrow the information storage media meeting the requirements being entered or when any additions to necessary to download records from set forth in the final rule adopted existing records are made. Therefore, an optical disk. Accordingly, the final rule 12 today. Nonetheless, in the future, if audit record is not required when a adopted today includes such proposed difficulties arise in detecting abuses in record is accessed but cannot be altered requirement. handwritten records stored in electronic by the reader. III. Staff No-Action Position format, the Commission may revisit this issue both with regard to electronic E. Third Party Down-Load Provider The Commission also is providing storage media, as well as microfilm and The Proposing Release would require notice that the staff of the Division will microfiche.13 broker-dealers to have arrangements not recommend enforcement action to with at least one third party that has the the Commission if broker-dealers, 12 But see infra note 16 and accompanying text for ability to download information from transfer agents, and clearing agencies certain limited exceptions. the broker-dealer’s electronic storage fulfill their record retention and 13 Recently, the Commission published its views system to another acceptable medium. preservation requirements set forth in with respect to the use of electronic media by the following rules under the Exchange broker-dealers, transfer agents, and investment The third party must submit advisers to deliver information as required under undertakings to the SRO for the broker- Act by using electronic storage media as the Exchange Act and the Investment Advisers Act dealer indicating that it agrees to permitted by the final amendments to of 1940. Securities Exchange Act Release No. 37182 promptly furnish information necessary Rule 17a–4(f) described herein: (, 1996), 61 FR 24644 (, 1996) (‘‘May Rule 3a51–1 (17 CFR 240.3a51–1) Interpretive Release’’). As the Commission noted in the May Interpretive Release, the staff of the 14 See Letter from Michael D. Udoff, supra note Rule 15a–6 (17 CFR 240.15a–6) Division also reminds broker-dealers, transfer 8. Rule 15c1–7 (17 CFR 240.15c1–7) agents, and clearing agencies of their 15 Another issue raised by several commenters Rule 15c2–5 (17 CFR 240.15c2–5) responsibilities to prevent, and the potential concerns the time at which the duplicate must be Rule 15c2–11 (17 CFR 240.15c2–11) liability associated with, unauthorized transactions. created. Broker-dealers will be permitted to wait to Rule 15c3–1 (17 CFR 240.15c3–1) In this regard, broker-dealers, transfer agents, and make the duplicate until the original optical disk Rule 15c3–3 (17 CFR 240.15c3–3) clearing agencies should have reasonable assurance is full, provided that broker-dealers maintain the that information preserved by means of electronic duplicate data on another acceptable medium such Rule 15g–3 (17 CFR 240.15g–3) storage media, including customer signatures, is as paper or micrographic media until it creates the Rule 15g–4 (17 CFR 240.15g–4) authentic. See id. at note 29. duplicate optical disk. Rule 15g–5 (17 CFR 240.15g–5) 6472 Federal Register / Vol. 62, No. 29 / Wednesday, February 12, 1997 / Rules and Regulations

Rule 15g–6 (17 CFR 240.15g–6) The Commission understands that the regulatory requirements for broker- Rule 17a–2 (17 CFR 240.17a–2) broker-dealers use e-mail and the dealers using currently accepted media Rule 17a–5 (17 CFR 240.17a–5) Internet to communicate important for record retention purposes (i.e., Rule 17a–6 (17 CFR 240.17a–6) information relating to the broker- paper, microfilm, or microfiche). A copy Rule 17a–7 (17 CFR 240.17a–7) dealer’s business internally, to of the certification is attached to this Rule 17a–8 (17 CFR 240.17a–8) customers, and to the general public. release as Appendix A. Rule 17f–1 (17 CFR 240.17f–1) The Commission is also aware that VI. Paperwork Reduction Act Rule 17f–2 (17 CFR 240.17f–2) many broker-dealers use such electronic Rule 17Ad–6 (17 CFR 240.17Ad–6) systems to communicate about issues In connection with the Proposing Rule 17Ad–10 (17 CFR 240.17Ad–10) unrelated to the business of the broker- Release, on , 1993, notice was Rule 17Ad–11 (17 CFR 240.17Ad–11) dealer. Consistent with the published in the Federal Register 20 Rule 17Ad–13 (17 CFR 240.17Ad–13) Commission’s recommendation to the that, pursuant to the Paperwork Rule 17Ad–15 (17 CFR 240.17Ad–15) SROs regarding the appropriate Reduction Act of 1980 (‘‘Old PRA’’), 21 The staff of the Division believes that standard for prior supervisory review the Commission had submitted to the the recordkeeping requirements under for electronic communications, the Office of Management and Budget Exchange Act Rules 15g–2 and 15g–9 16 Commission believes that for record (‘‘OMB’’) request for approval of the should not be met by means of retention purposes under Rule 17a–4, proposed amendments to Rule 17a–4. electronic storage media, and the the content of the electronic No comments were received with records required by such rules should communication is determinative, and respect to the notice. The OMB control be maintained and preserved in paper therefore broker-dealers must retain number, 3235–0279, was originally format for the prescribed time period. only those e-mail and Internet issued in 1993 and was reauthorized on Rules 15g–2 and 15g–9 require broker- communications (including inter-office , 1996. Comment was sought dealers to obtain from a customer prior communications) which relate to the with respect to the reauthorization and to effecting transactions in penny stocks broker-dealer’s ‘‘business as such.’’ no comment was received. 22 The OMB (1) a manually signed acknowledgement number was issued pursuant to the Old V. Summary of Final Regulatory PRA, prior to the amendment of such of the receipt of a risk disclosure Flexibility Analysis document, (2) a written agreement to act in 1995. transactions involving penny stocks, The Regulatory Flexibility Act, which The Proposing Release included and (3) a manually signed and dated became effective on , 1981, certain requirements that would be copy of a written suitability statement. imposes procedural steps applicable to unique to broker-dealers which chose to Because the Commission, in the May agency rulemaking that has a use optical storage systems and which Interpretative Release, did not permit ‘‘significant economic impact on a qualified as collections of information the use of electronic media to satisfy the substantial number of small entities.’’ 19 under the Old PRA. The final rule requirements of Rules 15g–2 and 15g–9, The Chairman of the Commission has amendments do not contain substantive the staff of the Division believes it certified pursuant to the Regulatory modifications to the collections of would not be appropriate to permit the Flexibility Act that the final information originally set forth in the storage of records required by such rules amendments to Rule 17a–4 will not Proposing Release. The collection of using electronic storage media.17 have a significant economic impact on information is in accordance with the a substantial number of small entities clearance requirements of 44 U.S.C. IV. Electronic Communications because the amendments do not alter 3507. The final amendments clarify that Finally, the Commission is aware that broker-dealers may use any electronic many questions have been raised which will require prior supervisory review of storage media that meets the regarding the applicability of Rule 17a– those communications with the general public and requirements of the rule. Since the final customers which include advertisements, market rule amendment expands the scope of 4(b)(4) to electronic mail letters, sales literature, and similar types of communications (‘‘e-mail’’) and Internet communications, as well as research reports. The recordkeeping options and does not communications. In the May proposal also requires members to develop alter the options currently permitted Interpretive Release, the Commission reasonable procedures for review of registered under the rule, broker-dealers may representatives’ communications with the public chose to continue to store information discussed its beliefs regarding the relating to their business. See File No. SR–NYSE– adaptation of SRO supervisory review 96–26. using paper, microfilm, or microfiche, requirements governing 19 Although Section 601(b) of the Regulatory or may chose to employ electronic communications with customers to Flexibility Act defines the term ‘‘small entity,’’ the storage media as permitted by the final statute permits agencies to formulate their own rule amendments. If broker-dealers accommodate the use of electronic definitions. The Commission has adopted communications by broker-dealers. The definitions of the term ‘‘small entity’’ for purposes chose the electronic storage media Commission recommended that the of Commission rulemaking in accordance with the option, then compliance with the SROs work with broker-dealers with Regulatory Flexibility Act. Those definitions are set collection of information requirement is forth in Rule 0–10, 17 CFR 240.0–10. See Securities mandatory. respect to the adaptation of such rules Exchange Act Release No. 18452 (, 1982), and recommended that the SRO rules 47 FR 5215 (, 1982). A broker-dealer is A. Collection of Information Under Rule concerning the supervisory a ‘‘small business’’ or ‘‘small organization’’ under 17a–4 requirements for electronic Rule 0–10 if the broker-dealer (i) had total capital (net worth plus subordinated liabilities) of less than Under the final rule amendments, communications ‘‘should be based on $500,000 on the date in the prior fiscal year as of users of electronic storage media must the content and audience of the message which its audited financial statements were have in place an audit system that and not merely the electronic form of prepared pursuant to 17 CFR 240.17–5(d) or, if not provides for accountability regarding the communication.’’ 18 required to file such statements, a broker-dealer that had total net capital (net worth plus subordinated inputting of records required to be liabilities) of less than $500,000 on the last business maintained and preserved pursuant to 16 17 CFR 240.15g–2 and 240.15g–9. day of the preceding fiscal year (or in the time that 17 See May Interpretive Release at note 50. it has been in business, if shorter); and (ii) is not 18 See id. at note 5. The Commission notes that affiliated with any person (other than a natural 20 58 FR 42992 (August 12, 1993). the New York Stock Exchange, Inc. (‘‘NYSE’’) has person) that is not a small business or small 21 44 U.S.C. 3501 et seq. submitted a proposal to modify its supervisory rules organization as defined in 17 CFR 240.0–10. 22 61 FR 14586 (, 1996). Federal Register / Vol. 62, No. 29 / Wednesday, February 12, 1997 / Rules and Regulations 6473

Rules 17a–3 and 17a–4 to electronic rules and regulations of the Commission comply with the following storage media and inputting of any and the SROs. The collections of requirements: changes made to every original and information generally will not be made (i) The member, broker, or dealer duplicate record maintained and publicly available. The ultimate purpose must notify its examining authority preserved thereby. Although the of the final amendment is the protection designated pursuant to section 17(d) of Commission is not specifying the of investors. the Act (15 U.S.C. 78q(d)) prior to contents of each audit system, data employing electronic storage media. If automatically or otherwise stored (in the VII. Statutory Analysis employing any electronic storage media computer or in hard copy) regarding Pursuant to the Securities Exchange other than optical disk technology inputting of records and changes to Act of 1934 and particularly section (including CD–ROM), the member, existing records will be part of that 17(a)(1) thereof, 15 U.S.C. 78q(a)(1), the broker, or dealer must notify its system. The Commission envisions that Commission is adopting amendments to designated examining authority at least names of individuals actually inputting § 240.17a–4 of Title 17 of the Code of 90 days prior to employing such storage records and making particular changes, Federal Regulations in the manner set media. In either case, the member, and the identity of documents changed forth below. broker, or dealer must provide its own and the identity of new documents representation or one from the storage List of Subjects in 17 CFR Part 240 created, are the kind of information that medium vendor or other third party automatically would be collected Brokers, Reporting and recordkeeping with appropriate expertise that the pursuant to the audit system requirements, Securities. selected storage media meets the requirement. The results of the audit conditions set forth in this paragraph Text of Final Rule system must be available for (f)(2). examination by the staffs of the In accordance with the foregoing, (ii) The electronic storage media must: Commission and the appropriate SROs Title 17, chapter II, part 240 of the Code (A) Preserve the records exclusively and must be preserved for the time of Federal Regulations is amended as in a non-rewriteable, non-erasable required for the audited records. follows: format; In addition, the entity employing the (B) Verify automatically the quality electronic storage media must organize PART 240ÐGENERAL RULES AND and accuracy of the storage media and index all information maintained REGULATIONS, SECURITIES recording process; on both original and duplicate EXCHANGE ACT OF 1934. (C) Serialize the original and, if electronic storage media, and each applicable, duplicate units of storage index must be duplicated. The entity 1. The authority citation for part 240 media, and time-date for the required employing the technology must also continues to read in part as follows: period of retention the information maintain, keep current, and provide Authority: 15 U.S.C. 77c, 77d, 77g, 77j, placed on such electronic storage media; promptly upon request by the 77s, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, and Commission or SROs all information 78d, 78f, 78i, 78j, 78k, 78k–1, 78l, 78m, 78n, (D) Have the capacity to readily necessary to access records and indexes 78o, 78p, 78q, 78s, 78w, 78x, 78ll(d), 79q, download indexes and records stored on electronic storage media, or 79t, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, preserved on the electronic storage 80b–4 and 80b–11, unless otherwise noted. escrow and keep current a copy of the media to any medium acceptable under physical and logical file format, the field * * * * * this paragraph (f) as required by the format of all different information types 2. Section 240.17a–4 is amended by Commission or the self-regulatory written on the electronic storage media revising paragraph (f) to read as follows: organizations of which the member, and the source code, together with § 240.17a±4 Records to be preserved by broker, or dealer is a member. appropriate documentation and certain exchange members, brokers and (3) If a member, broker, or dealer uses information necessary to access records dealers. micrographic media or electronic and indexes. * * * * * storage media, it shall: The recordkeeping requirements (i) At all times have available, for described above are unlikely to prove (f) The records required to be examination by the staffs of the burdensome to users because the maintained and preserved pursuant to Commission and self-regulatory recordkeeping requirements are §§ 240.17a–3 and 240.17a–4 may be organizations of which it is a member, specifically tied to the design and use of immediately produced or reproduced on facilities for immediate, easily readable electronic storage media. To the extent ‘‘micrographic media’’ (as defined in projection or production of that the final rule amendments create this section) or by means of ‘‘electronic micrographic media or electronic any burden on users, however, such storage media’’ (as defined in this storage media images and for producing burden should be small, even negligible, section) that meet the conditions set easily readable images. relative to the reduced recordkeeping forth in this paragraph and be (ii) Be ready at all times to provide, burden that will result from broker- maintained and preserved for the and immediately provide, any facsimile dealers’ ability to use electronic storage required time in that form. enlargement which the Commission or media. (1) For purposes of this section: its representatives may request. (i) The term micrographic media (iii) Store separately from the original, B. Proposed Use of the Information means microfilm or microfiche, or any a duplicate copy of the record stored on The information contained in the similar medium; and any medium acceptable under records required to be preserved by (ii) The term electronic storage media § 240.17a–4 for the time required. those subject to Rule 17a–4 will be used means any digital storage medium or (iv) Organize and index accurately all by examiners and other representatives system and, in the case of both information maintained on both original of the Commission and the SROs to paragraphs (f)(1)(i) and (f)(1)(ii) of this and any duplicate storage media. ensure that broker-dealers are in section, that meets the applicable (A) At all times, a member, broker, or compliance with applicable financial conditions set forth in this paragraph (f). dealer must be able to have such responsibility, antifraud, and (2) If electronic storage media is used indexes available for examination by the antimanipulation rules as well as other by a member, broker, or dealer, it shall staffs of the Commission and the self- 6474 Federal Register / Vol. 62, No. 29 / Wednesday, February 12, 1997 / Rules and Regulations regulatory organizations of which the to any medium acceptable under Rule 17a– Securities Exchange Act of 1934 broker or dealer is a member. 4. (‘‘Exchange Act’’), the net capital rule, (B) Each index must be duplicated Furthermore, the undersigned hereby to permit broker-dealers to employ and the duplicate copies must be stored undertakes to take reasonable steps to theoretical option pricing models in separately from the original copy of provide access to information contained on determining net capital requirements for the broker’s or dealer’s electronic storage each index. media, including, as appropriate, listed options and related positions. (C) Original and duplicate indexes arrangements for the downloading of any Alternatively, broker-dealers may elect a must be preserved for the time required record required to be maintained and strategy-based methodology. The for the indexed records. preserved by the broker or dealer pursuant to amendments are intended to simplify (v) The member, broker, or dealer Rules 17a–3 and 17a–4 under the Securities the net capital rule’s treatment of must have in place an audit system Exchange Act of 1934 in a format acceptable options for capital purposes and more providing for accountability regarding to the Commission’s staff or its designee. accurately reflect the risk inherent in inputting of records required to be Such arrangements will provide specifically broker-dealer options positions. that in the event of a failure on the part of maintained and preserved pursuant to EFFECTIVE DATE: The amendments §§ 240.17a–3 and 240.17a–4 to a broker or dealer to download the record into a readable format and after reasonable become effective , 1997. electronic storage media and inputting notice to the broker or dealer, upon being FOR FURTHER INFORMATION CONTACT: of any changes made to every original provided with the appropriate electronic Michael A. Macchiaroli, Associate and duplicate record maintained and storage medium, the undersigned will Director (202) 942–0131, Peter R. preserved thereby. undertake to do so, as the Commission’s staff Geraghty, Assistant Director (202) 942– (A) At all times, a member, broker, or or its designee may request. 0177, or Louis A. Randazzo, Special dealer must be able to have the results * * * * * Counsel (202) 942–0191, Division of of such audit system available for By the Commission. Market Regulation, Securities and examination by the staffs of the Dated: February 5, 1997. Exchange Commission, 450 Fifth Street, Commission and the self-regulatory Margaret H. McFarland, N.W., Mail Stop 5–1, Washington, D.C. organizations of which the broker or Deputy Secretary. 20549. dealer is a member. (B) The audit results must be Note: Appendix A to the Preamble will not SUPPLEMENTARY INFORMATION: appear in the Code of Federal Regulations. preserved for the time required for the I. Introduction audited records. Appendix A—Regulatory Flexibility Act (vi) The member, broker, or dealer Certification The Commission is adopting amendments to Rule 15c3–1 under the must maintain, keep current, and I, Arthur Levitt, Chairman of the Securities provide promptly upon request by the and Exchange Commission, hereby certify Exchange Act to permit broker-dealers staffs of the Commission or the self- pursuant to 5 U.S.C. 605(b) that the final to employ theoretical option pricing regulatory organizations of which the amendments to Rule 17a–4 set forth in models to calculate required net capital member, broker, or broker-dealer is a Securities Exchange Release No. 34–38245 for listed options and the related member all information necessary to will not have a significant economic impact positions that hedge those options. In on a substantial number of small entities. access records and indexes stored on the adopting these amendments, the Specifically, the amendments do not alter the Commission is continuing its process of electronic storage media; or place in regulatory requirements for broker-dealers escrow and keep current a copy of the revising the net capital rule that was using currently accepted media for record contemplated when the Commission physical and logical file format of the retention purposes (i.e., paper, microfilm, or microfiche). Instead, the amendments expand solicited comments on a range of capital electronic storage media, the field 1 format of all different information types the record retention media options by related issues in 1993. The written on the electronic storage media allowing broker-dealers to utilize certain amendments being adopted today were and the source code, together with the electronic storage media to store records proposed in initial form in March of appropriate documentation and required under 17 CFR 240.17a–3 and 1994 and would allow broker-dealers to 240.17a–4. Accordingly, the amendments use an options pricing model to information necessary to access records will not change the impact of current and indexes. determine capital charges for listed regulatory record preservation requirements options and related positions.2 (vii) For every member, broker, or on a substantial number of small entities. dealer exclusively using electronic Simultaneously with the Commission’s Dated: January 31, 1997. proposal, the Division of Market storage media for some or all of its Arthur Levitt, record preservation under this section, Regulation (‘‘Division’’) issued a no- Chairman. at least one third party (‘‘the action letter allowing broker-dealers to undersigned’’), who has access to and [FR Doc. 97–3426 Filed 2–11–97; 8:45 am] utilize the options pricing approach 3 the ability to download information BILLING CODE 8010±01±P immediately. Based on the experience from the member’s, broker’s, or dealer’s gained by the Commission under the no- electronic storage media to any action letter, and the nature of the 17 CFR Part 240 acceptable medium under this section, comments received during the public shall file with the designated examining [Release No. 34±38248; File No. S7±7±94] comment period, the Commission is authority for the member, broker, or RIN 3235±AG14 1 Securities Exchange Act Release No. 32256 (May dealer the following undertakings with 4, 1993), 58 FR 27486 (, 1993) (‘‘Concept respect to such records: Net Capital Rule Release’’). The undersigned hereby undertakes to 2 Securities Exchange Act Release No. 33761 AGENCY: Securities and Exchange furnish promptly to the U.S. Securities and (, 1994), 59 FR 13275 (, 1994) Commission. (‘‘Proposing Release’’). Exchange Commission (‘‘Commission’’), its 3 designees or representatives, upon reasonable ACTION: Final rule. Letter from Brandon Becker, Division of Market Regulation, SEC to Mary L. Bender, First Vice request, such information as is deemed President, CBOE and Timothy Hinkas, Vice SUMMARY: necessary by the Commission’s or designee’s The Securities and Exchange President, The Options Clearing Corporation staff to download information kept on the Commission (‘‘Commission’’) is (‘‘OCC’’) (March 15, 1994) (‘‘1994 No-Action broker’s or dealer’s electronic storage media amending Rule 15c3–1 under the Letter’’).