[Federal Register: May 12, 2003 (Volume 68, Number 91)]
[Rules and Regulations]
[Page 25281-25283]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12my03-3]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 241
[Release No. 34-47806]
Electronic Storage of Broker-Dealer Records
AGENCY: The Securities and Exchange Commission.
ACTION: Interpretation.
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SUMMARY: The Securities and Exchange Commission is publishing its views
on the operation of its rule permitting broker-dealers to store
required records in electronic form. Under the rule, electronic records
must be preserved exclusively in a non-rewriteable and non-erasable
format. This interpretation clarifies that broker-dealers may employ a
storage system that prevents alteration or erasure of the records for
their required retention period.
EFFECTIVE DATE: May 12, 2003.
FOR FURTHER INFORMATION: Michael A. Macchiaroli, Associate Director,
202/942-0131; Thomas K. McGowan, Assistant Director, 202/942-4886; or
Randall W. Roy, Special Counsel, 202/942-0798, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-1001.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is publishing guidance with respect to paragraph
(f)(2)(ii)(A) of Rule 17a-4, which requires broker-dealers maintaining
records electronically to use a digital storage medium or system that
``[p]reserve[s]
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the records exclusively in a non-rewriteable, non-erasable format.''
\1\
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\1\ 17 CFR 240.17a-4(f)(2)(ii)(A).
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I. Introduction
Broker-dealers are allowed to preserve records on ``electronic
storage media.'' \2\ Rule 17a-4 defines that term as ``any digital
storage medium or system.'' \3\ Paragraph (f)(2)(ii)(A) of Rule 17a-4
requires that the electronic storage media preserve the records
exclusively in a non-rewriteable and non-erasable format.\4\ The staff
has received oral requests from broker-dealers for guidance on whether
this requirement limits them to using optical platters, CD-ROMs, DVDs
or similar physical mediums to achieve this result.
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\2\ 17 CFR 240.17a-4(f).
\3\ 17 CFR 240.17a-4(f)(1)(ii).
\4\ Under the rule, the electronic storage media also must
verify automatically the quality and accuracy of the storage media
recording process; serialize the original and, if applicable,
duplicate units of storage media, and time-date for the required
period of retention the information placed on such electronic
storage media; and have the capacity to readily download indexes and
records preserved on the electronic storage media to any medium
acceptable under paragraph (f) as required by the Commission or the
self-regulatory organizations of which the member, broker, or dealer
is a member.
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II. Background
Section 17(a)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') authorizes the Commission to issue rules requiring broker-
dealers to make and keep for prescribed periods, and furnish copies
thereof, such records as necessary or appropriate in the public
interest, for the protection of investors or otherwise in furtherance
of the purposes of the Exchange Act.\5\ Pursuant to this authority, the
Commission adopted Rules 17a-3 and 17a-4. Rule 17a-3 requires broker-
dealers to make certain records, including trade blotters, asset and
liability ledgers, income ledgers, customer account ledgers, securities
records, order tickets, trade confirmations, trial balances, and
various employment related documents.\6\ Rule 17a-4 specifies the
manner in which the records created in accordance with Rule 17a-3, and
certain other records produced by broker-dealers, must be
maintained.\7\ It also specifies the required retention periods for
these records.\8\ For example, many of the records, including
communications that relate to the broker-dealer's business as such,
must be retained for three years; certain other records must be
retained for longer periods.\9\
In combination, Rules 17a-3 and 17a-4 require broker-dealers to
create, and preserve in an easily accessible manner, a comprehensive
record of each securities transaction they effect and of their
securities business in general. These requirements are integral to the
Commission's investor protection function because the preserved records
are the primary means of monitoring compliance with applicable
securities laws, including antifraud provisions and financial
responsibility standards. Recent events involving the deletion of
emails by broker-dealers have affirmed the need to have measures in
place to protect record integrity.
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\5\ 15 U.S.C. 78q(a)(1).
\6\ 17 CFR 240.17a-3.
\7\ 17 CFR 240.17a-4.
\8\ Id.
\9\ See e.g. 17 CFR 240.17a-4(a)-(e).
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In 1997, the Commission amended paragraph (f) of Rule 17a-4 to
allow broker-dealers to store records electronically.\10\ The rule, by
its terms, does not limit broker-dealers to using a particular type of
technology such as optical disk. Instead, it allows them to employ any
electronic storage media, subject to certain requirements, including
that the media ``[p]reserve the records exclusively in a non-
rewriteable, non-erasable format.''\11\ This requirement does not mean
that the records must be preserved indefinitely. Like paper and
microfilm, electronic records need only be maintained for the relevant
retention period specified in the rule.
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\10\ Exchange Act Release No. 38245 (Feb. 5, 1997), 62 FR 6469
(Feb. 12, 1997) (``Adopting Release'').
\11\ 17 CFR 240.17a-4(f)(2)(ii)(A).
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III. Storing Records in a Non-Rewriteable, Non-Erasable Manner for a
Specified Period
Broker-dealers and vendors of electronic record storage systems
have asked whether broker-dealers may use, consistent with Rule 17a-
4(f), systems they describe as storing records in a manner that
prevents the records from being overwritten, erased or otherwise
altered without relying solely on the system's hardware features.
Specifically, these systems use integrated hardware and software codes
that are intrinsic to the system to prevent the overwriting, erasure or
alteration of the records. Thus, while the hardware storage medium used
by these systems (e.g., magnetic disk) is inherently rewriteable, the
integrated codes intrinsic to the system prevent anyone from
overwriting the records. Moreover, the codes used by these systems
cannot be turned off to remove this feature. Thus, broker-dealers and
venders claim these systems achieve the non-rewriteable and non-
erasable requirement without relying solely on the systems' hardware
features, such as is the case with optical platters, CD-ROMs and DVDs
where digital information is permanently written onto the medium and,
consequently, can never be changed or deleted.
One method using such a system stores a specified expiry or
retention period with each record or file system. The system blocks
record deletion or alteration by any manner of intervention until the
expiry is reached or the retention period has lapsed. At expiry, or
after the retention period, the records may be deleted from the system,
thereby freeing space for reuse.
IV. Discussion
It is the view of the Commission that Rule 17a-4 does not require
that a particular type of technology or method be used to achieve the
non-rewriteable and non-erasable requirement in paragraph
(f)(2)(ii)(A). Specifically, when we adopted Rule 17a-4(f), we stated:
The Commission is adopting a rule today, which, instead of
specifying the type of storage technology that may be used, sets
forth standards that the electronic storage media must satisfy to be
considered an acceptable method of storage under Rule 17a-4.\12\
\12\ Adopting Release, 62 FR at 6470.
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A broker-dealer would not violate the requirement in paragraph
(f)(2)(ii)(A) of the rule if it used an electronic storage system that
prevents the overwriting, erasing or otherwise altering of a record
during its required retention period through the use of integrated
hardware and software control codes. Rule 17a-4 requires broker-dealers
to retain records for specified lengths of time. Therefore, it follows
that the non-erasable and non-rewriteable aspect of their storage need
not continue beyond that period.
The Commission's interpretation does not include storage systems
that only mitigate the risk a record will be overwritten or erased.
Such systems--which may use software applications to protect electronic
records, such as authentication and approval policies, passwords or
other extrinsic security controls--do not maintain the records in a
manner that is non-rewriteable and non-erasable. The external measures
used by these other systems do not prevent a record from being changed
or deleted. For example, they might limit access to records through the
use of passwords. Additionally, they might create a ``finger print'' of
the record based on its content. If the record is changed, the
fingerprint will indicate that it was altered (but the original
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record would not be preserved). The ability to overwrite or erase
records stored on these systems makes them non-compliant with Rule 17a-
4(f).
Any system used by a broker-dealer must comply with every
requirement in paragraph (f) of the rule. Among other requirements in
paragraph (f), the broker-dealer would need to have in place an audit
system providing for accountability regarding the inputting of records
into the storage system.\13\ The audit procedures for a storage system
using integrated software and hardware codes to comply with paragraph
(f) would need to provide accountability regarding the length of time
records are stored in a non-rewriteable and non-erasable manner. This
should include senior management level approval of how the system is
configured to store records for their required retention periods in a
non-rewriteable and non-erasable manner. It would be prudent to
configure such a storage system so that records input without an expiry
or a retention period, by default, would be assigned a permanent
retention period. This would help to ensure the records are maintained
in accordance with the retention periods specified in Rule 17a-4 or
other applicable Commission rules.
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\13\ 17 CFR 240.17a-4(f)(3)(v).
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Moreover, there may be circumstances (such as receipt of a
subpoena) where a broker-dealer is required to maintain records beyond
the retention periods specified in Rule 17a-4 or other applicable
Commission rules. Accordingly, a broker-dealer must take appropriate
steps to ensure that records are not deleted during periods when the
regulatory retention period has lapsed but other legal requirements
mandate that the records continue to be maintained, and the broker-
dealer's storage system must allow records to be retained beyond the
retentions periods specified in Commission rules.
V. Conclusion
For the foregoing reasons, the Commission finds this interpretation
to be consistent with section 17 of the Exchange Act and Rule 17a-4
thereunder.
List of Subjects in 17 CFR Part 241
Securities.
Amendment to the Code of Federal Regulations
0
For the reasons set out in the preamble, the Commission is amending
title 17, chapter II of the Code of Federal Regulations as set forth
below:
PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
0
Part 241 is amended by adding Release No. 34-47806 and the release date
of May 7, 2003 to the list of interpretive releases.
By the Commission.
Dated: May 7, 2003.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11727 Filed 5-9-03; 8:45 am]
BILLING CODE 8010-01-P