[Federal Register: May 29, 2003 (Volume 68, Number 103)]
[Rules and Regulations]
[Page 32307-32311]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29my03-23]
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Part V
Securities and Exchange Commission
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17 CFR Part 241
Books and Records Requirements for Brokers and Dealers Under the
Securities Exchange Act of 1934; Final Rule
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 241
[Release No. 34-47910]
Books and Records Requirements for Brokers and Dealers Under the
Securities Exchange Act of 1934
AGENCY: Securities and Exchange Commission.
ACTION: Interpretation.
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SUMMARY: The Securities and Exchange Commission is publishing guidance
to clarify certain issues relating to broker-dealer books and records
rules. Some of these issues have been raised as a result of the
amendments to these rules that were adopted on October 26, 2001.
EFFECTIVE DATE: May 29, 2003.
FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at (202) 942-0131; Thomas K. McGowan, Assistant Director, at
(202) 942-4886; or Bonnie L. Gauch, Attorney, at (202) 942-0765; Office
of Risk Management and Control, Division of Market Regulation, United
States Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-1001.
SUPPLEMENTARY INFORMATION:
I. Introduction
Section 17(a)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') requires registered broker-dealers to make, keep, furnish, and
disseminate reports the Securities and Exchange Commission (the
``Commission'') deems ``necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of this title.'' Rule 17a-3\1\ and Rule 17a-4\2\ under
the Exchange Act (the ``Books and Records Rules'') specify minimum
requirements with respect to the records that broker-dealers must make,
and how long those records and other documents relating to a broker-
dealer's business must be kept.
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\1\ 17 CFR 240.17a-3.
\2\ 17 CFR 240.17a-4.
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The Commission amended its Books and Records Rules on October 26,
2001\3\ to clarify and expand recordkeeping requirements with respect
to purchase and sale documents, customer records, associated person
records, customer complaints, and certain other matters. The amendments
expanded the types of records that broker-dealers must maintain and
required broker-dealers to maintain or promptly produce certain records
at each office to which those records relate. The amendments were
designed to assist securities regulators, particularly State \4\
securities regulators, when conducting sales practice examinations of
broker-dealers. Certain interpretive questions have arisen regarding
these amendments.
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\3\ See Exchange Act Release No. 44992 (October 26, 2001), 66 FR
55818 (Nov. 2, 2001) (the ``Adopting Release'').
\4\ Exchange Act Sec. 3(a)(16) states, ``the term `State' means
any State of the United States, the District of Columbia, Puerto
Rico, the Virgin Islands, or any other possession of the United
States'' (15 U.S.C. 78c(a)(16)).
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II. Interpretive Questions
The Commission has received questions from broker-dealers, industry
representatives, and regulators, requesting clarification of certain
requirements under the Books and Records Rules. These questions, along
with the Commission's answers to these questions are as follows:
Question 1
New paragraphs (a)(6) and (a)(7) of Rule 17a-3 require a broker-
dealer to create a record of each brokerage order and for each purchase
or sale for the account of the broker-dealer showing, among other
things, the time the order was received. Under Rules 17a-3(a)(6) and
(a)(7), is the broker-dealer required to record the time of receipt of
an order to purchase a mutual fund, variable annuity, or direct
participation plan that is effected on a basis other than
subscription--way where the purchase price is determined only once
daily at the close of business?
Answer 1
If the time of receipt is material to an order, then the broker-
dealer must record the time of receipt on the order ticket. Generally,
for many types of transactions, the time of receipt may be material to
the price or other terms of the execution of the order. For example,
recording the time of receipt would be material if an intra-day time
deadline existed that determined whether the order was priced as-of the
date the order was received or the price as-of the next day. If the
broker-dealer does not record the time of receipt of an order, the
broker-dealer must be able to demonstrate that the time of receipt is
not material to that order.
Question 2
New Rule 17a-3(a)(17) provides that each registered broker-dealer
must create an account record for ``each account with a natural person
as a customer or owner.'' Broker-dealers have specifically asked
whether the term ``account with a natural person as a customer or
owner'' would include accounts of a corporation, partnership, limited
liability company, or trust, or a Uniform Gift/Transfer to Minor Act
(commonly referred to as an UGMA or UTMA) account, IRA account, or 401k
account?
Answer 2
The account record requirement of Rule 17a-3(a)(17) does not apply
to an account for which the customer or owner is not a natural person,
such as the account of a corporation, partnership, limited liability
company, or REIT. Similarly, where the account is owned by the trustees
of the trust or a trust that is a legal entity separate from the
holders of its beneficial interests (which may be natural persons) the
account record requirement does not apply. However, the term ``owner''
in Rule 17a-3(a)(17) would generally apply to an UGMA/UTMA account, an
IRA account and a 401k account where the beneficiary of the account is
a natural person.
We remind broker-dealers, however, that paragraph (a)(17)(i)(D) of
Rule 17a-3 provides that the account record requirement only applies to
accounts for which the broker-dealer is, or has within the past 36
months been, required to make a suitability determination under the
Federal securities laws or under the requirements of a self-regulatory
organization of which the broker-dealer is a member. If the firm has
not been, within the past 36 months, required to make a suitability
determination for recommendations about securities made to the customer
of an account under federal laws or the requirements of a self-
regulatory organization of which it is a member, then the firm would
not be required to make the records described in new paragraph 17a-
3(a)(17).
As noted in the Adopting Release, application of new paragraph 17a-
3(a)(17) does not limit any other Federal law or regulation or SRO rule
that requires that a broker-dealer collect information regarding its
customers.\5\
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\5\ See text accompanying note 43 in the Adopting Release. 66 FR
55818, at 55822 (Nov. 2, 2001).
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Question 3
New Rule 17a-3(a)(17) applies to an ``account with a natural person
as a customer or owner.'' Would the Commission consider a 401k account
where the employer has established an omnibus account at the broker-
dealer holding the assets of all its employees to be within the purview
of this rule? How about a bank trust account where the bank has
established an omnibus
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account at the broker-dealer holding the co-mingled assets of the banks
customers and the bank's customers are not aware that their assets are
held by the broker-dealer?
Answer 3
No. The 401k account or bank trust account described above would
not be subject to Rule 17a-3(a)(17).
Question 4
New Rule 17a-3(a)(17) provides that each registered broker-dealer
must keep a record indicating that the broker-dealer has furnished all
information required by paragraph (a)(17)(i)(A) to each customer or
owner at specified intervals. To whom should this account record
information be sent in the case of a trust?
Answer 4
In the case of a trust, the account record information should be
sent to the same person that receives account statements for that
account.
Question 5
A broker-dealer is required, pursuant to new paragraph 17a-
3(a)(17)(i)(B), to provide a copy of the account record to the customer
(i) Within 30 days after opening an account and thereafter at intervals
no greater than every 36 months, and (ii) within 30 days after certain
account record information has been changed. If one customer has a
personal account, a separate IRA account, and a trust account for his
child at the same broker-dealer, and has agreed in writing to receive
account-related documentation, such as account statements, on a
combined basis, may the firm meet its requirements under Rule 17a-
3(a)(17) by combining in one mailing the account record information for
all three accounts? Would the answer be different if spouses living at
the same address each had a personal account and agreed to receive
account documents on a combined basis for their personal accounts?
Answer 5
If the customer has agreed in writing to receive account-related
documentation on a combined basis for multiple accounts at the same
address, the broker-dealer may send account record information
regarding each of those accounts to the customer in a combined mailing.
However, the account record information should be separated by account
so the customer can easily identify the account record information that
relates to each account. If spouses living at the same address have
agreed to receive account documents on a combined basis for their
personal accounts, the broker-dealer may send account record
information regarding each of those accounts to the customer in a
combined mailing.
Question 6
New paragraph (a)(17)(iii) of Rule 17a-3 requires that a broker-
dealer create a record for each account indicating the customer or
owner was furnished with a copy of each written agreement entered into
on or after the effective date of the rule and that, if requested by
the customer or owner, the customer or owner was furnished with a fully
executed copy of each agreement. Would an instruction to wire monies
out of a customer's account be considered a ``written agreement,'' a
copy of which must be provided to the customer pursuant to the new
rule?
Answer 6
An instruction received by the broker-dealer from the customer
would not constitute a written agreement for purposes of this rule.
Examples of written agreements contemplated by this new paragraph would
include customer account agreements, margin agreements, options
agreements, or securities lending agreements. However, a written
instruction sent by the customer to the broker-dealer would constitute
a communication received by the broker-dealer relating to its business
as such, and should be maintained in accordance with paragraph 17a-
4(b)(4).
Question 7, Parts A and B
Background
A broker-dealer may create a team of associated persons to handle
business with a particular customer rather than designating one
associated person as being responsible for the account. In this
situation, no individual team member is directly compensated for a
particular transaction; instead, each transaction by that customer is
credited to the team for compensation purposes. Consequently, when a
member of the team creates an order ticket, the broker-dealer often
only records the identity of the team on its order ticket as having
entered the order.
Part A
New provisions to paragraphs (a)(6) and (a)(7) of Rule 17a-3
require a broker-dealer to record on the order ticket the identity of
the associated person responsible for the account and the identity of
the person who entered or accepted the order on behalf of the customer.
If a broker-dealer has assigned a team of associated persons to a
customer's account, must it record the identity of a particular
associated person on the order ticket to meet these new requirements?
Answer 7, Part A
In the Books and Records Release, the Commission stated that a firm
may comply with Rule 17a-3(a)(6) and (a)(7) if it records on the order
ticket an identification number or code assigned to the person entering
or accepting the order or the computer terminal at which an order was
entered or accepted, provided that the firm has created and maintained
as part of the order ticket records a companion record that can be used
to identify the associated person entering the order. Similarly, the
broker-dealer may record the identity of the team on the order ticket,
provided it creates and maintains a companion record that can be used
to identify the associated person that entered that order. The
companion record would be part of the firm's order ticket records and
must be maintained, preserved, and available for examination in the
same manner as the firm's order tickets.
Part B
New Rule 17a-3(a)(19)(i) requires a broker-dealer to create a
record, as to each associated person, listing each purchase and sale of
a security attributable for compensation purposes to that associated
person. If a broker-dealer has created a team of associated persons as
described above, must it create a separate duplicate record for each
associated person listing each transaction attributed to the team to
comply with this rule?
Answer 7, Part B
To comply with Rule 17a-3(a)(19)(i), a broker-dealer that has
created a team of associated persons as described above may create a
single record that identifies each transaction attributable to a
particular team for compensation purposes provided that the firm also
creates and maintains as part of this record a companion record that
identifies each associated person that has been a member of that team,
including the dates the person joined and left the team, and the manner
in which compensation is allocated among the members of the team.
Question 8
New Rule 17a-3(a)(19)(i) requires each broker-dealer to create a
record as to each associated person listing each purchase and sale of a
security attributable, for compensation purposes, to that associated
person. The record shall include the amount of compensation if monetary
and a
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description of the compensation if non-monetary. The Books and Records
Release states that:
The term ``non-monetary compensation'' includes compensation
such as sales incentives, gifts, or trips that would be provided to
associated persons if certain sales goals were achieved. Such non-
monetary compensation should be recorded if directly related to
sales. If sales would be counted toward achieving these goals, then
a notation of the sales should be made regardless of whether that
goal is actually achieved.\6\
\6\ 66 FR 55818, at 55823 (November 2, 2001).
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Assume the following fact pattern. A broker-dealer with 100
registered representatives, at the end of each year, reviews the sales
performance of all of its registered representatives, and sends the
five representatives that have generated the most commission revenues
for the firm to Hawaii for a week. Under this sales incentive plan,
registered representatives do not receive additional credit for earning
commissions on any particular product or type of products. The broker-
dealer has created a record pursuant to Rule 17a-3(a)(19)(i) for each
associated person listing each transaction that contributed to their
achievement of this non-monetary compensation because those persons
received monetary commissions for each transaction. Would the firm be
required under Rule 17a-3(a)(19)(i) to separately note on the record
for each associated person the trip to Hawaii as potential
compensation?
Answer 8
In this circumstance, a broker-dealer would be in compliance with
Rule 17a-3(a)(19)(i) if it created a single record describing the
firm's practice of providing an end-of-year non-cash bonus to a certain
number of representatives, a description of the non-cash bonus, the
criteria used to select which representatives would achieve such a
bonus, a list or description of the representatives eligible to receive
the bonus, and the names of the registered representatives that
received the non-cash bonus.
Question 9
Rule 17a-3(a)(19)(ii) requires that a broker-dealer maintain a
record of agreements pertaining to the relationship between each
associated person and the broker-dealer, including a summary of each
associated person's compensation arrangements such as commission and
concession schedules. Some associated persons do not directly
participate in securities transactions with customers. One example is
an attorney who is an associated person and is compensated based on a
fixed salary and a discretionary bonus determined by the firm's
management based on the profits of the firm as a whole. Another example
would be a branch manager who does not generally receive sales-related
compensation, but does receive a bonus if the branch achieves a certain
yearly sales goal (for instance, $10 million in annual commissions).
Must a broker-dealer create the record required under Rule 17a-
3(a)(19)(ii) for the attorney or the branch manager based on the
compensation schemes described above where they do not directly
participate in securities transactions with customers?
Answer 9
Generally, if an associated person is not directly involved with or
compensated based on securities transactions with customers, the
broker-dealer would not be required to create the record required
pursuant to Rule 17a-3(a)(19)(ii). In the example of the attorney who
is compensated based on a salary and discretionary yearly bonus based
on the profits of the firm as a whole, the broker-dealer would not be
required to create the record required under Rule 17a-3(a)(19)(ii).
However, in the example of the branch manager that receives a bonus
tied to the yearly sales goal for that branch, the broker-dealer would
be required to create the Rule 17a-3(a)(19)(ii) record, even though the
branch manager is not directly involved in the customer's securities
transactions, because the compensation is intended to reward the branch
manager for encouraging sales.
Question 10
New Rule 17a-4(e)(6) requires every broker-dealer to preserve each
report that a securities regulatory authority has requested or required
the broker-dealer to make and furnish to it pursuant to an order or
settlement. Under this rule, is a broker-dealer required to preserve
documents or other materials delivered to the Commission in response to
a Commission subpoena?
Answer 10
Rule 17a-4(e)(6) does not require a broker-dealer to preserve
documents or other materials delivered to the Commission in response to
a subpoena. However, if those documents are otherwise required to be
created and maintained pursuant to Rules 17a-3 and 17a-4, the broker-
dealer must preserve them in compliance with those provisions. In
addition, we note that a broker-dealer, under other applicable laws or
rules, may have an obligation to preserve such reports, documents or
other materials.
Question 11
Rule 17a-3(a)(1) requires that a broker-dealer make and keep
current blotters containing, among other things, an itemized daily
record of all purchases and sales of securities and all receipts and
disbursements of cash. When purchasing a mutual fund, variable annuity,
or a direct participation program a broker-dealer's participation in
the transaction may be limited to forwarding the customer's completed
application and check to the fund. In other purchase transactions, a
registered representative may make a recommendation to a customer and
assist the customer in completing the purchase application, but the
customer may send the application and check to the fund. With relation
to sale transactions, the customer may request that the broker-dealer
send the sale instruction to the fund on the customer's behalf.
Alternatively, the customer may write or call the fund directly and
request that the fund sell those shares and the broker-dealer may not
be compensated for participating in the sale. In some instances, the
purchase of a variable contract would automatically initiate the sale
of another variable contract, such as in a 1035 exchange. When must the
broker-dealer record these transactions on its purchase and sales
blotter?
Answer 11
Under Rule 17a-3(a)(1), a broker-dealer must record all purchases
or sales of mutual funds, variable contracts, or direct participation
programs. For example, if the broker-dealer forwards an application and
check to the fund on behalf of the customer, sends a purchase or sale
instruction to the fund (including an instruction resulting in a 1035
exchange), or calls the fund to place an order on behalf of the
customer, the transaction must be recorded on the broker-dealer's
purchase and sales blotter, regardless of whether the firm received
compensation for the transaction. Further, if the broker-dealer
forwarded an instruction regarding a 1035 exchange, the firm must
record both the relevant sale and purchase transactions on its blotter.
If a customer wrote or talked to the registered representative or
if the registered representative helped the customer fill out the
subscription agreement but the customer subsequently took that
paperwork when departing from the broker-dealer's office, the broker-
dealer generally would not be required to record the transaction
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on its purchase and sales blotter. However, the broker-dealer may be
required to create and maintain other types of records relating to
these transactions, for example, pursuant to new paragraph 17a-
3(a)(19)(i) and SRO rules.\7\
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\7\ See e.g., NYSE Rule 405 and NASD Rule 3110(c).
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III. Change to Code of Federal Regulations
List of Subjects in 17 CFR Part 241
Brokers, Reporting and recordkeeping requirements, Securities.
Amendments to the Code of Federal Regulations
0
For the reasons set out in the preamble, title 17 chapter II of the
Code of Federal Regulations is amended as set forth below:
PART 241--INTERPRETIVE RELEASES RELATING TO THE SECURITIES EXCHANGE
ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
0
Part 241 is amended by adding Release No 34-47910 and the release date
of May 22, 2003 to the list of interpretive releases.
By the Commission.
Dated: May 22, 2003.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-13444 Filed 5-28-03; 8:45 am]
BILLING CODE 8010-01-P