[Federal Register: June 20, 2003 (Volume 68, Number 119)]
[Proposed Rules]
[Page 36951-36955]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20jn03-36]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-48036; File No. S7-13-03]
RIN 3235-AI88
Recordkeeping Requirements for Registered Transfer Agents
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The U.S. Securities and Exchange Commission is proposing for
public comment two amendments to its rule concerning recordkeeping
requirements for registered transfer agents. The amendments would add
language to make clear that registered transfer agents may use
electronic, microfilm, and microfiche media as a substitute for hard
copy records, including cancelled stock certificates, for purposes of
complying with the Commission's transfer agent recordkeeping rules and
that a third party on behalf of a registered transfer agent may place
into escrow the required software information.
DATES: Comments should be received on or before July 21, 2003.
ADDRESSES: To help us process and review your comments more
efficiently, comments should be sent by hard copy or e-mail, but not by
both methods. Comments sent by hard copy should be submitted in
triplicate to Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 5th Street, NW., Washington, DC 20549-0609. Comments
may also be submitted electronically at the following e-mail address:
rule-comments@sec.gov. All comment letters should refer to File No. S7-
13-03. This file number should be included on the subject line if e-
mail is used. Comment letters will be available for public inspection
and copying in the Commission's Public Reference Room, 450 5th Street,
NW., Washington, DC 20549. Electronically submitted comment letters
also will be posted on the Commission's web site (http://www.sec.gov
).\1\
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\1\ We do not edit personal, identifying information such as
names or e-mail addresses from electronic submissions. Submit only
information you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant
Director, or David Karasik, Special Counsel, at 202-942-4187, Office of
Risk Management and Control, Division of Market Regulation, U.S.
Securities and Exchange Commission, 450 5th Street, NW., Washington, DC
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20549-1001.
SUPPLEMENTARY INFORMATION: The U.S. Securities and Exchange Commission
(``Commission'') is requesting public comment on a proposed amendment
to Rule 17Ad-7(f) under the Securities Exchange Act of 1934 (``Act'')
(17 CFR 240.17Ad-7(f)).
I. Discussion of Amendments to Rule 17Ad-7(f)
On April 27, 2001, the Commission adopted amendments \2\ to its
transfer agent record retention rule, Rule 17Ad-7,\3\ that (1) allowed
registered transfer
[[Page 36952]]
agents to use electronic storage media \4\ to maintain records that
they are required by Rule 17Ad-6 to retain and (2) modified the
requirements for using micrographic media \5\ as a method of record
storage. Specifically, Rule 17Ad-7(f), as amended, requires transfer
agents that use electronic or micrographic media to store records to:
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\2\ Securities Exchange Act Release No. 44227 (Apr. 27, 2001),
66 FR 21648 (May 1, 2001) (``Adopting Release'').
\3\ 17 CFR 240.17Ad-7(f). All references to Rules 17Ad-6 and
17Ad-7 or to any paragraph of those rules will be to 17 CFR
240.17Ad-6 and 240.17Ad-7, respectively.
\4\ Under Rule 17Ad-7(f)(1)(ii), the term ``electronic storage
media'' refers to any digital storage medium or system.
\5\ Under Rule 17Ad-7(f)(1)(i), the term ``micrographic media''
refers to microfilm or microfiche or any similar medium.
[sbull] Use electronic or micrographic storage mechanisms that are
designed to ensure the accessibility, security, and integrity of the
records, detect attempts to alter or remove the records, and provide
means to recover altered, damaged, or lost records;
[sbull] Create an index of the records that are electronically or
micrographically stored and store the index with the underlying
records;
[sbull] Keep a duplicate of all records and indexes that are stored
using electronic or micrographic storage media;
[sbull] Be able to promptly download electronically or
micrographically stored records to an alternate medium such as paper,
microfilm, or microfiche; and
[sbull] Keep in escrow an updated copy of the software or other
information that is necessary to access and download electronically
stored records.
Those amendments to Rule 17Ad-7 did not require transfer agents
that wish to continue to maintain their records in hard copy format to
maintain their records any differently from the way they stored them
prior to the rule change. The amendments apply only to those transfer
agents that choose to retain their records electronically or
micrographically. The purpose of those amendments was to increase the
flexibility and efficiency of transfer agent recordkeeping while
maintaining necessary controls over accuracy, integrity, and access to
transfer agent records.
Notwithstanding the Commission's intent in adopting the amendments
to Rule 17Ad-7, there appears to be some uncertainty whether (1) Rule
17Ad-7 allows transfer agents to rely exclusively on electronic or
micrographic records for purposes of the Commission's transfer agent
recordkeeping rules and to no longer maintain hard copy records,
including cancelled certificates and (2) a third party on behalf of the
transfer agent may deposit with an independent escrow agent a copy of
all the documentation required under Rule 17Ad-7(f)(5)(ii) for the
purpose of complying with Rule 17Ad-7(f)(5)(ii).\6\ In order to
eliminate this uncertainty, we propose to amend Rule 17Ad-7(f).
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\6\ Under Rule 17Ad-7(f)(5)(ii), transfer agents that choose to
use electronic storage media must, among other things, ``place in
escrow with an independent third party and keep current a copy of
the physical and logical format of the electronic storage or
micrographic media, the field format of all different information
types written on the electronic storage media and source code and
the appropriate documentation and information necessary to access
records and indexes. * * *''
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II. Proposed Rule Language
We are proposing to amend paragraph (f) of Rule 17Ad-7 to clarify
that records, including cancelled securities certificates, stored
electronically or micrographically in accordance with the provisions of
Rule 17Ad-7 may serve as a substitute for hard copy records required to
be maintained pursuant to Rule 17Ad-6. Accordingly, this
``substitution'' provision would allow, but would not mandate, the
destruction of hard copy records, including securities certificates,
after electronic or micrographic records have been created in
conformity with Rule 17Ad-7(f).\7\
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\7\ The Commission has proposed new Rule 17Ad-19 that would
require transfer agents to establish and implement written
procedures for the cancellation, storage, transportation, and
destruction of securities certificates. Securities Exchange Act
Release No. 43401 (Oct. 2, 2000); 65 FR 59766 (Oct. 6, 2000). In
addition, while Rule 17Ad-7 would permit the destruction of paper
records for purposes of our recordkeeping requirements, a transfer
agent may have an obligation to preserve such paper records under
other applicable law or rules.
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In addition, we are proposing to amend paragraph (f)(5)(ii) of Rule
17Ad-7 to clarify that a transfer agent may fulfill its software escrow
obligation by having a third party deposit with an independent escrow
agent a copy of all the documentation required under Rule 17Ad-
7(f)(5)(ii) on behalf of the transfer agent.\8\ A transfer agent using
a third party vendor to maintain its records would be allowed under the
proposed amendment to have the third party vendor place in escrow a
copy of the vendor's proprietary source code on behalf of the transfer
agent using the vendor's services. This proposed amendment would also
allow a third party vendor maintaining the records of more than one
transfer agent to place in escrow one copy of the vendor's proprietary
source code for all the transfer agents for which it acts.\9\
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\8\ One situation that calls for this clarifying amendment is
when a software provider licenses its electronic records storage
system software to a transfer agent but does not grant a license for
the source code. As a result, the transfer agent does not have
access to the source code.
\9\ Rule 17Ad-7(f)(5)(ii) requires the third party to file a
written undertaking with the Commission stating that it agrees to
furnish the Commission with the appropriate documentation and
information necessary to access the records and indexes promptly
upon request.
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III. Request for Comments
We request comment from all interested persons on whether the
proposed rule amendments accomplish our goals of clarifying that (1)
registered transfer agents may use electronic, microfilm, and
microfiche media as a substitute for hard copy records for purposes of
complying with the Commission's transfer agent recordkeeping rules and
(2) a third party may place into escrow the required software
information on behalf of a registered transfer agent.
We also invite commenters to provide views and data relating to the
costs and benefits associated with the proposed changes discussed
above. If possible, commenters should provide empirical data to support
their views. Comments should be submitted by July 21, 2003.
IV. Paperwork Reduction Act
The proposed amendments to Rule 17Ad-7(f) do not contain new
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 ``(PRA'').\10\ Accordingly, the PRA is
not applicable to the proposed amendments because they do not impose
any new collection of information requirements that would require
approval of the Office of Management and Budget (``OMB''). OMB
initially approved the paperwork burden analysis for Rule 17Ad-7(f)
(OMB Control No. 3235-0136) when the Commission proposed amendments for
Rule 17Ad-7(f) in 1999.\11\
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\10\ 44 U.S.C. 3501 et seq.
\11\ Securities Exchange Act Release No. 41442 (May 25, 1999),
64 FR 29608 (June 2, 1999). Subsequently, OMB approved the extension
of this paperwork collection.
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V. Costs and Benefits of the Proposed Rule Amendments
The Commission is considering the costs and the benefits of the
proposed amendment to Rule 17Ad-7(f) as described below. We encourage
comments that address any additional costs or benefits that we may have
not considered. Commenters should provide analysis and empirical data
to support their views on the costs and benefits associated with the
proposed amendment.
A. Benefits
The proposed amendments to Rule 17Ad-7(f) should provide specific
benefits to U.S. investors, issuers, transfer agents, and other
financial
[[Page 36953]]
intermediaries. While these benefits are not readily quantifiable in
terms of dollar value, we believe that transfer agents that choose to
exclusively adopt electronic or micrographic-based records systems in
lieu of paper records may realize cost-savings and reduce certain risks
associated with paper-based recordkeeping. For example, the use of
electronic and storage media should reduce storage burdens (e.g., the
need for storage space) that transfer agents currently face in
maintaining paper records.
Other benefits include:
[sbull] increased efficiency of recordkeeping operations by
reducing the need to maintain records in hard copy format;
[sbull] reduced likelihood that documents will be lost or misfiled;
[sbull] ability to retrieve documents more quickly;
[sbull] audit trails can be automated;
[sbull] reduction of risk for natural disasters;
[sbull] file centralization is automatic (file and records need not
be removed from their storage in order to reference them);
[sbull] multiple persons can view the same document simultaneously;
[sbull] access authorization can be automated;
[sbull] space required for document storage is drastically reduced;
[sbull] document indexing and cross-referencing can be automatic;
and
[sbull] documents can be copied, faxed, printed, and e-mailed
without the paper originals.
In addition, the proposed software escrow provision would enable
transfer agents to more conveniently comply with the current Rule 17Ad-
7(f)(5)(ii) requirement that a copy of the electronic storage system
the transfer agent utilizes to store its records be placed in escrow
with an independent third party.
The Commission requests comments on the potential benefits of
electronic recordkeeping including quantitative data on the potential
cost savings from eliminating hard copy records.
B. Costs
The amendments to Rule 17Ad-7(f) would not impose costs on any
particular person or entity because compliance with this provision
would apply only to those transfer agents that choose to store any of
their records exclusively in electronic form. Nevertheless, transfer
agents that elect to use micrographic media or electronic storage media
may incur some costs in destroying or otherwise disposing hard copy
records that they elect to dispose or destroy. Any costs related to the
use of micrographic or electronic storage media should be at least
partly offset by the resulting elimination of the need to maintain and
store records in hard copy format. This cost is likely to depend upon
the volume of hard copy records needed to be disposed. We expect these
costs to be relatively minimal.
We estimate that approximately 60 transfer agents \12\ will use a
third party to escrow the required source code.\13\ Each transfer agent
will evaluate the risk and cost effectiveness of its records management
solution differently based upon the solution that is best for its
business model, such as its business practices and volume, and that
assures its ability to comply with Rule 17Ad-7. Moreover, we cannot
predict the effect of future market competition and innovation on the
technologies that transfer agents might employ for their recordkeeping.
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\12\ In the adopting release to Rule 17Ad-7(f), we estimated
that approximately 500 transfer agents were likely to use electronic
or micrographic storage systems. During the year-and-a-half since
Rule 17Ad-7(f) has been effective, however, only five transfer
agents have taken advantage of the record storage alternatives
provided by the rule.
\13\ Although this estimate represents less than 10% of the
number of currently-registered transfer agents, we expect that many
of the largest bank, corporate, and independent transfer agents,
which represent over 90% of the entire transfer agent industry
volume, will eventually convert their records-management systems to
electronic-based solutions.
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In addition, there will be some cost imposed by the proposed escrow
requirement amendment. However, the Commission considered these costs
in the Adopting Release and any new costs associated with the escrow
amendment (i.e., having a third party escrow the source code on the
transfer agent's behalf) would likely be included in the software
contract between the parties.
The Commission requests commenters to provide cost data for
switching from hard copy records to electronic recordkeeping. In
particular, what would be the startup costs and annual maintenance
costs?
VI. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\14\ a rule is ``major'' if it has resulted or is likely to
resort in:
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\14\ 5 U.S.C. 801 et seq.
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[sbull] an annual effect on the economy of $100 million or more;
[sbull] a major increase in costs or prices for consumers or
individual industries; or
[sbull] significant adverse effects on competition, investment, or
innovation.
We request comment regarding the potential impact of the proposed
rule amendments on the economy on an annual basis. We request that
commenters provide empirical data and other factual support for their
views.
VII. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
Section 3(f) of the Act \15\ as amended by the National Securities
Markets Improvement Act of 1996\16\ provides that whenever the
Commission is engaged in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, the Commission shall consider, in addition to the protection
of investors, whether the action will promote efficiency, competition,
and capital formation. In addition, Section 23(a)(2) of the Act \17\
requires the Commission, when adopting rules under the Act, to consider
the anti-competitive effects of any rules it adopts.
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\15\ 15 U.S.C. 78c.
\16\ Pub. L. No. 104-290, 110 Stat. 3416 (1996).
\17\ 15 U.S.C. 78w(a)(2).
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We are considering the proposed amendments to Rule 17Ad-7(f) in
light of the standards set forth in Sections 3(f) and 23(a)(2) of the
Act. For the reasons stated herein, the proposed amendments (1) should
promote efficiency by allowing registered transfer agents to benefit
from being allowed to dispose of hard copies, (2) should not adversely
affect capital formation because they relate solely to post-issuance
activity, and (3) should not impose any burden on competition because
they will apply equally to all registered transfer agents.
We do not anticipate that the proposed amendments would have a
significant effect on competition or impose any burden on competition
that is not necessary or appropriate in furtherance of the Act. Under
the proposed amendments, all registered transfer agents would be
permitted, though not required, to exclusively use micrographic media
and electronic storage media to fulfill all of the Commission's
regulatory obligations. In addition, the proposed amendments would
apply equally to all registered transfer agents. However, in order to
fully evaluate the effects on competition of the proposed amendments,
the Commission requests commenters to provide their views and specific
empirical data as to any effects on competition that might result from
the Commission's proposed amendments to Rule 17Ad-7(f).
[[Page 36954]]
VIII. Summary of Regulatory Flexibility Analysis
The Commission has prepared an initial regulatory flexibility
analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding the
proposed amendments to Rule 17Ad-7(f) to determine whether the proposed
rule amendments will have a significant economic impact on a
substantial number of small entities.
A. Reasons for Proposed Action
The IRFA states that despite recent amendments to Rule 17Ad-7,
there appears to be some uncertainty concerning the scope of the
current rule with respect to electronic recordkeeping and the ability
of a third party to deposit certain documentation with an independent
escrow agent.
B. Objectives and Legal Basis
In order to eliminate this uncertainty, the Commission is proposing
to amend Rule 17Ad-7(f). The proposed amendments are designed to make
clear that transfer agents may use electronically and micrographically
retained records to comply with the Commission's transfer agent
recordkeeping requirements. In addition, proposed amendments to
paragraph (f)(5)(ii) of Rule 17Ad-7 are designed to clarify that a
transfer agent may fulfill its software escrow obligation by having a
third party deposit with an independent escrow agent a copy of all the
documentation required under Rule 17Ad-7(f)(5)(ii) on behalf of the
transfer agent.
Amendments to Rule 17Ad-7 are proposed under the Commission's
authority set forth in Sections 17, 17A, and 23 of the Act.
C. Small Entities Subject to the Rule
The IRFA states that, for purposes of Commission rulemaking, Rule
0-10(h) under the Act defines the term ``small business'' or ``small
organization'' to include any transfer agent that: (1) Received less
than 500 items for transfer and less than 500 items for processing
during the preceding six months (or in the time that it has been in
business, if shorter); (2) transferred items only of issuers that would
be deemed ``small business'' or ``small organizations'' as defined in
Rule 0-10 under the Act; (3) maintained master shareholder files that
in the aggregate contained less than 1,000 shareholder accounts or was
the named transfer agent for less than 1,000 shareholder accounts at
all times during the preceding fiscal year (or in the time that it has
been in business, if shorter); and (4) is not affiliated with any
person (other than a natural person) that is not a small business or
small organization under Rule 0-10.\18\ The IRFA states that we
estimate that 180 registered transfer agents qualify as small entities
and would be subject to the proposed amendment to Rule 17Ad-7(f).
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\18\ 17 CFR 240.0-10(h).
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D. Reporting, Recordkeeping, and Other Compliance Requirements
The IRFA states that the proposed amendments would not impose any
new reporting, recordkeeping, or other compliance costs or requirements
on any particular person or entity because compliance with this
provision would be purely voluntary. Nevertheless, transfer agents that
elect to exclusively use micrographic media or electronic storage media
may incur some costs in destroying or otherwise disposing hard copy
records. However, the Commission believes that this cost is minimal.
The IRFA notes that the proposed amendment to Rule 17Ad-7(f) would
apply only to registered transfer agents that choose to exclusively use
electronic or micrographic storage media. The IRFA notes further that
some small transfer agents will not be able to afford the costs
involved with storing records electronically and therefore will not
choose to use electronic or micrographic storage media. The IRFA states
that the proposed amendments to Rule 17Ad-7(f) should not have a
significant economic impact on a substantial number of small entities.
E. Duplicative, Overlapping, or Conflicting Federal Rules
The Commission believes that there are no rules that duplicate,
overlap, or conflict with the proposed amendments.
F. Significant Alternatives
The IRFA states that we believe that it is not feasible to further
clarify, consolidate, or simplify the proposed amendments for small
entities. The IRFA also states that the Commission believes that the
use of performance standards rather than design standards is not
applicable to the proposed amendments.
The IRFA states that we believe that creating an exemption from the
requirements of the proposed amendments would not reduce the impact of
the proposed amendments on small entities. The IRFA notes that Rule
17Ad-4(b) under the Act \19\ already exempts small transfer agents from
many of the recordkeeping requirements of Rules 17Ad-6 and 17Ad-7. In
addition, the IRFA notes that any burden imposed by the proposed
amendments would apply only to those transfer agents that choose to use
electronic or micrographic storage media. The IRFA states that we
believe that there are no rules that duplicate, overlap, or conflict
with the proposed alternative versions of the rule.
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\19\ 17 CFR 240.17Ad-4(b).
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G. Solicitation of Comments
The IRFA contains information concerning the solicitation of
comments with respect to the IRFA. In particular, the IRFA requests
comment on whether the proposed amendments to Rule 17Ad-7(f) would have
a significant economic impact on a substantial number of small entities
and requests that any such comments be accompanied by specific
empirical data. A copy of the IRFA may be obtained by contacting David
Karasik, U.S. Securities and Exchange Commission, 450 Fifth Street,
NW., Washington, DC 20549-1001.
XI. Statutory Authority
The Commission is proposing amendments to Sec. 240.17Ad-7 of
Chapter II of Title 17 of the Code of Federal Regulations pursuant to
sections 17, 17A(a)(2), 17A(d), and 23(a) \20\ of the Act in the manner
set forth below.
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\20\ 15 U.S.C. 78q, 78q-1(a)(2), 78q-1(d) and 78w(a)
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List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities, Transfer
agents.
Text of Amendment
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, and 7202 unless otherwise noted.
2. Section 240.17Ad-7 is amended by:
a. Adding introductory text to paragraph (f); and
b. In the first sentence of paragraph (f)(5)(ii), revise the phrase
``Place in escrow'' to read ``Place, or have a third party place on
your behalf, in escrow'.
The addition reads as follows:
[[Page 36955]]
Sec. 240.17Ad-7 Record retention.
* * * * *
(f) Subject to the conditions set forth in this section, the
records required to be maintained pursuant to Sec. 240.17Ad-6 may be
retained using electronic or micrographic media and may be preserved in
those formats for the time required by Sec. 240.17Ad-7. Records stored
electronically or micrographically in accordance with this paragraph
may serve as a substitute for the hard copy records required to be
maintained pursuant to Sec. 240.17Ad-6. * * *
* * * * *
By the Commission.
Dated: June 16, 2003.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-15648 Filed 6-19-03; 8:45 am]
BILLING CODE 8010-01-P