Recordkeeping Requirements for Transfer Agents

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-41442; File No. S7-17-99]

RIN 3235-AH74

Recordkeeping Requirements for Transfer Agents

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (Commission) is

publishing for comment a proposal to allow registered transfer agents

to use electronic storage media to produce and preserve the records

that they are required to retain. In addition, the Commission is

proposing to expressly allow registered transfer agents to use

microfiche in addition to microfilm for record retention purposes. The

proposed amendments are designed to increase the flexibility and

efficiency of transfer agent recordkeeping.

DATES: Comments should be received on or before July 2, 1999.

ADDRESSES: Interested persons should submit three copies of their

written data, views, and opinions to Jonathan G. Katz, Secretary, Mail

Stop 0609, Securities and Exchange Commission, 450 Fifth Street, NW,

Washington, DC 20549-0609. Comments also may be submitted

electronically at the following E-mail address: [email protected].

All comment letters should refer to File No. S7-17-99; this file number

should be used on the subject line if E-mail is used. Comment letters

will be available for public inspection and copying at the Commission's

Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549.

Electronically submitted comment letters will be posted on the

Commission's Internet site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant

Director, or Theodore R. Lazo, Attorney, at 202/942-4187, Office of

Risk Management and

Control, Division of Market Regulation, Securities and Exchange

Commission, 450 Fifth Street, NW, Mail Stop 1001, Washington, DC 20549-

1001.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Background

sion's Internet site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant

Director, or Theodore R. Lazo, Attorney, at 202/942-4187, Office of

Risk Management and

Control, Division of Market Regulation, Securities and Exchange

Commission, 450 Fifth Street, NW, Mail Stop 1001, Washington, DC 20549-

1001.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Background

Section 17(a)(1) of the Securities Exchange Act of 1934 (Exchange

Act) requires registered transfer agents to make, keep, and disseminate

reports prescribed by the Commission as necessary or appropriate in the

public interest, for the protection of investors, or otherwise in

furtherance of the purposes of the Exchange Act.\1\ Rules 17Ad-6 and

17Ad-7 under the Exchange Act specify the records that registered

transfer agents must make and keep and the amount of time that the

records must be preserved.\2\ Depending on the type of record, the

records covered by these rules generally must be maintained for two

years,\3\ six years,\4\ or until one year after the termination of a

transfer agency relationship.\5\

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\1\ 15 U.S.C. 78q(a)(1).

\2\ 17 CFR 240.17Ad-6 and 240.17Ad-7.

\3\ 17 CFR 240.17Ad-7 (a) and (b).

\4\ 17 CFR 240.17Ad-7(d).

\5\ 17 CFR 240.17Ad-7(c).

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Rule 17Ad-7(f) permits registered transfer agents to preserve the

records listed in Rule 17Ad-6 on microfilm, subject to certain

conditions.\6\ However, Rule 17Ad-7 provides no other alternative to

maintaining records in hard copy. In light of advances in electronic

recordkeeping technology, we believe that Rule 17Ad-7 should be amended

to accommodate a wider range of storage media.

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\6\ 17 CFR 240.17Ad-7(f).

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vides no other alternative to

maintaining records in hard copy. In light of advances in electronic

recordkeeping technology, we believe that Rule 17Ad-7 should be amended

to accommodate a wider range of storage media.

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\6\ 17 CFR 240.17Ad-7(f).

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The Securities Transfer Association has requested the Commission to

allow transfer agents to use optical disk storage systems to fulfill

their recordkeeping requirements under Rule 17Ad-7.\7\ We believe that

this request has merit, and so we are proposing to amend Rule 17Ad-7

under the Exchange Act to permit registered transfer agents to preserve

records using electronic storage media. We also are proposing to amend

Rule 17Ad-7 to permit the preservation of records on micrographic

media.\8\ These proposals incorporate the essential provisions of our

rule that permits broker-dealers to use alternative recordkeeping

methods.\9\

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\7\ Letter from Charles Rossi, President, Securities Transfer

Association, to Arthur Levitt, Chairman, Commission (July 2, 1996).

The letter is available for inspection and copying in the

Commission's Public Reference Room in File No. S7-17-99.

\8\ Under the proposed amendments, the term ``micrographic

media'' would be defined to mean microfilm or microfiche, or any

similar medium.

\9\ See Securities Exchange Act Release No. 38245 (February 5,

1997), 62 FR 6469 (Broker-Dealer Release) (adopting amendments to

Rule 17a-4(f) to allow broker-dealers to use electronic storage

media and micrographic media).

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B. Alternative Recordkeeping Methods

d to mean microfilm or microfiche, or any

similar medium.

\9\ See Securities Exchange Act Release No. 38245 (February 5,

1997), 62 FR 6469 (Broker-Dealer Release) (adopting amendments to

Rule 17a-4(f) to allow broker-dealers to use electronic storage

media and micrographic media).

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B. Alternative Recordkeeping Methods

1. Electronic Storage Media

There are different types of electronic storage media available for

recordkeeping purposes. The principal focus of the proposed amendments

is on optical storage technology, which allows for digital data

recording in a non-rewriteable, non-erasable format that provides a

permanent and unalterable record.\10\ Optical storage systems record

digital information by using a laser to burn a pattern on a metallic

film on a disk surface (known as an optical disk) that can hold

billions of bytes of data. Optical disks are removable from the

hardware that records the information onto the disk. Using optical disk

storage, any record, whether it is computer generated (such as a

computer report) or electronically digitized from another medium (such

as paper or micrographics), can be recorded and then accessed and

managed using computers.

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\10\ This format is sometimes referred to as ``write once, read

many'' or ``WORM.''

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2. Micrographic Media

Microfilm and microfiche are types of micrographic media that

photographically reduce the size of document images. However,

microfiche images are stored on a sheet of film while microfilm images

are stored on spooled film.

II. Proposed Amendments and Discussion

te once, read

many'' or ``WORM.''

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2. Micrographic Media

Microfilm and microfiche are types of micrographic media that

photographically reduce the size of document images. However,

microfiche images are stored on a sheet of film while microfilm images

are stored on spooled film.

II. Proposed Amendments and Discussion

The Commission believes that the use of optical disks and other

electronic storage media for the preservation of records must be

conditioned with safeguards against erasability, provisions for the

immediate verification of the stored information, and mandatory backup

facilities. The proposed amendments to Rule 17Ad-7 would contain

additional conditions to ensure that the documents stored on the disk

are indexed and may be accessed by Commission examiners or by examiners

from another appropriate regulatory agency.\11\

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\11\ The term ``appropriate regulatory agency'' is defined in

section 3(a)(34) of the Exchange Act, 15 U.S.C. 78c(a)(34), and

includes the Commission, the Board of Governors of the Federal

Reserve System, the Federal Deposit Insurance Corporation, and the

Office of the Comptroller of the Currency.

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Exchange Act Rule 17a-4 contains conditions on broker-dealers' use

of electronic storage media that are similar to the ones we are

proposing for transfer agents. However, we anticipate that transfer

agents (unlike broker-dealers) would use electronic storage media to

store canceled securities certificates. The storage and destruction of

canceled securities certificates present issues unique to transfer

agents' use of electronic storage media. As a result, we believe that

these conditions are particularly necessary for transfer agents

transfer agents. However, we anticipate that transfer

agents (unlike broker-dealers) would use electronic storage media to

store canceled securities certificates. The storage and destruction of

canceled securities certificates present issues unique to transfer

agents' use of electronic storage media. As a result, we believe that

these conditions are particularly necessary for transfer agents. In

addition, we believe that these conditions are necessary because

optical disk storage technology is relatively new and there does not

appear to be an industry standard for its development and for

compatibility among different optical disk storage systems.

The proposed amendments to Rule 17Ad-7 would contain additional

conditions to ensure that the documents stored on the disk are indexed

and may be downloaded by Commission examiners or by examiners from

another appropriate regulatory agency.\12\

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\12\ The term ``appropriate regulatory agency'' is defined in

section 3(a)(34) of the Exchange Act, 15 U.S.C. 78c(a)(34), and

includes the Commission, the Board of Governors of the Federal

Reserve System, the Federal Deposit Insurance Corporation, and the

Office of the Comptroller of the Currency.

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The proposed amendments would require transfer agents that use

electronic storage media to store the records in a non-rewriteable,

non-erasable format. This requirement should ensure that the

information stored on electronic storage media cannot be modified or

removed without detection. As an additional protection, the proposed

amendments would require that electronic storage media label the

storage units used (e.g., the optical disks) in sequential order and

record the date and time that information is electronically stored. In

addition, transfer agents would be required to keep a duplicate of any

records that are stored using electronic storage media

ved without detection. As an additional protection, the proposed

amendments would require that electronic storage media label the

storage units used (e.g., the optical disks) in sequential order and

record the date and time that information is electronically stored. In

addition, transfer agents would be required to keep a duplicate of any

records that are stored using electronic storage media. The duplicates

may be kept on any type of medium that is acceptable under Rule 17Ad-

7.\13\

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\13\ The Commission does not intend that the proposed amendments

to Rule 17Ad-7 would override any state laws or regulations

regarding destruction of canceled securities certificates.

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In order to ensure efficient and complete access to records during

examinations, transfer agents using electronic storage media would be

required to create an index of the records that are electronically

stored and store the index with those records. In addition, the

proposed amendments would require transfer agents to maintain a

duplicate index along with the duplicates of the indexed records

separately from the originals. Transfer

agents would also be required to have the capacity to download records

stored on electronic storage media so that the records could be

promptly transferred to an alternate medium such as paper, microfilm or

microfiche.

In addition, the proposed amendments contain conditions on the use

of electronic storage media that are designed to provide access to

information stored on electronic storage media if a transfer agent is

no longer operating, refuses to cooperate with the Commission or

another appropriate regulatory agency, or has not properly or fully

indexed electronically stored records

ilm or

microfiche.

In addition, the proposed amendments contain conditions on the use

of electronic storage media that are designed to provide access to

information stored on electronic storage media if a transfer agent is

no longer operating, refuses to cooperate with the Commission or

another appropriate regulatory agency, or has not properly or fully

indexed electronically stored records. Accordingly, the proposed

amendments to Rule 17Ad-7 would require transfer agents to preserve,

keep current, and surrender upon request the information necessary to

download records stored on electronic storage media. As an alternative,

transfer agents that use another party to maintain their records (such

as an outside service bureau) would be permitted to place in escrow and

keep current a copy of the information necessary to access the format

of the electronic storage media and to download records that are

electronically stored. Moreover, before a transfer agent uses

electronic storage media, the proposed amendments would require that at

least one party other than the transfer agent (e.g., the transfer

agent's electronic storage media vendor) file representations with the

Commission that it has the ability to download information from the

transfer agent's electronic storage system and that it would do so at

the request of either the Commission or its appropriate regulatory

authority.

We understand that some broker-dealers now use electronic storage

media and micrographic media to fulfill their recordkeeping

requirements. We believe that the proposed amendments to Rule 17Ad-7

will similarly increase the flexibility and efficiency of transfer

agent recordkeeping.

III. General Request for Comments

he request of either the Commission or its appropriate regulatory

authority.

We understand that some broker-dealers now use electronic storage

media and micrographic media to fulfill their recordkeeping

requirements. We believe that the proposed amendments to Rule 17Ad-7

will similarly increase the flexibility and efficiency of transfer

agent recordkeeping.

III. General Request for Comments

Any interested person wishing to submit comments on the proposed

amendments to Rule 17Ad-7, as well as on other matters that might have

an impact on the proposal, is requested to do so. We seek comment on

whether the proposed requirements regarding the use of electronic

storage media will create an undue burden on transfer agents or others.

We seek comment on whether additional or fewer safeguards may be

required in the context of transfer agents' use of electronic storage

media. We also request comments on whether other new technologies are

available for use in retaining records, and whether the rule should

allow use of these technologies. If so, under what conditions?

We specifically solicit comments as to whether the proposed

amendments to Rule 17Ad-7 present any issues that are unique to

transfer agents that did not arise with respect to the amendments to

Rule 17a-4. In particular, we request commenters to address any issues

that may arise from the use of electronic storage media to store

canceled securities certificates

s. If so, under what conditions?

We specifically solicit comments as to whether the proposed

amendments to Rule 17Ad-7 present any issues that are unique to

transfer agents that did not arise with respect to the amendments to

Rule 17a-4. In particular, we request commenters to address any issues

that may arise from the use of electronic storage media to store

canceled securities certificates. Are there legal issues associated

with transfer agents destroying canceled securities certificates that

have been electronically stored? For example, could the inability to

produce an original certificate during a legal proceeding create

evidentiary problems even if a facsimile of the certificate could be

downloaded from the electronic storage media? Should transfer agents

that use electronic storage media to store canceled securities

certificates be permitted to destroy canceled securities certificates

as soon as they are electronically stored, or should transfer agents be

required to maintain the original certificates for some period of time

after storing them electronically?

Should Rule 17Ad-7 contain specific standards regarding image

quality for electronic storage media used by transfer agents? Should

Rule 17Ad-7 require that any electronic storage media used by transfer

agents automatically verify the resolution quality of the

electronically stored records? Should transfer agents using electronic

storage media be required to periodically audit the resolution quality?

IV. Cost and Benefits of the Proposed Amendments

mage

quality for electronic storage media used by transfer agents? Should

Rule 17Ad-7 require that any electronic storage media used by transfer

agents automatically verify the resolution quality of the

electronically stored records? Should transfer agents using electronic

storage media be required to periodically audit the resolution quality?

IV. Cost and Benefits of the Proposed Amendments

The Commission is considering the costs and the benefits of the

proposed amendments to Rule 17Ad-7. The Commission has identified

certain costs and benefits relating to the proposed amendments, which

are discussed below, and encourages commenters to discuss any

additional costs or benefits. In particular, the Commission requests

comment on the potential costs for any necessary modifications to

information gathering, management, and recordkeeping systems or

procedures as well as any potential benefits resulting from the

proposals for issuers, transfer agents, regulators, or others.

Commenters should provide analysis and empirical data to support their

views on the costs and benefits associated with the proposed

amendments.

A. Benefits

The proposed amendments to Rule 17Ad-7 should provide specific

benefits to U.S. investors, issuers, transfer agents, and other

financial intermediaries. These benefits are not readily quantifiable

in terms of dollar value. Allowing registered transfer agents to

maintain their records using micrographic media and electronic storage

media should increase the efficiency of their recordkeeping operations

by reducing the need to maintain records in hard copy format. In

addition, the use of micrographic media and electronic storage media

should reduce storage burdens (e.g., the need for storage space) that

transfer agents currently face in keeping paper records.

B. Costs

cords using micrographic media and electronic storage

media should increase the efficiency of their recordkeeping operations

by reducing the need to maintain records in hard copy format. In

addition, the use of micrographic media and electronic storage media

should reduce storage burdens (e.g., the need for storage space) that

transfer agents currently face in keeping paper records.

B. Costs

The proposed amendments to Rule 17Ad-7 should not result in

significant costs to any particular person or entity. We have

identified costs associated with the proposed amendments. Transfer

agents that use micrographic media or electronic storage media may

incur some costs in transferring hard copy records to micrographic or

electronic storage media. In addition, there could be some cost to

registered transfer agents to fulfill the conditions that would be

imposed on the use of electronic storage media. Specifically, the

requirements that transfer agents using electronic storage media create

a duplicate of the records electronically stored, that they create an

index of the electronically stored records, and that they establish an

audit system to account for inputting of and changes to electronically

stored records all could result in costs to those transfer agents.

However, any costs related to the use of micrographic media 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. In addition, we note that transfer agents' use of

micrographic media or electronic storage media would be voluntary.

We request comment on these costs and invite commenters to submit

their own estimates of the costs and benefits that would result from

the proposed amendments to Rule 17Ad-7

rtly offset by the

resulting elimination of the need to maintain and store records in hard

copy format. In addition, we note that transfer agents' use of

micrographic media or electronic storage media would be voluntary.

We request comment on these costs and invite commenters to submit

their own estimates of the costs and benefits that would result from

the proposed amendments to Rule 17Ad-7. In order to fully evaluate the

costs and benefits associated with the proposed amendments, we request

that commenters' estimates of the costs and benefits of the proposed

amendments be accompanied by specific empirical data supporting the

estimates.

V. Effect of the Proposed Amendments on Competition, Efficiency,

and Capital Formation

Section 23(a)(2) of the Exchange Act \14\ requires the Commission,

in adopting rules under the Exchange Act, to consider the impact any

such rule would have on competition, and to not adopt any rule that

would impose a burden on competition not necessary or appropriate in

furtherance of the purposes of the Exchange Act. In addition, section 3

of the Exchange 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.

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\14\ 15 U.S.C. 78w(a)(2).

\15\ 15 U.S.C. 78c.

\16\ Pub. L. 104-290, 110 Stat. 3416 (1996).

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Commission shall consider, in addition to the protection of investors,

whether the action will promote efficiency, competition, and capital

formation.

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\14\ 15 U.S.C. 78w(a)(2).

\15\ 15 U.S.C. 78c.

\16\ Pub. L. 104-290, 110 Stat. 3416 (1996).

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We are considering the proposed amendments to Rule 17Ad-7 in light

of the standards cited in sections 3 and 23(a)(2) of the Exchange Act.

For the reasons stated herein, the proposed amendments (i) should

promote efficiency by allowing registered transfer agents to benefit

from advances in recordkeeping technology, (ii) should not adversely

affect capital formation because they relate solely to post-issuance

activity, and (iii) 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 Exchange

Act. Under the proposed amendments, all registered transfer agents

would be permitted to use micrographic media and electronic storage

media to fulfill their recordkeeping obligations. In addition, the

proposed conditions with respect to using electronic storage media

would apply equally to all registered transfer agents. However, in

order to fully evaluate fully 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.

VI. Summary of Regulatory Flexibility Analysis

would apply equally to all registered transfer agents. However, in

order to fully evaluate fully 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.

VI. Summary of Regulatory Flexibility Analysis

The Commission has prepared an initial regulatory flexibility

analysis (``IRFA'') in accordance with 5 U.S.C. 603(a) regarding the

proposed amendments to Rule 17Ad-7. The IRFA states that the proposed

amendments are intended to allow registered transfer agents to take

advantage of advances in electronic recordkeeping technology. The IRFA

sets forth the statutory basis for the proposed amendments.

The IRFA states that, for purposes of Commission rulemaking,

paragraph (h) of Rule 0-10 under the Exchange 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 businesses'' or ``small

organizations'' as defined in Rule 0-10 under the Exchange 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.\17\ The IRFA states that we estimates that 180

registered transfer agents qualify as small entities and would be

subject to the proposed amendments to Rule 17Ad-7.

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s, 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.\17\ The IRFA states that we estimates that 180

registered transfer agents qualify as small entities and would be

subject to the proposed amendments to Rule 17Ad-7.

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\17\ 17 CFR 240.0-10(h).

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The IRFA states that the proposed amendments would impose certain

reporting, recordkeeping, and compliance requirements. The proposed

amendments also would require each registered transfer agent that uses

electronic storage media to set up a system to record the inputting of

records to electronic storage media and the inputting of any changes to

that are electronically stored.

The proposed amendments would require transfer agents that use

electronic storage media to store the records in a non-rewriteable,

non-erasable format. In addition, the proposed amendments would require

that electronic storage media label the storage units used in

sequential order and record the date and time that the information is

electronically stored. Transfer agents would be required to keep a

duplicate of any records that are stored using electronic storage media

which could be kept on any type of medium that is acceptable under Rule

17Ad-7.

Transfer agents using electronic storage media would be required to

create an index of the records that are electronically stored and store

the index with those records. In addition, transfer agents would be

required to maintain a duplicate index along with the duplicate records

separately from the originals. Transfer agents would also be required

to have the capacity to download records stored on electronic storage

media so that the records could be promptly transferred to an alternate

medium such as paper, microfilm or microfiche

e index with those records. In addition, transfer agents would be

required to maintain a duplicate index along with the duplicate records

separately from the originals. Transfer agents would also be required

to have the capacity to download records stored on electronic storage

media so that the records could be promptly transferred to an alternate

medium such as paper, microfilm or microfiche.

The proposed amendments would require transfer agents to preserve,

keep current, and surrender upon request the information necessary to

download records stored on electronic storage media. Moreover, before a

transfer agent uses electronic storage media, the proposed amendments

would require that at least one party other than the transfer agent

(e.g., the transfer agent's electronic storage media vendor) file

representations with the Commission that the third party has the

ability to download information from the transfer agent's electronic

storage system and that it would do so at the Commission's request.

The IRFA notes that the reporting, recordkeeping, and compliance

requirements contained in the proposed amendments to Rule 17Ad-7 would

apply only to registered transfer agents that specifically choose to

use electronic 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 storage media. The IRFA states that the proposed amendments

to Rule 17Ad-7 should not have a significant economic impact on a

substantial number of small entities.

The IRFA states that as an alternative to the proposed amendments

we considered proposing different compliance and reporting requirements

and timetables with respect to transfer agents' use of electronic

storage media

electronic storage media. The IRFA states that the proposed amendments

to Rule 17Ad-7 should not have a significant economic impact on a

substantial number of small entities.

The IRFA states that as an alternative to the proposed amendments

we considered proposing different compliance and reporting requirements

and timetables with respect to transfer agents' use of electronic

storage media. However, the IRFA states that the Commission believes

that the compliance and reporting requirements and timetables as

proposed are necessary to ensure the accuracy and integrity of transfer

agent records that are electronically stored and to ensure the access

to such records by the Commission or another appropriate regulatory

agency. The IRFA also states that the timetables contained in the

proposed amendments are consistent

with the timetables that are already contained in Rule 17Ad-7.

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 Exchange Act \18\ 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 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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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 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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\18\ 17 CFR 240.17Ad-4(b).

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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 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. Cost-benefit information reflected in the ``Cost/

Benefit Analysis'' section of this Release also is reflected in the

IRFA. A copy of the IRFA may be obtained by contacting Theodore R.

Lazo, Securities and Exchange Commission, 450 Fifth Street, NW, Mail

Stop 1001, Washington, DC 20549-1001.

For purposes of the Small Business Regulatory Enforcement Fairness

Act of 1996, the Commission is also requesting information regarding

the potential impact of the proposed amendments on the economy on an

annual basis. Commenters should provide empirical data to support their

views.

VII. Paperwork Reduction Act

nge Commission, 450 Fifth Street, NW, Mail

Stop 1001, Washington, DC 20549-1001.

For purposes of the Small Business Regulatory Enforcement Fairness

Act of 1996, the Commission is also requesting information regarding

the potential impact of the proposed amendments on the economy on an

annual basis. Commenters should provide empirical data to support their

views.

VII. Paperwork Reduction Act

Certain provisions of the proposed amendments to Rule 17Ad-7

contain ``collection of information'' requirements within the meaning

of the Paperwork Reduction Act of 1995,\19\ and the Commission has

submitted them to the Office of Management and Budget for review in

accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the

collection of information is: ``Record Retention Requirements for

Registered Transfer Agents.'' The OMB control number for the collection

of information is 3235-0136. The collection of information requirements

are necessary both to ensure the integrity of transfer agents' records

that are maintained on electronic storage media and to ensure the

Commission's ability to access such records.

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\19\ 44 U.S.C. 3501 et seq.

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Proposed Rules 17Ad-7(f)(1)(iii) and 17Ad-7(f)(1)(iv) contain a

collection of information requirements that are intended to ensure that

the Commission would have full and complete access to transfer agents'

records during examinations. Proposed Rule 17Ad-7(f)(1)(iii) and 17Ad-

7(f)(1)(iv) would require transfer agents that use electronic storage

media to create an index of all electronically stored records and to

maintain a duplicate of each index. We do not propose to specify the

format of the index that would be required to be maintained. However,

the original and duplicate indexes would be required to be kept in

separate locations in order to protect against loss or damage

would require transfer agents that use electronic storage

media to create an index of all electronically stored records and to

maintain a duplicate of each index. We do not propose to specify the

format of the index that would be required to be maintained. However,

the original and duplicate indexes would be required to be kept in

separate locations in order to protect against loss or damage. The

indexes would be required to be maintained for as long as the transfer

agent was using electronic storage media.

Proposed Rule 17Ad-7(f)(3) contains a collection of information

requirement that is intended to ensure the integrity of transfer

agents' records that are stored on electronic storage media. Proposed

Rule 17Ad-7(f)(3) would require each registered transfer agent that

uses electronic storage media to set up a system to record the

inputting of records to electronic storage media and to record the

inputting of any changes to records that are electronically stored. We

do not propose to specify the contents of each audit system, but any

data stored regarding inputting of records and changes to existing

records would be part of that system. We anticipate that the names of

the individuals that input and make changes to records and the

identities of documents inputted and changed are the kinds of

information that automatically should be collected pursuant to the

audit system requirement. The results of the audit system would be

required to be preserved for the time required for the audited records.

Proposed Rules 17Ad-7(f)(4) and 17Ad-7(f)(5) contain collection of

information requirements that would ensure the Commission's access to

records of a transfer agent that was no longer operating, refused to

cooperate with the investigative efforts of the Commission or another

appropriate regulatory agency, or had not properly or fully indexed

electronically stored records

the audited records.

Proposed Rules 17Ad-7(f)(4) and 17Ad-7(f)(5) contain collection of

information requirements that would ensure the Commission's access to

records of a transfer agent that was no longer operating, refused to

cooperate with the investigative efforts of the Commission or another

appropriate regulatory agency, or had not properly or fully indexed

electronically stored records. Proposed Rule 17Ad-7(f)(4) would require

each transfer agent that uses electronic storage media to maintain and

provide upon request or to keep in escrow all information necessary to

access records and indexes that are electronically stored. We do not

propose to specify the types of information that the transfer agent

would be required to maintain if such information is maintained on the

transfer agent's premises. However, if the transfer agent chose to

place such information in escrow, it would have to keep in escrow a

copy of the physical and logical format of the electronic storage

media, the field format of all different information types written on

the electronic storage media and the source code, together with

appropriate documentation and information necessary to access records

and indexes. The information required by Proposed Rule 17Ad-7(f)(4)

would be required to be maintained for as long as the transfer agent

was using electronic storage media.

Proposed Rule 17Ad-7(f)(5) would require that for each transfer

agent using electronic storage media at least one party other than the

transfer agent would have to file with the Commission written

undertakings that it has the ability to download the transfer agent's

electronically stored records and that it would do so at the request of

either the Commission or its appropriate regulatory authority. This

requirement is intended to assure that examining authorities would be

able to access a transfer agent's electronically stored records if the

transfer agent could not or would not download the records

hat it has the ability to download the transfer agent's

electronically stored records and that it would do so at the request of

either the Commission or its appropriate regulatory authority. This

requirement is intended to assure that examining authorities would be

able to access a transfer agent's electronically stored records if the

transfer agent could not or would not download the records. We

anticipate that this requirement could be fulfilled in the form of a

letter to the Commission staff. This collection of information

requirement does not contain any new recordkeeping requirements.

The collection of information required by the proposed amendments

to Rule 17Ad-7 should not result in any new significant burden to

transfer agents. All information required as a condition of transfer

agents' use of electronic storage media is specifically tied to a

transfer agent's decision to use electronic storage media to satisfy

its already existing recordkeeping obligations.

The likely respondents to the collection of information are large

registered transfer agents. At this time, we estimate that there are 40

likely respondents to the collection of information requirements

contained in the proposed amendments to Rule

17Ad-7. The proposed frequency of response to the collection of

information requirements varies depending on the specific requirement.

The collection of information requirements contained in Proposed Rules

17Ad-7(f)(3)(vi) and 17Ad-7(f)(3)(vii) would require a one time

response. The collection of information requirements contained in

Proposed Rules 17Ad-7(f)(3)(iv) and 17Ad-7(f)(3)(v) would require

continuing responses.

The Commission estimates that the average amount of time needed to

comply with the collection of information requirements of the proposed

amendments to Rule 17Ad-7 would be 125 hours per year. However, this

time burden would apply only to registered transfer agents that choose

to use electronic storage media

posed Rules 17Ad-7(f)(3)(iv) and 17Ad-7(f)(3)(v) would require

continuing responses.

The Commission estimates that the average amount of time needed to

comply with the collection of information requirements of the proposed

amendments to Rule 17Ad-7 would be 125 hours per year. However, this

time burden would apply only to registered transfer agents that choose

to use electronic storage media. Based on the Commission's estimate of

40 likely respondents, we estimate that the proposed collection of

information requirements would result in 5000 additional burden hours

(40 x 125) and would increase the total number of burden hours for Rule

17Ad-17 from 142,272 to 147,272.\20\

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\20\ Based on an estimated average administrative labor cost of

$50.00 per hour, the Commission's staff estimates that the total

labor cost to the transfer agent industry for complying with the

collection of information requirements contained in the proposed

amendments would be $250,000 annually ($50.00 x 5000). The

Commission's staff developed these estimates in consultation with

representatives of the transfer agent industry.

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If a transfer agent chooses to use electronic storage media, then

providing the information will be mandatory. Responses to the

collection of information requirements will not be kept confidential.

An agency may not conduct or sponsor, and a person is not required to

respond to, a collection of information unless it displays a currently

valid Office of Management and Budget control number.

Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits

comments to:

ing the information will be mandatory. Responses to the

collection of information requirements will not be kept confidential.

An agency may not conduct or sponsor, and a person is not required to

respond to, a collection of information unless it displays a currently

valid Office of Management and Budget control number.

Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits

comments to:

(i) Evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the agency,

including whether the information shall have practical utility;

(ii) Evaluate the accuracy of the Commission's estimate of the

burden of the proposed collection of information;

(iii) Enhance the quality, utility, and clarity of the information

to be collected; and

(iv) Minimize the burden of collection of information on those who

are to respond, including through the use of automated collection

techniques or other forms for information technology.

Persons desiring to submit comments on the collection of

information requirements should direct them to the following persons:

Desk Officer for the Securities and Exchange Commission, Office of

Information and Regulatory Affairs, Office of Management and Budget,

Room 3208, New Executive Office Building, Washington, DC 20503; and

Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450

Fifth Street, NW, Mail Stop 0609, Washington, DC 20549-0609, and refer

to File No. S7-17-99. The Office of Management and Budget (OMB) is

required to make a decision concerning the collection of information

between 30 and 60 days after publication of this release in the Federal

Register, so a comment to OMB is best assured of having its full effect

if OMB receives it within 30 days of this publication.

VIII. Statutory Bases

The amendments to Rule 17Ad-7 are being proposed pursuant to

sections 17A(a)(2) and 17A(d) of the Exchange Act (15 U.S.C. 78q-

1(a)(2) and 78q-1(d)).

Text of the Amendments

between 30 and 60 days after publication of this release in the Federal

Register, so a comment to OMB is best assured of having its full effect

if OMB receives it within 30 days of this publication.

VIII. Statutory Bases

The amendments to Rule 17Ad-7 are being proposed pursuant to

sections 17A(a)(2) and 17A(d) of the Exchange Act (15 U.S.C. 78q-

1(a)(2) and 78q-1(d)).

Text of the Amendments

List of Subjects in 17 CFR part 240

Reports and recordkeeping requirements, Securities, Transfer

agents.

In accordance with the foregoing, the Commission proposes to amend

part 240 of Chapter II of Title 17 of the Code of Federal Regulation 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, 77eee,

77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,

78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),

78mm, 79q, 79t, 80a-20, 80-23, 80a-29, 80a-37, 80b-3, 80b-4, and

80b-11, unless otherwise noted.

* * * * *

2. Section 240.17Ad-7 is amended by revising paragraph (f) to read

as follows:

Sec. 240.17Ad-7 Record retention.

* * * * *

(f) Record retention using micrographic media or electronic storage

media. Registered transfer agents may use micrographic media or

electronic storage media that complies with the conditions in this

paragraph to store the records that they are required to keep under

Secs. 240.17Ad-6 and 240.17Ad-7.

(1) If you as a registered transfer agent use either micrographic

media or electronic storage media to store your records you must:

ic media or electronic storage

media. Registered transfer agents may use micrographic media or

electronic storage media that complies with the conditions in this

paragraph to store the records that they are required to keep under

Secs. 240.17Ad-6 and 240.17Ad-7.

(1) If you as a registered transfer agent use either micrographic

media or electronic storage media to store your records you must:

(i) Have available at all times for examination by the staffs of

the Commission and of your appropriate regulatory agency (if the

Commission is not your appropriate regulatory agency) facilities for

immediate projection or production of easily readable images of the

records that you store on electronic storage media;

(ii) Be ready at all times to immediately provide any facsimile

enlargement of the records that you store on electronic storage media

that the staffs of the Commission and of your appropriate regulatory

agency (if the Commission is not your appropriate regulatory agency) or

their representatives may request;

(iii) Create an accurate index of the records that you store on

electronic storage media, store the index with those records, and have

the index available at all times for examination by the staffs of the

Commission and of your appropriate regulatory agency (if the Commission

is not your appropriate regulatory agency); and

(iv) Maintain a duplicate of the index of the records that you

store on electronic storage along with duplicates of the indexed

records separately from the originals. You may store the duplicates of

the indexed records on any medium permitted by this section. You must

preserve the duplicate index and the duplicates of the indexed records

for the same time that is required by this section for the indexed

records, and you must have them available at all times for examination

by the staffs of the Commission and of your appropriate regulatory

agency (if the Commission is not your appropriate regulatory agency).

on any medium permitted by this section. You must

preserve the duplicate index and the duplicates of the indexed records

for the same time that is required by this section for the indexed

records, and you must have them available at all times for examination

by the staffs of the Commission and of your appropriate regulatory

agency (if the Commission is not your appropriate regulatory agency).

(2) Any electronic storage media that you use to store your records

must:

(i) Preserve the records in a format that is not rewriteable and

not erasable;

(ii) Automatically verify the quality and accuracy of its recording

process;

(iii) Label all units of storage media used in sequential order and

record the date and time that information is stored on the electronic

storage media; and

(iv) Have the capacity to readily download indexes and records

preserved on the electronic storage media to any medium acceptable

under this paragraph as required by the staffs of the Commission and of

your appropriate regulatory agency (if the Commission is not your

appropriate regulatory agency).

(3) If you use electronic storage media to store your records, you

must set up an audit system that accounts for the inputting of and any

changes to every record that is stored on electronic storage media:

(i) You must be able to have the results of the audit system

available at all times for examination by the staffs of the Commission

and of your appropriate regulatory agency (if the Commission is not

your appropriate regulatory agency); and

(ii) The audit results must be preserved for the time required for

the audited records.

(4) If you use electronic storage media to store your records you

must either:

e able to have the results of the audit system

available at all times for examination by the staffs of the Commission

and of your appropriate regulatory agency (if the Commission is not

your appropriate regulatory agency); and

(ii) The audit results must be preserved for the time required for

the audited records.

(4) If you use electronic storage media to store your records you

must either:

(i) Maintain, keep current, and provide promptly upon request by

the staffs of the Commission and of your appropriate regulatory agency

(if the Commission is not your appropriate regulatory agency) all

information necessary to access records and indexes stored on

electronic storage media; or

(ii) If you use another party to maintain your records, place in

escrow and keep current a copy of the physical and logical format of

the electronic storage 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.

(5) Before you begin to use electronic storage media to preserve

some or all of your records under this section, there must be at least

one party other than you who has access to your electronic storage

media system and has the ability to download information from your

system and that party must file with the Commission and with your

appropriate regulatory agency (if the Commission is not your

appropriate regulatory agency) the following undertakings with respect

to such records:

ds under this section, there must be at least

one party other than you who has access to your electronic storage

media system and has the ability to download information from your

system and that party must file with the Commission and with your

appropriate regulatory agency (if the Commission is not your

appropriate regulatory agency) the following undertakings with respect

to such records:

The undersigned hereby undertakes to furnish promptly to the

U.S. Securities and Exchange Commission (``Commission''), the

transfer agent's appropriate regulatory agency (``ARA'') (if its ARA

is not the Commission), and their designees or representatives, upon

reasonable request, such information as is deemed necessary by the

Commission's, ARA's, or designee's staff to download information

kept on the registered transfer agent's electronic storage media to

any medium acceptable pursuant to Rule 17Ad-7 under the Securities

Exchange Act of 1934.

Furthermore, the undersigned hereby undertakes to take

reasonable steps to provide access to information contained on the

registered transfer agent's electronic storage media, including, as

appropriate, arrangements for the downloading of any record required

to be maintained and preserved by the registered transfer agent

pursuant to Rules 17Ad-6 and 17Ad-7 under the Securities Exchange

Act of 1934 in a format acceptable to the Commission's staff and the

ARA's staff or their designees. Such arrangements will provide

specifically that in the event of the registered transfer agent's

failure to download the record into a readable format and, after

reasonable notice to the registered transfer agent, upon being

provided with the appropriate electronic storage medium, the

undersigned will undertake to download the record into a readable

format as the Commission's staff and the ARA's staff or their

designees may request.

(6) For purposes of this section, the following definitions apply: