1 Securities and Exchange Commission Release No. 34-40518 (Oct. 2, 1998), 63 Fed. Reg. 54409 (Oct. 9, 1998).
2 See Memorandum to SEC Rules Committee No. 121-96 (Nov. 15, 1996).
3 The ICI submitted comments on the original proposal recommending that broker-dealers that only serve as mutual fund
underwriters be exempt from the proposal because, due to their limited activities, they are not subject to suitability
requirements. The SEC’s release does not discuss the ICI’s comments.
1
[10365]
October 12, 1998
TO: SEC RULES COMMITTEE No. 101-98
RE: SEC REPROPOSES BROKER-DEALER BOOKS AND RECORDS RULES
______________________________________________________________________________
The Securities and Exchange Commission has reproposed amendments to its books and records
rules (Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934).1 The SEC originally proposed
amendments to these rules in 1996 in response to concerns raised by members of the North American
Securities Administrators Association about the adequacy of the SEC’s books and records rules.2 The
SEC received numerous comments on the original proposal and has reproposed amendments to these
rules. Significant aspects of the proposed amendments are summarized below, and a copy of the SEC’s
release is attached.
The amendments would require a broker-dealer (“broker”) to identify on each order ticket the
associated person and any other person that accepted or entered the order on behalf of a customer.
Unlike the original proposal, the current amendments would not require an order ticket to indicate
whether the order was solicited or unsolicited. A broker also would be required to record on an order
ticket the time at which the broker received a customer order, even if the order were subsequently
executed. Current Rule 17a-3 only requires this information if an order is not executed.
The amendments would require brokers to maintain additional records on their associated
persons, such as records of agreements between associated persons and the broker-dealer, customer
complaint information, and client trading records for each associated person. These records would not
be required for persons whose functions are solely clerical, ministerial or not related to securities
business.
Unlike the original proposal, the reproposed amendments would not require brokers to maintain
an account form for each customer; however, brokers still would have to maintain certain records for
each natural person customer account, including the customer’s investment objectives or risk tolerance.3
A broker would have to update a customer’s investment objectives at least once every 36 months. A
broker also would have to furnish a
customer’s account record to the customer within 30 days of opening the account and thereafter at least
once every 36 months or when the account record is otherwise updated. The amendments also would
require a broker to record whether a customer is an associated person of a broker. If an account is a
discretionary account, the records would have to contain the dated signatures of each customer granting
4 As an alternative to maintaining a record of each customer complaint, a broker-dealer could keep a copy of the written
complaint along with a record of the disposition of the complaint.
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the discretionary authority and the person to whom such authority has been granted. Brokers also
would have to create records indicating whether they have complied with applicable rules governing the
information required when opening or updating an account, such as those applicable to accounts trading
in penny stocks or options.
Unlike the original proposal, brokers would not have to document and retain records of oral
complaints. However, brokers would have to keep records of all written complaints, including records
at each local office of written complaints against each associated person that conducts business at that
office.4 Additionally, brokers would have to create records indicating that they notified each customer of
the address and telephone number to which complaints may be directed. This requirement would apply
to both introducing brokers and clearing brokers.
The amendments would require brokers to create commission and compensation records for
each associated person, but would allow brokers some flexibility in how they retain these records.
Unlike the original proposal, brokers would not have to produce reports monitoring unusual
occurrences in customer accounts, such as frequent trading or unusually high commissions. However,
brokers would be required to retain these reports, if created, or be able to recreate them upon request.
The amendments contain detailed recordkeeping and retention requirements for each broker
“local office,” defined as a location where two or more associated persons regularly conduct securities
business. The amendments also would require brokers to retain any written approvals of outgoing
communications and any written procedures they use to review such communications. Brokers also
would have to maintain records of any written procedures for reviewing marketing materials and records
listing each principal responsible for ensuring compliance with applicable standards. Finally, brokers
would have to retain for three years all reports requested or required by a securities regulatory authority
and any regulatory authority’s examination reports.
Comments on these amendments are due to the SEC no later than November 9, 1998. If you
have any comments on these amendments that you would like the Institute to include in its
comment letter, please contact me (telephone: 202/326-5819, fax: 202/326-5839, or e-mail:
savage@ici.org) no later than October 23, 1998.
Joseph P. Savage
Assistant Counsel
Attachment