[13500]
May 14, 2001
TO: ELECTRONIC COMMERCE ADVISORY COMMITTEE No. 10-01
OPERATIONS MEMBERS No. 9-01
SEC RULES MEMBERS No. 39-01
SMALL FUNDS MEMBERS No. 13-01
TECHNOLOGY ADVISORY COMMITTEE No. 4-01
TRANSFER AGENT ADVISORY COMMITTEE No. 33-01
RE: SEC ADOPTS FINAL RULES GOVERNING ELECTRONIC RECORDKEEPING FOR
TRANSFER AGENTS
The Securities and Exchange Commission has adopted amendments to Rule 17Ad-7
under the Securities Exchange Act of 1934 to allow registered transfer agents to use electronic or
micrographic storage media to maintain their records.1 As you may recall, the Commission had
originally proposed amendments to Rule 17Ad-7 in 1999.2 As adopted, the final rule (attached)
has been modified to reflect comments received from the Institute and other industry
participants. The final rule becomes effective May 31, 2001.
Briefly summarized, amended Rule 17Ad-7 requires transfer agents that choose to
maintain their records using electronic or micrographic storage media3 to --
use 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;
create an index of the records that are electronically or micrographically stored and store
the index with the underlying records;
keep a duplicate of all records and indexes that are stored using electronic or
micrographic storage media;
1 See SEC Rel. No. 34-44227 (April 27, 2001) (“Adopting Release”).
2 See SEC Rel. No. 34-41442 (May 25, 1999).
3 The new provisions of Rule 17Ad-7 define the term “micrographic media” to mean microfilm or microfiche or any
similar medium, and the term “electronic storage media” to mean any digital storage medium or system.
2 be able to promptly download electronically or micrographically stored records to an
alternate medium such as paper, microfilm, or microfiche; and
keep in escrow an updated copy of the software or other information that is necessary to
access and download electronically stored records.
As part of these conditions, the final rule also imposes obligations on transfer agents to
have available at all times for examination by Commission examiners and the transfer agent’s
appropriate regulatory agency (“ARA”) the stored records, the related index, and facilities to
project or produce easily readable images of the stored records.4
Record Integrity Standards
Amended Rule 17Ad-7 imposes record integrity standards to deter the alteration of
stored records. The Commission had proposed to require transfer agents that maintained their
records electronically to do so in a non-rewriteable, non-erasable format (also known as
“WORM” or write once, read many). In the final rule, however, the Commission eliminated
this requirement, in part due to the low incidence of altered transfer agent records, and the
paucity of enforcement actions brought against transfer agents in this area. Instead, amended
Rule 17Ad-7 adopts a goals oriented approach and permits a transfer agent to use an electronic
storage system so long as it is designed to: (1) ensure the security and integrity of the records by
means of manual and automated controls; (2) detect attempts to alter or remove the records;
and (3) provide means to recover altered, damaged or lost records.
Third Party Access Requirement
The proposed amendments to Rule Ad-7 contained certain conditions on the use of
electronic storage media that were designed to provide access to information stored on such
media if a transfer agent is no longer operating, refuses to cooperate with the Commission or its
ARA, or has not properly or fully indexed electronically stored records. Specifically, before a
transfer agent could use electronic storage media, it would have had to have an independent
third party file an undertaking with the Commission stating that it had 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 the transfer agent’s ARA.
The Adopting Release discusses the concerns expressed by industry commenters that
the proposed requirement raises security and confidentiality risks as it would require that
undertakings be filed by a third party that has direct access to the transfer agent’s records. In
consideration of such concerns, the Adopting Release clarifies that the third party is not
required to have a continuous or unlimited right to use or have access to the records. Rather,
the final rule requires a transfer agent to place in escrow with an independent third party5 its
records management software that will enable the Commission or the transfer agent’s ARA to
4 The Adopting Release clarifies that Rule 17Ad-7, as amended, does not specify the type of medium on which the
index should be stored. The Release also clarifies that the requirement to maintain duplicates of records stored on
micrographic or electronic storage media is not a requirement to maintain backup storage systems.
5 For this purpose, the final rule defines “independent” third party as a third party that does not control, is not
controlled by, and is not under common control with, the transfer agent.
3access records and indexes. The Adopting Release makes clear that the escrow agent will only
have in its possession the records management software but will not have access to the
underlying records. The escrow agent will be required under the final rule to file an
undertaking with the Commission and the transfer agent’s ARA that it will make such software
available to them promptly upon request.
In response to the Institute’s request for clarification regarding the third party access
undertakings requirement and the electronic storage media already in use by transfer agents,
the Adopting Release clarifies that Rule 17Ad-7, as amended, supersedes all previously issued
no-action letters.6
E-SIGN and Related Rulemaking Initiatives
The Adopting Release refers to the Electronic Signatures in Global and National
Commerce Act (“E-SIGN”) that became effective last fall, and reports that the adopted
amendments are consistent with the requirements of E-SIGN. The Adopting Release explains
that E-SIGN’s recordkeeping provisions with respect to SEC rules would have become effective
on March 1, 2001, but since the Commission announced several pending rulemaking activities
regarding its recordkeeping requirements7 prior to the March 1st deadline for doing so, the
timeframe was extended until June 1, 2001. At that time any such rulemaking initiative must be
completed in order to be given effect under E-SIGN.8 As noted above, the amendments to Rule
17Ad-7 become effective on May 31, 2001, which coincides with the June 1st deadline.
Barry E. Simmons
Associate Counsel
Attachment
Note: Not all recipients receive the attachment. To obtain a copy of the attachment to which this memo refers, please
call the ICI Library at (202) 326-8304 and request the attachment for memo 13500. ICI Members may retrieve this
memo and its attachment from ICINet (http://members.ici.org).
Attachment (in .pdf format)
6 See DST Systems, Inc. (February 2, 1993) (permitting transfer agents, investment advisers, and investment companies
to retain their records using optical disk storage technology); Securities Exchange Act Rel. No. 38245 (Feb. 5, 1997)
(permitting transfer agents to fulfill their recordkeeping requirements by complying with the provisions of Rule 17a-4
under the Securities Exchange Act of 1934).
7 See SEC Rel. No. 34-44014 (February 28, 2001).
8 Consistent with this rulemaking initiative, in March, the SEC’s Division of Investment Management proposed
amendments to its recordkeeping rules under the Investment Company Act of 1940 and the Investment Advisers Act
of 1940 to expand the circumstances under which investment companies and investment advisers may use electronic
storage media to maintain and preserve required records. See Electronic Recordkeeping by Investment Companies and
Investment Advisers, SEC Rel. No. IC-24890; IA-1932 (March 13, 2001).
In a related matter, the Institute understands that the Division of Market Regulation has decided to forego any
changes to its electronic record retention requirements for broker-dealers after determining that its current rules are
in conformance with E-SIGN. Under those rules, a broker-dealer is not required to use an electronic format, but if it
does choose to maintain records electronically, it must do so using WORM technology.