[14153]
November 16, 2001
TO: BROKER/DEALER ASSOCIATE MEMBERS No. 9-01
COMPLIANCE ADVISORY COMMITTEE No. 56-01
SEC RULES MEMBERS No. 77-01
RE: SEC ADOPTS REVISIONS TO BROKER-DEALER RECORDKEEPING REQUIREMENTS
The Securities and Exchange Commission recently adopted revisions to Rules 17a-3 and
17a-4 under the Securities Exchange Act of 1934, which govern the recordkeeping requirements
of federally registered brokers and dealers.1 These revisions, which will be effective May 2,
2003, are the culmination of a rulemaking initiative begun by the SEC in 1996. We are pleased
that the final amendments include revisions recommended by the Institute. Significant aspects
of the revised rules that are of particular interest to members are summarized below.
I. CUSTOMER ACCOUNT INFORMATION
A. Required Information in Account Records
As proposed, Rule 17a-3(a)(16) would have required every broker or dealer to maintain
for each account that has a natural person as the beneficial owner extensive information about
the customer including, but not limited to, marital status, number of dependents, annual
income, net worth, and investment objectives or risk tolerance. The Institute strongly objected
to the application of this provision to those accounts for which the broker or dealer was not
obligated to make a suitability determination.
We are pleased to report that, as adopted, Rule 17a-3(a)(17)(i)(D) of the rule provides
that the customer account information required by the rule “shall only apply to accounts for
which the member, broker or dealer, is or has within the past 36 months been, required to make
a suitability determination under the federal securities laws or under the requirements of a self-
regulatory organization.”2
1 SEC Release No. 34-44992 (October 26, 2001), 66 Fed. Reg. 55818 (November 2, 2001)(the “Adopting Release”). The
Adopting Release is available through the SEC’s website, www.sec.gov.
2 According to the Adopting Release, “the term ‘suitability determination’ should be interpreted broadly” and would
include obligations under the Exchange Act, SEC rules, SRO rules, or common law. Adopting Release at p. 55822.
2
B. Furnishing/Updating Account Records
Rule 17a-3 was also amended to add a requirement that a broker-dealer furnish its
account record information to each customer or account owner on a periodic basis. In
particular, new Subsection (a)(17)(i)(B) requires that a broker-dealer provide a copy of the
account record to each customer or account owner within thirty days of opening the account
and, thereafter, in intervals of no greater than 36 months. The required information may be
combined with other mailings to the customer or it may be printed on a customer’s account
statement. Importantly, as with the exemption provided in Rule 17a-3(a)(17)(i)(A), accounts for
which the broker-dealer is not required to make a suitability determination are exempt from
this requirement. They are, however, subject to the provisions of Rule 17a-3(a)(17)(i)(B)(2) and
(3), which are also new to the rule and which require a broker-dealer to notify a customer
within 30 days of any change to the name or address of the customer or owner or any change to
the account’s investment objectives.
II. MEMORANDA OF BROKERAGE ORDERS AND DEALER TRANSACTIONS
Rule 17a-3(a)(6), which requires a broker-dealer to maintain a memorandum of each
brokerage order or other instruction given or received for the purchase or sale or a security, has
been revised to require that the memoranda include the following additional information: (1)
the identity of the associated person, if any, responsible for the account and any other person
who entered or accepted the order on behalf of the customer; (2) whether the order was entered
subject to discretionary authority; (3) the time at which the broker-dealer received the order,
even if the order is subsequently transmitted for execution; and (4) any information regarding
modifications to the order.
When the revisions to this portion of the rule were proposed, the Institute expressed
concern with their application to investment company underwriters. We are pleased to report
that, as adopted, the rule provides relief to investment companies. In particular, new Paragraph
(a)(6)(ii) of the rule exempts from the memoranda requirement transactions involving “a
purchase, sale or redemption of a security on a subscription way basis directly from or to the
issuer” if the broker-dealer maintains a copy of the subscription agreement. According to the
Adopting Release, this provision was added in recognition of the fact that for certain
transactions, “such as purchases of mutual funds or variable annuities,” the customer may
simply fill out an application or a subscription agreement that is forwarded to the issuer.3
Moreover, the Release notes that this exemption extends to transactions such as automatic
dividend reinvestments.4
III. COMPLIANCE WITH REQUIREMENTS FOR COMMUNICATIONS WITH THE PUBLIC
Rule 17a-3 has been amended to add a new paragraph (a)(20) that requires each firm to
make a record documenting that the firm has complied with, or adopted policies and
procedures reasonably designed to establish compliance with, applicable federal requirements
and rules of SROs that require a principal to approve any advertisements, sales literature, or
3 Adopting Release at p. 55819.
4 Id.
3
other communications with the public. According to the Adopting Release, this new provision
does not establish a new source of supervisory responsibility, and the policies and procedures
that a firm currently uses to evidence compliance with SRO rules may be used to fulfill this
requirement if such procedures require principal approval of any advertisements, sales
literature, or other communications with the public.5
IV. CUSTOMER COMPLAINT INFORMATION; NEW NOTICES REQUIRED
New paragraph (a)(18) of Rule 17a-3 requires every broker-dealer to maintain a record
indicating that each customer has been provided a notice containing the name, address, and
telephone number of the department of the broker-dealer to which any complaints as to the
account may be directed.6 In addition, this new rule requires that the firm’s record for each
associated person include every written customer complaint received by the firm concerning
such person, including those received electronically.7 In particular, the record must include: the
complainant’s name, address, and account number; the date the complaint was received; the
name of each associated person identified in the complaint; a description of the nature of the
complaint; and, the disposition of the compliant. In lieu of creating this new record, a broker-
dealer may instead keep the original complaint along with a record of its disposition provided
this information is retained by name of the associated person.
V. PERSONS TO EXPLAIN RECORDS AND THEIR CONTENT
New Paragraph (a)(21) of Rule 17a-3 requires broker-dealers to maintain a listing, by
name or title, of all personnel at an office who, without delay, can explain the types of records
the firm maintains at that office, and the information contained therein. This provision has been
added to address concerns expressed, primarily by the states, that recordkeeping practices
differ from firm to firm.
VI. LIST OF FIRM PRINCIPALS
New Paragraph (a)(22) of Rule 17a-3 requires firms to make a record listing each
principal of the firm responsible for establishing policies and procedures reasonably designed
to ensure compliance with any applicable securities regulatory requirements that require
acceptance or approval of a record by a principal. This provision is to assist regulators in
identifying persons in the firm responsible for designing the firm’s compliance procedures and
managing the firm.
5 Adopting Release at p. 55823.
6 According to the staff of the SEC, unlike the grace period afforded in the amendments to Rule 17a-3(a)(17) relating
to customer account information, the notice required by Rule 17a-3(a)(18) must have been sent by the effective date of
the rule (i.e., by May 2, 2003). Also according to the staff, such notice is not required to be a stand-alone document
but may be incorporated on the account statement, an envelope, or other information provided to the customer.
7 The Adopting Release notes that the revised rule does not limit a broker-dealer’s responsibility under SRO rules
and other regulations that may require creation and maintenance of records relating to oral complaints. Adopting
Release at p. 55822-55823.
4
VII. RULE 17a-4: LOCAL OFFICES; AMENDMENTS TO THE RETENTION REQUIREMENTS
As reproposed by the SEC, Rule 17a-4(l) would have required that certain of the records
listed in Rule 17a-3 be maintained in the “local office” to which they pertained; and Rule 17a-
3(g)(1) would have defined “local office” as “any location at which two or more associated
persons regularly conduct the business of” effecting transactions on behalf of the broker-dealer.
As noted in the Adopting Release, this provision “was the requirement most seriously
disputed” by the firms that commented on the proposal. To address the concerns expressed by
the industry, while at the same time addressing concerns expressed by the states regarding the
examination delays resulting from firms not having records available at local offices, the SEC
has added a new Paragraph (k) to Rule 17a-4.
New paragraph (k) revises Rule 17a-4 in three significant ways. First, the term “office”
as used in the rule has been revised to mean “any location where one or more associated
persons regularly conduct” the business of effecting transactions on behalf of the broker-dealer.8
Secondly, and more importantly, however, Rule 17a-4(k) provides that, “rather than maintain
the records at each office, the member, broker or dealer may choose to produce the records
promptly at the request of a representative of a securities regulatory authority at the office to
which they relate or at another location agreed to by the representative.” This provision was
added to accommodate those broker-dealers that maintain their records at a central facility in
lieu of having them decentralized among some or all of their offices. As regards the use of the
word “promptly” in this provision, according to the Adopting Release, while this word was
deliberately not defined in the rule, “[g]enerally, requests of certain records which are readily
available at the office (either on-site or electronically) should be filled on the day the request is
made. If a request is unusually large or complex, then the firm should discuss with the
regulator a mutually agreeable time-frame for production.”9 Third, it expands the requirement
to maintain certain records at each office location from one year to two years.
A copy of the Adopting Release is attached.
Tamara K. Reed
Associate Counsel
Attachment
Note: Not all recipients receive the attachment. To obtain a copy of the attachment, please visit our members website
(http://members.ici.org) and search for memo 14153, or call the ICI Library at (202) 326-8304 and request the
attachment for memo 14153.
Attachment (in .pdf format)
8 This definition of “office” is found in Rule 17a-3(g)(1), which is referenced in Rule 17a-4(l)(1). Rule 17a-4(k), which
governs the records that must be maintained in such “office” includes special provisions relating to an office that is a
private residence. The Adopting Release notes that the definition of “office” as used in these rules may be broader
and more inclusive than the definition of “branch.” Adopting Release at p. 55825.
9 Id.