SEC Broker/Dealer Books and Records Requirements - May 2, 2006 Compliance Deadline

©2006 Investment Company Institute. All rights reserved. Information may be abridged and therefore incomplete. Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice. [19752] February 16, 2006 TO: OPERATIONS COMMITTEE No. 6-06 BROKER/DEALER ADVISORY COMMITTEE No. 7-06 BANK AND TRUST ADVISORY COMMITTEE No. 6-06 TRANSFER AGENT ADVISORY COMMITTEE No. 11-06 TECHNOLOGY ADVISORY COMMITTEE No. 2-06 RE: SEC BROKER/DEALER BOOKS AND RECORDS REQUIREMENTS - MAY 2, 2006 COMPLIANCE DEADLINE As you know, amendments to the SEC’s Books and Records Rules 17a-3 and 17a-4 for Broker/Dealers went into effect on May 2, 20031 that clarified and expanded recordkeeping requirements for firms. The NASD recently reminded member firms that one of the provisions of the amended rule mandates that by May 2, 2006 (three years after the effective date of the rule changes), each firm must obtain the required account records for accounts that were in existence prior to May 2, 2003.2 This requirement includes furnishing the customer with a copy of the account record that includes information required under Rule 17a-3. The document or account record provided to each customer or owner by a firm should also include a request for the customer to mark any corrections and return the account record to the firm. In order to comply with the May 2, 2006 deadline to furnish account records to customers, broker/dealer firms may request assistance from mutual funds to obtain certain account (registration) information for their customer accounts that are held directly at the fund company that are not on the books and records of the firm (known as “direct accounts” or “matrix level 0” accounts). 1 The Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934 adopted on November 2, 2001 became effective on May 2, 2003. The text of the final rule is available on the SEC website at http://www.sec.gov/rules/final/34-44992.htm. A Correction to the Final Rule was also effective on May 2, 2003. See http://www.sec.gov/rules/final/34-44992a.htm. 2 See NASD's Books and Records Amendments Web page for more information: http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_006360 2 There are several alternatives available to fund companies to provide firms with direct account information that may be needed to meet the May 2006 deadline. First, the National Securities Clearing Corporation (NSCC) provides Direct Account Networking functionality. In order to assist broker/dealer firms in meeting their “books and records” requirements and to satisfy the Joint/NASD Industry Breakpoint Task Force Recommendation L: Broker/Dealer Transmission of TIN/BIN Data to Mutual Funds3, the NSCC implemented enhancements to the Networking system on March 19, 2005 to support the exchange of customer account data held directly at the fund company that are not on the books and records of the firm. These enhancements allow funds to send account position files (existing and new), daily activity and fund conversion/update files to firms designated as broker of record on its direct accounts using Networking (Level 0).4 Second, two mutual fund transfer agents – DST Systems, Inc. and PFPC, Inc. – offer products for financial intermediaries, including broker/dealers, that allow dealer firms and registered representatives to retrieve shareholder position and account registration information for their customers. Therefore, firms have the option of downloading certain customer direct account data needed to comply with the books and recordkeeping requirements through these secure websites.5 And last, fund companies (and their service providers) may choose to assist their broker/dealer partners individually on such requests. Fund companies may wish to begin communicating with their distribution partners soon to gauge the nature and extent of support to be expected. We will keep you informed of any developments. Kathleen C. Joaquin Director –Operations & Distribution 3 The Task Force recommended that mutual funds provide firms with information on holdings “held away” from the broker/dealer of record in order to assist firms in their account linking process to determine if an investor has received the appropriate breakpoint discount. A full copy of the July 2003 Report of the Joint NASD/Industry Task Force on Breakpoints can be found on the NASD website at http://www.nasd.com/web/groups/rules_regs/documents/rules_regs/nasdw_006434.pdf. 4 Information on Direct Account Networking is outlined in NSCC’s Important Notices Release A#5948, P&S#5518 (dated December, 9, 2004) and Release A#5976, P&S#5546 (dated February 2, 2005), and may be accessed via their website at http://www.nscc.com/impnot/notices. 5 For further information on these products, see DST Systems - Financial Advisor Network® Mail (FAN Mail) at www.DSTFANMail.com and PFPC’s – Daily Access Zip Link (DAZL) at http://www.dazl.com.