Amendments To Broker/Dealer Books And Records Rules Under The Securities Exchange Act Of 1934

INFORMATIONAL

Books And Records Rules

Executive Summary

On October 25, 2001, the Securities and Exchange Commission (SEC or Commission) adopted amendments to Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934 (Exchange Act) to clarify and expand record keeping requirements in connection with purchase and sale documents, customer records, associated person records, customer complaint records, and certain other matters. The amendments also require broker/dealers to maintain or promptly produce certain records at each office to which those records relate.

The amendments become effective on May 2, 2003. The Federal Register version of the SEC final rule release is provided in Attachment A. For a more complete description of the amendments, members should review the attached SEC final rule release.

Questions/Further Information

Questions concerning this Notice may be directed to Emily Gordy, Acting Director, Office of Regulation Policy, Department of Member Regulation, NASD Regulation, Inc. (NASD Regulation), at (202) 728-8070, or Grace Yeh, Assistant General Counsel, Office of General Counsel, NASD Regulation, at (202) 728-6939.

Discussion And Background

In general, Rules 17a-3 and 17a-4 of the Exchange Act establish minimum requirements for records that broker/dealers must prepare and periods during which such records must be maintained.

On October 11, 1996, the National Securities Market Improvement Act of 1996 (NSMIA) was enacted, prohibiting states from establishing books and records rules that differ from, or are more burdensome than those established by the Commission's rules. NSMIA also requires that the SEC periodically consult with states concerning the adequacy of the Commission's books and records rules. The SEC originally proposed amendments to its books and records rules in 1996 (the 1996 Amendments) in response to NSMIA and to concerns expressed by the members of the North American Securities Administrator's Association that the existing Commissions books and records rules do not require firms to make and retain records that would facilitate sales practice examinations and enforcement activities in individual broker/dealer offices by state regulators. Based on comments received on the proposed 1996 Amendments, the SEC substantially revised the amendments and re-proposed them in 1998 (the 1998 Amendments). The final rule amendments incorporate many of the suggestions raised in the approximately 115 comment letters and a letter from the Office of Management Budget that the Commission received in response to the proposed 1998 Amendments.

Highlights Of Amendments

The Commission believes that the final amendments balance the interests of securities regulators to obtain information in a timeefficient manner with the concerns expressed by many industry representatives that costs of complying with the proposed requirements, particularly the customer account record and rules that require records to be maintained at offices, will be unduly burdensome. The Commission further believes that since broker/dealers presently maintain a significant portion of the records required under the adopted amendments in order to comply with federal or selfregulatory organization (SRO) requirements or in the normal course of business, the new requirements should not present considerable additional burdens for most broker/dealers.

Some of the more significant changes to the books and records rules are discussed below.

• for the life of the entity, copies of Forms BD and all amendments thereto;
• 
  
  
• for three years after the date of the report, all reports which a securities regulatory authority has requested or required a firm to create and each examination report;
• 
  
  
• for three years after the termination of use, all manuals describing the firm's policies and practices with respect to compliance and supervision; and
• 
  
  
• for 18 months after the date the report was generated, reports created to review unusual activity in customer accounts.

Endnotes

¹ NASD Conduct Rules 2310 and 2860(b)(16)(B) require that members use reasonable efforts and exercise diligence to collect customer information, including a customer's investment objective in connection with making investment recommendations or prior to opening up an options trading account for the customer, respectively.

² Firms that do not make investment recommendations are excluded from the customer account requirements.

³ Members are required under NASD Conduct Rule 3110(c) maintain certain customer information.

⁴ If the broker/dealer uses an electronic system to generate the order ticket, and such system does not have a field to enter the name of any person, other than the associated person responsible for the account, who accepted the order, the broker/dealer may produce upon request by a regulator a separate record to identify the person rather than identify the person on the order ticket.

⁵ NASD Conduct Rule 2860(b)(17) and IM-3110(d) require each member to keep records of complaints.

⁶ NASD Conduct Rule 2210(b) requires that a principal of the member must approve all items of advertising and sales literature.

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 242

[Release No. 34-44992; File No. S7-26-98]

RIN 3235-AH04

Books and Records Requirements for Brokers and Dealers Under the Securities Exchange Act of 1934

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; request for comments on Paperwork Reduction Act burden estimate.

SUMMARY: The Securities and Exchange Commission today is adopting amendments to its broker-dealer books and records rules. The amendments clarify and expand recordkeeping requirements with respect to purchase and sale documents, customer records, associated person records, customer complaints, and certain other matters. In addition, the amendments expand the types of records that broker-dealers must maintain and require brokerdealers to maintain or promptly produce certain records at each office to which those records relate. These amendments are specifically designed to assist securities regulators when conducting sales practice examinations of broker-dealers, particularly examinations of local offices.

EFFECTIVE DATE: May 2, 2003.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate Director, at (202) 942-0131; Thomas K. McGowan, Assistant Director, at (202) 942-4886; or Bonnie L. Gauch, Attorney, at (202) 942-0765; Office of Risk Management and Control, Division of Market Regulation, United States Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION:

I. Introduction

The Securities and Exchange Commission's (the "Commission") books and records rules, Rule 17a-3¹ and Rule 17a-4² under the Securities Exchange Act of 1934 ("Exchange Act")(hereinafter the "Books and Records Rules"), specify minimum requirements with respect to the records that broker-dealers must make, and how long those records and other documents relating to a broker-dealer's business must be kept. The Commission has required that broker-dealers create and maintain certain records so that, among other things, the Commission, selfregulatory organizations ("SROs"), and State Securities Regulators ³ (collectively "securities regulatory authorities") may conduct effective examinations of broker-dealers. The Commission originally proposed amending the Books and Records Rules in 1996 in response to concerns raised by members of the North American Securities Administrator's Association ("NASAA") regarding the adequacy of those Rules.⁴ On October 11, 1996, the National Securities Market Improvement Act of 1996 ("NSMIA") was enacted.⁵ NSMIA prohibits States from establishing books and records rules that differ from, or are in addition to, the Commission's rules. Prior to NSMIA many States had laws or rules that required broker-dealers to make and keep certain books and records that allowed the State Securities Regulators to conduct examinations and investigations to review for, among other things, sales practice violations.⁶ NSMIA also provides that the Commission must consult periodically with the States concerning the adequacy of the Commission's Books and Records Rules,⁷ particularly relating to the need by State Securities Regulators to have records readily accessible for their examinations.⁸

The Commission, recognizing the vital role that State regulators play in providing for customer protection, issued the Proposing Release, in part, to enhance the ability of the State Securities Regulators to conduct effective and efficient sales practice examinations of activities within their respective States, including those involving smaller broker-dealer offices. By adopting these rules, the Commission enables the State regulators to adopt and enforce similar rules on a State level, to support their examination responsibilities, and investigatory and enforcement requirements. An important aspect of the amendments is that broker-dealers are required to produce records at offices within a State. Moreover, many of these amendments require broker-dealers to make or keep records currently kept by broker-dealers as a matter of business practice or to comply with SRO rules. However, unless these requirements are adopted as Commission rules, the State regulators are unable to apply or enforce them at the State level.

II. Proposing and Reproposing Releases

In response to the comments received on the Proposing Release, the Commission substantially modified the amendments, and reproposed them to allow for public comment on the modifications.⁹ In response to the reproposal, the Commission received approximately 115 comment letters from various groups, including brokerdealers, law firms representing brokerdealers, industry associations, and State Securities Regulators. Generally, State Securities Regulators supported the rules as reproposed, but suggested some minor changes. While broker-dealers generally supported the Commission's efforts to adopt uniform books and records rules, they opposed various sections of the reproposed rules. In particular, firms were opposed to the requirements to periodically update the customer account record and to maintain records at local offices. As discussed in the respective sections throughout this release, the Commission has substantially modified the content of the re-proposed amendments and incorporated many of the suggested changes into the final rules.

To a significant degree, the amendments to Rules 17a-3 and 17a-4 adopted by the Commission track existing SRO requirements and certain State regulations that were in place prior to NSMIA. In addition, they largely represent a codification of prudent recordkeeping practices of many broker-dealers. Accordingly, many portions of the Books and Records Rule amendments should not present additional burdens for most broker-dealers.

III. Amendments to Rule 17a-3

In brief, the amendments to present Rule 17a-3 include revisions to the information that must be recorded on order tickets, and new requirements to: create certain records relating to associated persons; collect certain account record information and verify that information with customers periodically; create a record of customer complaints; create a record indicating compliance with applicable advertising rules; and create records identifying persons responsible for establishing procedures and persons able to explain the broker-dealer's records to a regulator.

IV. Office Records

The Reproposing Release would have required that broker-dealers make certain records for each local office and maintain copies of those records at the office to which the records relate. These requirements were designed to assist securities regulators when conducting sales practice examinations at particular offices. The Commission has adopted the requirements regarding the creation of these records substantially as reproposed, but has materially altered the alternatives for maintenance of those records.

Generally, State Securities Regulators supported a requirement that records as to a particular office be maintained at that office, even if only electronically. The State Securities Regulators stated, in their comment letters, that they had encountered excessive and costly delays when conducting examinations when records were kept at another office. In sum, they stated that although firms generally had the records available in local offices, the firms preferred to funnel all records requested by examiners through their centralized compliance departments in order to assure accuracy, anticipate any potential violations, review material for applicable privileges, and make a record of documents reviewed by regulators.⁵⁹ While the State regulators have the power to impose fines and penalties on firms that fail to timely produce records, the delays still result in unnecessary, wasted examination time at firms waiting for the records production. The delay is costly for regulators, particularly when they travel to remote areas to conduct surprise examinations at an office where they may spend numerous days awaiting the records.⁶⁰

The broker-dealer commenters were strongly opposed to this requirement for two main reasons. First, they stated that the requirement to maintain copies of documents at all local offices would be costly and burdensome because they would need to create and maintain two sets of records. They stated that even with the flexibility of being able to maintain the records electronically, this requirement would be costly because many firms do not currently have computer systems capable of retaining and producing all the required records. Second, firms stated that maintaining records at all local offices would force them to decentralize their recordkeeping, which would potentially compromise their controls on recordkeeping and supervisory practices.

Requiring records to be maintained at each local office was the requirement most seriously disputed by the firms. The reproposal has been altered to allow a firm, rather than to maintain records at an office, to produce the records promptly at the request of a representative of a securities regulatory authority at the office to which the records relate or at such other place as is agreed to by the representative. These alternative methods for complying with paragraph (k) of Rule 17a-4 were added in response to comments that the requirement, as reproposed, would have forced firms to decentralize their recordkeeping systems and would have compromised their internal controls and supervisory practices.⁶¹

The Commission believes that the amendments to Rules 17a-3 and 17a-4 adopted today, which set forth, (i) the definition of "office," (ii) what records must be created as to each office,⁶² and (iii) what records must be maintained at each office,⁶³ address the concerns of both regulators and broker-dealers.

V. Rule 17a-4

VI. Effective Date

The final rules adopted today shall become effective May 2, 2003.

VII. Technical Amendments

VIII. Costs and Benefits of the Amendments

In the Reproposing Release, the Commission requested comment on the costs and benefits associated with the reproposed rules and rule amendments.⁸³ Of the comments received by the Commission, fifty-seven commenters discussed the benefits and costs associated with the reproposal. Of those commenters, thirty were broker-dealers,⁸⁴ twenty-two were States,⁸⁵ two were consumer groups,⁸⁶ two were other groups,⁸⁷ and one was an individual.⁸⁸ Most of the commenters (including all of the broker-dealer commenters) argued that the costs outweighed the benefits of the reproposed amendments and that the cost estimates provided in the Reproposing Release were too low. Although most of those arguments were general in nature, twenty-three commenters specifically referenced paragraph (a)(17)(i) of Rule 17a-3,⁸⁹ and fifteen commenters specifically referenced paragraph (k) of Rule 17a-4.⁹⁰ All the States and the consumer groups that commented argued that most broker-dealers presently maintained most, if not all, the records required under the reproposed amendments, and that the benefits, although difficult to quantify, justified any costs which might be incurred.

One commenter stated that wellorganized firms are less likely to experience the potentially catastrophic losses that result from serious securities violations.⁹¹ Many State Securities Regulators indicated in their comment letters that their agencies generally found that firms with inadequate books and records were more likely to have other problems, such as inadequate supervisory systems and selling-away issues. According to the NASD's Office of Dispute Resolution, $126 million and $76 million were awarded by NASD arbitrators in 1999 and 2000 respectively in customer claimant cases, of which $48 million and $21 million respectively constituted punitive damages.⁹² The vast majority of claims filed for arbitration with the NASD's Office of Dispute Resolution during this time period related to sales practice issues. In addition, two industry participants estimated that they presently pay outside counsel approximately $50 million and $25 million respectively each year to deal with sales practice complaints.⁹³ Many States indicated that they believed the amendments would impose only minimal additional costs to brokerdealers because, in their experience, many broker-dealers already maintain the records required by the amendments in order to comply with SRO rules, State laws that applied prior to NSMIA, or simply to properly manage costs and supervise offices. Further, some States indicated that they believed that brokerdealers were exaggerating the potential costs of the reproposed amendments.⁹⁴ In fact, the States of Connecticut ⁹⁵ and Florida ⁹⁶ conducted special reviews, in conjunction with their examination programs, to determine the extent to which broker-dealers already maintained the records required under the Reproposal at office locations. The State of Connecticut concluded that its review "overwhelmingly indicate[d] that all the books and records that would be required by the re-proposed rule proposal are, at the present time, being maintained in offices within Connecticut and similarly outside the state." Further, Connecticut stated, "During this review process the records were immediately available for inspection upon request," and "the types of records required by the reproposed rule would not be burdensome in that the firms retained substantially more records than required." Connecticut also stated, "[t]he retention schedules listed in the firms' compliance [manuals] were consistent with the requirements under the reproposed rule." Florida stated, "[t]he reviews indicated that based on records maintained most branch offices met or exceeded the records requirement for the [re-]proposed rule, and "[a] vast majority of the branch offices maintained the records on-site for periods of at least 2 years (and in some cases up to 6 years)." Further, Connecticut stated, "[t]he firms' recordkeeping requirements did not vary from location to location or even state to state because they were required by the firms' own compliance manuals," and "[i]n certain instances, the firms' compliance manuals indicated that these additional records were necessary to adequately supervise its branch operations." Similarly, Florida stated, "[m]anagement of several firms visited reported that record creation and retention is a nationwide requirement; the same for all offices in all states, not specific to the state of Florida * * * [t]his information was verified by the firms' Operational/Supervisory Compliance Manuals."

A number of the States contend that investors are defrauded of millions and millions of dollars every year as a result of sales practice violations by broker-dealers.⁹⁷ Further, Commission staff found through "The Large Firm Project" ⁹⁸ "25% of the branch office examinations conducted in this project resulted in referrals for enforcement investigation and possible disciplinary action," and "[t]he examinations also revealed that some branch office managers were not implementing firm procedures adequately," and recommended that "the Commission should develop better means of identifying sales practice problems." ⁹⁹ The enhanced recordkeeping requirements would help make available critical information necessary for securities regulatory authorities to discover and take appropriate action for various securities violations, particularly sales practice violations. The cost to securities regulatory authorities to obtain the same information and evidence that otherwise would be available by these rules from other methods would be high. In addition, the possibility exists that government regulatory authorities would be unable to obtain certain information by any other means if the information is not required to be kept. Investigatory delays often lead to additional investor losses. The State of New Jersey contended that these delays could lead to an erosion of public confidence in the industry, which can be exacerbated by the public's belief that securities regulatory authorities lack the ability to properly oversee broker-dealers and enforce securities regulations.¹⁰⁰ NASAA commented that lack of public confidence in the marketplace can lead to an inability of issuers to raise capital.¹⁰¹

Most broker-dealer commenters indicated that two of the reproposed amendments would cause them to incur substantial additional costs. These two amendments were paragraph (k) of Rule 17a-4, which required that records be maintained at local offices or that firms produce those records at the local office on the same day a request for records was made by a regulator at that local office, and paragraph (a)(17)(i) of Rule 17a-3, which required that a brokerdealer provide customers with a copy of their account record at specified times. As a result of comments received in response to the Reproposing Release, the Commission substantially modified those two amendments as described above.

The only other paragraphs brokerdealers specifically identified as resulting in increased costs were (a)(6) and (a)(7) of Rule 17a-3, which require that brokerage order tickets include the time of receipt, and that dealer order tickets include a notation of any modifications to an order. The Commission addressed some of these comments by modifying paragraph (a)(6) to provide an exemption for mutual fund and variable contract orders processed on a subscription-way basis. Further, for certain securities, the receipt time and notation of modification are already required under SRO rules.¹⁰² The only cost to firms resulting from these paragraphs relate to assuring that processes for recording this information will record the information for all orders that are not exempt and not just those orders covered by SRO rules.

A few commenters attempted to provide alternative cost estimates for use in calculating the costs of the amendments. Some firms provided specific numbers, but provided no explanation as to the source of their estimates or their reason for believing that they would be more accurate than the Commission's estimates. In addition, certain costs are no longer relevant because the Commission substantially modified the amendments in response to comments. Accordingly, after consideration of all of the circumstances, the Commission has altered its cost estimates to reflect the fact that changes were made to the amendments in response to the comments received. Further, where the amendments were not altered significantly, the Commission has substantially increased estimates of costs that commenters argued were significantly underestimated.

The Commission estimates that the aggregate cost of these amendments will be approximately between $78.2 million and $84.3 million in the first year, and between $52.5 and $58.6 million per year thereafter (depending on what estimated postage cost is included in the calculations). Dollar costs relating to specific amendments are detailed below.

For purposes of this cost-benefit analysis, the amendments to Rules 17a-3 and 17a-4 are divided into three groups: (i) Those pertaining to the maintenance of office records and alternatives to these requirements; (ii) those pertaining to the periodic updating of customer information; and (iii) all other new requirements covered by the amendments.

IX. Effects on Efficiency, Competition, and Capital Formation

Section 23(a)(2) of the Exchange Act ¹⁴⁰ requires the Commission, in adopting Exchange Act rules, to consider the impact any such rule would have on competition and to not adopt a rule that would impose a burden on competition not necessary or appropriate in furthering the purposes of the Exchange Act. Section 3(f) of the Exchange Act ¹⁴¹ 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. The Commission has considered the amendments to Rules 17a-3 and 17a-4 in light of the standards in Sections 23(a)(2) and 3(f) of the Exchange Act.

In the Reproposing Release, the Commission requested comment on the effect of the reproposed rule amendments on competition, efficiency, and capital formation.¹⁴² The Commission received 115 substantive comment letters¹⁴³ in response to the Reproposal. Approximately 44% were from broker-dealers opposing particular amendments and approximately 37% were from State Securities Regulators supporting the amendments. Few commenters provided any information on how these amendments would affect competition, efficiency, or capital formation. One commenter argued that, "[c]ompetition among broker-dealers is facilitated by the amendments to the [Books and Records Rules]" because they "[allow] firms to create and maintain records by alternative means * * *." ¹⁴⁴ Conversely, a few of commenters argued that; (i) the requirement to maintain records at local offices would place an unfair competitive burden upon smaller broker-dealers who do not have the resources to utilize imaging technology,¹⁴⁵ and (ii) the amendments would have a disparate impact on nontraditionally organized broker-dealers with limited businesses.¹⁴⁶ In addition, a number of commenters, while not specifically addressing this issue, did argue that it would be duplicative to maintain records at a local office while also maintaining the same documents at a main office. In response to these concerns and others, the Commission has modified the amendments to allow firms the flexibility to promptly produce records at the offices to which they relate instead of maintaining those records at the offices,¹⁴⁷ and has added exemptions in recognition of present business practices.¹⁴⁸

The Commission believes that any burden imposed by the amendments is justified by the enhanced investor protections described above. Further, as NASAA pointed out in its comment letter, when addressing Section 23(a) concerns, "the [amendments] to Rules 17a-3 and 17a-4, pursuant to a directive by Congress, must also reflect the needs of the State Securities Regulators as well as federal regulators."¹⁴⁹ In addition, by improving examination capabilities of all securities regulatory authorities, the amendments should improve investor confidence in broker-dealer firms and help to maintain fair and orderly markets.

Broker-dealers with larger customer bases would have correspondingly greater obligations under the amendments than smaller broker-dealers. Accordingly, any burden on competition should be slight, especially in light of the significant regulatory benefits discussed above.

X. Summary of Final Regulatory Flexibility Analysis

A Final Regulatory Flexibility Analysis ("FRFA") regarding the amendments to Rules 17a-3 and 17a-4 under the Exchange Act,¹⁵⁰ which require broker-dealers to maintain certain additional records, specify that certain books and records must be maintained at each office, and set forth the length of time these records must be kept, has been prepared in accordance with the provisions of the Regulatory Flexibility Act (5 U.S.C. 604).

XI. Paperwork Reduction Act

Certain provisions of the amendments contain "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995.¹⁶⁶ The Commission has submitted the amendments to the Office of Management and Budget ("OMB") for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11 under the title "Books and Records Rule Amendments." The rules being amended contain currently approved collections of information under OMB control numbers 3235-0033 and 3235-0279 respectively. The collections and maintenance of information, and the reports made to the SEC and others that are required pursuant to Rules 17a-3 and 17a-4 are mandatory. 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 control number.

XII. Statutory Basis

The amendments are adopted pursuant to the authority conferred on the Commission by the Exchange Act, including Sections 17(a) and 23(a).

List of Subjects in 17 CFR Parts 240 and 242

Brokers, Reporting and recordkeeping requirements, Securities.

For the reasons set forth in the preamble, Title 17 Chapter II of the Code of Federal Regulation is amended as follows:

PART 240-GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

The revisions and additions read as follows:

§ 240.17a-3 Records to be made by certain exchange members, brokers and dealers.

§ 240.17a-3 [Amended]

The revisions and additions read as follows:

§ 240.17a-4 Records to be preserved by certain exchange members, brokers and dealers.

§ 240.17a-4 [Amended]

PART 242-REGULATIONS M and ATS

Dated: October 26, 2001.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01-27439 Filed 11-1-01; 8:45 am]

BILLING CODE 8010-01-P

¹ 17 CFR 240.17a-3.

² 17 CFR 240.17a-4.

³ For purposes of this release, "State Securities Regulators" include, as described in Section 15(h) of the Exchange Act, "the securities commissions (or any agency or office performing like functions) of the States." 15 U.S.C. 78o(h).

⁴See Exchange Act Release No. 37850 (October 22, 1996), 61 FR 55593 (Oct. 28, 1996) ("Proposing Release" and/or "Proposal") (File No. S7-27-96).

⁵ Pub. L. No. 104-290, 110 Stat. 3416 (1996).

⁶E.g., violations of State suitability and fraud laws, or federal regulations.

⁷ 15 U.S.C. 78o(h).

⁸ 142 Cong.Rec.S. 12093, S12094 (October 1, 1996) (statement of Sen. Dodd) ("It is the intent of the conferees that the SEC work closely with the States to determine what records should be maintained at branch offices and to establish a mechanism so that States could require such records be kept in the branch office, rather than at a back office halfway across the Nation.").

⁹ Exchange Act Release No. 40518 (Oct. 2, 1998), 63 FR 54404 (Oct. 9, 1998) (the "Reproposing Release" and/or "Reproposal"). The staff of the Division of Market Regulation has prepared a summary of the comment letters received on the reproposed rules and rule amendments (hereinafter referred to as "Comment Summary"). Copies of the comment letters and the Comment Summary have been placed in Public Reference File No. S7-26-98 and are available for inspection in the Commission's Public Reference Room.

¹⁰ 17 CFR 240.17a-3(a)(6). Most broker-dealers are currently required to record the time the order was received from a customer under the National Association of Securities Dealers' ("NASD") Order Audit Trail System ("OATS") rules (NASD rules 6950 through 6957 and 3110) (hereinafter "OATS rules") (See specifically NASD rules 6954(b)(16) and 3110(h)), and New York Stock Exchange ("NYSE") rules 123 and 410A.

¹¹ 7 CFR 240.17a-3(a)(7).

¹²E.g., a firm may satisfy this requirement by using the record listing any internal identification number or code assigned to associated persons which is required under new Rule 17a-3(a)(12)(ii) (17 CFR 240.17a-3(a)(12)(ii)). Additionally, the Commission believes this requirement is consistent with the NASD's OATS rules.

¹³ A number of firms have asked for guidance on the meaning of the term "to the extent feasible." The time of execution should be included on the order ticket except for situations in which it may be impossible to determine the precise time when the transaction was executed; however, in that case the broker-dealer must note the approximate time of execution. Exchange Act Release No. 3040 (Oct. 13, 1941), 11 FR 10984. The Commission has stated that the "phrase "to the extent feasible" was intended to be applicable only in exceptional circumstances where it might be actually impossible to determine the exact time of execution." Exchange Act Release No. 13508 (May 5, 1977) 42 FR 25318. However, in that case the broker-dealer must note the approximate time of execution.

¹⁴ This is referred to elsewhere in the rules as a "subscription-way basis" transaction. See 17 CFR.15c3-1(a)(2)(v).

¹⁵ 17 CFR 240.17a-3(a)(12)(ii).

¹⁶ First, reproposed paragraphs (a)(12)(ii) and (a)(12)(iii) have been moved to paragraph (a)(19) of Rule 17a-3 to keep all requirements relating to compensation records in the same section (most agreements between associated persons and broker-dealers relate to compensation in some manner). Second, reproposed paragraphs (a)(12)(iv) and (a)(12)(v) have been combined into new paragraph (a)(12)(ii). And finally, the Commission has deleted the references to local offices and state record depositories to make this paragraph consistent with the changes to the definition of "office" in paragraph (g)(1) of Rule 17a-3.

¹⁷ 15 U.S.C. 78c(a)(21) and 15 U.S.C. 78c(a)(18).

¹⁸ The Commission has consistently taken the position that independent contractors (who are not themselves registered as broker-dealers) involved in the sale of securities on behalf of a broker-dealer are "controlled by" the broker-dealer, and, therefore, are associated persons of the broker-dealer. See, e.g., In the Matter of William V. Giordano, 61 S.E.C. Dkt. 345, Exchange Act Release No. 36742 (Jan. 19, 1996) (in finding that an officer of a broker-dealer firm failed reasonably to supervise an independent contractor, the Commission found that the independent contractor was an "associated person" of the firm within the meaning of Section 3(a)(18) of the Exchange Act). See, also, Letter from Douglas Scarff, Director, Division of Market Regulation, to Gordon S. Macklin, NASD; Charles J. Henry, Chicago Board Options Exchange; Robert J. Birnbaum, American Stock Exchange; and John J. Phelan, NYSE, [1982-1983 Transfer Binder] Fed. Sec. L. Rep. (CCH) P77,303 at P77,116 (Jun. 18, 1982); Hollinger v. Titan Capital Corp., 974 F.2d 1564, 1572-76 (9th Cir. 1990), cert. denied, 111 S. Ct. 1621 (1991). A similar analysis would be applicable to other persons, such as consultants and franchisees, performing securities activities with or for the broker-dealer.

¹⁹ This provision was reproposed as Rule 17a-3(a)(16).

²⁰ Generally, suitability rules require that broker-dealers and their associated persons refrain from recommending transactions or investment strategies to a customer that would be "unsuitable" for that customer based upon the customer's situation. Factors that may be considered in assessing a customer's situation include the customer's age, financial situation, and investment experience or knowledge of the industry.

²¹See NYSE Rule 408 and NASD Rule 2510(b).

²²See, e.g., Comment Letters from Raymond James, p. 4; Investment Management and Research, p. 3, and Mayer, Brown & Platt, pp. 6-7.

²³ 17 CFR 240.17a-3(a)(17)(i)(A). This requirement is consistent with SRO rules regarding the signatures of associated persons and principals when opening customer accounts. See NYSE Rule 405(3) and NASD Rule 3110(c)(1)(C).

²⁴ The Commission believes that this requirement is consistent with SRO requirements regarding customer accounts such as those discussed above in footnote 23.

²⁵ 17 CFR 240.17a-3(a)(17).

²⁶ See Comment Letters from Donaldson, Lufkin and Jenrette, p. 9, and the International Association for Financial Planning, pp. 2-3.

²⁷ 17 CFR 240.17a-3(a)(17)(i)(A).

²⁸ 17 CFR 240.17a-3(a)(17)(i)(B)(1).

²⁹ Certain SRO rules already require that customer account records be sent to customers who open options accounts. See NASD Rule 2860(b)(16)(C) and IM-2860-2, and NYSE Rule 721(c) and Supplemental Material at .30 regarding options accounts.

³⁰ 17 CFR 240.17a-3(a)(17)(i)(B)(1) through (B)(3).

³¹ 17 CFR 240.17a-3(a)(17)(i)(B)(1).

³² Id.

³³ 17 CFR 240.17a-3(a)(17)(i)(B)(2).

³⁴ 17 CFR 240.17a-3(a)(17)(i)(B)(3).

³⁵See Comment Letters from Fidelity Investments, p. 5, Benefits Communication Corporation, p. 1, American Express Financial Advisors, Inc., p. 4, and Comerica Securities, p. 3.

³⁶ 17 CFR 240.17a-3(a)(17)(i)(B)(4).

³⁷See, e.g., NASD Rules 2310 and 2860(b)(16)(B), NYSE Rule 723, Chicago Board Options Exchange Rule 9.9, and Municipal Securities Rulemaking Board Rule G-19.

³⁸ 17 CFR 240.17a-3(a)(17)(i)(D).

³⁹ Sections 10(b) and 15(c) (15 U.S.C. 78j(b) and 15 U.S.C. 78o(c)). See e.g., Hanley v. SEC, 415 F.2d 589, 596 (2d Cir. 1969); F.J. Kaufman and Co., 50 S.E.C. 164 (1989); O'Connor v. R.F.Lafferty & Co., 965 F.2d 893 (10th Cir. 1992).

⁴⁰ 17 CFR 240.10b-5 and 17 CFR 240.15c1-2.

⁴¹See supra note 37.

⁴² If a recommendation is made, a suitability obligation arises irrespective of the medium used to deliver that recommendation. For example, a broker-dealer can make a recommendation in person, on a website, via telephone, mail, or email. A broker-dealer also can recommend a security online regardless of whether that recommendation is attributable to a specific registered representative. Whether a broker-dealer has made a recommendation is a question that can only be answered by considering all of the facts and circumstances. (See "Suitability Hypotheticals," Report of Commissioner Laura S. Unger, Online Brokerage: Keeping Apace of Cyberspace, pp. 32-4. (Nov. 1999))

⁴³ 17 CFR 240.17a-3(a)(9).

⁴⁴See, e.g., Comment Letter of Salomon Smith Barney, pp. 3-4.

⁴⁵ This paragraph was proposed as paragraph (a)(17) of Rule 17a-3.

⁴⁶ This requirement is in addition to other recordkeeping requirements such as Rule 17a-4(b)(4), which requires firms to keep originals of all correspondence received. For example, if a brokerdealer firm received a written complaint regarding the firm itself, the firm would be required to keep that complaint under Rule 17a-4(b)(4). If the complaint related to a particular associated person, the firm would also be required to make a record of the complaint as to that associated person under Rule 17a-3(a)(18); however, the firm may keep one copy of the complaint to satisfy both Rules 17a-3(a)(18)(i) and 17a-4(b)(4).

⁴⁷See 17 CFR 240.17a-4(b)(4), and NASD Rule 3110(d).

⁴⁸ This requirement expands on an existing interpretation of the Commission's financial responsibility rules and the Securities Investor Protection Act of 1970, which states that, for purposes of custody of securities, for a firm to qualify as an introducing firm with a lesser net capital requirement than a clearing firm, its customers must be treated as customers of the clearing firm. In addition, under that interpretation, the clearing firm must issue account statements directly to customers, and each account statement must contain the name, address, and telephone number of a responsible individual at the clearing firm whom a customer can contact with inquiries and complaints regarding the customer's account.

⁴⁹See, e.g., Comment Letter from Lawrence M. Lowman, p. 1.

⁵⁰See supra note 48; Exchange Act Release No. 31511 at note 21 and accompanying text, (Nov. 24, 1992), 57 FR 56973 (Dec. 2, 1992).

⁵¹ See Comment Letters from the Discount Brokers, p. 7, and Donaldson, Lufkin & Jenrette, p. 10.

⁵² The phrase "and the specific security," which appeared in the Reproposing Release, was not included in the Rule as adopted because it is redundant. The record "listing all purchases and sales of securities for which the associated person was compensated" must provide enough information to identify that purchase or sale to which the compensation was attributable.

⁵³ This Rule was reproposed as Rule 17a-3(a)(12)(ii) and Rule 17a-3(a)(12)(iii).

⁵⁴ This paragraph was reproposed as paragraph (a)(19) of Rule 17a-3.

⁵⁵See e.g., NASD Rule 2210(b) and NYSE Rule 472.

⁵⁶E.g., the record may consist of a principal's signature or initials on the communication, or a signed memo from the principal granting permission for use of the communication. Further, a firm may have policies and procedures designed to establish compliance with applicable federal regulations and SRO rules which require that a principal approve any advertisements, sales literature, or other communications with the public. Thus, records presently used to evidence compliance with SRO rules may also be used to fulfill this requirement.

⁵⁷Supra note 7.

⁵⁸ New paragraph (a)(12)(ii) of Rule 17a-3 requires firms to make a record showing, for each associated person, every office where the associated person regularly conducts a securities business and certain other information.

⁵⁹See Comment Letter from Citicorp, p. 3, "RRs in all local offices would have to be trained to do a function outside their current job responsibilities, namely to review material for applicable privileges and make records of documents reviewed by regulators."

⁶⁰See, e.g., Comment Letters from Arkansas Securities Department, pp. 1-3; Department of Financial Institutions, Commonwealth of Kentucky, p. 6; and Securities Division, State of Rhode Island and Providence Plantations, p. 1.

⁶¹ This does not relieve broker-dealers from any other Federal or SRO requirements to maintain records at office locations. See, e.g., NASD Rule 3110(d) which requires firms to keep at each Office of Supervisory Jurisdiction (defined at NASD Rule 3010(g)(1)), either a separate file of all written complaints of customers and action taken by the firm, or a separate record of such complaints and a clear reference to the files containing the correspondence connected with such complaint maintained in such office.

⁶² 17 CFR 240.17a-3(f).

⁶³ 17 CFR 240.17a-4(k).

⁶⁴ 17 CFR 240.17a-3(g)(1).

⁶⁵ The term "immediate family," as used in paragraph (k), should be interpreted to have the same meaning as it does in NASD IM-2110-1(l)(2).

⁶⁶ New paragraph (f) of Rule 17a-3 requires firms to make and keep current separately as to each office, the books and records required under various paragraphs in Rule 17a-3.

⁶⁷ New paragraph (k) of Rule 17a-4 requires firms to either keep certain records at each office or produce them at that office or at another agreeable location.

⁶⁸ Firms need not apply to or notify securities regulators as to which office it selects as the associated person's "office." However, pursuant to paragraph (a)(12)(iii) of Rule 17a-3, the firm must identify the office as such.

⁶⁹ The specific paragraphs of Rule 17a-3 that are included in this requirement are (a)(1), (a)(6), (a)(7), (a)(12), (a)(16), (a)(17), (a)(18), (a)(19), (a)(20), (a)(21), and (a)(22).

⁷⁰Per Schedule 1 data filed by broker-dealers as of year-ending December 31, 1998. Pursuant to 17 CFR 240.17a-10, Broker-dealers are required to file Schedule 1, which requires the reporting of general information designed to measure certain economic and financial characteristics.

⁷¹ Supra note.

⁷² Valid reasons for delays in producing the requested records do not include the need to send the records to the firm's compliance office for review prior to providing the records.

⁷³See Comment Letter from A.G. Edwards & Sons, Inc., p. 8.

⁷⁴ Exchange Act Release No. 38245 (Jan. 31, 1997), 62 FR 6469 (Feb. 12, 1997).

⁷⁵ For instance, limited liability companies ("LLCs") would be covered.

⁷⁶ For example, if the original report includes customer name, account number, social security number, and transactional information, however the report that can be re-created at a later date does not include social security numbers, the firm should provide the re-created report to the regulator with an explanation that although social security numbers appeared on the original report, the firm is unable to re-create the report including that information.

⁷⁷ This includes changes to hardware, software, or changes to the database used to produce the exception reports.

⁷⁸ Exchange Act Release No. 38245 (Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997) ("Electronic Storage Media Release").

⁷⁹ 17 CFR 240.17a-4(f).

⁸⁰ See 17 CFR 240.17a-4(f)(3)(i).

⁸¹ See 17 CFR 240.17a-4(f)(3)(vii).

⁸² Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 70844 (Dec. 22, 1998).

⁸³See supra note 9, at p. 54411.

⁸⁴See Comment Letters from Mutual Service Corporation, p. 6; Titan Value Equities Group, Inc., pp. 2 and 4; USAA, pp. 2 and 6; MetLife, p. 4; A.G. Edwards and Sons, Inc., p. 6; MONY, p. 4; Capital West, p. 2; Comerica Securities, p. 2; Nationwide Investment Services Corporation, p. 2; Edward Jones, pp. 1 and 3; Advest, p. 1; Salomon Smith Barney, pp. 1 to 2; NyLife Securities, pp. 6 to 7; HD Vest, p. 2; American Express Financial Advisors, pp. 2 to 5; First Union, pp. 3 to 4; Charles Schwab, pp. 3 to 4; MML Investors Services, Inc., pp. 2 to 4; National Planning Corporation, p. 1; Pumphrey Securities, p. 2; Citicorp Investment Services, pp. 2 to 3; Discount Brokers, pp. 4 to 5; M & T Securities,pp. 1 and 2; Donaldson, Lufkin & Jenrette, p. 6; Investment Management & Research, Inc., p. 4; John Hancock Distributors, Inc., pp. 3 to 4; Southwest Securities, p. 2; the Securities Industry Association, p. 10; Merrill Lynch, pp. 1, 6 to 7, and 11; and Raymond James, p. 5.

⁸⁵See Comment Letters from Michigan, pp. 1 to 2; Idaho, pp. 1 and 4; Kansas, pp. 1 to 2; Delaware, pp. 1 to 2; Colorado, p. 2; North Dakota, p. 1; Ohio, p. 1; Texas, pp. 1, 2 to 3, and 6; Hawaii, pp. 1 to 2; Rhode Island, pp. 1 to 2; New Hampshire, pp. 1 and 2; Nebraska, p. 1; Utah, pp. 1 and 3; NASAA, pp. 3 to 5 and 22; New York, pp. 1 and 3; Virginia, pp. 1 to 3; New Jersey, pp. 2 to 7; Washington, pp.2 and 6; Arkansas, pp. 1, 3, and 5; New Mexico, p. 1; North Carolina, pp. 1 to 2; and Montana, pp. 1, and 3 to 5.

⁸⁶See Comment Letters from AARP, p. 2; and the Consumer Federation of America, pp. 2 to 3.

⁸⁷See Comment Letters from American Council of Life Insurance, pp. 12 to 13; and International Association of Financial Planning, p. 6.

⁸⁸See Comment Letter from Thomas Koutris, p. 1.

⁸⁹ This paragraph provides that broker-dealers must obtain certain information relating to the accounts of natural customers, and that customer account records must be updated regularly.

⁹⁰ In the reproposed rule this paragraph provided that certain records had to be maintained at the local office, or that they had to be produced at the local office to which they related on the same day a request for those records was made by a representative of a securities regulatory authority.

⁹¹See Comment Letter from State of Virginia, pp. 1 to 3.

⁹² Per NASD Dispute Resolution, Inc. website: www.nasdradr.com/statistics.asp.

⁹³ It should be noted that these estimates do not include any internal compliance, operational, and/or legal costs incurred by these firms in dealing with these complaints.

⁹⁴See, e.g., Comment Letter from the State of New Jersey, p. 5.

⁹⁵See Second Comment Letter from State of Connecticut. The State of Connecticut performed examinations of forty-nine office locations of twenty-three broker-dealers in five States. Seventeen of these offices had two or less associated persons working there. In addition, the State reviewed the most recent 100 examinations it had performed, and as well as investigatory materials from the prior two years wherein subpoenas were issued to obtain broker-dealer records.

⁹⁶See Second Comment Letter from NASAA. The State of Florida performed examinations on 19 broker-dealers.

⁹⁷ Four States provided specific information regarding investor losses. Illinois indicated (in its Comment Letter, p. 2) that over the past 8 years, 29 enforcement cases were brought in which Illinois investors lost over $38.9 million dollars. Kansas indicated (in the attachment to its Comment Letter) that, with respect to cases they have brought over the past ten years, Kansas customers have lost over $6.4 million dollars. Ohio indicated (in its Comment Letter, p. 3) that in one particular case Ohio investors lost over $60 million dollars. Lastly, Connecticut indicated (in its Comment letter, p. 2) that, with respect to cases they have brought where the investors' relationship was established through small offices, Connecticut investors have lost over $12 million.

⁹⁸ Report by the Division of Market Regulation and the Division of Enforcement, U.S. Securities and Exchange Commission, The Large Firm Project: A Review of Hiring, Retention and Supervisory Practices (May 1994).

⁹⁹ Id., at pp. 5 and 7.

¹⁰⁰See, Comment Letter from the State of New Jersey, p. 3.

¹⁰¹See, Comment Letter from NASAA, pp. 7-8.

¹⁰²E.g., the NASD's OATS rules, and NYSE rules 123 and 410A.

¹⁰³See, Comment Letter from the Consumer Federation of America, p. 3, note 4.

¹⁰⁴See Comment Letter from State of Michigan Department of Consumer & Industry Services, p. 1.

¹⁰⁵See Comment Letter from State of Texas' State Securities Board, pp. 2-3.

¹⁰⁶ The Commission estimates that these amendments to Rule 17a-4 will take broker-dealers an additional four hours each per year. In the Reproposal the Commission estimated that these amendments would take an additional eight hours. Since the amendments being adopted today allow broker-dealers the option of not maintaining records at each office or producing records to the office to which they relate on the same day they are requested, the original estimate was reduced by one-half. The Commission believes that firms will have senior compliance personnel ensure compliance with these amended rules. According to the Securities Industry Association ("SIA") Management and Professional Earnings 2000 report, Table 051, the hourly cost of a Compliance Manager + 35% overhead is $101.25. ($101.25 x 4)=approximately $405.00 for each respondent, per year.

¹⁰⁷ ($405.00 per respondent x (7,217 broker-dealers)=approximately $2.9 million per year.

¹⁰⁸Supra at note 95 .

¹⁰⁹ 17 CFR 240.17a-3(a)(9), NASD Rules 2310(b), 3110(c) and IM-2860-2, and NYSE Rules 405, 407, 408, 410A, and 721.10.

¹¹⁰ Including customer name, address, telephone number, employment status, annual income, net worth, and the investment objectives for the account.

¹¹¹ The Commission originally proposed that broker-dealers verify customer account information at least once each year (See Proposing Release), however this was modified and reproposed as once every thirty-six months in the Reproposal based upon comments received from broker-dealers who contended that it would be too costly to send account information to customers yearly.

¹¹² Broker-dealers must furnish notification of a change in the name or address information to the customer's old address, and must furnish a copy of new account record information to the customer if some other information component is changed.

¹¹³See e.g., Comment Letter from Raymond James Financial, Inc., p. 4.

¹¹⁴See e.g., Comment Letter from Investment Management & Research, Inc., p. 4.

¹¹⁵Supra note 1.

¹¹⁶See infra note 117.

¹¹⁷ Broker-dealers reported, in their 12/31/00 Schedule 1 filings (required to be filed pursuant to 17 CFR 240.17a-10), that they maintained a total of 97,600,000 customer accounts. The Commission estimates that at least 27,100,000 of these accounts are excluded from the provisions of Rule 17a-3(a)(17) because they are either not accounts of natural persons, inactive, or accounts for which the broker-dealer does not have a suitability requirement (the Commission arrived at this number using estimates provided by the firms, in their comment letters and otherwise, as to how many of their accounts would fit into one or more of these categories. See Rule 17 CFR 240.17a-3(a)(17)(i)(D)). Accordingly, the total number of accounts which would need to be contacted for updating is 70,500,000 every three years. 70,500,000/3 = 23,500,000 per year.

¹¹⁸ Of the 23,500,000 accounts to which a copy of the account agreement must be sent each year, 22,975,000 (or 97%) of those accounts are attributable to 70 large broker-dealers which maintain over 100,000 customer accounts. Based upon the comment letters and other communications, large broker-dealers are more automated and small broker-dealers have more manual processes. The estimated additional time to send out customer account information is 1½ minutes per account for large broker-dealers and 7 minutes per account for small broker-dealers. The estimated number of customers who will provide updated account record information is 4,700,000 (or 20% of customers to which notification is sent— this estimate is based on a comment letter sent by Merrill Lynch) (4,559,000 the 4,700,000 are estimated to be maintained at large broker-dealers). The estimated time to update these account records is 5 minutes per account record for large brokerdealers and 10 minutes per account for small broker-dealers, and the estimated time to send updated account record to customer to notify of change is 11.2 minutes for large broker-dealers and 7 minutes for small broker-dealers. The estimated number of customers who will change their account record without being prompted by a mailing is 3,525,000 (3,419,250 of which are maintained at large broker-dealers), and the estimated time to send updated account record information to those customers is 11.2 minutes per account for large broker-dealers and 7 minutes per account for small broker-dealers. Thus it would take approximately 2.25 minutes per account contacted each year to send account records (((22,795,000 x 1½) + (705,000 x 7)) + ((4,559,000 x 1½) + (141,000 x 7)) + ((3,419,250 x 1½) + (105,750 x 7)))/23,500,000 accounts contacted yearly. In addition, it would take approximately 1.03 minutes per account contacted each year to update the account records (((4,559,000 x 5) + (141,000 x 10))/23,500,000 accounts contacted yearly. In total, the Staff estimates that it would take 3.28 minutes per account contacted each year for processing and any updating.

¹¹⁹ The estimated total additional hours to provide customers with account record information is 880,369 hours ((((22,795,000 x 1½) + (705,000 x 7)) + ((4,559,000 x 1½) + (141,000 x 7)) + ((3,419,250 x 1½) + (105,750 x 7)))/60 minutes). The estimated total additional hours to update customers accounts is 403,417 hours (((4,559,000 x 5) + (141,000 x 10))/60 minutes in an hour). The hourly wage of the average person who would be providing customers with account record information is $22.70 per hour (per the SIA Report on Office Salaries In the Securities Industry 2000, Table 082 (Retail Sales Assistant, Registered) and including 35% in overhead charges). The hourly wage of the average person who would be updating account record information is $25.90 per hour (per the SIA Report on Office Salaries In the Securities Industry 2000, Table 086 (Data Entry Clerk, Senior) and including 35% in overhead charges). Thus the aggregate cost of these hours is about $30.4 million ((880,369 hours x $22.70) + (403,417 hours x $25.90)). The estimated additional cost of paper, printing, and postage to provide this information to customers is between $.05 and $.244 per record sent, or between $1.6 million and $7.7 million (($.05 or $.244) x (23,500,000 + 4,700,000 + 3,525,000)). Yielding a total cost per record sent of between $1.36 and $1.62 (($30.4 million + ($1.6 million or $7.7 million))/23,500,000 records sent per year).

¹²⁰ It is estimated that it will take firms 2 hours each, on average, to update their forms to include information regarding the meaning of investment objective terms. The Commission believes that firms will have an attorney perform this task. According to the SIA Management and Professional Earnings 2000 report, Tables 107 (Attorney) and 108 (Compliance Attorney), the hourly cost of an attorney + 35% overhead is $156.00 per hour. ($156.00 x 2) = approximately $312.00 per broker-dealer.

¹²¹ One small broker-dealer stated, "smaller firms lack the automation to do this type of action* * * without additional personnel," (See Comment Letter from Titan Value Equities Group, Inc., p. 2) another stated, "[w]e do not have electronic account records," (See Comment Letter from Capital West Securities, Inc., p. 2) and another stated, "for most firms [the] initial identification process would be manual" and "compiling the account record to send would require* * * pulling out a paper file for the account and making photo copies of the documents or pulling up the account on a computer system and printing out the required account information screens." (See Comment Letter from Comerica Securities, p. 2.) No smaller broker-dealer provided information regarding any increased equipment or systems development costs.

¹²²See Comment Letter from Morgan Stanley Dean Witter, p. 4.

¹²³See Comment Letter from Merrill Lynch, p. 7 ($630,000 + $370,000 + $300,000).

¹²⁴See Comment Letter from Dean Witter, p. 4.

¹²⁵ See Comment Letter from Merrill Lynch, p. 7. Merrill Lynch's estimate that they would spend $3.8 million for ongoing costs was reduced to account for the fact that the Commission has included costs to send account records to customers, costs to update customer account records, costs to send notification of updates to customers, and postage costs, which are included in Merrill's $3.8 million figure, elsewhere.

¹²⁶ 17 CFR 240.17a-3(a)(19)(ii).

¹²⁷ 17 CFR 240.17a-3(a)(12)(ii).

¹²⁸ 17 CFR 240.17a-3(a)(12)(iii).

¹²⁹ 17 CFR 240.17a-3(a)(19)(i).

¹³⁰See supra text accompanying notes 95 and 96.

¹³¹See supra 102 note.

¹³² 17 CFR 240.17a-3(a)(17)(ii) and 17 CFR 240.17a-4(b)(4).

¹³³ 17 CFR 240.17a-3(a)(21).

¹³⁴ 17 CFR 240.17a-3(a)(22).

¹³⁵See e.g., NASD Rule 3010.

¹³⁶See e.g., NASD Rule 3110(d), and for options complaints NASD Rule 2860(b)(17).

¹³⁷ The Commission estimates that it will take each broker-dealer, on average, two hours to update its forms to include the address to which complaints should be sent. This is a very conservative estimate, since it will probably take much less than 2 hours to write down the brokerdealer's address and where it should be placed on the form, but additional time was added to account for supervisory review. The Commission believes broker-dealers would have an attorney perform this task. According to the SIA Management and Professional Earnings 2000 report, Tables 107 (Attorney) and 108 (Compliance Attorney), the hourly cost of an attorney + 35% overhead is $156.00 per hour. ($156.00 x 2) = approximately $312.00 per broker-dealer.

¹³⁸ The Commission estimated in its Reproposal that, on average, this requirement will obligate a broker-dealer to spend approximately 30 minutes each year to ensure that the records are in compliance with these amendments. The Commission received no specific comments relating to this estimate. The Commission believes firms may have senior compliance personnel perform this task. According to the SIA Management and Professional Earnings 2000 report, Table 051, the hourly cost of a Compliance Manager + 35% overhead is $101.25. ($101.25 x ½ hour) = approximately $50.63 per broker-dealer.

¹³⁹ The Commission estimated in its Reproposal that it will take each firm 10 additional minutes each year to assure compliance with the amendments, and it received no specific comments relating to this estimate. The Commission believes that firms will have senior compliance personnel perform this task. According to the SIA Management and Professional Earnings 2000 report, Table 051, the hourly cost of a Compliance Manager + 35% overhead is $101.25. ($101.25 x 10 minutes/60 minutes in an hour) = approximately $16.88 per broker-dealer.

¹⁴⁰ 15 U.S.C. 78w(a)(2).

¹⁴¹ 15 U.S.C. 78c(f).

¹⁴²Supra note 9, at 54411.

¹⁴³ Of the 144 total "comment letters" on file, seventeen are memos by the staff of the Commission relating to meetings with various industry groups, and twelve simply request that the comment period be extended.

¹⁴⁴See, Comment Letter from NASAA, p. 7.

¹⁴⁵See, Comment Letters from Titan Value Equities Groups, Inc., p. 3; BenefitsCorp Equities, Inc., p. 2; and One Orchard Equities, Inc. p. 2.

¹⁴⁶See, Comment Letter from MML Investor Services, Inc., pp. 5 to 6.

¹⁴⁷ Paragraph (k) of Rule 17a-4.

¹⁴⁸See paragraphs (a)(6)(ii) and (a)(17)(i)(D) of Rule 17a-3. In addition, paragraph (a)(17) of Rule 17a-3 was modified to limit the requirement to accounts with a natural person as the customer.

¹⁴⁹See Comment Letter from NASAA, p. 4.

¹⁵⁰ 15 U.S.C. 78a et. seq., adopted on October 11, 1996.

¹⁵¹ 15 U.S.C. 78o(h).

¹⁵²See supra note 8.

¹⁵³ Pursuant to 17 CFR 240.0-10, the term "small business" or "small organization" when used with reference to a broker or dealer means a broker or dealer that: (i) had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date its audited financial statements for the prior fiscal year were prepared pursuant to 17 CFR 240.17-5(d) or, if not required to file such statements, a broker-dealer that had total net capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (ii) is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in 17 CFR 240.0-10. In addition, Exchange Act Release No. 40122 (June 24, 1998) 63 FR 35508 (June 30, 1998) recently amended standard that defines what it means to be "affiliated" with any person that is not a small business.

¹⁵⁴See supra note 9.

¹⁵⁵See Comment Letter from American Council of Life Insurance, p. 16.

¹⁵⁶See Comment Letters from Titan Value Equities Group, Inc., pp. 2-3; Lawrence Lowman, p. 1; and John Hancock Distributors, Inc., p. 3.

¹⁵⁷E.g., broker-dealers which only facilitate transactions in certain types of products or broker-dealers which do not make recommendations.

¹⁵⁸See e.g., NASD Rule 3110(c).

¹⁵⁹ 17 CFR 240.17a-4(a)(1).

¹⁶⁰See Comment Letter from Lawrence Lowman, p. 1.

¹⁶¹See Comment Letter from Titan Value Equities, p. 3.

¹⁶²Id., p. 2.

¹⁶³See Comment Letter from John Hancock Distributors, Inc., p. 3.

¹⁶⁴Id.

¹⁶⁵ 15 U.S.C. 78o(h).

¹⁶⁶ 44 U.S.C. 3502 et seq.

¹⁶⁷ Of approximately 7,739 broker-dealers registered with the Commission, approximately 341 are not yet active because their registration is pending SRO approval and approximately 181 are inactive because they have ceased doing a securities business and have filed a Form BDW with the Commission. Of these 7,217 active, registered broker-dealers, three are registered OTC Derivatives Dealers. OTC Derivatives Dealers are a special class of broker-dealers that limit their business to dealer activities in eligible over-the-counter derivative instruments and that meet certain financial responsibility and other requirements.

¹⁶⁸Supra note 117.

¹⁶⁹ The Commission, in its Reproposal, estimated that it would take broker-dealers 10 seconds to furnish the account record to customers. Because many commenters contended that this estimate was too low, the Commission raised its estimates.

¹⁷⁰Supra note 121.

¹⁷¹See Comment Letter from Comerica Securities, p. 2.

¹⁷²See Comment Letter from Merrill Lynch, p. 7.

¹⁷³See Comment Letter from Titan Value Equities, Inc., p. 2.

¹⁷⁴See NASD Rules 3110(c) and IM-2860-2}, and NYSE Rules 405, 407, 410A, and 721.10.

¹⁷⁵See e.g., NASD Rule 2310(b) and IM-2860-2.

¹⁷⁶Supra note 158.

¹⁷⁷See e.g., NYSE Rule 408.

¹⁷⁸Supra note 126.

¹⁷⁹Supra note 127.

¹⁸⁰Supra note 128.

¹⁸¹Supra note 129.

¹⁸² 17 CFR 240.17a-3(a)(18)(i).

¹⁸³Supra note 136.

¹⁸⁴ 17 CFR 240.17a-3(a)(17)(ii) and 17 CFR 240.17a-3(a)(20).

¹⁸⁵Supra note 133.

¹⁸⁶Supra note 134.

¹⁸⁷Supra note 135.

¹⁸⁸Supra note 102.

¹⁸⁹ 17 CFR 240.17a-3(a)(17).

¹⁹⁰ 17 CFR 240.17a-3(12) and (19).

¹⁹¹ 17 CFR 240.17a-3(a)(20) to (22).