Electronic Confirms For Broker-Dealers
October 27, 1997
Mr. Michael A. Macchiaroli
Division of Market Regulation
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. Macchiaroli:
The Department of the Treasury (“Department”) has received a number of inquiries from government securities broker-dealers regarding the permissibility of issuing electronic confirmations under the regulations implementing the Government Securities Act of 1986, as amended/1/ (“GSA regulations,” 17 CFR 400, et seq.). Specifically, the callers have asked whether firms retaining custody of government securities that are the subject of repurchase agreements (“hold-in-custody repos”) can deliver electronic confirmations of these transactions to customers pursuant to § 403.4(e) of the GSA regulations. The purpose of this interpretive letter is to: (1) clarify that the electronic delivery and storage of confirmations and other information by firms registered with the Securities and Exchange Commission (“SEC”) as specialized government securities brokers or dealers under Section 15C of the Securities Exchange Act of 1934 (“15C firms”) are permissible in accordance with the requirements specified below, and (2) eliminate any ambiguity that may exist as to the specific regulatory requirements and conditions that apply to 15C firms' electronic delivery and storage of information.
Electronic Delivery of Information
During the past two years, the SEC has issued two releases regarding the use of electronic media by general securities broker-dealers and other entities to deliver information as required under the Securities Exchange Act of 1934 and other statutes./2/ These releases include interpretations of four SEC rules that are adopted, with minor modifications, by the GSA rules that govern 15C firms. All four of the SEC rules address the obligations of broker-dealers to deliver certain information to customers: Rule 8c-1 (includes the requirement of a written customer consent to hypothecation and of a written notice to a pledgee that a security pledged is carried for the account of a customer); Rule 15c3-2 (includes free credit balance notification requirements); Rule 15c3-3 (includes hold-in-custody repurchase agreement and confirmation requirements); and Rule 17a-5 (includes financial statement requirements). These rules are adopted by sections 403.2, 403.3, 403.4(e), and 405.2 of the GSA rules, respectively. The Department has reviewed the standards established by the SEC in these interpretations and views them as appropriate for 15C firms that wish to deliver confirmations and other information to customers electronically./3/ The application of the SEC standards to 15C firms will also ensure consistency between 15C firms and general securities broker-dealers with respect to regulatory requirements for electronic information dissemination.
Accordingly, pursuant to 15 U.S.C. 78o-5(b), we interpret 17 CFR 403.2, 403.3, 403.4(e), and 405.2 to mean that 15C firms may use electronic media to fulfill their obligations to deliver information to customers, provided that such firms adhere to the guidelines established in SEC Releases 33-7233 and 33-7288./4/ 15C firms are strongly encouraged to review these releases in their entirety to ensure that they are in compliance with all of the electronic delivery requirements.
The Department views certain of the SEC standards as particularly important for 15C firms that intend to engage in the electronic delivery of hold-in-custody repo confirmations to customers. Accordingly, the Department wishes to emphasize the importance of the following requirements: (1) electronically delivered confirmations must include all of the information required pursuant to the provisions of 17 CFR 240.15c3-3(b)(4), as modified by 17 CFR 403.4(e) of the GSA regulations; (2) before delivering confirmations electronically, 15C firms must obtain the customer's informed consent; and (3) paper copies of confirmations must be provided by 15C firms should the customer request them -- even if the customer initially consented to the receipt of electronic confirmations. The Department notes that these requirements are consistent with the conditions specified in the Department's July 1992 interpretive letter addressing facsimile confirmations./5/ Moreover, it is important to note that an unsuccessful electronic delivery of a confirmation or other document would not relieve the 15C firm of its obligation to deliver the required information to the customer. Delivery of the confirmation, which must be issued by the end of the transaction day (i.e., prior to opening the next business day), would still need to be accomplished by other appropriate means.
Electronic Storage of Records
The Department also recognizes that evolving technological developments will continue to provide economic and time-saving advantages to 15C firms by expanding the scope of their recordkeeping options. Pursuant to a no-action letter of the SEC staff, some market participants began to employ non-rewriteable, non-erasable optical disk technology to store various records required by federal securities regulations. The SEC later amended its recordkeeping preservation Rule 17a-4/6/ in February 1997 to permit the electronic storage of broker-dealer records under specified conditions.
Since the recordkeeping provisions of the GSA rules that apply to 15C firms (17 CFR 404.3) adopt SEC Rule 17a-4, the amendment to that rule also applies to 15C firms, thus permitting them to maintain electronic records in accordance with the specified conditions. Further, the Department has reviewed the amendment to Rule 17a-4 and believes it contains sufficient recordkeeping safeguards to obviate any additional requirements by the Department. Therefore, 15C firms wishing to engage in electronic recordkeeping must familiarize themselves and comply with the conditions contained in the SEC amendment to Rule 17a-4.
We have consulted with the staff of the SEC in considering the issues in this letter. This letter is also being sent to the National Association of Securities Dealers Regulation, Inc. and the New York Stock Exchange as guidance. A similar interpretive letter is being sent to the bank regulatory agencies.
Pursuant to 17 CFR 400.2(c)(7)(i), this letter will be made immediately available to the public.
Richard L. Gregg
Identical Letters also sent to:
Mr. Edward A. Kwalwasser
Executive Vice President
New York Stock Exchange
11 Wall Street
New York, NY 10005
Mr. Samuel Luque, Jr.
Associate Director, Compliance
National Association of Securities Dealers Regulation, Inc.
1735 K. Street, N.W.
Washington, D.C. 20549
/1/ 15 U.S.C. 78o-5.
/2/ Securities Act Release No. 33-7233 (October 6, 1995), 60 FR 53458 (October 13, 1995) and Securities Act Release No. 33-7288 (May 9, 1996), 61 FR 24644 (May 15, 1996).
/3/ 17 CFR 400.2(d) states, among other things, that interpretations of the SEC and its staff of any SEC regulation expressly adopted by reference in the GSA regulations shall be of the same effect as if the regulation being interpreted were solely the SEC's regulation.
/4/ See supra note 2.
/5/ See letter from Richard L. Gregg, Commissioner, Bureau of the Public Debt, Department of the Treasury, to Mr. Richard S. Allen, Senior Vice President, First Interstate Bank of Oregon, N. A. (July 2, 1992) regarding facsimile transmissions of confirmations by financial institutions and 15C firms to customers.
/6/ Securities Exchange Act Release No. 34-38245 (February 5, 1997), 62 FR 6469 (February 12, 1997).