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SEC Issues Final Rules for Electronic Records


The Securities and Exchange Commission has adopted much of what the Investment Company Institute of Washington, D.C. had requested in its final rule for electronic record-keeping by investment companies and advisers. The rule, which the SEC released on May 25, went into effect last Thursday.

In April, the ICI sent comments to the SEC on its proposed rule changes to permit investment companies and advisors to preserve required records electronically in line with the Electronic Signatures in Global and National Commerce Act (E-SIGN), enacted by Congress last June. The act is intended to facilitate the commercial use of electronic records and signatures and to establish guidelines on contracts signed electronically.

In February, the Federal Trade Commission and the Department of Commerce requested comments on the consumer consent requirement of E-SIGN. The comments will be used to develop a report required by Congress. The final interpretation of the act will have a major impact on how investment companies conduct business. (MFMN 4/23/01) The ICI sent a letter to the Federal Trade Commission in March, outlining several problems it had with the consent requirement, such as the mandate that consent be received electronically and the uncertainty of which disclosures are required to be in writing. (MFMN 4/23/01) The FTC has not yet responded publicly to those comments.

The rule recently issued by the SEC is an amendment to the Investment Company Act of 1940 precipitated by the E-SIGN legislation, and is separate from the Federal Trade Commission report to Congress. One of the objections the ICI had to the original SEC proposal dealt with the time granted to investment companies to provide records to the SEC upon request, according to the ICI letter. The proposal stated that records must be provided no more than one business day after a request, according to the SEC. The ICI maintained that there are some instances in which one business day may not be sufficient, according to the letter. Currently, an informal system between the SEC examiners and fund companies exists whereby minor extensions can be granted without formal documentation, a process that has been very effective, according to the letter. The SEC, in its final rule, eliminated the 24-hour requirement and allowed informal arrangements to continue.

"We agree that such arrangements when entered into and performed in good faith by funds or advisers can facilitate the examination process," according to an SEC statement accompanying the release of the final rule. "While the promptly' standard imposes no specific time limit, we expect that a fund or adviser would be permitted to delay furnishing electronically-stored records for more than 24 hours only in unusual circumstances. At the same time, we believe that in many cases, funds and advisers could, and therefore will be required to, furnish records immediately or within a few hours of request."

The ICI also said in its comment letter that there are some record-keeping rules under the 40 Act that were not addressed by the newly-proposed amendments. It should be made clear that the new rules apply to all records kept by funds, according to the letter.

"In response to a suggestion of one commenter, we are expanding [the] rules ... to include all records that are required to be maintained and preserved by any rule under the Investment Company or Advisers Acts so that it is clear that if funds and advisers keep records electronically they must comply with the conditions of these rules," according to the SEC, in its final rule.

The ICI also requested that the SEC examine standards that would apply to electronic record-keeping by transfer agents specifically. On May 11, the SEC adopted amendments to the Securities Exchange Act of 1934, which allow transfer agents to store records electronically under certain conditions not unlike those for investment companies, according to the ICI.

Some of the ICI's suggestions were not addressed in the final rule, however. For example, the rule states that when funds provide records to the SEC examination staff, they must do so "in the medium" in which they are stored, according to the ICI.

"It is unclear why this requirement is necessary," according to the ICI letter. "We question the need, for example, to require a fund or an adviser that stores records on CD ROM to produce copies of its CD ROMs merely for the purpose of providing a copy of the record to the examination staff."

Still, the ICI is very pleased with the final rule, according to John Collins, a spokesperson for the ICI.

"When the SEC proposed the rules, we generally supported it," he said. "We just had some comments and wanted to clarify that the rules would apply to all records held by funds, and the final rule does do that. It's comprehensive."