Rules 17a-3 and 17a-4 (the "Books and Records Rules") under the Securities and Exchange Act of 1934 impose requirements on broker-dealers to create and maintain records relating to a broad range of business activities. Significant amendments to these rules became effective May 2, 2003. This notice is a reminder that members and member organizations should carefully examine their recordkeeping, supervisory, account approval and other aspects of their business covered by Rules 17a-3 and 17a-4 and implement all procedures necessary to comply with those rules in their entirety. In particular, members and member organizations should ensure that their procedures conform to amendments to Rules 17a-3 and 17a-4 that took effect in May.
While many of the amendments relate to customers and firms conducting business at multiple locations and, therefore, may not be applicable to Amex members and member organizations that do not have customers or which do not conduct business from multiple locations, a number of the amendments are of general applicability and, therefore, must be complied with by all Amex members and member organizations.
Specifically, Rule 17a-3, as amended, imposes additional requirements with respect to the creation and maintenance by broker-dealers of information relating to:
Moreover, Rule 17a-3, as amended, requires that broker-dealers:
- Employees and other associated persons;
- Order tickets;
- Customers and their accounts; and
- Communications with the public.
Additionally, these rules specify how long specific records must be kept. Note that in some instances, these time frames are longer than pre-May 2, 2003 time frames. Members and member organizations are cautioned to pay special attention to the retention time frames that apply for specific records as well as to records accessibility.
- Make certain records available at their branch offices;
- Designate in writing persons at each location who can explain the information in their records; and
- Designate in writing the principals responsible for establishing compliance policies and procedures.
These amendments are described in more detail below. Members and member organizations are cautioned, however, that the following description is not meant to be exhaustive and is not a substitute for review of the full text of the Commission releases approving the amendments. Please refer to the SEC Release adopting the amendments (Release 34-44992 (October 26, 2001), available on the SEC's website at www.sec.gov), and the SEC's Interpretive Release on the amendments at www.sec.gov/rules/interp/34-47910.htm. Members and member organizations are also directed to information regarding the amendments that have been published by the NASD, including a "New and Amended Recordkeeping Requirements Checklist" and a memorandum in question and answer format, available at the NASD's website at http://www.nasdr.com/books.asp.
Rule 17a-3 (Records to Be Made by Certain Exchange Members, Brokers and Dealers)
An associated person includes any partner, officer, director, or branch manager of a broker-dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with a broker-dealer, or any employee of a broker-dealer. This includes order-takers, any independent contractor, consultant, franchisee, or other person providing services to a broker-dealer equivalent to those services provided by persons specifically referenced in the Exchange Act. The term does not include persons whose functions are solely clerical or ministerial. (See Rule 17a-3(h)(4) and sections of the 1934 Act referred to therein.).
Broker-dealers are required to keep certain records regarding their associated persons. Required records include all agreements pertaining to the associated person's relationship with the broker-dealer and a summary of each associated person's compensation arrangement, a record listing all identification numbers relating to each associated person, a record of the office at which each associated person regularly conducts business, and a record that lists each transaction for which each associated person will be compensated. (Rule 17a-3(a)(12) and (19)).
Compensation Arrangements-Members and member organizations are required to keep a record for each associated person of each purchase and sale of a security attributable to that associated person; for each such purchase or sale, the amount of compensation if monetary and a description of the compensation if not monetary; and all agreements pertaining to the relationship between each associated person and the member or member organization. (Rule 17a-3(a)(19)).
Person to Explain Records and their Content
Customer Complaints -Members and member organizations are required to keep a record for each associated person relating to written customer complaints concerning that associated person. The record must include the complainant's name, address, and account number; the date the complaint was received; the name of any associated person identified in the complaint; a description of the nature of the complaint; and the disposition of the complaint. (Rule 17a-3(a)(18)).
Members and member organizations are required to create a written list designating the persons who can explain the information in their records, and that list principals responsible for establishing compliance policies and procedures. (Rule 17a-3(a)(21) and (22)).
Members and member organizations are required to note on the memorandum for each brokerage or proprietary order the identity of the associated person responsible for the account, the identity of the person who accepted the order, the terms of the order, any modification of the order, and whether the order was entered pursuant to discretionary authority. (Rule 17a-3(a)(6) and (7)). In addition, Rule 17a-3(a)(6) requires that firms record the time a brokerage order was received from a customer.
Communication with the Public
Members and member organizations are required to retain all communications received and copies of all communications sent (including inter-office memoranda and communications relating to their business as such, including all communications that are subject to rules of a SRO of which the member or member organization is a member regarding communications with the public. The term communications includes sales scripts.(Rule 17a-4(b)(4)). Members and member organizations should also refer to Amex Rule 991 (Communications to Customers) for Exchange requirements applicable to customer communications.
Account Information-Members and member organizations are required to send account information to customers for verification within 30 days of account opening and at least once every 36 months thereafter.
Updated Account Information--If a customer has provided updated account record information, the member or member organization must send a copy of the revised account record to the customer within 30 days after it received notification of the change or they may send the notification with the next statement mailed to the customer. (Rule 17a-3(a)(17)).
Increased Customer Information-Members and member organizations must obtain the following additional information for each account with a natural person as the customer: the customer name, tax identification number, address, telephone number, date of birth, employment status, annual income, net worth, investment objectives, and the signature of the associated person and a principal (Rule 17a-3(a)(17)).
If the account is a discretionary account, the member or member organization must obtain (i) the signature of the customer granting discretion, (ii) the date discretion was granted, and (iii) the signature of the person to whom discretion was granted. (Rule 17a-3(a)(17)).
Rule 17a-4 (Records to Be Preserved by Certain Exchange Members, Brokers and Dealers)
Rule 17a-4, as amended, requires broker-dealers to maintain certain additional books and records, including a record listing all persons who are qualified to explain a broker-dealer's books and records. Rule 17a-4, as amended, requires members and member organizations to make available certain records at each office, including the following:
Rule 17a-4(k), as amended, was modified to provide that members and member organizations may either maintain copies of records in the office to which they pertain or must produce certain records that relate to a particular office "promptly."
- Brokerage orders and orders for the broker- dealer's account;
- Records relating to associated persons;
- Associated persons' compensation records;
- Customer account records;
- Records of customer complaints;
- Advertisements, sales literature, or other communications with the public;
- The identity of principals responsible for establishing policies and procedures.
Rule 17a-4 also increases the length of time broker-dealers must maintain certain records.
Questions concerning topics in this Notice may be directed to Glen P. Barrentine, Senior Vice President / Director of Member Firm Regulation at 212-306-1560 or by e-mail at firstname.lastname@example.org or Robert J. Devine, the Financial Regulatory Services Director at 212-306-1588 or by e-mail at email@example.com.
- Information relating to the principals responsible for reviewing and updating policies and procedures created - Must be preserved six years, the first two years in an easily accessible place.
- Copies of Forms BD, BDW and amendments - Must be preserved for the life of the enterprise and of any successor enterprise.
- Copies of compliance, supervisory, and procedures manuals - Must be preserved until three years after the termination of the use of the manual.
- Customer account records - Must be preserved for six years after the closing of the account or the date on which the information replaced or updated, whichever is earlier.
- Order ticket information - Must be preserved for six years, the first two years in an easily accessible place.
- Records relating to compensation of associated persons - Must be preserved at least three years after the termination of employment.
- Evidence of compliance with SRO advertising and sales literature rules - Must be preserved three years, the first two years in an easily accessible place.
- Exception reports - Must be preserved for at least eighteen months after the date the report was generated.
- Specialized reports produced pursuant to an order or settlement - Must be preserved three years after the date of the report.