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83-3 Securities and Exchange Commission Approves Amendments to Rule 17f-2; Fingerprinting of Securities Industry Personnel

TO: All NASD Members

The Securities and Exchange Commission has adopted a number of amendments to Rule 17f-2 concerning the fingerprinting of securities industry personnel. These revisions are intended to simplify the process of claiming exemptions by clarifying existing provisions of the rule and by incorporating in the rule other exemptions previously granted by the Commission on a case-by-case basis.

These amendments represent substantial relief to members by reducing the burden associated with the submission and review of notices and certain requests for exemptions, among other things. As finally adopted, the rule reflects a number of recommendations made by the NASD via the comment process.

The details of the changes to the rule are contained in Securities Exchange Act Release No. 19268, published in the Federal Register on December 1, 1982, (a reprint of that release is attached). A discussion of the significant aspects of these amendments follows.

Permissive Exemptions Available to Registered Broker-Dealers Engaged in Sales of Certain Securities

Paragraph (a)(l)(iii) grants permissive exemptions from the requirements of the fingerprinting rule to registered broker-dealers engaged in the sale of certain securities which are not ordinarily evidenced by the issuance of certificates. This relief is available on a self-operative basis to registered broker-dealers engaged exclusively in the sale of shares of registered open-end management investment companies, variable contracts, or interests in limited partnerships, unit investment trusts or real estate investment trusts; provided that:

  • The broker-dealer is current in its continuing obligation to update Item 10 of Form BD to disclose the existence of any statutory disqualification;
  • The broker-dealer has insurance or bonding coverage indemnifying it for losses to customers caused by the fraudulent or criminal acts of any of its partners, directors, officers or employees for whom an exemption is being claimed under this paragraph; and,
  • The broker-dealer is subject to the jurisdiction of a state insurance department with respect to its sale of variable contracts.

Once the broker-dealer satisfies these conditions, the permissive exemption is available to every partner, director, officer and employee of the broker-dealer provided that such person meets the requirements of paragraph (a)(l)(i)(B), i.e., he does not regularly have access to the keeping, handling or processing of securities, monies or the original books and records relating to the securities or the monies.

Notice Requirement

The adopted amendments also include a change concerning the "Notice Pursuant to Rule 17f-2" ("Notice") which contains information concerning those persons for whom a broker-dealer claims an exemption from the fingerprinting requirement. Previously, a broker-dealer was required to submit these Notices to the SEC's principal office in Washington, D.C., and to the regional office in which the broker-dealer has its principal place of business. The revised rule, however, eliminates this requirement. Instead, a broker-dealer is required to retain the Notice among its records and to furnish it upon request by the Commission or the broker-dealer's designated examining authority. The amendments also clarify what information must be included in the Notice.

This change regarding the Notice requirement has implications for a firm which processes registration application forms through the Central Registration Depository (CRD). The CRD, which is governed by contractual agreement between the NASD and the North American Securities Administrators Association, honors federal exemptions from the fingerprint requirement in accordance with the provisions of Rule 17f-2. However, CRD must be advised that a firm is claiming such exemptions. In this regard, a broker-dealer is requested to submit a copy of its Notice to the CRD. The Notice should be directed to the attention of James J. Cummings, Associate Director, NASD Membership Department, 1735 K Street, N.W., Washington, D.C. 20006.

Exemptive Relief Available for Illegible Fingerprints

Paragraph (a)(l)(iv) incorporates in the rule an exemption that has been granted in Commission letters to persons from whom a complete set of legible fingerprints cannot be obtained. In the past, these exemptions have only been granted by the Commission upon specific written application.

As a result of the recent amendments, any person who is required to be fingerprinted but who cannot produce legible prints will now be exempt if the employing broker-dealer can demonstrate that it has on at least three occasions attempted in good faith to obtain a complete set of fingerprints; it is no longer necessary to make written application to the Commission.

In this regard, however, a broker-dealer is expressly directed to have that person's fingerprints rolled by someone competent to do so and to submit the prints for processing in accordance with proper procedures. This exemption is then available provided that the fingerprint cards were rejected by the FBI specifically because the fingerprints were illegible.

Again, there are CRD considerations connected with this amendment. As of October 1, 1982, there were significant enhancements made to CRD which included improvements to the way in which fingerprinting records are maintained. As a result, for those applications for which fingerprint cards have been processed three times since October 1, 1982, and rejected each time because the fingerprints are illegible, CRD will automatically make note of the exemption which is now available. For those applications for which one or more attempts to submit an acceptable set of fingerprints was made prior to October 1, 1982, proof of the prior attempt(s) (and rejection(s)) must be submitted to CRD. Copies of these records should be directed to the attention of H. Craig Thompson, Assistant Director, Special Registration Review, 1735 K Street, N.W., Washington, D.C. 20006.

Record Maintenance

Paragraph (d) states that every broker-dealer is required to maintain processed fingerprint cards and other substitute records and information received from the FBI, regardless of the method used to fulfill the requirement. All such records must be retained for a period of not less than three years after termination of an individual's employment or relationship with the broker-dealer.

As a result of the revisions to the rule, in addition to maintaining these records in its principal office, a broker-dealer must provide written evidence to its appropriate regional, branch or satellite office that a person's fingerprints have been processed by the FBI. It must also provide to that office a copy of any criminal history information received.

Another change permits a broker-dealer to reproduce and maintain on microfilm processed fingerprint cards, provided that the broker-dealer meets certain requirements concerning the storage and accessibility of these records.

Other Exemptions

One last note concerns requests for other exemptions from the fingerprinting requirement. The revised rule continues to provide that a broker-dealer may request exemptions for other persons by specific written application to the Commission (paragraph (a)(2)). As in the past, these requests will be considered by the Commission on a case-by-case basis.

* * *

Questions concerning these amendments may be directed to James J. Cummings, Associate Director, Membership, or H. Craig Thompson, Assistant Director, Special Registration Review at (202) 728-8105 and (202) 728-8362, respectively.

Sincerely

Gordon S. Macklin
President

Attachment

federal register

Wednesday, December 1, 1982

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-19268]

Amendments Granting Additional Exemptions From Fingerprinting Requirement

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Commission today is adopting amendments to the rule that establishes a scheme for complying with the fingerprinting requirement contained in Section 17(f)(2) of the Securities Exchange Act of 1934 (the "Act") and for claiming exemptions from that requirement. The adopted rule simplifies the process of claiming exemptions and makes that process less costly and more efficient.

EFFECTIVE DATE: November 22, 1982.

FOR FURTHER INFORMATION CONTACT: Thomas V. Sjoblom, Special Counsel, (202) 272-7345, or Ester Saverson, Jr., Staff Attorney, (202) 272-2906, Division of Market Regulation, Securities and Exchange Commission, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: On April 29, 1982, the Commission published for comment in the Federal Register1 Securities Exchange Act Release No. 18645 (April 14, 1982) (the "Proposal Release"), proposing amendments to Rule 17f-2 [17 CFR 240.17f-2], which describes procedures for complying with and claiming certain exemptions from the requirement of Section 17(f)(2) of the Act.2 The proposed amendments to Rule 17f-2 as published for comment would (1) clarify the conditions necessary for claiming certain exemptions; (2) incorporate other exemptions previously granted by the Commission, on a case-by-case basis, pursuant to paragraph (g) of the rule: (3) clarify the subject matter content required in "Notices Pursuant to Rule 17f-2" ("Notices") claiming exemptions from the fingerprinting requirement;3 (4) eliminate the Notice submission requirement and, instead, require subject organizations to retain the Notice among their records; and (5) exempt from the requirement to prepare and retain a Notice any transfer agent that performs transfer agent functions only on behalf of itself as an issuer and that receives fewer than 500 items for transfer and fewer than 500 items for processing during any six consecutive months. As stated in the Proposal Release, the Commission anticipated that these amendments would eliminate certain ambiguities in the rule and would reduce the burden on the securities industry and the Commission associated with the submission and review of Notices and other requests for exemptions.

In response to the Proposal Release, the Commission received comments from five commentators;4 they unanimously favored the proposed amendments, although certain modifications were suggested. In light of these comments, the Commission has modified the proposed amendments and, as modified, is adopting those amendments to the rule. Since the Commission is adopting the amendments as published for comment with only minor revisions, the remainder of this release will discuss those revisions along with certain other issues raised by the commentators. The text of Rule 17f-2, as amended today, is set forth at the end of this release. Guidance concerning the operation of the basic amendments can be found in the Proposal Release, except as expressly discussed below.

I. Public Comments and Modification to Rule 17f-2

A. Exemption from the Fingerprinting Requirement
The New York Stock Exchange, Inc., ("NYSE") and the National Association of Securities Dealers, Inc. ("NASD") commented on various aspects of the exemption granted to certain persons associated with registered broker-dealers that are engaged exclusively in the sale of certain securities ordinarily not evidenced by certificates ("uncertificated securities") — namely shares of registered open-end management investment companies, variable contracts or interests in limited partnerships, unit investment trusts or real estate investment trusts (paragraph (a)(l)(iii)). The NYSE also commented on the exemption available to persons whose fingerprint cards had been rejected by the FBI because of illegibility (paragraph (a)(l)(iv)).
1. Broker-Dealers Engaged In Sale of uncertificated Securities. The NYSE questioned whether the availability of this exemption should be determined according to a broker-dealer's "business mix." The NYSE suggested that sales personnel who sell uncertificated securities should be exempt from the fingerprinting requirement, regardless of the business mix of the registered broker-dealer.
Section 17(f)(2) of the Act permits the Commission to exempt various "classes of persons" from the fingerprinting requirement, and Section 23(a)(l) of the Act permits the Commission, when making rules to implement the provisions of the Act, to" classify persons, securities and transactions in various ways. In addition, Section 17(f)(2) provides that the Commission may exempt those persons upon any "specified terms conditions and periods" deemed necessary, if not inconsistent with the public interest or the protection of investors. Accordingly, when determining whether a particular class of persons should be exempt from the fingerprinting requirement of Section 17(f)(2) of the Act, the Commission in the past has taken into account whether the particular class of persons has access to securities, monies or related original books and records. In determining whether that class of persons has access, the Commission has considered the nature of the securities handled by that class of persons and the business and operational characteristics of the broker-dealer. As a result, the Commission believes that, contrary to the views of the NYSE, the nature of a broker-dealer's business is relevant in identifying classes of persons for whom exemptions from the fingerprinting requirement are appropriate.
As noted in the Proposal Release, the exemption in paragraph (a)(l)(iii) incorporates an exemption granted in the past by the Commission, on a case-by-case basis, to a class of personnel in a certain class of broker-dealers, such as subsidiaries of insurance companies, that are engaged in a very limited securities business involving, for the most part, uncertificated securities. Unlike a general securities firm, the likelihood that non-fingerprinted sales or other personnel in such "limited-product" firms will have access to certificated securities, monies or the related original books and records is remote.5 In contrast, in a broker-dealer engaged in a general securities business, certain non-fingerprinted personnel, including sales representatives who do not regularly have access to securities, monies or the related original books or records, may have or be able to obtain access to certificated securities, monies or the related original books and records and, for that reason, may create a type of security risk that the fingerprinting requirement could help circumscribe. Therefore, paragraph (a)(l)(iii) has been adopted without change in that respect.6
The NASD suggested that the bonding/insurance requirement in paragraph (a)(l](iii)(C) would require certain broker-dealers, which are not otherwise required to carry fidelity bonding protection,7 to obtain blanket or fidelity bonding protection. In contrast, the NYSE applauded the idea and suggested that anyone "engaged in the sale of any securities, having access to monies, securities or original books and records or having any direct supervisory responsibility in these areas should be subject to a bonding requirement." 8
The bonding/insurance requirement (as originally proposed in paragraph (a)(l)(iii)) was not intended to impose fidelity bonding on broker-dealers not required to carry that coverage. A broker-dealer claiming an exemption from the fingerprinting requirement under paragraph (a)(l)(iii) for a class of personnel may elect to carry either insurance or bonding, and that coverage need only protect it against customer losses caused by the fraudulent or criminal acts of any of its officers or employees. Thus, paragraph (a)(l)(iii)(C) would permit insurance coverage less extensive than the NASD bonding requirements.9
In any event, the Commission believes that, consistent with the regulatory policy entailed in Section 17(f)(2) of the Act, a limited-product broker-dealer may legitimately be required to choose between the costs of fingerprinting its personnel and the expense associated with insuring the firm against wrongful customer losses. The importance of customer protection warrants at least that much regulatory intervention. Moreover, while the requirement to have insurance or bonding protection might seem to introduce a new requirement on non-SIPC member broker-dealers, every limited-product firm to date that has requested and obtained an exemption from the fingerprinting requirement has had insurance or bonding as a safeguard already in place for the protection of customer funds and securities. Accordingly, the Commission has concluded that the added expense associated with obtaining bonding or insurance to claim an exemption under new paragraph (a)(l)(iii)(C) is both minimal and justified.10
The NASD also suggested that paragraph (a)(l)(iii)(C) should expressly recognize that, under NASD rules, partners and directors, who otherwise do not serve as officers or employees of a broker-dealer, usually are excluded from the firm's blanket fidelity bonding protection 11 and that the words "losses to customers" should not include losses due to poor business judgment or advice given by associated persons of a broker-dealer, but instead should be limited to losses arising from fraudulent or criminal acts of associated persons.12 While the Commission believes that the bonding/insurance requirement is an important safeguard when FBI processing of fingerprints does not occur, the class of persons subject to the bonding-insurance condition can be narrowed, as the NASD suggests, without lessening investor protection. To accomplish that end, the Commission is changing the language in paragraph (a)(l)(iii)(C) to require that broker-dealers maintain insurance or bonding coverage only for those partners, directors, officers and employees "for whom an exemption is being claimed under paragraph (a)(l)(iii)." Therefore, under this language change, a broker-dealer will not be subject to the insurance or bonding condition with respect to persons who qualify for the general exemption, such as outside directors or partners, in paragraph
2. Illegible Fingerprints. The NYSE suggested that proposed paragraphs (a) (1) (iv) (A) and (a) (1) (iv) (B) should be collapsed into one provision because the two paragraphs are analytically similar. The commission agrees that the specific requirements in proposed paragraph (a) (1) (iv) (B) relate to the general condition stated in proposed paragraph (a) (1) (iv) (A). New paragraph (a) (1) (iv) (A), therefore, contains both a subjective standard, pursuant to which the availability of an exemption will be tested by the good faith efforts of the subject organization, and an objective standard, which will require a subject organization to obtain a complete set of fingerprints (as originally proposed in paragraph (a) (1) (iv) (A)), to have the fingerprints rolled by a person competent to do so, and to have those fingerprints submitted to the FBI for processing (as originally proposed in paragraph (a) (1) (iv) (B)).
The Commission also is adding language to paragraph (a) (1) (iv) to require expressly that the fingerprint cards must be rejected by the FBI because the fingerprints were in fact illegible. This concept was merely implicit in the originally proposed amendments.
B. Record Maintenance
1. Subsection 240.17f-2(d). The NYSE suggested that subsection (d), regarding record maintenance, include a provision that would allow subject organizations "or their approved designees" to maintain the records required by subsection (d). The Commission believes it would be inefficient, time consuming and costly to both the subject organization and the designated examining authority to allow outside parties, other than self-regulatory organizations ("SROs"), to act as recordkeepers for records required to be kept by subsection (d). Because several SROs have oversight responsibilities for broker-dealers, however, the Commission does believe that there may be both economic and regulatory benefits to the securities industry in allowing an SRO that is also the designated examining authority for a broker-dealer to act as a repository of fingerprint cards or substitute records for that broker-dealer. Paragraph (d)(2) has been added, therefore, to provide that a broker-dealer's designated examining authority may provide for the storage and maintenance of records required to be kept by that subsection.13
Before an SRO may store and maintain those records for subject organizations, however, several concerns must be addressed by an SRO proposing to act as a recordkeeper under this rule. These concerns may be easily addressed in an amendment to the SRO's fingerprinting plan." Because the duty to fingerprint personnel and have those fingerprints processed by the FBI is that of the broker-dealer, an SRO must design a plan that will provide to subscribing broker-dealers copies of all information received from the FBI regarding their personnel, especially any information regarding a person's criminal history record. In addition, under this amendment, an SRO would not only act as a conduit for the transmission of fingerprint cards but also act as a repository. In that regard, the SRO plan must ensure that any added responsibility does not impact adversely on the SRO's obligations under the Act to operate its trading markets efficiently. Finally, the SRO plan must offer this service to its members on a voluntary basis.
In addition, the Commission, in an effort to reduce the cost of maintenance and the amount of paper required to be kept by subject organizations, has determined that processed fingerprint cards may be reproduced and maintained on microfilm. The FBI has informed the Commission that clear and legible fingerprints can be obtained from a clear facsimile enlargement of a fingerprint card reproduced from microfilm. The Commission, therefore, is adding new paragraph (d){3) that allows processed fingerprint cards as well as the other records required by subsection (d) to be maintained on microfilm, provided that the subject organization: (1) Has facilities for the immediate and legible projection of that microfilm and for producing clear and legible facsimile enlargements; (2) indexes and files the films in a manner as to permit the immediate location of any particular record; (3) is ready immediately to provide a clear facsimile enlargement of any records requested by the Commission, the appropriate regulatory agency (if not the Commission) or the designated examining authority; and (4) stores separately from the original microfilm records a copy of the microfilm records.
C. Rules 17a-3(a)(15) and 17a-4(e)(3)
Rule 17a-3(a) [17 CFR 240.17a-3(a)] enumerates the records that must be made and kept current by certain members of national securities exchanges and other brokers and dealers. Since subsection (e) of Rule 17f-2 will require the preparation, maintenance and continual updating of Notices claiming exemptions, the Commission is amending Rule 17a-3(a) by adding new paragraph (a)(15) to include the Notice required under subsection (e) of Rule 17f-2.
Rule 17a-4 requires certain members of national securities exchanges and other brokers and dealers to maintain and preserve certain records for certain specified periods of time. Subsection (e) of Rule 17f-2 will require the maintenance and preservation of certain records. The Commission, therefore, is amending Rule 17a-4(e)(3) to reflect the record retention requirement under subsection (e) of Rule 17f-2.

II. Regulatory Flexibility Act Certification

Pursuant to 15 U.S.C. 605(b), the Chairman of the Commission has certified that the proposed rule, if promulgated, would not have a significant economic impact on a substantial number of small entities. The Commission has not received any comments concerning the Chairman's certification.

III. Paperwork Reduction Act

The information collection required by this rule has been cleared by the Office of Management and Budget and has been assigned clearance No. 3235-0031.

IV.Statutory Basis

The following amendments are being adopted pursuant to Sections 2,17[a), 17(f)(2) and 23(a) of the Securities Exchange Act of 1934 [15 U.S.C. 78b, 78q[a), 78q(f)(2), 78w(a)]. The Commission finds that there will be no burden upon competition imposed by these revisions and amendments to Rule 17f-2, that they are necessary and appropriate for the protection of investors, and that they are in the public interest.

As required by Section 17{f)(2) of the Act, the Commission also finds that the amendments to Rule 17f-2, granting additional exemptions and eliminating the requirement that Notices be submitted to the Commission for formal staff review and retention, are not inconsistent with the public interest or the protection of investors. The granting of additional exemptions for certain personnel of registered broker-dealers engaged in limited securities activities will not adversely affect the public interest or the protection of investors because those persons claimed as exempt do not regularly have access to the handling or processing of securities monies or the original books and records relating thereto. With respect to the elimination of the requirement to submit Notices to the Commission, subject organizations will still be required to prepare Notices and keep those Notices on their premises in order to monitor the use of exemptions as well as the physical security systems of the subject organizations.

List of Subjects in 17 CFR Part 240

Reporting requirements, Securities.

Dated: November 18, 1982.

By the Commission.

George A. Fitzsimmons,
Secretary.

Text of Proposals

In accordance with the foregoing, the Commission amends Part 240 of Chapter II of Title 17 of the Code of Federal Regulations as follows:

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

1. By revising § 240.17f-2 to read as follows:

§ 240.171-2 Fingerprinting of securities industry personnel.

(a) Exemptions for the fingerprinting requirement. Except as otherwise provided in paragraph (a)(l) or (a)(2) of this section, every member of a national securities exchange, broker, dealer, registered transfer agent and registered clearing agency shall require that each of its partners, directors, officers and employees be fingerprinted and shall submit, or cause to be submitted, the fingerprints of such persons to the Attorney General of the United States or its designee for identification and appropriate processing.
(1) Permissive exemptions. Every member of a national securities exchange, broker, dealer, registered transfer agent and registered clearing agency may claim one or more of the exemptions in paragraph (a)(l) (i), (ii), (iii) or (iv) of this section; Provided, That all the requirements of paragraph (e) of this section are also satisfied.
(i) Member of a national securities exchange, broker, dealer or registered clearing agency. Every person who is a partner, director, officer or employee of a member of a national securities exchange, broker, dealer, or registered clearing agency shall be exempt if that person:
(A) Is not engaged in the sale of securities;
(B) Does not regularly have access to the keeping, handling or processing of (1) securities, (2) monies, or (3) the original books and records relating to the securities or the monies; and
(C) Does not have direct supervisory responsibility over persons engaged in the activities referred to in paragraphs (a)(l)(i) (A) and (B) of this section.
(ii) Registered Transfer Agents. Every person who is a partner, director, officer or employee of a registered transfer agent shall be exempt if that person:
(A) Is not engaged in transfer agent functions (as defined in section 3(a)(25) of the Securities Exchange Act of 1934) or activities incidental thereto; or
(B) Meets the conditions in paragraphs (a)(l)(i) (B) and (C) of this section.
(iii) Registered broker-dealers engaged in sales of certain securities. Every partner, director, officer and employee of a registered broker or dealer who satisfies paragraph (a)(l)(i)(B) of this section shall be exempt if that broker or dealer:
(A) Is engaged exclusively in the sale of shares of registered open-end management investment companies, variable contracts, or interests in limited partnerships, unit investment trusts or real estate investment trusts; Provided, That those securities ordinarily are not evidenced by certificates;
(B) Is current in its continuing obligation under §§ 240.15bl-l and 15b3-l(b) to update Item 10 of Form BD to disclose the existence of any statutory disqualification set forth in sections 3(a)(39), 15(b)(4) and 15(b)(6) of the Securities Exchange Act of 1934;
(C) Has insurance or bonding indemnifying it for losses to customers caused by the fraudulent or criminal acts of any of its partners, directors, officers or employees for whom an exemption is being claimed under paragraph (a)(l)(iii) of this section; and
(D) Is subject to the jurisdiction of a state insurance department with respect to its sale of variable contracts.
(iv) Illegible fingerprint cards. Every person who is a partner, director, officer or employee shall be exempt if that member of a national securities exchange, broker, dealer, registered transfer agent or registered clearing agency, on at least three occasions:
(A) Attempts in good faith to obtain from such person a complete set of fingerprints acceptable to the Attorney General or its designee for identification and appropriate processing by requiring that person to be fingerprinted, by having that person's fingerprints rolled by a person competent to do so and by submitting the fingerprint cards for that person to the Attorney General of the United States or its designee in accordance with proper procedures;
(B) Has that person's fingerprint cards returned to it by the Attorney General of the United States or its designee without that person's fingerprints having been identified because the fingerprints were illegible; and
(C) Retains the returned fingerprint cards and any other required records in accordance with paragraph (d) of this section and §§ 240.17a-3(a)(13), 17a- 4(e)(2) and 17Ad-7(e)(l) under the Securities Exchange Act of 1934.
(2) Other exemptions by application to the Commission. The Commission, upon specified terms, conditions and periods, may grant exemptions to any class of partners, directors, officers or employees of any member of a national securities exchange, broker, dealer, registered transfer agent or registered clearing agency, if the Commission finds that such action is not inconsistent with the public interest or the protection of investors.
(b) Fingerprinting pursuant to other law. Every member of a national securities exchange, broker, dealer, registered transfer agent and registered clearing agency may satisfy the fingerprinting requirement of section 17(f)(2) of the Securities Exchange Act of 1934 as to any partner, director, officer or employee, if:
(1) The person, in connection with his or her present employment with such organization, has been fingerprinted pursuant to any other law, statute, rule or regulation of any state or federal government or agency thereof;
(2) The fingerprint cards for that person are submitted, or are caused to be submitted, to the Attorney General of the United States or its designee for identification and appropriate processing, and the Attorney General or its designee has processed those fingerprint cards; and
(3) The processed fingerprint cards or any substitute records, together with any information received from the Attorney General or its designee, are maintained in accordance with paragraph (d) of this section.
(c) Fingerprinting plans of self-regulatory organizations. The fingerprinting requirement of section 17(f)(2) of the Securities Exchange Act of 1934 may be satisfied by submitting appropriate and complete fingerprint cards to a registered national securities exchange or to a registered national securities association which, pursuant to a plan filed with, and declared effective by, the Commission, forwards such fingerprint cards to the Attorney General of the United States or its designee for identification and appropriate processing. Any plan filed by a registered national securities exchange or a registered national securities association shall not become effective, unless declared effective by the Commission as not inconsistent with the public interest or the protection of investors; and, in declaring any such plan effective, the Commission may impose any terms and conditions relating to the provisions of the plan and the period of its effectiveness as it may deem necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Securities Exchange Act of 1934.
(d) Record maintenance.
(1) Maintenance of processed fingerprint cards and other related information. Every member of a national securities exchange, broker, dealer, registered transfer agent and registered clearing agency shall maintain the processed fingerprint card or any substitute record when such card is not returned after processing, together with any information received from the Attorney General or its designee, for every person required to be fingerprinted under section 17(f)(2) of the Securities Exchange Act of 1934 and for persons who have complied with this section pursuant to paragraphs (b) or (c) of this section. Every substitute record shall state the name of the person whose fingerprint card was submitted to the Attorney General of the United States, the name of the member of a national securities exchange, broker, dealer, registered transfer agent or registered clearing agency that submitted the fingerprint card, the name of the person or organization that rolled the fingerprints, the date on which the fingerprints were rolled, and the date the fingerprint card was submitted to the Attorney General of the United States. The processed fingerprint card and every other substitute record containing the information required by this paragraph, together with any information received from the Attorney General of the United States, shall be kept in an easily accessible place at the organization's principal office and shall be made available upon request to the Commission, the appropriate regulatory agency (if not the Commission) or other designated examining authority. The organization's principal office must provide to the regional, branch or satellite office actually employing the person written evidence that the person's fingerprints have been processed by the FBI, and must provide to that office a copy of any criminal history record information received from the FBI. All fingerprint cards, records and information required to be maintained under this paragraph shall be retained for a period of not less than three years after termination of that person's employment or relationship with the organization.
(2) Record maintenance by designated examining authorities. The records required to be maintained and preserved by a member of a national securities exchange, broker, or dealer pursuant to the requirements of paragraph (d)(l) of this section may be maintained and preserved on behalf of that member, broker, or dealer by a self-regulatory organization that is also the designated examining authority for that member, broker or dealer. Provided That the self- regulatory organization has filed in accordance with § 240.17f-2(c) a fingerprinting plan or amendments to an existing plan concerning the storage and maintenance of records and that plan, as amended, has been declared effective by the Commission, and Provided Further That:
(i) Such records are subject at any time, or from time to time, to reasonable periodic, special or other examinations by representatives of the Commission; and
(ii) The self-regulatory organization furnishes to the Commission, upon demand, at either the principal office or at the regional office complete, correct and current hard copies of any and all such records.
(3) Reproduction of records on microfilm. The records required to be maintained pursuant to paragraph (d](l) of this section may be produced or reproduced on microfilm and preserved in that form. If such microfilm substitution for hard copy is made by a member of a national securities exchange, broker, dealer, registered transfer agent or registered clearing agency, or by a self-regulatory organization maintaining and storing records pursuant to paragraph (d)(2) of this section, it shall at all times:
(i) Have available for examination by the Commission, the appropriate regulatory agency (if not the Commission) or other designated examining authority, facilities for the immediate, easily readable projection of the microfilm and for the production of easily readable and legible facsimile enlargements;
(ii) File and index the films in such a manner as to permit the immediate location and retrieval of any particular record;
(iii) Be ready to provide, and immediately provide, any facsimile enlargement which the Commission, the appropriate regulatory agency (if not the Commission) or other designated examining authority by their examiners or other representatives may request; and
(iv) For the period for which the microfilm records are required to be maintained, store separately from the original microfilm records a copy of the microfilm records.
(e) Notice requirement. Every member of a national securities exchange, broker, dealer, registered transfer agent and registered clearing agency that claims one or more of the exemptions in paragraph (a)(l) of this section shall make and keep current a statement entitled "Notice Pursuant to Rule 17f-2" containing the information specified in paragraph (e)(l) below.
(1) Contents of statement. The Notice required by paragraph (e) of this section shall:
(i) State the name of the organization and state whether it is a member of a national securities exchange, broker, dealer, registered transfer agent, or registered clearing agency;
(ii) Identify by division, department, class, or name and position within the organization all persons who are claimed to have satisfied the fingerprinting requirement of section 17(f)(2) of the Securities Exchange Act of 1934 pursuant to paragraph (b) of this section;
(iii) Identify by division, department, class, title or position within the organization all persons claimed to be exempt under paragraphs (a)(l)(i)-(iii) of this section, and identify by name all persons claimed to be exempt under paragraph (a)(l)(iv). Persons identified under this paragraph (e)(l)(iii) shall be exempt from the requirement of section 17(f)(2) of the Securities Exchange Act of 1934 unless notified to the contrary by the Commission;
(iv) Describe, in generic terms, the nature of the duties of the person or classes of persons, and the nature of the functions and operations of the divisions and departments, identified as exempt in paragraph (e)(l)(iii) above; and
(v) Describe the security measures utilized to ensure that only those persons who have been fingerprinted in accordance with the fingerprinting requirement of section 17(f)(2) of the Securities Exchange Act of 1934 or who are exempt under paragraph (a)(l)(iv) of this section have access to the keeping, handling or processing of securities or monies or the original books and records relating thereto.
(2) Record maintenance. A copy of the Notice required to be made and kept current under paragraph (e) of this section shall be kept in an easily accessible place at the organization's principal office and at the office employing the persons for whom exemptions are claimed and shall be made available upon request for inspection by the Commission, appropriate regulatory agency (if not the Commission) or other designated examining authority.
(3) Exemption from the notice requirement. A registered transfer agent that performs transfer agent functions only on behalf of itself as an issuer and that receives fewer than 500 items for transfer and fewer than 500 items for processing during any six consecutive months shall be exempt from the Notice requirement of paragraph (c) of this section.
2. By adding paragraph (a)(15) to § 240.17a-3 to read as follows:

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

* * * * *

(a) * * *
(15) Records required to be maintained pursuant to paragraph (e) of § 240.17f-2.
3. By revising paragraph (e)(3) of § 240.17a-4 to read as follows:

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

* * * * *

(e) * * *
(3) All records required pursuant to paragraph (a)(15) of § 240.17a-3 for the life of the enterprise.

* * * * *

4. By revising paragraph (e)(2) of § 240.17Ad-7 to read as follows:

§ 240.17Ad-7 Record retention.

* * * * *

(e) * * *
(2) All records required pursuant to § 240.17f-2(e).

* * * * *


1 See 47 FR 18351 (April 29, 1982).

2 Section 17(f)(2) of the Act provides, in pertinent part, that "[e]very member of a national securities exchange, broker, dealer, registered transfer agent, and registered clearing agency [collectively, 'subject organizations'] shall require that each of its partners, directors, officers, and employees [collectively, 'personnel'] be fingerprinted and shall submit such fingerprints, or cause the same to be submitted, to the Attorney General of the United States for identification and appropriate processing."

3 A suggested format for the Notice was published in the Proposal Release, 47 FR 18351 (April 29, 1982).

4 Comments were received from the New York Stock Exchange, Inc.: National Association of Securities Dealers. Inc.; North American Securities Administrators Association; Texas Instruments, Inc.; and American Council of Life Insurance. These comment letters are available for inspection and copying in the Commission's Public Reference Room. 450 5th Street. Washington, D.C. In addition, as required by Section 17A(d)(3)(A)(i) of the Act, the Commission, at least fifteen days prior to issuance of this release, consulted with and requested the views of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation.

5 See Proposal Release, at 10,13-14.

6 Use of this exemption for sales personnel of limited-product broker-dealers will be monitored as part of the examination programs of the self-regulatory organizations and the Commission. In addition, the Commission, in appropriate case, may deny claims for exemptions under this subparagraph. See § 2-lO.17f-2(e)(l)(iii). For example, the Commission believes it usually would be inappropriate to claim an exemption on the basis that personnel in certain departments of the firm (e.g., the departments that sell mutual fund shares or variable annuities) do not have access to securities, monies and related books and records by asserting that those departments are physically separate from the departments engaged in the general securities business of the firm.

7 The NASD does not require non-SIPC member broker-dealers to carry fidelity bonding protection. See, e.g.. NASD Manual (CC11) Us2182 & 2182A (Appendix C). Section 3(a)(2)(A) of the Securities investor Protection Act of 1970 ("S1PA") identifies broker-dealers that are not required to be members of SIPC. These include, among others, broker-dealers engaged exclusively in (1) the distribution of shares of registered open-end management investment companies or unit investment trusts; (2) the sale of variable annuities; or (3) the business of insurance. See 15 U.S.C. 78ccc(a)(2)(A). S1PA protection is available, however, only when a broker-dealer is forced to liquidate; it affords no protection for customer losses caused by the fraudulent or criminal acts of personnel when the firm continues in business.

8 See note 4 supra.

9 The condition in paragraph (a)(l)(iii)(C), however, will he met if the firm carries either insurance or bonding. If bonding is selected, protection need only cover, in addition to fidelity protection, losses occurring from forgery, alteration (including check forgery) and securities loss
(including forgery) due to fraudulent trading or other criminal acts.

10 The Commission also has cited blanket fidelity bonding protection covering all officers, employees and agents as a factor to be considered in granting exemptions from other rules under the Act, such as the financial responsibility rules, to insurance companies registered as broker-dealers and engaged in the distribution of variable annuities. See e.g., Securities Exchange Act Release No. 83889 (August 28, 1968).

11 The blanket fidelity bond required by the NASD covers officers and employees only. See NASD Manual (CCII) ¶ 2182A(1) (Appendix C).

12 The Commission concurs and, accordingly, has revised the language in paragraph (a)(l)(iii)(C) to limit covered losses to those caused by the fraudulent and criminal acts of personnel.

13 Records regarding personnel of registered transfer agents and registered clearing agencies, however, must be maintained by those organizations at their principal offices pursuant to paragraph (d) (1) and (3). Neither the Commission nor any of the federal bank regulatory agencies will act as repositories for those records.

14 Currently, all SROs have fingerprint plans approved by the Commission pursuant to Rule 17f-2(c) under the Act. None of the plans, however, provide any SRO with the authority to act as a recordkeeper for records required to be kept by subsection (d). Therefore, before a designated examining authority can act as a repository of records required to be kept by subsection (d), it must have on file a plan that provides for the responsible storage and maintenance of those records and that plan must be approved by the Commission pursuant to Rule 17f-2(c) under the Act.


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