[Federal Register: June 5, 1998 (Volume 63, Number 108)]
[Proposed Rules]
[Page 30668-30675]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05jn98-39]
[[Page 30668]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
Recordkeeping
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
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SUMMARY: The Commodity Futures Trading Commission ("CFTC" or
"Commission") is proposing to amend its Regulation 1.31 to maximize
the cost-reduction and time-savings arising from technological
developments in the area of electronic storage media while maintaining
necessary safeguards to ensure the reliability of the recordkeeping
process. Specifically, the Commission proposes to expand the category
of required records for which an affected person may employ electronic
storage media to meet the recordkeeping obligations imposed by the
Commodity Exchange Act ("Act" or "CEA") and Commission regulations.
In addition, the Commission proposes to eliminate the current
requirement that paper records eligible for transfer to micrographic
storage media be maintained in hard copy form for two years. The
Commission is also seeking comment on several recordkeeping-related
issues.
DATES: Comments must be received on or before August 4, 1998.
ADDRESSES: Comments should be mailed to Jean A. Webb, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW, Washington, DC 20581; transmitted by facsimile to (202)
418-5521; or transmitted electronically to ([email protected]).
Reference should be made to "Recordkeeping".
FOR FURTHER INFORMATION CONTACT: Edson G. Case, Counsel, or Robert B.
Wasserman, Special Counsel, Division of Trading and Markets, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
NW, Washington, DC 20581. Telephone (202) 418-5430.
SUPPLEMENTARY INFORMATION:
I. Background
Commission Regulation 1.31 sets forth certain recordkeeping
requirements imposed by the CEA or Commission regulations. For example,
it mandates that record required to be kept by the Act or Commission
regulations ("required records") be maintained for a period of five
years and be kept in a "readily accessible" manner for the first two
years of this period. Regulation 1.31 also defines the rights of
representatives of the Commission and Department of Justice to inspect
and obtain copies of required records.\1\
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\1\ For example, Regulation 1.31(a) provides that all required
records shall be open to inspection by such representatives and
imposes on the person required to maintain the records a duty to
provide a copy (at the person's expense) of any required record
requested by such representatives. In addition, the regulation
states that the person shall provide all copies or originals
"promptly."
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Regulation 1.31 takes into account some technological advances in
the development of recordkeeping systems. For example, it defines the
circumstances under which a reproduction of a paper record on microfilm
or microfiche may be substituted for the original paper record,\2\ as
well as the circumstances under which a computer, accounting machine or
business machine generated record nay be transferred to and retained on
optical disk media or microfilm/microfiche media.\3\ It also imposes
special inspection-related requirements for persons who choose to
maintain their records on these media.\4\
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\2\ The regulation requires that all paper required records be
maintained in hard-copy form for the first two years of the mandated
five-year period, after which they may be transferred to microfilm
and microfiche, except for trading cards and written customers
orders, which must be maintained in hard-copy form and for the full
five-year period.
\3\ The regulation permits immediate transfer of computer or
machine generated records to microfilm/microfiche media and permits
immediate transfer of computer generated records to defined class of
optical storage media.
\4\ For Example, persons maintaining records in these media must
maintain indexes of the records as well as facilities that permit
representatives of the Commission and the Department of Justice to
view and obtain hard copies of the records immediately. For records
stored on the specified optical storage media, Regulation
1.31(c)(1)(iii) also mandates that a copy of each record be
immediately provided "on Commission compatible machine-readable
media as defined in [Commission Regulation] 15.00(1) . . . ."
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The Commission has recently undertaken a series of steps to
facilitate the use of electronic media technology where adequate
measures exist to safeguard regulatory interests.\5\ Various issues
implicating the Commission's recordkeeping requirements under
Regulation 1.31 have arisen in the context of these Commission
initiatives. Indeed, in a February 20, 1997 Federal Register release,
the Commission specifically acknowledged that "it may be necessary to
amend Regulation 1.31 to account for further technological
developments." \6\
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\5\ See, e.g., 62 FR 39104 (July 22, 1997) (interpreting
Commission requirements affecting the use of electronic media by
commodity pool operators ("CPOs") and commodity trading advisors
("CTAs") and amending Part 4 of the Commission's Rules in light of
the interpretion); 62 FR 31507 (June 10, 1997) (issuing guidance
regarding a futures commission merchant's (`'FCM's") electronic
delivery of confirmation, purchase-and-sale, and monthly statements
to customers and the related recordkeeping requirements); 62 FR
18265 (April 15, 1997) (adopting a voluntary program for CPOs and
CTAs to use electronic means to file disclosure with the
Commission); 62 FR 10441 (March 7, 1997) (providing for use of
personal identification numbers for FCMs and introducing brokers
("IBs") that use electronic means to file attested financial
reports with the Commission); 62 FR 7675 (February 20, 1997)
(permitting the use of electronic records of customer orders
generated by an electronic order-routing system).
\6\ 62 FR 7677, n. 26.
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In recognition of both the need for interim relief and the number
of Commission registrants that are also subject to the recordkeeping
requirements of the Securities and Exchange Commission ("SEC"), the
Commission has had occasion to rely on the recordkeeping rules the SEC
adopted in February 1997.\7\ For example, in August 1997, the
Commission adopted revisions to Part 4 addressing the use of electronic
media by commodity pool operators ("CPOs") and commodity trading
advisors ("CTAs") for delivery of disclosure documents and other
materials.\8\ Several of the comments during this rulemaking raised
questions about the practicality of the Commission's current
recordkeeping requirements in the context of electronic media. In
response to these comments, the Commission permitted CPOs and CTAs to
use the guidelines set forth in the SEC's rulemaking in lieu of the
requirements of Regulation 1.31.\9\ The Commission took this step
"[t]o facilitate CPOs' and CTAs' use of electronic media when possible
and to avoid imposing duplicative or inconsistent requirements on
registrants who may also be registered with the SEC. . . ."\10\
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\7\ 62 FR 6469. The SEC's rulemaking involved reporting
requirements for brokers or dealers under the Securities Exchange
Act of 1934.
\8\ 62 FR 39104.
\9\ The Commission adopted a similar approach in its advisory
permitting FCMs to deliver confirmations, purchase and sale
statements, and monthly statements electronically. 62 FR 31507 (June
10, 1997), and its advisory concerning compliance with the
"written" record requirements of Commission Regulations 1.35. 62
FR 7675 (February 20, 1997).
\10\ 62 FR 39112. The Commission's concern about the regulatory
cost imposed on dual registrants is consistent with its traditional
focus on minimizing unnecessary regulatory costs. For example, the
Commission has adopted several rules that permit dual-registrant
FCMs to fulfill Commission regulatory requirements in the same
manner they fulfill SEC regulatory requirements. See, e.g.,
Commission Rules 1.10(h), 1.12(b)(4), 1.14(b)(1), 1.15(d)(1),
1.16(c)(5), 1.17(a)(1)(ii)(C), 1.18(a), 1.52(a).
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Consistent with these goals, experience with registrants'
maintaining records in accordance with the SEC's rules, and a
commitment to maximizing the cost-reduction and time-savings arising
from technological developments in the area of electronic
[[Page 30669]]
storage media while maintaining necessary safeguards to assure the
reliability of the recordkeeping process, the Commission is proposing
amendments to Regulation 1.31.
II. Discussion
The proposed rules would make several changes to the current
requirements of Regulation 1.31. The proposed rules would shift the
Commission's approach to recordkeeping technology from the current
rule's focused specification of a particular class of optical disk or
micrographic media to a more generic, performance-based approach to the
definition of permissible technology. As a result, persons subject to
the Commission's recordkeeping requirements would have more freedom to
take advantage of technological advances and to tailor their
recordkeeping systems to individual business needs. The proposed rules
would also expand the class of required records that may be maintained
on micrographic or electronic storage media for the full five-year
period. The Commission anticipates that this change will permit the
type of simplification and streamlining of recordkeeping systems likely
to result in both a reduction in costs and improvements in system
reliability. The Commission also anticipates that the proposed rules
will foster improvements in the security and availability of required
records. For example, the proposed rules would require that there be a
duplicate copy of all records maintained on micrographic or electronic
storage media and that the duplicate be stored at a location separate
from the original.\11\ As a result, incidents of loss of access to
required records due to fire, flood, or other catastrophic
circumstances should be reduced to a minimum.\12\ The proposed
regulation would also create a procedure that should allow the
Commission to obtain access to required records maintained on
electronic storage media even if the owner of the records has ceased
doing business and, despite Commission regulations,\13\ cannot be
located.
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\11\ The proposal does not specify how "separate" the location
of the original records must be from the location of the duplicate
records. The Commission anticipates that persons required to
maintain records will use their business judgment in selecting a
location for the duplicate records that is sufficiently distant to
make it unlikely that both sets of documents could be destroyed by a
single catastrophic event (such as a fire or flood) but sufficiently
close to ensure that duplicate records may be accessed and retrieved
promptly should the original documents be destroyed.
\12\ During the week of October 28, 1996, a fire destroyed a
Chicago warehouse operated by Brambles Information Services. As a
result, records that Commission registrants were required to
maintain under Regulation 1.31 were damaged and destroyed, and the
Commission developed a special procedure for the affected
registrants to obtain relief from their obligations under that
regulation. See Commission Advisory 96-62, [Current Transfer Binder]
Comm. Fut. L. Rep. (CCH) para. 26,907 (December 18, 1996).
\13\ See 17 C.F.R. 3.30(b), 3.33(b)(4).
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A. Definitions of Micrographic and Electronic Storage Median
The proposed rules would include new definitions of both
micrographic media and electronic storage media. The former definition
would include microfilm and microfiche, which are permitted under the
current regulation, but would open the definition to additional
developments in this area by including "any similar medium." The
latter definition would extend to any digital storage system that meets
four general criteria: (1) it preserves records exclusively in a non-
rewritable, non-erasable format; (2) it verifies automatically the
quality and accuracy of the recording process; (3) it serializes \14\
the units of storage media and creates a time-date record whenever
information is placed on the storage media; and (4) it permits the
immediate downloading of indexes and records maintained on the storage
media to any of the media permitted by the regulation (paper,
micrographic media or electronic media). These generic requirements
(which establish performance criteria similar to those in the present
rule) are designed to permit the use of the broadest range of available
technology while maintaining safeguards necessary to assure both the
reliability of the stored information and immediate access to the
stored information by representatives of the Commission and the
Department of Justice.\15\
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\14\ To "serialize" a unit of storage media (such as a disk or
a trading ticket) is to assign it a unique, consecutive number so
that (1) an additional, forged unit cannot be surreptitiously
inserted and (2) a "true" unit cannot be surreptitiously removed.
\15\ The Commission is not proposing an approval process for
persons who wish to convert from their current storage format to a
system that maintains records on electronic storage media. Prior to
any conversion to an electronic storage system, however, an affected
person must submit a representation to the Commission that the
selected electronic storage system meets the requirements set forth
in paragraph (b) of Regulation 1.31.
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B. Conditions on the Use of Micrographic and Electronic Storage Media
The proposed conditions on the use of micrographic and electronic
storage media are intended to maintain the ease of access necessary to
the Commission's regulatory interests and to ensure that the
Commission's access will not be compromised by catastrophic events.
Affected persons who wish to use these types of storage media must
index all stored information and keep available facilities allowing for
immediate production of both easily readable images of the stored
records and easily readable hard-copy images. Affected persons must
also waive any privilege, claim of confidentiality or other objection
to disclosure of non-Commission-required information stored on the same
individual medium (e.g., the same disk or sheet of microfiche) with
Commission-required records. In addition, such persons must store a
duplicate of each record, in any of the media acceptable under the
regulation, as well as a duplicate of each index, at a location
separate from the original.
C. Additional Conditions on the Use of Electronic Storage Media
The nature and capabilities of electronic storage media foster an
efficient approach to record production that can benefit both the
Commission and persons subject to Regulation 1.31's record-production
requirements. The Commission is proposing to retain the current
requirement that, upon request by an appropriate representative,
persons maintaining required records on electronic storage media
immediately provide copies of such records on Commission compatible
machine-readable media (as defined by Commission Regulation
15.00(1)).\16\
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\16\ The copies must use a format and coding structure (e.g.,
ASCII) specified in the request. ASCII is the American Standard Code
For Information Interchange, a scheme for arranging bits (one or
zero) in groupings of eight-bit "bytes," each of which represents
a character.
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The nature and capabilities of electronic storage media raise
special concerns about the Commission's ability to detect both
inadvertent errors during the transfer and storage process and
intentional alteration of the stored record. To address these concerns,
the Commission is proposing that persons who maintain documents on
electronic storage media develop and maintain written operational
procedures and controls (an "audit system") \17\ designed to provide
accountability over both the initial storage of data on the electronic
storage media and the entry of any
[[Page 30670]]
subsequent change to such data.\18\ Both the written procedures and the
results of the audit system must be available to representatives of the
Commission and the Department of Justice at all times for immediate
examination and must be maintained for the time period applicable to
the records stored on the electronic storage media.
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\17\ The Commission is not specifying the contents of this audit
system, but data regarding the inputting of records and changes to
existing records will be a part of the system. Data must be captured
systematically on a computer or in hard copy form. The Commission
envisions that the identities of individuals actually inputting
records and making particular changes, and the identity of both new
documents created and documents changed, are the kind of information
that must be collected either automatically or systematically.
\18\ Because an eligible electronic storage medium creates
records that are non-rewritable and non-erasable, both the original
input transaction and the correcting transaction will be retained.
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The range of available electronic storage media raises concerns
about the Commission's ability to access stored information when a
person who maintains documents on electronic storage media fails to
comply as required by Regulation 1.31. Paper records and records
maintained on micrographic storage can usually be accessed and
understood without specific cooperation from the originator. In
contrast, electronically stored data may be difficult to access or
understand without information concerning the format in which the data
has been stored. To address this concern, the Commission is proposing
that persons who maintain required records on electronic storage media
take steps to ensure that the Commission has a continuous source of the
information necessary to access the records and indexes stored on that
media.\19\ Such persons must either (1) maintain, keep current, and
make available such information to representatives of the Commission
and the Department of Justice or (2) place in escrow and keep current a
copy of the necessary information.\20\
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\19\ The proposal does not specify a list of information that
the Commission will invariably consider "necessary." However, the
Commission envisions that the necessary information will include the
physical and logical format of the electronic storage media, the
file format of all different information types maintained on the
electronic storage media, and any source code, related
documentation, and other information necessary to access the records
and indexes maintained on the electronic storage media. The term
"physical format" refers to the physical characteristics of the
media and the equipment from which the information was transferred
to the media (e.g., a 3.5" high-density diskette created on an IBM-
compatible personal computer). The term "logical format" refers to
the type and version of the data management software, such as a
database management system (e.g., Oracle version 8) or file storage
system (e.g., DOS file allocation table, Windows-NT file store
(NTFS)). The term "file format of all information types" refers to
record from format information, descriptions of data fields, and the
relationships between fields and/or records. The term "source
code" refers to a computer program in a format that can be
understood by humans. Source code is read by a specialized program,
known as a compiler, and converted into "object code," which is
the format in which the program is understood by a computer. Other
information which may be necessary to access the records and indexes
stored on electronic storage media might include password
information required to access either the equipment or the
information, or the type and version of the operating system used on
the equipment which created the media (e.g., Solaris version 2.6).
\20\ Escrow arrangements are a common feature of software
licensing agreements. For example, in a "source code escrow," the
licensor deposits with an independent third party escrow company a
copy of the software's sources code and system documentation and
covenants to update the code and documentation as necessary. The
escrow agreement describes in detail the situations which will
trigger release by the escrow company to the licensee of the
materials deposited in escrow. See D. Bender, "Software
Development, Licensing, and Protection: Strategies for Evolving
Technology," 9 No. 1 J. Proprietary Rts. 9 (Jan. 1997).
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The issue of ready access takes on particular importance when
electronic storage media are the sole media used to maintain required
records. For example, if a recordkeeper ceases doing business and
cannot be located, gaining access to records maintained solely on
electronic storage media would be costly and time-consuming, if not
particularly impossible.\21\ To ensure access to records in the
circumstances, the SEC's current rules requires that records be
available through an alternative source whenever a recordkeeper
maintains documents solely on electronic storage media. Specifically,
those rules require that brokers and dealers using electronic storage
media as their sole media to maintain require records enter into an
arrangement with a third-party that has access to such persons'
electronic storage media and the ability to download information from
such media to any medium acceptable to the SEC. The third party must
undertake to take reasonable steps to provide the SEC with access to
the information contained on the recordkeeper's electronic storage
media including, as appropriate, arrangements for the downloading of
required records in a format designated by the SEC.
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\21\ The level of difficulty would vary with the nature of the
electronic storage system used and the availability of the
information such as the physical and logical file format of the
electronic storage media, the file format of all different
information types maintained on the electronic storage media, and
the source code and related documentation. While the proposed rule
would requires that the listed information be kept available to the
Commission, a recordkeeper which has ceased doing business and (in
violation of Commission regulations) disappeared may also fail to
meet this requirement.
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The Commission is proposing a similar requirement for persons
required to maintain records under the Act or Commission regulations.
The Commission invites comments regarding the likely cost of this
requirement.\22\ The Commission also invites comment on any practical
alternative that will ensure access to the records of uncooperative
recordkeepers without imposing undue costs on recordkeepers that
cooperate in the manner contemplated by Regulation 1.31.
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\22\ Because the conversion to an electronic storage system is
voluntary, and the requirement at issue would only apply to persons
which maintain some or all of their records solely on electronic
storage media, the Commission expects that an affected person would
only convert to a recordkeeping system based solely on electronic
storage media when the cost of obtaining the services of a qualified
third party is less than the cost of maintaining a duplicate hard
copy of all required records. Given these circumstances, the
Commission invites comment on both the cost of obtaining the
services of a qualified third party and the cost of maintaining a
duplicate hard copy of required records
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D. Retention of Trading Cards and Written Customer Orders
The Commission intends to maintain the current requirement that
trading cards and written customer orders be retained in hard-copy form
for the full five-year period. When the Commission considered issues
related to the unique status of these records in 1993, there was a
consensus that transferring these records to alternative media for
storage was not common in the industry.\23\ Moreover, the three futures
exchanges that commented at that time agreed that electronic storage
media should have limited application to trading cards and written
customer orders.\24\
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\23\ 58 FR 27465, 27466 (May 10, 1993).
\24\ Id.
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There have been significant changes in the industry since 1993,
including an increase in order flow through electronic order routing
systems.\25\ Similar changes in the securities industry led to the
SEC's 1997 decision to permit almost all handwritten records, including
customer orders, to be maintained on either micrographic or electronic
storage media.\26\ The SEC acknowledged the need for caution in this
area, however, and rested its decision largely on its conclusion that
"many of the larger broker-dealers no longer create traditional order
tickets (with or without handwritten notations) because such broker-
dealers enter most orders directly through electronic systems which
automatically retain an electronic record of the trade entry." \27\
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\25\ See generally 62 FR 7675.
\26\ 62 FR 6471.
\27\ Id.
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At the present time, electronic order routing in the futures
industry is not as prevalent as in the securities industry. Moreover,
the Commission has only limited experience with the transfer of written
records to electronic storage media. Given these circumstances and the
importance of trading cards and written order tickets to an effective
[[Page 30671]]
audit trail for trades, the Commission believes it would be premature
to permit these records to be stored on either micrographic or
electronic storage media.
The Commission proposes to clarify the description of the class of
records that must be retained in hard copy form for the full five-year
period. Currently, Regulation 1.31 refers to "written customer
orders" required to be kept pursuant to Regulation 1.35(a-1)(1), (a-
1)(2) and (d) (emphasis supplied). Written order tickets for trades
initiated by persons who may not be regarded as customers under these
provisions can plan an important role in an effective audit system.
Regulation 1.35(a) currently requires future commission merchants,
introducing brokers, and members of contract markets to retain "all
orders (filled, unfilled or canceled) * * *" Given these
circumstances, the Commission proposes that the class of records that
must be retained in hard copy form for the full five-year period be
clarified by referring to "written orders" rather than "written
customer orders."
Regulation 1.31 also refers to "trading cards" in its description
of the class of records that must be retained in hard copy form for the
full five-year period. The Commission proposes to clarify this
reference by also including documents on which trade information is
originally recorded in writing. These documents fall within the class
of "original source documents" that Commission Regulation 1.35(a)
requires to be retained and produced. The purpose of this clarification
is to ensure that the Commission has access to written hard copy
documents necessary to assure an effective audit trail.
E. Related Issues for Comment
The Commission invites comment on the issues raised by its proposed
amendments to Regulation 1.31. The Commission also seeks comments on
several related issues. The first involves the scope of the duty to
permit inspection imposed by Regulation 1.31. As noted above,
subsection (a)(1) provides that all required records shall be "readily
accessible" during the first two years of the five-year maintenance
period. Subsection (a)(2) mandates that an affected person promptly
provide (at the affected person's expense) a copy of any required
record requested by a representative of the Commission or the
Department of Justice.\28\ Nothing in these subsections, however,
specifies how "readily accessible" a record must be to ensure prompt
production in response to a request by a representative of the
Commission or the Department of Justice.
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\28\ In the alternative, the regulation provides that the
affected person may promptly provide the original book or record for
reproduction.
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Subsections (b), (c), and (d) of Regulation 1.31 govern the use of
eligible "reproductions" as substitutes for hard copy records. As
discussed above, the current regulations provide that, under
appropriate circumstances, reproductions on microfilm, microfiche and
optical disk may be substituted for hard copy records. As one of the
conditions for permitting such a substitution, subsection (c) requires
that affected persons, among other things, have on their premises
"facilities for immediately producing complete, accurate and easily
readable" hard copy images of the required records. Again, nothing in
this subsection specifies how "readily accessible" a record must be
to ensure immediate production in response to a request by a
representative of the Commission or the Department of Justice.
The regulatory history of Regulation 1.31 does provide limited
guidance regarding the difference between the standard governing
production under subsection (a)--promptly--and the standard governing
production under subsections (b), (c), and (d)--immediately. The
requirement that copies of eligible reproductions be provided
"immediately" was inherited from regulations promulgated by the
Commission's regulatory predecessors, the Department of Agriculture and
the Commodity Exchange Commission.\29\ Subsection (a)'s requirement
that an original hard copy record (or a copy of the record) be provided
"promptly" upon request was adopted by the Commission in January
1981.\30\ The Commission had initially proposed to permit a
representative of the Commission or Department of Justice to remove an
original hard copy record for reproduction unless the person required
to maintain the record provided a copy "immediately." \31\ In
amending the proposal to substitute the standard "promptly," the
Commission noted that, in some circumstances, hard copy records might
not be "readily accessible" for the final three years of the five-
year storage period. The Commission acknowledged that this factor
should be taken into account in formulating an appropriate standard and
explained that, in such circumstances, production would be deemed
prompt if the affected person "retrieve[d] the documents requested as
expeditiously as is reasonable in light of the circumstances." \32\
The Commission also noted that the extent and nature of a document
request could be appropriate factors in assessing the promptness of a
production, explaining that:
\29\ See generally 41 FR 3192 (Jan. 21, 1976).
\30\ 46 FR 21 (Jan. 2, 1981).
\31\ 43 FR 50699 (Oct. 31, 1978).
\32\ 46 FR 21 n. 6.
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The recordkeeper is obligated by this requirement to furnish a
copy of the original of a book or record as expeditiously as
reasonably can be expected. This modification is not intended to
permit any person to avoid the responsibility to provide any member
of the Commission staff with prompt, complete access to any books
and records required to be maintained. Rather, it is a recognition
that in practice a requirement to furnish copies immediately in all
instances, depending upon the extent or nature of a staff request,
could impose an unwarranted burden upon the recordkeeper.\33\
\33\ 46 FR 21 (footnote omitted).
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Finally, the Commission specifically stated that the adoption of
the "promptly" standard in subsection (a) did not affect a
"recordkeeper's obligation under [subsection (c)] immediately to
provide a `facsimile enlargement' of any records kept on microfilm as
permitted by Rule 1.31." \34\
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\34\ 46 FR 21 n. 6.
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In a letter addressing technology issues facing the futures
industry, the National Futures Association ("NFA") has recommended
that the Commission eliminate the timing standards from subsections
(b), (c), and (d) of Regulation 1.31 and substitute a general standard
providing that an affected person must be able to retrieve required
records in a usable form by the next business day. Under this
definition of "readily accessible," production of both hard copy
documents and eligible reproductions would be deemed prompt if copies
were provided on the business day following the affected person's
receipt of a request. In addition, NFA requests that the facility and
equipment-related conditions subsections (c) and (d) impose on the
substitution of eligible reproductions for hard copy records be limited
to the two years when the original records must be readily accessible.
NFA proposes a uniform standard which would eliminate the
distinction in the existing regulation between records maintained in
hard copy and those maintained in electronic or micrographic media. The
regulatory history discussed above shows that, in establishing
production requirements under regulation 1.31, the Commission always
has distinguished between records maintained in hard copy form and
records maintained in electronic or
[[Page 30672]]
micrographic format by requiring "prompt" production of hard copies
and "immediate" production of copies of electronic and micrographic
records. This distinction recognizes that the reduced space and storage
requirements for electronic and micrographic records, as compared with
hard copy records, enable recordkeepers to keep such required records
on their premises, rather than in a separate storage facility, and
accordingly, to make immediate production of such records upon request
of a representative of the Commission or the Department of Justice.
Indeed, electronic recordkeeping technology continues to improve,
enhancing the ability of registrants to meet their recordkeeping
obligations, while further reducing their costs. Thus, it may remain
appropriate to impose different production standards for hard copy
records and electronic or micrographic records. Similarly, it may
remain appropriate to require immediate production of electronic
records, rather than next day production, acknowledging the
technological improvements that make compliance with that standard
reasonable.
Moreover, the Commission is unaware of any practical problems
arising out of the production standards currently set forth in
Regulation 1.31. Nevertheless, the Commission invites comment on NFA's
recommendation, with particular attention to the existence of such
problems, the benefits that might be incident to a uniform standard and
how such a uniform standard could be implemented without compromising
the Commission's regulatory interest in expeditious production of
required records.
NFA's letter also raises questions about current Regulation 1.31's
selective treatment of security/integrity issues raised by records
maintained on electronic storage media. NFA correctly notes that
current Regulation 1.31 does not include any requirements for the
security/integrity of paper records, but has fairly detailed
requirements for records stored on optical disks.\35\ It recommends
that the Commission move to a unified approach that mandates that all
affected persons have and enforce reasonable procedures to keep their
records from being altered or destroyed.
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\35\ The Commission addressed the security/integrity issue when
it amended Rule 1.31 in 1993. The Commission explained that: The
Commission's concern in this area relates to the trustworthiness of
documents that may be relied upon by the Commission in conducting
investigations and entered into evidence in administrative and
judicial proceedings. In this respect, microfilm records are
considered trustworthy, since the image cannot be readily altered
and firms use documented procedures that are performed in the
ordinary course of business. The Commission believes under specified
conditions, optical disk storage can be as trustworthy as microfilm
and paper records. 58 FR 27460.
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The Commission agrees that all affected persons must have and
enforce procedures to keep their records from being altered or
destroyed. Even apart from regulatory duties, maintenance of such a
system serves important business interests of Commission registrants.
As a regulatory duty, it is implicit in registrants' duty to supervise
pursuant to Commission Regulation 166.3.\36\ The Commission solicits
comment on whether Regulation 1.31 could be improved by specifying the
nature of this duty in the context of records maintained in hard copy
form or on micrographic media.
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\36\ Regulation 166.3 requires each Commission registrant other
than associated persons with no supervisory duties to diligently
supervise the "handling by its partners, officers, employees and
agents (or persons occupying a similar status or performing a
similar function ) of * * * all * * * activities of its partners,
officers, employees and agents (or persons occupying a similar
status or performing a similar function) relating to its business as
a Commission registrant."
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The Commission believes that it is important that Regulation 1.31
take into account the special security/integrity issues raised by
electronic storage media. Given the variety of electronic storage
systems available and the pace of technological change in such systems,
the Commission believes that it is prudent to require that persons who
utilize such systems meet specific security/integrity standards, at
least until the Commission gains more experience with such systems. The
Commission solicits comment on whether the security/integrity standards
in the proposed amendments to Regulation 1.31 can be made more
practical or cost-effective while serving the Commission's regulatory
interest in the maintenance of secure and accurate records.
Finally, NFA's letter raises an issue arising out of the
Commission's February 1997 advisory on alternatives for complying with
the written record requirements of Commission Regulation 1.35. In that
advisory's discussion of electronic order-routing systems, the
Commission referred to several "no-action" letters issued by the
Commission's Division of Trading and Markets ("Division"). Those
letters, in turn, discussed the capacity of particular electronic
order-routing systems to capture the time a particular order was
executed.\37\ When the Commission described the general criteria for
systems covered by the advisory in the latter portion of the document,
it made the following statement:
\37\ Commission Regulation 1.35 requires that written customer
orders be time-stamped with the date and time "to the nearest
minute." In this regard, the Division's no-action letters for two
specific electronic order-routing systems noted that the systems had
the capacity to capture execution times to the nearest second.
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All order-related times required under Commission Regulation
1.35, as well as the times for all modifications, are to be captured
to the highest level of precision achievable by the operating
system. In this regard, the Commission's experience is that these
systems have the capability, at a minimum, to capture times to the
second. Therefore, the Commission is requiring that such times must
be accurate at least to the second.\38\
\38\ 62 FR 7677.
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In its conclusion, the Commission's advisory again described the
time an eligible system should capture as "at least to the second."
\39\
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\39\ 62 FR 7678.
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In its letter, NFA notes that this guidance does not sufficiently
specify the appropriate increment of time a registrant's system must
capture. It recommends that the Commission determine the appropriate
increment of time all electronic time-recording systems should meet and
apply this increment without regard to the particular system's
capacity. In this regard, NFA contends that the regulatory benefit to
mandating more precise time-stamping diminishes as the time increment
approaches a fraction of a second.
The Commission intends that electronic time-recording systems
covered by the advisory meet a one-second performance standard.
However, for business-related reasons, affected persons may choose to
operate systems that capture times at a more-refined level. If an
affected person does operate its system in a manner that captures time
increments of less than a second, it must make that information
available at the request of a representative of the Commission or the
Department of Justice. Put simply, an affected person may not fulfill
its recordkeeping duties by providing the Commission with timing data
less refined than the data its system has actually captured.
While the Commission believes this clarification addresses the
issue raised by NFA, comment is invited on the role system capacity
should play in assessing an affected person's recordkeeping
responsibilities under the Act and Commission regulations.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act ("RFA"), 5 U.S.C. Sec. 601, et
seq., 611,
[[Page 30673]]
requires that, in adopting rules and regulations, all federal agencies
consider their impact on small entities. In accordance with Section
601(3) of the RFA, the Commission published a "Policy Statement of
Definitions of Small Entities for Purposes of the Regulatory
Flexibility Act," 47 FR 18618 (Apr. 30, 1982). In that statement,\40\
the Commission indicated that some classes of persons were excluded
from the definition of small entities. These include: futures
commission merchants registered or required to be registered; floor
brokers employed by registered futures commission merchants; commodity
pool operators registered or required to be registered and large
traders in the futures market. The Commission considers other entities
to be small under particular facts and circumstances. These may
include: futures commission merchants exempt from registration;
commodity pool operators exempt from registration; introducing brokers;
floor brokers not employed by futures commission merchants; floor
traders and commodity trading advisors. Because the rules discussed
herein will affect the full spectrum of Commission registrants, it is
likely that small entities within the meaning of the RFA will be
affected.
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\40\ The Commission subsequently clarified some of the
definitions. See 48 FR 35276 (Aug. 3, 1983); 55 FR 13550 (Apr. 11,
1990); 58 FR 40347 (Jul. 28, 1993).
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The proposed regulation amendments would generally expand the
category of record storage systems permissible under the Commission's
rules. The Commission anticipates that, if the proposed rules are
adopted, small entities will have more freedom to tailor their record
storage systems to the overall needs of their businesses. For example,
the proposed rules would have no impact on a small entity that chooses
to maintain a paper-based record storage system. For a small entity
that chooses to use micrographic storage media for its record storage
system, the proposed rules would permit the small entity to take
advantage of technological advances. The only additional cost would be
that of creating a duplicate record and storing it at a location
separate from the original record. The bulk of this cost could be
avoided by moving the hard copies of the records transferred to
micrographic media to a separate location.
For a small entity that chooses to use electronic storage media,
the proposed regulation would eliminate the current rule's requirement
that the small entity use a limited class of optical storage
technology. This change would permit small entities to select
electronic storage systems that may be less costly and simpler to
manage. The proposed rules would impose limited additional costs on
small entities that use electronic storage technology. The new costs
would include requirements that the affected person: (1) provide a
representation that the system meets pertinent regulatory requirements
prior to converting to an electronic storage system; (2) create a
duplicate of both required records and an index of those records, and
maintain the duplicate at a separate location; (3) create and maintain
an audit system for transferring records to electronic storage media;
(4) take steps to ensure Commission access to information necessary to
download records from the electronic storage media; and (5) provide an
independent source for the downloading of records that are maintained
solely on electronic storage media. The Commission anticipates that
small entities will not convert their recordkeeping systems to
electronic storage media unless the accompanying costs are outweighed
by the financial savings and operational efficiency that would result
from the change to electronic storage media.
The Chairperson, on behalf of the Commission, hereby certifies,
pursuant to 5 U.S.C. 605(b), that the action taken herein will not have
a significant economic impact on a substantial number of small
entities.
B. Paperwork Reduction Act
When publishing proposed rules, the Paperwork Reduction Act of 1995
\41\ ("PRA") imposes certain requirements on federal agencies
(including the Commission) in connection with their conducting or
sponsoring any collection of information as defined by the PRA. In
compliance with the PRA, the Commission through this rule proposal,
solicits comments to:
\41\ Pub. L. 104-13 (May 13, 1995).
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(1) evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including the validity of the methodology and assumptions used; (2)
evaluate the accuracy of the agency's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used; (3) enhance the quality, utility
and clarity of the information to be collected; and (4) minimize the
burden of the collection of information on those who are to respond,
including through the use of appropriate automated, electronic,
mechanical or other technological collection techniques or other
forms of information technology (e.g., permitting electronic
submission of responses.
The Commission has submitted this proposal and its associated
information collection requirements to the Office of Management and
Budget. The burden associated with this entire collection (3038-0022),
including the proposed rule, is as follows:
Average burden hours per response: 3,551.89
Number of respondents: 15,682
Frequency of response: On occasion
The burden associated with this specific proposed rule, is as
follows:
Average burden hours per response: 17.50
Number of respondents: 3412
Frequency of response: On occasion
Persons wishing to comment on the information that would be
required by this proposal should contact the Desk Officer, CFTC, Office
of Management and Budget, Room 10202, NEOB, Washington, DC 20503, (202)
395-7340. Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street N.W.,
Washington DC 20581, (202) 418-5160.
List of Subjects in 17 CFR Part 1
Recordkeeping requirements.
Accordingly, 17 CFR part 1 is proposed to be amended as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, 24.
2. Section 1.31 is amended by revising paragraphs (b), (c), and (d)
to read as follows:
Sec. 1.31 Books and records, keeping and inspection.
* * * * *
(b) Except as provided in paragraph (d) of this section, immediate
reproductions on either "micrographic media" (as defined in paragraph
(b)(1)(i) of this section) or "electronic storage media" (as defined
in paragraph (b)(1)(ii) this section) may be kept in that form for the
required time period under the conditions set forth in this paragraph
(b).
(1) For purposes of this section:
(i) The term "micrographic media" means microfilm or microfiche
or any similar medium.
[[Page 30674]]
(ii) The term "electronic storage media" means any digital
storage medium or system that:
(A) Preserves the records exclusively in a non-rewritable, non-
erasable format;
(B) Verifies automatically the quality and accuracy of the storage
media recording process;
(C) Serializes the original and, if applicable, duplicate units of
storage media and creates a time-date record for the required period of
retention for the information placed on such electronic storage media;
and
(D) Permits the immediate downloading of indexes and records
preserved on the electronic storage media onto paper, microfilm,
microfiche or other medium acceptable under this paragraph upon the
request of representatives of the Commission or the Department of
Justice.
(2) Persons who use either micrographic media or electronic storage
media to maintain records in accordance with this section must:
(i) Have available at all times, for examination by representatives
of the Commission or the Department of Justice, facilities for
immediate, easily readable projection or production of micrographic
media or electronic storage media images;
(ii) Be ready at all times to provide, and immediately provide at
the expense of the person required to keep such records, any easily
readable hard-copy image that representatives of the Commission or
Department of Justice may request.
(iii) Waive any privilege, claim of confidentiality, or other
objection to disclosure of non-Commission-required information stored
on the same individual medium (e.g. the same disk or sheet of
microfiche) as Commission-required records;
(iv) Store a duplicate of the record, in any medium acceptable
under this section, at a location separate from the original for the
period of time required for maintenance of the original; and
(v) Organize and maintain an accurate index of all information
maintained on both the original and duplicate storage media such that:
(A) The location of any particular record stored on the media may
be immediately ascertained;
(B) The index is available at all times for immediate examination
by representatives of the Commission or the Department of Justice;
(C) A duplicate of the index is stored at a location separate from
the original index; and
(D) Both the original index and the duplicate index are preserved
for the time period required for the records included in the index.
(3) In addition to the conditions in paragraph (b)(2) of this
section, persons using electronic storage media must:
(i) Be ready at all times to provide, and immediately provide at
the expense of the person required to keep such records, copies of such
records on such approved machine-readable media as defined in
Sec. 15.00(l) of this chapter which any representative of the
Commission or the Department of Justice may request. Records must use a
format and coding structure specified in the request.
(ii) Develop and maintain written operational procedures and
controls (an "audit system") designed to provide accountability over
both the initial entry of required records to the electronic storage
media and the entry of each change made to any original or duplicate
record maintained on the electronic storage media such that:
(A) The results of such audit system are available at all times for
immediate examination by representatives of the Commission or the
Department of Justice;
(B) The audit results are preserved for the time period required
for the records maintained on the electronic storage media; and
(C) The written operational procedures and controls are available
at all times for immediate examination by representatives of the
Commission or the Department of Justice.
(iii) Either:
(A) Maintain, keep current, and make available at all times for
immediate examination by representatives of the Commission or
Department of Justice all information necessary to access records and
indexes maintained on the electronic storage media; or
(B) Place in escrow and keep current a copy of the physical and
logical format of the electronic storage media, the file format of all
different information types maintained on the electronic storage media
and the source code, documentation, and information necessary to access
the records and indexes maintained on the electronic storage media.
(4) In addition to the foregoing conditions, any person who uses
only electronic storage media to preserve some or all of its required
records ("Electronic Recordkeeper") shall, prior to the media's use,
enter into an arrangement with at least one third party technical
consultant ("Technical Consultant") who has the technical and
financial capability to perform the undertakings described in this
paragraph (b)(4). The arrangement shall provide that the Technical
Consultant will have access to and the ability to download information
from the Electronic Recordkeeper's electronic storage media to any
media to any medium acceptable under this section.
(i) The Technical Consultant must file with the Commission on
undertaking in a form acceptable to the Commission, signed by the
Technical Consultant or a person duly authorized by the Technical
Consultant. An acceptable undertaking must include the following
provision with respect to the Electronic Recordkeeper:
With respect to any books and records maintained or preserved on
behalf of the Recordkeeper, the undersigned hereby undertakes to
furnish promptly to any representative of the United States
Commodity Futures Trading Commission or the United States Department
of Justice (the "Representative"), upon reasonable request, such
information as is deemed necessary by the Representative to download
information kept on the Electronic Recordkeeper's electronic storage
media to any medium acceptable under 17 CFR 1.31. The undersigned
also undertakes to take reasonable steps to provide access to
information contained on the Electronic Recordkeeper's electronic
storage media, including, as appropriate, arrangements for the
downloading of any record required to be maintained under the
Commodity Exchange Act or the rules, regulations, or orders of the
United States Commodity Futures Trading Commission, in a format
acceptable to the Representative. Such arrangements will provide
specifically that in the event the Electronic Recordkeeper fails to
download a record into a readable format and after reasonable notice
to the Electronic Recordkeeper, upon being provided with the
appropriate electronic storage medium, the undersigned will
undertake to do so, at no charge to the United States, as the
Representative may request.
(c) Persons employing an electronic storage system shall provide a
representation to the Commission prior to the initial use of the
system. The representation shall be made by the person required to
maintain the records, the storage system vendor, or another third party
with appropriate expertise and shall state that the selected electronic
storage system meets the requirements set forth in paragraph (b)(1)(ii)
of this section. Persons employing an electronic storage system using
media other than optical disk or CD-ROM technology shall so state. The
representation shall be accompanied by the type of oath or affirmation
described in Sec. 1.10(d)(4) of this chapter.
(d) Trading cards, documents on which trade information is
originally recorded in writing, and written orders required to be kept
pursuant to Sec. 1.35(a), (a-1)(1), (a-1)(2) and (d), must be
[[Page 30675]]
retained in hard-copy for the required time period.
Issued in Washington, DC on may 29, 1998 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-14805 Filed 6-4-98; 8:45 am]
BILLING CODE 6351-01-M
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