01-13586. Electronic Recordkeeping by Public Utility Holding Companies

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission is adopting amendments to revise rules under the Public Utility Holding Company Act of 1935 regarding recordkeeping requirements for registered public utility holding companies and their mutual or subsidiary service companies. The current rules were most recently updated in 1984 and allow regulated companies to preserve records using storage media such as paper, magnetic tape, and microfilm. The amendments will expand the approved recordkeeping methods to allow the use of modern information technology resources. The Commission is adopting these rule amendments in response to the passage of the Electronic Signatures in Global and National Commerce Act, which encourages federal agencies to accommodate electronic recordkeeping.

EFFECTIVE DATE:

May 31, 2001.

FOR FURTHER INFORMATION CONTACT:

Catherine A. Fisher, Assistant Director, Robert P. Wason, Chief Financial Analyst, or Victoria J. Adraktas, Attorney-Advisor, Office of Public Utility Regulation, [phone], Division of Investment Management, Securities and Exchange Commission, 450 5th Street, NW., Washington, DC 20549-0503.

SUPPLEMENTARY INFORMATION:

The Securities and Exchange Commission (“Commission”) today is adopting amendments to rule 1 [17 CFR 257.1],^[1] regarding the preservation and destruction of records of registered public utility holding companies and of mutual and subsidiary service companies, under the Public Utility Holding Company Act of 1935 [15 U.S.C. 79] (“Holding Company Act”).

Executive Summary

Federal law requires registered public utility holding companies and their mutual or subsidiary service companies to make and keep books and records.^[2] The recordkeeping requirements are a key part of the Commission's public utility holding company regulatory program because they allow us to monitor the operations of companies and to evaluate their compliance with federal law. The recordkeeping rule currently permits records to be preserved and maintained using storage media such as paper, magnetic tape, and microfilm. In light of the advances in information technology since the rule was promulgated in 1984 and in particular the rapid changes in technology in recent years, we believe that we should revise the standards for permissible recordkeeping media to allow the use of current electronic recordkeeping and storage resources in maintaining required records.^[3] Moreover, because the proposed amendments do not specify the use of any particular technologies, they allow for the adoption of new technologies in the future. Finally, we are also interpreting rule 1 to be the exclusive means by which companies can comply with the recordkeeping provisions of the Electronic Signatures in Global and National Commerce Act (“Electronic Signatures Act,” “Act,” or “ESIGN”).

Last year, Congress passed the Act to facilitate the use of electronic records and signatures in interstate and foreign commerce.^[4] Consistent with the purpose and goals of the Electronic Signatures Act, we are amending the Holding Company Act rules to expand the circumstances under which companies may keep their records on electronic storage media. We are also updating our recordkeeping rules and amending them for clarification. The amendments are designed to update rule 1 to reflect and accommodate companies' use of modern information technology resources to maintain and index records.

I. Discussion

A. Amendments to Rule 1

The Commission is amending rule 1 to permit companies to keep their records in an electronic format. We also proposed to clarify the obligation of companies to provide copies of their records to Commission examiners, and to incorporate terminology used in electronic recordkeeping rules under the Securities Exchange Act of 1934 into rule 1.^[5] We received six comment letters addressing the proposal.^[6] Commenters supported the proposed amendments, and we are adopting them substantially as proposed, with a few changes in response to concerns expressed by commenters.

We are expanding the variety of formats that companies may use to maintain required records to include electronic and micrographic storage media. Under the revised rule 1, companies are permitted to maintain records electronically if they establish and maintain procedures: (i) To safeguard the records from loss, alteration, or destruction, (ii) to limit access to the records to authorized personnel, the Commission, and directors of the company, and (iii) to ensure that electronic copies of non-electronic originals are complete, true, and legible.^[7]

We are also amending the rules to clarify the obligation of companies to provide copies of their records to Commission examiners. The amendments make clear that companies may be requested to promptly provide (i) legible, true, and complete copies of records in the medium and format in which they are stored, and printouts of such records; and (ii) means to access, view, and print the records.^[8]

We are not adopting a proposed amendment that would have stated that records are to be provided in no case more than one business day after a request.^[9] Some commenters were concerned that such an amendment could preclude companies from agreeing to a schedule of record production with the examination staff to produce certain documents immediately and other documents, that are not immediately accessible, on a delayed basis. We agree that such arrangements when entered into and performed in good faith by the examined entity can facilitate the examination process. While the “promptly” standard imposes no specific time limit, we expect that a company would be permitted to delay furnishing electronically stored records for more than 24 hours only in unusual circumstances. At the same time, we believe that in many cases companies could, and therefore will be required to, furnish records immediately or within a few hours of request.

In addition, commenters raised concerns that the amendment requires companies to maintain duplicate copies of records. We wish to clarify that this requirement only applies to records stored on electronic or micrographic media. It is not a requirement for records kept in any other type of media. These duplicates may be maintained in any media form.

B. Electronic Signatures Act

Under the Electronic Signatures Act, an agency's recordkeeping requirements may be met by retaining electronic records that accurately reflect the information set forth in the record, and remain accessible to all persons who are entitled to access, in a format that can be accurately reproduced.^[10] The Act allows us to interpret this provision pursuant to our authority under the Holding Company Act.^[11] Our interpretation of the Electronic Signatures Act must be consistent with the Act and not add to its requirements.^[12] The interpretation must be based on findings that (i) our interpreting regulations are substantially justified; (ii) the methods selected to carry out our purposes are substantially equivalent to the requirements imposed on records that are not electronic records and will not impose unreasonable costs on the acceptance and use of electronic records; and (iii) the methods selected to carry out our purposes do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures.^[13] The Electronic Signatures Act explicitly authorizes agencies to interpret the Act's electronic recordkeeping provisions to specify performance standards to assure accuracy, record integrity, and accessibility of electronically retained records.^[14]

We interpret the Electronic Signatures Act with respect to the Holding Company Act to require companies to comply with the requirements of rule 1 when they keep required records on electronic storage media. Companies, therefore, can comply with the requirements of the Electronic Signatures Act only by complying with the requirements of amended rule 1. In the proposing release, we asked for comment on whether these interpretations were consistent with the Electronic Signatures Act's requirements.^[15] Commenters generally agreed that our interpretation of the Electronic Signatures Act was reasonable. As discussed below, our rules and interpretation satisfy all the requirements of the Electronic Signatures Act.

1. Consistency With Electronic Signatures Act

Rule 1 is consistent with the Electronic Signatures Act. The Act permits federally required records to be retained in an electronic format, and we are amending rule 1 to permit companies to maintain all required records electronically.

2. No Additional Requirements

Rule 1 imposes no requirements in addition to those imposed by the Act. The Electronic Signatures Act requires electronic records to be stored in a manner that ensures that they are accurate, accessible, and capable of being accurately reproduced for later reference.^[16] The rule requires companies that maintain their records electronically to comply with certain conditions that are consistent with the requirements of the Act and that are designed to bring about companies' compliance with the Act's requirements.^[17]

3. Substantial Justification

Our rule requires companies to maintain a wide variety of documents that we use to verify compliance with the Holding Company Act. The value of these records is entirely dependent on their integrity and accessibility. If companies are not required to protect their records from inadvertent or intentional alteration or destruction ^[18] and provide examiners with meaningful access to all required records,^[19] then the records become unreliable, and the examination process moot. Therefore, we find that our interpretation of the Electronic Signatures Act, that companies must comply with rule 1, is substantially justified.

4. Requirements Equivalent to Requirements for Other Record Formats

Rule 1 subjects electronic records to conditions that are substantially equivalent to conditions under which companies keep paper and micrographic records. These conditions are designed to ensure that the records exist in a form that is legible, authentic, complete, and accessible. While rule 1 stipulates that all records, regardless of format, must comply with certain conditions, other requirements, which would be superfluous for paper records, apply only to electronic and micrographic records.^[20]

Companies that maintain records in an electronic format must comply with several requirements that have no micrographic or paper equivalent. For example, companies must have procedures to reasonably protect electronic records from loss, alteration, or destruction,^[21] to limit access to electronic records,^[22] and to reasonably ensure that electronic records that are created from hard copy are complete, true, and legible.^[23] We believe that these additional requirements are necessary because of the unique vulnerability of unprotected electronic records to undetectable alteration and falsification.

5. No Unreasonable Costs on Acceptance and Use of Electronic Records

Rule 1 provides significant flexibility for companies subject to the Act's recordkeeping requirements. In particular, it permits the use of any electronic storage media. We conclude that rule 1 will not impose unreasonable costs on the acceptance and use of electronic recordkeeping.

6. Specific Technology or Technical Specification

The Electronic Signatures Act generally prohibits us from requiring or according greater legal status or effect to the implementation or application of a specific technology or technical specification. However, the Act does permit us to specify performance standards to assure the accuracy, integrity, and accessibility of required records, even if our standards require companies to implement or apply a specific technology or technical specification to their storage system.^[24] Rule 1 has been deliberately crafted to be technologically neutral, leaving companies free to adopt any combination of technological and manual protocols that meet the requirements of the rule. In any event, even if the rule was interpreted to favor a specific technology or technical specification, it would nonetheless be a valid exercise of our interpretive authority, as it serves the important governmental objective of assisting us to oversee company compliance with the Holding Company Act, and are substantially related to the achievement of that objective.^[25] The continuing accessibility and integrity of company records are critical to the fulfillment of our oversight responsibilities.

C. Effective Date

The effective date for these amendments is May 31, 2001. In most cases, the Administrative Procedures Act (“APA”) requires that a rule amendment be published in the Federal Register at least 30 days prior to its effective date unless the promulgating agency can show good cause for shortening this interim period.^[26] The Electronic Signatures Act becomes effective on June 1, 2001, at which point companies may opt to store required records electronically, so long as the records are accessible and accurate.^[27] As described above, the Electronic Signatures Act authorizes the Commission to interpret these terms. A gap between the effective dates of the Electronic Signatures Act and our rule amendments would needlessly create confusion about the appropriate standards for electronic recordkeeping. During the period between the effective dates, companies would be forced to choose between maintaining their electronic records in accordance with the Act's general, but operative standards, or relying instead on the more specific but as yet not effective standards set in rule 1. We find that there is good cause for these amendments to become effective on May 31, 2001.

The APA also authorizes acceleration of the effective date of a rule that “relieves a restriction.” ^[28] The amendments to rule 1 allow companies to store all of their required records electronically, remove restrictions on the type of electronic storage media that may be used, and effectively eliminate most of the conditions previously placed on the ability of companies to convert paper records to an electronic format.

II. Cost-Benefit Analysis

In proposing the amendments to rule 1, we considered the costs and benefits that the amendments would generate. Although we encouraged commenters to address the proposal's costs and benefits and to submit their own estimates of what they might be, we received no comment specifically addressing this issue.^[29]

We believe the amendments will impose few if any costs on companies that are not already required. As described above, the amended rules allow companies to choose to maintain required records on electronic storage media. Electronic storage remains optional with the adoption of these amendments. We assume that companies will not select the electronic storage option provided for in the amended rule unless doing so is less expensive (or otherwise more efficient and, therefore, supported by business considerations). It remains our belief that the amended rule will allow companies greater flexibility to make business decisions about recordkeeping and, when appropriate, opt for electronic storage with potential cost savings and other benefits.

In addition, we are adopting minor amendments to clarify the obligation of companies to provide records to our examination staff and minor technical amendments to conform the language of rule 1 to the recordkeeping rules under the Securities Exchange Act of 1934. We anticipate few if any costs to companies as a result of these amendments.

III. Regulatory Flexibility Act Certification

Pursuant to section 605(b) of the Regulatory Flexibility Act [U.S.C. 605(b)], the Acting Chairman of the Commission certified that the amendments will not have a significant economic impact on a substantial number of small entities. The certificate was published in the Federal Register with the proposal. We received no comments on the certificate.

IV. Paperwork Reduction Act

The amendments do not require a new collection of information. They affect only the manner in which, pursuant to rule 1, registrants can store the information that must be collected under rule 26 [17 CFR 250.26]. In connection with rule 26, the Commission previously submitted to the Office of Management and Budget, pursuant to the Paperwork Reduction Act, a request for approval and received an OMB control number for the rule, OMB Control No. 3235-0183.

V. Statutory Authority

The Commission is adopting amendments to rule 1 of the Holding Company Act pursuant to authority set forth in sections 15 and 20(a) of the Holding Company Act [15 U.S.C. 79(o) and 15 U.S.C. 79(t)].

List of Subjects in 17 CFR Part 257

• Holding companies
• Reporting and recordkeeping requirements

Text of Rule Amendments

For reasons set forth in the preamble, Title 17, Chapter II of the Code of Federal Regulations is amended as follows:

PART 257—PRESERVATION AND DESTRUCTION OF RECORDS OF REGISTERED PUBLIC UTILITY HOLDING COMPANIES AND OF MUTUAL AND SUBSIDIARY SERVICE COMPANIES

1. The authority citation for Part 257 is added to read as follows:

Authority: 15 U.S.C. 79(o) and 79(t), unless otherwise noted.

2. The authority citations following §§ 257.1 and 257.2 are removed.

3. Section 257.1 is amended by:

a. Removing paragraphs (e) through (h);

b. Adding new paragraph (e); and

c. Redesignating paragraphs (i) through (m), as paragraphs (f) through (j).

The addition reads as follows:

§ 257.1

General instructions.

* * * * *

(e)(1) Micrographic and electronic storage permitted. The records required to be maintained and preserved under § 250.26 of this chapter may be maintained and preserved for the required time by, or on behalf of, a company on, among other formats:

(i) Micrographic media, including microfilm, microfiche, or any similar medium; or

(ii) Electronic storage media, including any digital storage medium or system that meets the terms of this section.

(2) General requirements. The company, or person that maintains and preserves records on its behalf, must:

(i) Arrange and index the records in a way that permits easy location, access, and retrieval of any particular record;

(ii) Provide promptly any of the following that the Commission (by its examiners or other representatives) or the directors of the company may request:

(A) A legible, true, and complete copy of the record in the medium and format in which it is stored;

(B) A legible, true, and complete printout of the record; and

(C) Means to access, view, and print the records; and

(iii) Separately store, for the time required for preservation of the original record, a duplicate copy of a record that is stored on micrographic or electronic storage media.

(3) Special requirements for electronic storage media. In the case of records on electronic storage media, the company, or person that maintains and preserves records on its behalf, must establish and maintain procedures:

(i) To maintain and preserve the records, so as to reasonably safeguard them from loss, alteration, or destruction;

(ii) To limit access to the records to properly authorized personnel, the directors of the company, and the Commission (including its examiners and other representatives); and

(iii) To reasonably ensure that any reproduction of a non-electronic original record on electronic storage media is complete and true, and legible when retrieved.

* * * * *

Dated: May 24, 2001.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  Unless otherwise noted, all references to rule 1 will be to 17 CFR 257.1.

2.  “Company” or “companies” means a service company subject to 17 CFR 250.93, or a holding company subject to 17 CFR 250.26, which is not an electric utility company or a gas utility company, and any predecessor or inactive or dissolved associate company, the records of which are in the possession or control of such company.

3.  We recognize that the standards for electronic recordkeeping we are adopting for registered public utility holding companies are different from rules we have adopted for broker-dealers, which require brokerage records to be preserved in a non-rewritable, non-erasable (the “write-once, read many” or “WORM”) format. There are, however, significant differences between the industries. In addition, we have not experienced any significant problems with registered holding companies altering stored records. In light of these factors, the costs of requiring registered public utility holding companies to invest in new electronic recordkeeping technologies may not be justified.

4.  Electronic Signatures in Global and National Commerce Act, Pub. L. 106-229 (see Preamble).

5.  See Electronic Recordkeeping by Public Utility Holding Companies, Holding Company Act Release No. 25357 (Mar. 19, 2001) [66 FR 16158 (Mar. 23, 2001)] (“Proposing Release”) at section I.B.

6.  The comment letters are available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, DC (File No. S7-07-01).

7.  Rule 1. One commenter expressed concern that the restriction on access to records required to be maintained would restrict companies from allowing access to records by properly authorized employees. We note that “authorized personnel” in the text of the rule is intended to permit companies to allow access to required records to any person the company chooses to provide access. The objective of this restriction is to ensure that companies adequately safeguard records from unauthorized access.

8.  Rule 1(e)(2).

9.  See proposed rule 1(e)(2)(ii).

10.  ESIGN section 101(d)(1).

11.  Under the Electronic Signatures Act, a federal regulatory agency (like the Commission) that is responsible for rulemaking under any other statute (such as the Public Utility Holding Company Act) “may interpret section 101 [of the Electronic Signatures Act] with respect to such statute through the issuance of regulations pursuant to a statute; or to the extent such agency is authorized by statute to issue orders or guidance, the issuance of orders or guidance of general applicability that are publicly available and published (in the Federal Register in the case of an order or guidance issued by a Federal regulatory agency).” ESIGN section 104(b).

12.  ESIGN section 104(b)(2)(A) and (B).

13.  ESIGN section 104(b)(2)(C).

14.  ESIGN section 104(b)(3). Such performance standards may be specified in a manner that imposes a requirement in violation of the general prohibition against selecting methods that require or accord greater legal status or effect to the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures if the requirement (i) serves an important governmental objective; and (ii) is substantially related to the achievement of that objective. ESIGN section 104(b)(3).

15.  See Proposing Release, supra at note 5.

16.  ESIGN section 101(d)(1).

17.  The rules' general requirements that companies have procedures to protect electronic records from alteration, loss, or destruction, to limit unauthorized access, and verify the integrity of electronic copies of hard copy originals ensure that an electronic record is accurate from the outset, and limit the possibility that an electronic record will be corrupted during its retention period. The rule's requirements regarding indexing, and the obligation of companies to provide records to examiners and directors foster the accessibility of electronic records.

18.  See rule 1(e)(2)(ii) (requiring procedures to ensure the quality of electronic copies of non-electronic records); rule 1(e)(2)(iii) (requiring that companies separately store duplicates of electronic records); rule 1(e)(3)(ii) (requiring companies to limit access to electronic records); and rule 1(e)(3)(i) (requiring companies to adopt procedures to maintain and preserve electronic records, so as to reasonably safeguard them from loss, alteration, or destruction).

19.  See rule 1(e)(2)(ii)(A) (requiring companies to provide promptly a legible, true, and complete copy of an electronically stored record upon request from the Commission or other parties entitled to access the records); rule 1(e)(2)(i) (requiring companies to arrange and index their electronic and micrographic records in a way that permits easy location and retrieval); and rule 1(e)(2)(ii)(C) (requiring companies to provide means to access, view, and print electronic records).

20.  For example, the requirement that companies that keep micrographic or electronic records provide promptly (i) a legible, true, and complete copy of the record in the medium and format in which it is stored, (ii) a legible, true, and complete printout of the record, and (iii) means to access, view, and print the records is unnecessary for paper records, which require no special treatment to make them readable and reproducible.

21.  Rule 1(e)(3)(i).

22.  Rule 1(e)(3)(ii).

23.  Rule 1(e)(3)(iii).

24.  ESIGN section 104(b)(3)(A).

25.  ESIGN section 104(b)(3)(A).

26.  5 U.S.C. 553(d)(3).

27.  ESIGN section 101(d)(1).

28.  5 U.S.C. 553(d)(1).

29.  Commenters' submissions discussed the potential costs of keeping duplicates of all records required to be maintained regardless of their original format, which, as we clarify above, is not the intent of the amendment. In addition, commenters discussed the cost of the proposing release's inclusion of a 24 hour turn around period for document requests, which has been dropped from the amendment.