Notice To Members 95-25

SEC Approves NASD And Options Exchanges' Proposals Regarding Information Storage

Published Date:

SUGGESTED ROUTING

Legal & Compliance
Operations
Options

Executive Summary

The Securities and Exchange Commission has approved proposals by each of the five registered national options exchanges and the National Association of Securities Dealers, Inc. (the SROs) that provide member firms with more flexibility in how they store account statements and other information for options customers (options account information) for supervisory purposes. This circular describing the rule change has been prepared by the SROs acting jointly as members of the Options Self-Regulatory Council (OSRC).1

Discussion

SRO rules uniformly require the branch office servicing an options customer's account and the principal supervisory office having jurisdiction over that branch office retain account statements and other financial and background information for the account for supervisory purposes. With the advances in data storage and retrieval systems, such as optical disks, fax machines, computers, and microfiche, and with the increased expenses of storing records on-site in major financial centers such as New York City, member firms increasingly have been storing their records away from their principal supervisory offices. Because of the record retention requirements for options accounts, these arrangements have necessitated action by the OSRC. Specifically, on a case-by-case basis, member firms have obtained no-action positions from the OSRC providing that such off-site storage arrangements are consistent with the record retention requirement rules so long as the documents are readily accessible and promptly retrievable.

To ensure that all member firms are aware of the OSRC's position with respect to the storage of options account information off-site, the SROs proposed to incorporate the OSRC's no-action position into their respective rules. Specifically, with the Rule change, member firms are permitted to satisfy their record retention requirements for options accounts by storing required options account information in locations other than the respective principal supervisory office for the options accounts, provided such account information is readily accessible and promptly retrievable.2

Even though the rule change affords member firms the opportunity to store options account information in a more cost-effective manner in off-site locations, member firms are reminded that they are still obligated to discharge their supervisory responsibilities with respect to their options accounts. In this connection, to ensure that off-site document storage arrangements will not jeopardize or constrain members' supervisory activities, members must have procedures and mechanisms in place to assure that options account information is readily accessible and promptly retrievable. For purposes of this Rule, a document will be deemed to be readily accessible and promptly retrievable if it is retrievable by noon of the next business day. In addition, member firms are reminded that this rule change does not modify the record retention requirement with respect to branch offices—copies of options account information must still be retained at branch offices.

Questions regarding the rule change may be directed to these SRO representatives:

AMEX:
Roland Wyatt
(212) 306-1506

CBOE:
Larry Bresnahan
(312) 786-7713

NASD:
Tom Gira
(202) 728-8957

NYSE:
Patricia Dorilio
(212) 656-2744

PHLX:
Dianne Anderson
(215) 496-5184

PSE:
Dave Semak
(415) 393-7948

1 The OSRC is a committee comprised of representatives from each of the options exchanges and the NASD that was created pursuant to the plan submitted by the options exchanges and the NASD under Rule 17d-2 of the Act (17d-2 Plan). The 17d-2 Plan was adopted to reduce regulatory duplication relative to options-related sales practice matters for a large number of firms that are currently members of two or more SROs. The purpose of the OSRC is to administer the 17d-2 Plan and to address options-related sales practice matters in a common forum. See also NYSE Information Memo 95-7 (February 16, 1995).

2 See American Stock Exchange Rule 922; Chicago Board Options Exchange Rule 9.8; Section 33(b)(20) of the NASD Rules of Fair Practice; New York Stock Exchange Rule 722; Pacific Stock Exchange Rule 9.18; and Philadelphia Stock Exchange Rule 1025.

Text Of Amendments To Section 33(b) Of The NASD Rules Of Fair Practice

(Note: New text is underlined.)

Section 33 Of NASD By-Laws

* * *

Section 33(b)(17) Maintenance of Records

(A) No change.
(B) Background and financial information of customers who have been approved for options trading shall be maintained at both the branch office servicing the customer's account and the principal supervisory office having jurisdiction over that branch office. Copies of account statements of options customers shall also be maintained at both the branch office supervising the accounts and the principal supervisory office having jurisdiction over that branch for the most recent six-month period. With respect solely to the above-noted record retention requirements applicable to principal supervisory offices, however, the customer information and account statements may be maintained at a location other than the principal supervisory office if such documents and information are readily accessible and promptly retrievable. Other records necessary to the proper supervision of accounts shall be maintained at a place easily accessible both to the branch office servicing the customer's account and to the principal supervisory office having jurisdiction over that branch office.

Section 33(b)(18) and Section 33(b)(19) No change.

Section 33(b)(20) Supervision of Accounts

(A) through (C) No change.
(D) Headquarter's Review of Accounts. Each member shall maintain at the principal supervisory office having jurisdiction over the office servicing customer accounts, or have readily accessible and promptly retrievable, information to permit review of each customer's options account on a timely basis to determine (i) the compatibility of options transactions with investment objectives and with the types of transactions for which the account was approved; (ii) the size and frequency of options transactions; (iii) commission activity in the account; (iv) profit or loss in the account; (v)undue concentration in any options class or classes; and (vi) compliance with the provisions of Regulation T of the Federal Reserve Board.